Secretary of State Hillary Clinton has had several meetings with Pakistani civilians; they have asked her two pointed questions which she was either unwilling or unable to answer:
1. These terrorists that have been killed by U.S. drone planes, were they ever tried and convicted?
2. How do you distinguish between killing 20 innocent bystanders and perhaps one terrorist [see question 1] from a "pure terrorist" attack?
Until Ms. Clinton and the country she represents can give direct and convincing answers to these two related questions, our moral authority in Afghanistan -- and the world in general -- will be rightfully suspect.
[I have been mulling over the issue of proportional response and its central importance in both the U.S. and Israeli approach to terrorism. I would certainly like to hear from readers on this issue which I hope to write about in the near future.]
Saturday, October 31, 2009
Summary of criticism of the Frank Bank bill
In yesterday's blog I mentioned that the bill that came out of Rep. Barney Frank's Financial Services ommittee was facing strong criticism. Since I was concentrating on proposals to bring back the Glass-Steagall legislation that was repealed in 1999, I didn't go into specifics of Frank's bill, but here is the NY Times editorial critique from today's paper:
http://www.nytimes.com/2009/10/31/opinion/31sat1.html?_r=1&th=&adxnnl=1&emc=th&adxnnlx=1257001413-/WwcH/m6UoZLccScyuFVXg
http://www.nytimes.com/2009/10/31/opinion/31sat1.html?_r=1&th=&adxnnl=1&emc=th&adxnnlx=1257001413-/WwcH/m6UoZLccScyuFVXg
Friday, October 30, 2009
Glass-Steagall
The House Financial Services Committee, headed by my congressman Barney Frank, recently reported out a bill that would place some regulations on the banking industry. These include restrictions on secondary mortgages and mortgage-based securities (requiring more cash backup), and provisions dealing with banks that are "too big to fail." (You can read the details elsewhere.) Aside from the predictable opposition from banks, there was also opposition from people who didn't think the legislation went far enough to protect us from a repeat of the 2008-2009 banking crisis. One of the rallying cries of this segment of the opposition is "Bring Back Glass-Steagall!"
Well, I'm not an economist, but I did a bit of reading about the Glass-Steagall Act(s) -- there were actually two of them. The first one, in 1932, enabled the Federal Reserve to help refinance the banks during the Great Depression. This had to do with "rediscounting" loans or "notes," and also related to the switch away from gold-backed currency. This first act is not the one of most concern these days.
The second Glass-Steagall Act (1933) did two important things. First of all, it set up the Federal Deposit Insurance Corporation (FDIC) which insures bank deposits. This was crucial in restoring faith in the banks after their failures during the Depression. The second thing it did was to separate banks into two types: commercial and investment, and to forbid one type from offering the services provided by the other. A commercial bank is what I suppose most of us think of as a bank: it makes loans and gives mortgages, accepts deposits and pays interest, and offers services like checking accounts, CDs etc. An investment bank, on the other hand, deals with corporations. It underwrites (finances) stock offerings, speculates in stocks, and creates all sorts of financial "instruments" such securitized mortgages (mortgages bundled into stock offerings), credit-default swaps ("insurance" on possibly bad loans) and other "derivatives." To get an idea of how this plays out, check out a book such as Liar's Poker by Michael Lewis.
Before Glass-Steagall, any bank could act as a commercial bank or investment bank or both. A bank could use deposits to finance securities speculation, for example. If the risks didn't pan out, the depositors could be left holding the bag. As the story goes, banks that were exclusively commercial were afraid and envious of the money-making potential of investment banks; correspondingly, investment banks were greedy for the large funds that depositors could provide. Banks that combined both functions seemed to have a tremendous advantage if sheer money-making potential was the object. Furthermore, regulators were anxious to insulate depositers from speculation with their savings; creating the FDIC could not be possible in this atmosphere. Thus, the main provision of Glass-Steagall II was to require that banks be either commercial or investment banks, but not both.
This is not to say that commercial banks couldn't buy and sell stocks and bonds under Glass-Steagall: they could, but only of certain types and quality, which were regulated. Similarly, investment banks were allowed to make certain types of commercial loans. But, the general thrust of the law was to separate the two functions of banks.
Whatever the theory, the fact of the matter was that Glass-Steagall worked well. Before it, bank crises fueled by speculation were common; for the 35 years it was in effect, there were no such crises; however, less than 10 years after it was repealed in 1999 the 2008-2009 debacle unfolded, returning banks to the disaster level of the Great Depression.
I have spent the past week or so reading articles, blogs and commentary on the "bring back Glass-Steagall" proposition. Of course, it is anathema to so-called conservatives and other deregulators, who seem to cling to an odd academic faith in their own studies about how the act stifled competition and the free market, and if anything made the economic climate more risky. Some even praised Citibank, at least up to the moment its precarious condition became clear. On the other hand, some commentators don't think that the continuation of Glass-Steagall could have prevented the recent crash.
In any case, the Act was repealed in 1999 under the instigation of Senator Phil Gramm of Texas, a reactionary on every possible front, and advocate of the corporate position on banking, energy, taxes etc. (Don't get me started on Phil Gramm.) The vote to repeal in the Senate was largely along party lines, with the Republican majority winning the battle. It passed the House more handily, and President Bill Clinton signed it.
I'm inclined to say: just look at the empirical evidence. Before and after Glass-Steagall there were major failures of banks due to speculation, while during it (1935 - 1999) there were none. In general, de-regulation of industry has been a failure, dispite its proponents' theories. Economics and politics are inexact fields, so their theories don't "prove" anything (Gramm has a Ph.D. in, you guessed it, economics). Ultimately, one tries to learn by what actually happens.
I think that we must once again regulate banks very closely -- something that it is clear they can't and won't do for themselves. Something along the lines of Glass-Steagall is a partial step -- but improvements must be made in the light of what we have learned from the recent meltdown. In addition to the Frank bill, we should have a marketplace for "derivatives" that is scrupulous and transparent: they need their own special rules.
One way to avoid the "too big to fail" problem is to split off the commercial from the speculative very strongly, as in Glass-Steagall. If a commercial bank is in trouble, the depositors are protected by FDIC. If we must protect a bank, let it be a commercial one that serves a useful social function in a capitalist society: lending to businesses so that they can conduct business. If an investment bank is in trouble, let it fail and let its speculators lose what they must. One of the arguments for profit in a capitalist society is risk: no risk no justification for profit. But risk is risk and heat is the nature of the kitchen.
Well, I'm not an economist, but I did a bit of reading about the Glass-Steagall Act(s) -- there were actually two of them. The first one, in 1932, enabled the Federal Reserve to help refinance the banks during the Great Depression. This had to do with "rediscounting" loans or "notes," and also related to the switch away from gold-backed currency. This first act is not the one of most concern these days.
The second Glass-Steagall Act (1933) did two important things. First of all, it set up the Federal Deposit Insurance Corporation (FDIC) which insures bank deposits. This was crucial in restoring faith in the banks after their failures during the Depression. The second thing it did was to separate banks into two types: commercial and investment, and to forbid one type from offering the services provided by the other. A commercial bank is what I suppose most of us think of as a bank: it makes loans and gives mortgages, accepts deposits and pays interest, and offers services like checking accounts, CDs etc. An investment bank, on the other hand, deals with corporations. It underwrites (finances) stock offerings, speculates in stocks, and creates all sorts of financial "instruments" such securitized mortgages (mortgages bundled into stock offerings), credit-default swaps ("insurance" on possibly bad loans) and other "derivatives." To get an idea of how this plays out, check out a book such as Liar's Poker by Michael Lewis.
Before Glass-Steagall, any bank could act as a commercial bank or investment bank or both. A bank could use deposits to finance securities speculation, for example. If the risks didn't pan out, the depositors could be left holding the bag. As the story goes, banks that were exclusively commercial were afraid and envious of the money-making potential of investment banks; correspondingly, investment banks were greedy for the large funds that depositors could provide. Banks that combined both functions seemed to have a tremendous advantage if sheer money-making potential was the object. Furthermore, regulators were anxious to insulate depositers from speculation with their savings; creating the FDIC could not be possible in this atmosphere. Thus, the main provision of Glass-Steagall II was to require that banks be either commercial or investment banks, but not both.
This is not to say that commercial banks couldn't buy and sell stocks and bonds under Glass-Steagall: they could, but only of certain types and quality, which were regulated. Similarly, investment banks were allowed to make certain types of commercial loans. But, the general thrust of the law was to separate the two functions of banks.
Whatever the theory, the fact of the matter was that Glass-Steagall worked well. Before it, bank crises fueled by speculation were common; for the 35 years it was in effect, there were no such crises; however, less than 10 years after it was repealed in 1999 the 2008-2009 debacle unfolded, returning banks to the disaster level of the Great Depression.
I have spent the past week or so reading articles, blogs and commentary on the "bring back Glass-Steagall" proposition. Of course, it is anathema to so-called conservatives and other deregulators, who seem to cling to an odd academic faith in their own studies about how the act stifled competition and the free market, and if anything made the economic climate more risky. Some even praised Citibank, at least up to the moment its precarious condition became clear. On the other hand, some commentators don't think that the continuation of Glass-Steagall could have prevented the recent crash.
In any case, the Act was repealed in 1999 under the instigation of Senator Phil Gramm of Texas, a reactionary on every possible front, and advocate of the corporate position on banking, energy, taxes etc. (Don't get me started on Phil Gramm.) The vote to repeal in the Senate was largely along party lines, with the Republican majority winning the battle. It passed the House more handily, and President Bill Clinton signed it.
I'm inclined to say: just look at the empirical evidence. Before and after Glass-Steagall there were major failures of banks due to speculation, while during it (1935 - 1999) there were none. In general, de-regulation of industry has been a failure, dispite its proponents' theories. Economics and politics are inexact fields, so their theories don't "prove" anything (Gramm has a Ph.D. in, you guessed it, economics). Ultimately, one tries to learn by what actually happens.
I think that we must once again regulate banks very closely -- something that it is clear they can't and won't do for themselves. Something along the lines of Glass-Steagall is a partial step -- but improvements must be made in the light of what we have learned from the recent meltdown. In addition to the Frank bill, we should have a marketplace for "derivatives" that is scrupulous and transparent: they need their own special rules.
One way to avoid the "too big to fail" problem is to split off the commercial from the speculative very strongly, as in Glass-Steagall. If a commercial bank is in trouble, the depositors are protected by FDIC. If we must protect a bank, let it be a commercial one that serves a useful social function in a capitalist society: lending to businesses so that they can conduct business. If an investment bank is in trouble, let it fail and let its speculators lose what they must. One of the arguments for profit in a capitalist society is risk: no risk no justification for profit. But risk is risk and heat is the nature of the kitchen.
Wednesday, October 28, 2009
Traitor Joe
It's hard to say whether Democrats should have stripped Joe Lieberman of all his committee chairmanships after he effectively left the Democratic Party last election. That he retained his seat running as an independent against Ned Lamont, who won the Democratic primary, was a disaster which the Dems just might have prevented if they had seriously campaigned against him. They could easily have made it known then that returning Lieberman to office would have cost Connecticut much of its (non-Dodd) clout in the Senate. But no -- wimps are wimps.
Of course, once he was re-elected -- as an "independent" -- there was no point in stripping him of the committee chairmanship he most wanted: Homeland Security. That is, no point if the Dems intended to hold this chairmanship as a threat against him should he stab them in the back and desert them on healthcare. (Were they capable of thinking that far ahead?) From what I understand, Obama put pressure on the Dems to take Joe back.
Okay, now is the time to make it clear to Lieberman that he will pay very dearly if he continues his Republican ways. In a previous blog I wondered whether Ted Kennedy had left his spine to the Democrats: this will be a test. If they can't put the screws on Traitor Joe they will have let all of us down. Can't they ever learn about party discipline?
Of course, once he was re-elected -- as an "independent" -- there was no point in stripping him of the committee chairmanship he most wanted: Homeland Security. That is, no point if the Dems intended to hold this chairmanship as a threat against him should he stab them in the back and desert them on healthcare. (Were they capable of thinking that far ahead?) From what I understand, Obama put pressure on the Dems to take Joe back.
Okay, now is the time to make it clear to Lieberman that he will pay very dearly if he continues his Republican ways. In a previous blog I wondered whether Ted Kennedy had left his spine to the Democrats: this will be a test. If they can't put the screws on Traitor Joe they will have let all of us down. Can't they ever learn about party discipline?
Tuesday, October 27, 2009
Credit card usury
Our reps in Congress arent't exactly protecting us from predatory banks. The new law preventing outrageous credit card practices (see description here ) does not go into effect until June of 2010. So, of course, the credit card companies are trying to squeeze in as much customer abuse as they can before then.
You may have heard from your friendy credit card issuers recently that they have changed the terms of your contract, or that they have increased your rates. We recently got such a note telling us that our annual percentage rate (APR) had increased to 25.99% (and the rate for a cash advance to 29.95%). This was from CitiBank -- one of the worst-performing banks around. They were obviously hoping to pick up a few shekels from their credit card customers to make up for their other major inadequacies.
How are banks allowed to charge these rates? Here in Massachusetts, the usury rate is set at 20% APR: charging more is illegal. Unfortunately, there is a Supreme Court decision from 1978 that says a bank only has to obey the laws of the state in which it is chartered. That's all credit cards come from South Dakota, Virginia, etc -- a handful of states that have mostly no usury limits -- see this map,
Apparently there used to be national usury law, but our protectors in Washington repealed it after the Great Depression. The banking, healthcare and pharmaceutical industries are the largest contributers to Congress: surprise surprise! Collecting money from them is a bipartisan national pasttime.
One thing to do is to write to your senators and representative and demand protection (my rep is, fortunately Barney Frank). Ask them to pass a law making the Credit Cardholders Bill of Rights of 2009 effective retroactively to the date it was passed. Ask them to support a national usury law limiting APRs to a few points (max of 10) above prime.
Another thing to do is to cancel extra credit cards like ones from department stores, then let the store know why you cancelled it. These merchants send you the cards in order to attract you to their stores. If the cards get cancelled and they receive irate letters, they may put some pressure on the banks.
It's worth a try anyway.
You may have heard from your friendy credit card issuers recently that they have changed the terms of your contract, or that they have increased your rates. We recently got such a note telling us that our annual percentage rate (APR) had increased to 25.99% (and the rate for a cash advance to 29.95%). This was from CitiBank -- one of the worst-performing banks around. They were obviously hoping to pick up a few shekels from their credit card customers to make up for their other major inadequacies.
How are banks allowed to charge these rates? Here in Massachusetts, the usury rate is set at 20% APR: charging more is illegal. Unfortunately, there is a Supreme Court decision from 1978 that says a bank only has to obey the laws of the state in which it is chartered. That's all credit cards come from South Dakota, Virginia, etc -- a handful of states that have mostly no usury limits -- see this map,
Apparently there used to be national usury law, but our protectors in Washington repealed it after the Great Depression. The banking, healthcare and pharmaceutical industries are the largest contributers to Congress: surprise surprise! Collecting money from them is a bipartisan national pasttime.
One thing to do is to write to your senators and representative and demand protection (my rep is, fortunately Barney Frank). Ask them to pass a law making the Credit Cardholders Bill of Rights of 2009 effective retroactively to the date it was passed. Ask them to support a national usury law limiting APRs to a few points (max of 10) above prime.
Another thing to do is to cancel extra credit cards like ones from department stores, then let the store know why you cancelled it. These merchants send you the cards in order to attract you to their stores. If the cards get cancelled and they receive irate letters, they may put some pressure on the banks.
It's worth a try anyway.
Friday, October 23, 2009
The ongoing saga of corporate logic
As you've no doubt heard, the Obama administration is taking steps to cut the pay of top executives at some of the biggest firms that needed, and got, government bailout money. Rachel Beck of the AP reports:
"Those facing pay restrictions outside the executive suite hold leadership positions in areas like finance and investment banking at the banks, and in manufacturing, brand management, and design at the auto companies. They come with years of experience, whether it’s making deals or overseeing car design. For example, Ford Motor Co. which is in far better shape than its two Detroit rivals, could lure auto executives who would be difficult for Chrysler and GM to replace.
"There will be a fallout,"said Janice Reals Ellig, co-CEO of the executive search firm Chadick-Ellig. 'Talent that is short-term-focused because they have big mortgages, college education payments, and other things will feel more pressure to leave."
I see. Firms which have been virtually destroyed by the bad leadership of top executives are worried that salary cuts may force these very same executives to leave for positions at companies that were fortunate enough not to have such leaders. And why would any relatively successful company -- Ford, e.g. -- want to pick up the salaries of these losers?
If I were a stockholder of AIG or GMAC or CitiCorp, I'd love to save salary money by foisting off these losers on my competitors. How can Ms. Beck report this with a straight face? (OK, I don't in fact know how straight a face she had when reporting this nonsense.) I mean, it would be hard to make this stuff up.
(In a similar vein, see the October 11 blog: Musical chairs for incompetents.)
I also love the part about the big mortgages and college education payments that these poor execs have. If you're making a million or more a year, and get a bonus even larger, you are not seriously worried about college tuition. If these jokers can't deal with their household finances, they shouldn't be running Big Biz.
"Those facing pay restrictions outside the executive suite hold leadership positions in areas like finance and investment banking at the banks, and in manufacturing, brand management, and design at the auto companies. They come with years of experience, whether it’s making deals or overseeing car design. For example, Ford Motor Co. which is in far better shape than its two Detroit rivals, could lure auto executives who would be difficult for Chrysler and GM to replace.
"There will be a fallout,"said Janice Reals Ellig, co-CEO of the executive search firm Chadick-Ellig. 'Talent that is short-term-focused because they have big mortgages, college education payments, and other things will feel more pressure to leave."
I see. Firms which have been virtually destroyed by the bad leadership of top executives are worried that salary cuts may force these very same executives to leave for positions at companies that were fortunate enough not to have such leaders. And why would any relatively successful company -- Ford, e.g. -- want to pick up the salaries of these losers?
If I were a stockholder of AIG or GMAC or CitiCorp, I'd love to save salary money by foisting off these losers on my competitors. How can Ms. Beck report this with a straight face? (OK, I don't in fact know how straight a face she had when reporting this nonsense.) I mean, it would be hard to make this stuff up.
(In a similar vein, see the October 11 blog: Musical chairs for incompetents.)
I also love the part about the big mortgages and college education payments that these poor execs have. If you're making a million or more a year, and get a bonus even larger, you are not seriously worried about college tuition. If these jokers can't deal with their household finances, they shouldn't be running Big Biz.
Thursday, October 22, 2009
Bonuses and human services
According today's Boston Globe, the Governor is thinking of cutting about $50 million from the Commonwealth's 1.2 bllion dollar human services budget -- mostly in aid to the disabled.
Suppose that each state faced equal cuts. That's $2.5 billion in cuts -- assuming many low-population states balance out states like California and NY.
Compare that to the estimated $140 billion in compensation due to be handed out to traders and execs of just the top two dozen financial institutions. You could almost certainly pay the entire human services budget of all states with just this money, and probably have enough left over to buy new Beamers for all those bankers as well.
Wouldn't it be nice if they themselves made some gesture to donate a good chunk of this money to help their fellows, after all we've done for them? But no: dream on. That's why we despise them so.
Suppose that each state faced equal cuts. That's $2.5 billion in cuts -- assuming many low-population states balance out states like California and NY.
Compare that to the estimated $140 billion in compensation due to be handed out to traders and execs of just the top two dozen financial institutions. You could almost certainly pay the entire human services budget of all states with just this money, and probably have enough left over to buy new Beamers for all those bankers as well.
Wouldn't it be nice if they themselves made some gesture to donate a good chunk of this money to help their fellows, after all we've done for them? But no: dream on. That's why we despise them so.
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