Capitalism Loses Against Chimera

by Chidem Kurdas

Gripes about capitalism go back 150 years and more. In the Communist Manifesto of 1848 Marx and Engels thundered that the specter of revolution haunted Europe, that the periodic reappearance of commercial crises “put on its trial, each time more threateningly, the existence of the entire bourgeois society.” They were not the first to assail the system and were followed by numerous others spanning the political spectrum.

Thus the Financial Times recently started a series on  “The Crisis of Capitalism.”  Europe suffers from a sovereign debt crisis due to over-spending by governments—why is that the crisis of capitalism? But one should not quibble. It is an old tradition. In the 1998 turmoil brought on by Russia’s default on its bonds and the failure of a large hedge fund, commentaries appeared bearing titles such as The Crisis in Global Capitalism, Global Capitalism RIP, Collapse of Capitalism, Who Lost Capitalism? and The Free Market’s Crisis of Faith.

I’ve taken those titles from a response by Michael Boskin, “Capitalism and its Discontents,” a classic that rings true 14 years later and merits re-reading.  Continue reading

Future of Forecasts

by Chidem Kurdas

‘Tis the season for predictions. Pundits offer conjectures on every conceivable subject, though accumulating evidence in recent years has established, as much as anything can be established, that you might as well examine tea leaves to divine the future. Yet one could learn from prophesies; a few are thought provoking and some may even be true. Continue reading

Menace to Savings and Small Businesses

by Chidem Kurdas

As the old adage goes, be careful what you ask for, you might just get it. After the 2008 crisis it became fashionable to complain that too much trading is going on. There were calls in this and other countries to restrict financial transactions. And it happened. One example is the rule named after Paul Volcker in the 2010 Dodd-Frank law, banning depository banks’ trading on their own accounts (and also forbidding them from holding significant hedge fund or private equity interests).

Regulators are still in the process of determining how to implement the Volcker rule but the potential impact is already discernible. Likely victims include millions of Americans who save for their retirement and smaller companies that need to borrow money. Continue reading

Emerging Hope in Greece

 by Chidem Kurdas

The Greek economy continues to shrink. With the wider European debt crisis and slump hampering Greek recovery, the recession may persist through 2013.   Amid the grim news, however, there is a small sign that austerity measures are starting to work. Continue reading

Fannie, Dodd-Frank and Barney Frank

by Chidem Kurdas

Barney Frank  won’t run for Congress after his present term expires.  This May there were news stories about his  ex-lover getting a high-paying job at mortgage finance giant Fannie Mae while he sat on the Congressional committee that oversaw the government-sponsored entity.  Continue reading

Is USPS as American as Pumpkin Pie?

Chidem Kurdas

The United States Postal Service is in a deep financial hole that looks to get deeper unless the institution undergoes a major revamp.  Postmaster General Patrick Donahoe says current bills in Congress do not provide enough savings to get out of the hole.

US Mail has historical roots. What would Benjamin Franklin, who was appointed the first American Postmaster General in 1775 by the Continental Congress, do in this situation? Given the flexibility that existed in his time, he could no doubt make the changes to adapt the organization to the 21st century.  That flexibility, however, is gone.  Continue reading

Energy Policy vs. Market

by Chidem Kurdas

No matter how thoroughly public policy fails, there is no end to efforts in the same area.  Energy is a case in point. Reviewing the history of US energy policy in his new book, Columbia University legal scholar Michael Graetz writes: “The book  is, then, in one sense a story of failure…”  Continue reading

Malthusian Specter and Collective Action

by Chidem Kurdas

In an article titled “Can Our Species Escape Destruction?” John Terborgh argues that collective restraint is the one hope for stopping overgrown humanity’s devastation of the planet. This is a scientifically-imbued version of a common view. When the United Nations Population Fund announced that on Oct. 31st world population will reach seven billion, news stories referred to the event as a Halloween specterContinue reading

Politics of Healthcare Rationing

by Chidem Kurdas

The Obama administration’s remake of the US healthcare system stands on three legs. It makes the purchase of insurance compulsory. It doles out new entitlements via expanded Medicaid, subsidies and certain benefit mandates. And it promises to control the growth of medical costs. The title of the 2010 law, the Affordable Care Act, highlights the cost containment feature and Paul Krugman, for instance, has repeatedly cited a Congressional Budget Office prediction that the changes would reduce the federal budget deficit by keeping down costs.

Now we have more information as to how this supposed cost containment works. Continue reading

Revolution on Wall Street?

by Chidem Kurdas

Protestors have “occupied” a square near Wall Street for weeks. Hundreds of them were arrested, some 700 while blocking the Brooklyn Bridge. The movement may be spreading to other American cities. At least one demonstrator says: “This is a revolution.”

They complain of joblessness and the inequities of global capitalism, though the sources of their distress vary widely, from having to pay back student loans to the depredations of the internal combustion engine. At this point their immediate, tangible adversary appears to be the New York Police Department. It is easy to make fun of disaffected middle-class kids with Apple computers camping out in Downtown Manhattan. They bask in media limelight while taunting working-class cops. Still, we should try to understand the matter. Continue reading

Deregulated Lawyers and Regulatory Spread

by Chidem Kurdas

In their new book, First Thing We Do, Let’s Deregulate All the Lawyers (Brookings Institution Press, 2011),   Clifford Winston, Robert W. Crandall and Vikram Maheshri reach the surprising conclusion that America has too few lawyers rather than too many. They make a strong case but it raises a major question. Continue reading

Financial Crisis from Lehman to Europe

by Chidem Kurdas

The current financial crisis is a reverse of the 2008 disaster in key respects. Then, investment banks were seen as the main culprits while governments appeared in the guise of cavalry riding to the rescue. The trouble originated in the United States and spread to Europe. This time, the culprits are certain governments, the problem is European and how badly it will affect the American financial system is a question. How did the crisis go from US-based mortgage securities and Lehman Brothers to Italian sovereign debt and French banks?  Continue reading

Fannie Freddie Lawsuit and Risk Arbitrage

by Chidem Kurdas

Last week the Federal Housing Finance Agency filed suits against 17 major banks and mortgage businesses for misleading Fannie Mae and Freddie Mac regarding the risks of mortgage securities sold to these government-sponsored enterprises.  Though it targets banks, the litigation shows the mode of operation of Fannie and Freddie.

This development is best understood against the background provided by a revealing new book,  Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, by V. Acharya, M. Richardson, S. van Nieuwerburgh and L. White, professors at New York University’s Stern School of Business. Here’s a quote taken from a decade-old American Enterprise Institute compilation of warnings regarding GSEs from free marketers and left-wingers alike. This is from a Fannie Mae executive:

“We’re not casual about managing our political risk.” 

By contrast, they were casual about managing their credit risk, Continue reading

Fishy Federal Asset Seizures

by Chidem Kurdas

A Wall Street Journal article reports that the number of federal statutes giving the government the right to confiscate citizens’ assets has nearly doubled since the 1990s, by one count.  This is not something that happens only to convicted gangsters. Among the more than 400 federal statutes allowing for forfeiture is the Northern Pacific Halibut Act.

Violators of the Halibut Act, which prohibits fishing in certain areas in order to conserve stocks, can lose their boat and – this could get smelly – their fish as well.

“Last year, forfeiture programs confiscated homes, cars, boats and cash in more than 15,000 cases. The total take topped $2.5 billion, more than doubling in five years, Justice Department statistics show,” wrote John Emshwiller and Gary Fields in the WSJ. They don’t mention illicit halibut; Continue reading

Yale Model vs. Regulation

by Chidem Kurdas

David Swensen, the chief investment officer of Yale University’s endowment, rightly criticizes the behavior of mutual fund companies. Then he wrongly attributes the problems to regulators’ hands-off approach and argues for additional regulation. In fact the companies’ behavior reflects comprehensive rules dating to the Franklin Roosevelt administration. Mutual funds, among the most regulated of  financial services, would not be what they are without the regulatory system that spawned them. It is notable that no matter how much regulation exists, someone will want more.

To improve investment options for most Americans, the rules need to be changed and simplified to allow flexibility, not made even more cumbersome. Continue reading

Dodd-Frank Starves Congo; Advocates Win

by Chidem Kurdas

While I decided the financial regulation act Dodd-Frank is a gigantic dud after scanning its thousands of pages, I missed the bit on Congo that David Aronson brought to light in a NYT op-ed column this Monday.

Activist-lobbyists apparently inserted into the act a requirement that public companies buying minerals from Congo show how they prevent their purchases from benefiting warlords. Predictably, the companies did not want to risk being accused of financing bloodshed and simply switched to alternative mineral sources. Congolese who worked in mining lost that income and are now starting to go hungry. Continue reading

Spending Cuts and Politics of Bureaucracy

by Chidem Kurdas

I just read The Politics of Bureaucracy by Gordon Tullock, one of the best books written on the behavior of bureaucrats. Although originally published in 1965, it remains very much relevant today, especially as the debt deal currently in Congress could bring spending caps on programs administered by numerous bureaucracies. These entities implement policy changes, yet efforts to rein in government spending or impose new regulation typically pay little or no attention to their behavior.

Professor Tullock derives his insights from the basic observation that when embedded in an administrative hierarchy that is supposed to serve some – typically vague – public interest, people remain individuals; they still have their own preferences and interests. This is nicely expressed in the foreword by James Buchanan, who paraphrases Adam Smith’s well-known dictum about the butcher, the brewer or the baker. I will further paraphrase his take on Smith: “It is not from the benevolence of the bureaucrats that we expect our budget savings and better rules, but from their regard to their own interest.” Continue reading

Tax Baseline Key to Debt Fight

by Chidem Kurdas

Neither House Republican Speaker John Boehner  nor Senate Democratic Majority Leader Harry Reid propose tax increases in their competing deficit and debt-ceiling plans. Indeed, the Reid plan’s omission of tax hikes is described by Democrats as a major concession to Republicans.

But even if there are no new obligations, taxes are primed to go up. That baseline, biased in favor of a growing tax burden, is key to proposed deals and will no doubt remain the pivotal point in budget negotiations long after the current debt ceiling is broached.

In a recent report on the long-term fiscal outlook, the Congressional Budget Office  estimated that the wide range of tax increases built into current law would generate substantial additional tax revenue and boost the share of taxes to levels not seen in recent decades. That’s the baseline scenario. Continue reading

Soros and Open Society in America

by Chidem Kurdas

George Soros originally intended to wind down his Open Society Foundations at the end of his life but changed his mind. This worldwide network of activist groups – to whom he has given more than $8 billion and named after Karl Popper’s classic The Open Society and Its Enemies – is to continue operating after he’s gone.

In Eastern Europe, the network helped undermine communist regimes and bring about freer societies. The main mission ascribed by Mr. Soros is to hold governments accountable in countries that lack civil institutions. It has to be a bitter irony that he sees the United States, the long-time home of many such institutions, in serious danger of ceasing to be an open society, given the increasingly manipulative and deceptive public discourse.

He was an early and aggressive backer of Barack Obama apparently in the belief that the then presidential candidate would stop the dangerous trend. Now he is disappointed. Continue reading

Debt Deal as Salami Strategy

by Chidem Kurdas

Yes, a federal debt deadline is looming and, yes, it has become conventional wisdom that something needs to be done about the deficit and resulting debt. Having watched the  political jockeying, I am now persuaded that the notion of a bi-partisan deal to tackle the deficit is likely a trap.

To raise the debt ceiling, President Obama urges Republicans to accept a bargain that includes higher taxes and spending cuts. Note the reasoning: “The money’s been spent,” he reportedly said. “So this is urgent, and it needs to get settled.”  

Suppose Republicans agree to ending some tax breaks as Mr. Obama proposes. Next time around, he comes back with another oh dear, we already spent the money, you’ll have to raise some other taxes and, of course, the debt ceiling again. And so on and so forth, with Leviathan in the main protecting its ample bulk. Continue reading

Policy Makers and Irrational Exuberance

by Chidem Kurdas

Robert Shiller says the speculative bubble in real estate was driven by “a contagion of optimism” that pushed up prices and expectations in a feed-back loop. This epidemic apparently engulfed regulators as well.  “Government policy makers breathed in the same optimism, which no doubt encouraged them to be lax on regulatory restraint,” he writes in a NYT column.

This is a plausible explanation of the psychological mechanism that operates in any bubble. It eventually collapsed and led to the property slump that underpins the current economic malaise And Professor Shiller is right that public officials are not immune. But federal entities breathing in heady fumes is different from anybody else breathing in the same. Continue reading

Japan Reveals Regulatory Trap

by Chidem Kurdas

Once upon a time, people tried to explain the post-war “Japanese Miracle” of rapid growth. Then in the current century, the puzzle shifted to Japanese stagnation since 1990. The lesson from these two distinct phases of Japanese history is germane for current American policy.

Chalmers Johnson’s influential book, MITI and the Japanese Miracle (1982), examined how the powerful Ministry of International Trade and Industry had guided and regulated the economy.  MITI implemented industrial policy in what Mr. Johnson called a defining characteristic ofJapan, namely close collaboration between politicians, economic bureaucrats and big business.

MITI’s successor, the Ministry of Economy, Trade and Industry, promoted the use of nuclear power. The ongoing problems at Fukushima Daiichi nuclear plant threw new light on METI. The plant’s operator, Tokyo Electric Power Co., is a monopoly fostered by regulators. The government announced that the Nuclear and Industrial Safety Agency will now be separated from the Ministry, to give it greater independenceContinue reading

Why Dodd-Frank is Dud-Blarney

by Chidem Kurdas

It is a shame that Christopher Dodd  did not become a lobbyist earlier, before he teamed up with Barney Frank to sponsor the Dodd-Frank Act. Mr. Dodd first helped set into motion a fast-expanding web of obscure bureaucratic dicta for almost all financial activity, then took a lucrative job as Hollywood lobbyist.

As Richard Epstein writes in National Affairs, the new financial law is notably vague and broad, granting vast discretion to government bureaucracies, giving them the wherewithal to waive or soften requirements for some parties while riding hard on others.  Continue reading

Are Swiss Banks Socially Useless?

by Chidem Kurdas

That’s a daft question, but it is suggested by what became conventional political wisdom in the aftermath of the financial crisis. Finance was vilified and  financial activity widely described as socially useless, a term coined by British regulator Adair Turner. Yet the developed economy that has boomed in post-crisis years is Switzerland, a world financial hub. Continue reading

Kissinger on Bismarck

by Chidem Kurdas

A man described as both great and evil, Otto von Bismarck-Schönhausen makes a fascinating study,  as Jonathan Steinberg’s Bismarck: A Life demonstrates.  Henry Kissinger reviewed this biography in the New York Times Book Review, highlighting the diplomatic and political victories the unifier of Germany won through nimble maneuvers.

The review is a bravura tribute from one practitioner of realpolitik to another. Yet a closer look at Bismarck raises doubts as to realpolitik.

While admiring Bismarck’s subtle power games, Mr. Kissinger  admits that the result lacked institutional balance and “sowed the seeds of Germany’s 20th century tragedies.” But he takes issue with the connection Mr. Steinberg draws from Bismarck to Hitler. Kissinger points to the contrast between the two characters. “Bismarck was a rationalist, Hitler a romantic nihilist,” he writes. “Hitler left a vacuum. Bismarck left a state strong enough to overcome catastrophic defeats …”

Nevertheless, Bismarck’s actions led to those catastrophes. Continue reading