Tomorrow a proposal to revise how the financial sector is regulated will be announced. Some of the contents of the highly detailed plan have been leaked. Some key elements include:
1. A Financial Services Oversight Council to identify systemic risk and promote interagency cooperation. This would consist of the Treasury Secretary (its chair), the Chair of the Federal Reserve, the National Bank Supervisor, the Director of the National Consumer Financial Protection Agency, the Chair of the SEC, the Chair of the CFTC, the Chair of the FDIC and the Chair of the FHFA. It would have a full time staff.
2. Federal Reserve authority to supervise non-bank firms that threaten financial stability. This is a partial repeal of the Gramm-Leach-Bliley Act that repealed New Deal legislation that had segregated commercial and investment banking.
3. A new National Bank Supervisor with authority over bot federally chartered bank and federally chartered thrifts, which will be treated as banks in the future.
4. Investment advisor registration requirements for hedge funds, venture capital funds and private equity funds which are similar to the requirements now applicable to mutual funds would be imposed, with a low assets under management threshold.
5. Increased regulation of securitizations requiring greater disclosure, increasing regulation of credit reporting agencies and requiring that issuers and orginators of securitized loans retain a five percent interest in those securities. Credit ratings agencies will be required to disclose conflicts of interest and their ratings will be given less weight by regulators.
6. Comprehensive regulation of all "over-the-counter" derivatives (and hence presumably less than comprehensive regulation of back door private derivative transactions).
7. Increased Federal Reserve authority over payment, clearing and settlement systems in the financial markets.
8. A new Consumer Financial Protection Agency that would regulate bank and non-bank lending and investment transactions with consumers with respect to disclosures, fairness and appropriateness. The agency's authority would include credit cards and mortgages, but also comprehensive regulation of other consumer transactions. This federal regulation would not pre-empt additional state regulation. It could require "balanced" disclosures of pros and cons to a deal, established "plain vanilla" safe harbor transactions, ban anti-consumer terms as universally unfair, and would be charged with enforcing fair lending laws. The new agency would be responsible for Truth in Lending laws, the Home Equity and Ownership Protection Act, the Real Estate Settlement and Procedures Act, the Community Reinvestment Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Fair Debt Collections Practices Act. It would have the authority to restrict or ban mandatory arbitration clauses. The FTC would continue to control privacy regulation and would have backup authority to the new agency in areas where it already regulates financial transactions of consumers. Mortgage disclosures would be simplified and financial products marketers would be required to make "reasonable disclosures" rather than meeting the lower current standard that disclosures be "technically compliant" and "non-deceptive." Significant risk will require the most significant disclosures. Providers would be subject to agency action but not to private civil litigation for failing to meet these standards. A process for pre-approval of marketing materials similar to the private letter ruling process in tax law would be established.
9. "A new regime to resolve nonbank financial institutions whose failure could have serious systemic effects." This would use the FDIC as a model and would provide an option other than an AIG style loan and a bankruptcy for the federal government.
10. Revisions to the Federal Reserve's emergency lending authority to improve accountability. The Secretary of the Treasury would have to approve emergency loans in writing.
11. Improved international cooperation. This would include crackdowns on tax/asset protection/banking secrecy havens.
12. An office of National Insurance within the Treasury Department to coordinate insurance regulation nationally (a function almost entirely reserved to state regulations with little federal government involvement now).
Federal regulation of state banks through the Federal Reserve and the FDIC, and federal regulation of credit unions through the National Credit Union Administration would remain largely unchanged. The Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) would remain largely unchanged although their jurisdictional boundaries would be refined and coordinated more tightly.
"Too big to fail firms" would be more closely and comprehensively regulated and would have greater capitalization requirements. Capital requirements would be tuned to the boom-bust cycle requiring more to be set aside in booms for bad time later, consider the use of guarantees or insurance against major macroeconomic risks, using debt convertible to equity to reduce cash flow pressures, and increased regulation of capital requirements against subtle risks like mixed trading positions, levels of equity investment, exposures to low credit quality firms and persons, mortgage and asset backed securities, expo sue to off balance sheet risks, and exposure to derivatives that are not centrally cleared.
Regulation may be streamlined for small simple firms relative to large complex firms. Efforts to avoid agency capture will be institute.
OTC derivative markets would have instruments with standardized terms and greater disclosure of transactions which would have to take place in a public exchange environment.
There will be new "standards and guidelines" designed to align financial executive compensation incentives with long term investor well being, a requirement that executive compensation committees be more independent, and a requirement that senior executive compensation be subject to non-binding shareholder votes.
Accounting standards would be revised to better reflect available credit information and cash flow information.
Parent companies of financial institutions would be required to be less entangled financially with subsidiaries, so that subsidiary losses don't endanger other businesses of the parent.
Investment banking regulation would be transferred from the SEC to the Federal Reserve.
Proposals to prevent runs on money market funds will be offered by a Blue Ribbon commission some time in the near future.
Proposals to reform Fannie Mae, Freddie Mac and the Federal Home Loan Bank system will be made in the near future in a joint effort by the Treasury Department and HUD.
Securities brokers and dealers who offer investment advice would have fiduciary duties to their customers. Whistle blower protections would be enhanced.
Pre-payment penalties and commissions for selling consumers inappropriate products are targeted for regulatory prohibitions.
Elimination of mandatory arbitration for broker-dealer contracts is being considered.
Establish automatic IRA and savers plans for low income employees.
Analysis
Obama' raft of reforms are for the most part, moderate, long overdue, incremental improvements of our current system. They give government sufficient power that it make take another three quarters of a century to figure out how to get around this batch of rules, and create the next big bubble and impending collapse.
The plan is heavy on how this will be implemented and organized, but light on reforms that should be made in the bankruptcy and tax laws that would allow them to better response to a financial crisis.
The plan is heavy on avoiding a financial crisis, but weak on insuring that people who create the problems are wiped out if it all falls apart, and is dim about how it proposes that failures in the financial economy can be prevented from devastating the "real economy".
The Plan also lacks a larger economic framework and conception of American history to place the current Financial Crisis in the context of any larger vision. Five years from now, what does the economic future look like? How is that new economy best described? Who wins and who loses? What new intuitions mater the most? How do tax and bankruptcy policies adjust to meet the interests of financial regulations? What changes in our real economy happen quickly and what changes take their time?
The changes are consensus proposals, more of them sensible in nature. Many daring proposals for bureaucratic consolidating crashed and burdened. But, a lot of mainstream, sensible pr grams do make it into the financial draft. I am not convinced that all of the programs proposed will be successes. But few look like they will do any harm. The Proposal is less elegant than many, essentially throwing everything at the wall, rather than focusing on a small number of critical mistakes made. In many places it errs on the side of being to timid. Still, the reforms are meaningful and deserve to be enacted so tat our financial system can grow a little more robust as a result of this natural experiment.
16 June 2009
Maule On Wealth
Tax Prof James Edward Maule (and here) has an interesting pair of posts on his blog about wealth-creation v. wealth-grabbing. Some of the gist of the argument, which is in my view strikingly negative about what is involved in becoming and being wealthy is captured in these quotes from it. From the first post:
From the second:
I disagree with Maule on this one on multiple counts.
One disagreement harms like environmental damage and compromised worker safety associated with the conduct of business enterprises. I agree that business enterprises frequently engage in conduct that harms the environment and produces worker injuries. But, these harms would be present for the most part, whether the leadership of the businesses that cause them are fat and happy, or just getting by.
The vast majority of the revenues generated by the vast majority of businesses (at least in the "real economy") go towards producing goods and services which pay for often modest salaries for ordinary workers and often modest returns for investors some of whom are mere ordinary individuals saving for future middle class wants and needs. What we define as "profit" for either tax or accounting purposes is usually a minority of revenue, and senior executive compensation (let alone "excess senior executive compensation" by some sensible measure) is usually a small fraction of average profit and an even smaller fraction of business revenues.
In short, it is the very conduct of modern economic activity, and not its exploitative aspects, in particular, that led to the woes associated with an industrial and post-industrial era economy. Some of the most environmentally destructive businesses in the world, and often also the most hazardous to workers, are small, family owned farms, logging operations and mines owned by people who are just barely getting by as measured by their standard of living, or in relation to proxies for the ordinary working man, like the wages paid to the average factory worker.
Equally important, I think that Maule is mostly wrong about how wealth creation works. It would be nice if something like a labor theory of value (a Marxist economic theory based on the assumption that the value of a good was the sum of the labor inputs that went into make it) was supported by strong economic data. But, some of the most striking examples from the real world argue otherwise.
For example, in Zimbabwe, not in 21st century, rather than the 19th, most of the productive land in the country was owned and managed by a few thousand white plantation owners who were mostly descendants of the European colonial elites. Native Zimbawean farm workers did most of the raw labor, at modest wages. While the black majority government did not legally discriminate against its own citizens, and slavery proper was long ago abolished in name and deed in this part of Africa, the nature of the relationship between plantation owners and their workers looked a lot like the pre-Civil War American South. The government, understandably, was fed up with this situation and instituted land reform, in which land was seized from its post-colonial owners and given to farm workers by the government.
The trouble is that in Zimbabwe, the farm workers were not up to the task of managing the land. Farm production plummeted, the economy of Zimbabwe has collapsed, and the political system has dissolved into something just short of anarchy. As distasteful as the fact may be, the plantation owners knew how to run their farms, while their workers did not, and that made all the difference.
More generally, it simply is not true that "By definition, the "pursuers of great wealth" must exploit others and damage the world, for if they were not to do so, the world's resources would remain distributed among all people in rather even distribution, with variations of far less magnitude than exist today."
The most downtrodden in society both in our own domestic economy, and at a global level in the world economy, are most irrelevant to the economy than they are exploited by it. Those who don't participate in, or have a connection to, wealth creators in the economy are not given anything in our economic system, except due to charity or government intervention.
Exploitation implies that economic value is taken from some who create it to benefit others. The world certainly isn't free of exploitation. But, those who participate in creating wealth, even as "replaceable underlings" typically come out far ahead of those who aren't involved at all. For example, factory workers in early stage industrial economies and historically in places like the first Ford plant, face different risks from those who are in agricultural economies, but they often have more economic resources than their pre-industrial counterparts. Ford paid his workers more than he had to in order to get workers to fill his plants (and the automobile companies have continued that precedent for more or less their entire existence with the encouragement of industrial unions). The foreign plants to which manufacturing has been outsourced by American industrial giants have done the same, paying wages at the high end of the scale for their local economies. Proletarians have tended to be better off than peasants (this is starkly the case in modern pseudo-capitalist China and much of the rest of the Third World's sprawling megacities).
There is good reason to believe, in fact, that it is easier to restrain, regulate and redistribute earnings from the externalities created by large enterprises than it is to do the same with small enterprises. Big businesses are easier to regulate and have a harder time simply cheating on their taxes -- they manipulate and twist the tax rules, but, with rare exceptions, follow them.
It isn't that social equity isn't a proper role of government. It is one thing to say that wealthy individuals are a "but for" cause of great wealth, and quite another to say that this implies that those who have more have no obligation to share with those who have less, as a price for conducting business in an orderly society, like the United States, as opposed to one where government is ineffectual, like Somalia. But, I am no longer nearly so convinced that behind every great fortune is a great crime, as I was a couple decades ago.
[A]lthough we don't know why some people are obsessed with accumulating wealth beyond what is required for life, we do know that the obsessive pursuit of wealth generates a variety of life difficulties, dysfunctions, propensity toward unwise and even illegal behavior, intensification of other addictions, and a variety of other ills. In the long run, an individual's pursuit of wealth harms society. In contrast, those who put other values ahead of wealth accumulation for its own sake or for the sake of acquiring disproportionate power end up benefitting society, whether through unpaid volunteer work, dedication to underpaid careers such as nursing and hospice care, or even, I suppose, through the creation of a great symphony or work of art. A world filled with hospital aides, Red Cross volunteers, inner city mural artists, and minimum-wage-earning services workers suggests a more peaceful, nurturing planet that one filled with greedy, money-obsessed, wealth-accumulating power addicts adept at shifting cost onto others. . . .
There is nothing wrong per se with someone trying to turn "making a killing" into his or her art. The problem is that doing so is guaranteed to harm society. Is it possible to make a killing without imposing huge costs on others? Is it possible to make a killing without excessively harming the environment? Is it possible to make a killing without unduly putting the economic well-being and the security of nations at risk? Is it possible to make a killing without engaging in monopolistic or oligopolistic behavior? Is it possible to make a killing without riding on the backs of others? Is it possible to make a killing without undue infringement of the rights of others?
When one examines the lives of the "captains of industry" who made killings in the late 19th century, or the biographies of those who reached billionaire status during the 20th century, one finds all sorts of social evils being generated and compounded by the practices that were put in place. How many track and yard workers died so that the railroad barons could live in a luxury that probably hastened their own deaths? How many Ford Pinto owners, drivers, and passengers died so that anonymous shareholders could maximize profits? How many retirement finances were destroyed so that the big-wigs of Enron and dozens of other enterprises, some known, some yet to be outed, could wallow in money? How many jobs were lost because speculators, gamblers, and money addicts wanted to squeeze non-existant profits out of derivatives? Perhaps they call it "making a killing" because it kills so many people, destroys so many jobs, and ruins so many lives?
From the second:
I did intend to suggest that "wealth-seekers" who succeed in accumulating amounts far in excess of their needs do end up, sometimes intentionally, sometimes unwittingly, and almost always remorselessly, imposing huge costs on others, excessively harming the environment, unduly putting the economic well-being and security of nations at risk, engaging in monopolistic or oligopolistic behavior, riding on the backs of others, and unduly infringing the rights of others. By definition, it is impossible to accumulate huge amounts of wealth without pushing others aside, a fact demonstrated by the repeated and unrelenting pursuit of monopolies and oligopolies by the wealth-seekers. In other words, it is possible to become a great artist without exploiting others or damaging the world. By definition, the "pursuers of great wealth" must exploit others and damage the world, for if they were not to do so, the world's resources would remain distributed among all people in rather even distribution, with variations of far less magnitude than exist today. Borrowing from Mr. Pappas, "to suggest otherwise flies in the face of human experience."
Mr. Pappas notes that "the pursuer of great wealth" benefits society by supporting his or her own family and extended family, creating jobs, contributing to charity, paying taxes, and meeting the demand for goods and services. I disagree. The people who are doing these things aren't pursuers of great wealth. They're pursuers of making a living through independent action. They're entrepreneurs. They probably do provide more for society than do symphony-creators if one accepts a measurement of worth that reflects dollars and that precludes psychic value. No matter, the point isn't whether entrepreneurs are more worthwhile than composers, but whether the power-hungry pursuer of great wealth is a benefit or burden to society. Unfortunately, some of the world's power-hungry wealth pursuers began as enterpreneurs and then ran amok, giving entrepreneurs a bad name. Entrepreneurs create wealth. Wealth seekers desire and take the wealth created by others.
It is important to understand the distinction between a wealth creator and a wealth seeker. The slaves on the Southern plantations created wealth. One problem was that they ended up with very little of it, just barely enough to survive. The same can be said of the track and yard workers employed by the railroad barons and the migrant farmworkers employed by huge agribusinesses. The argument that entrepreneurs create wealth is a truism that misses the point. Yes, entrepreneurs contribute to the creation of wealth by providing services in the management of workers, the organization of projects, the implementation of ideas. And most entrepreneurs generate some modest amount of return, compensating them for their efforts. Most entrepreneurs earn not much more than their employees. Most entrepreneurs don't try to stomp out their competition. Most entrepreneurs end up being destroyed by the monopolists and oligopolists. Most entrepreneurs are wealth-creators, but they, just like the workers, become the victims of the wealth-grabbers.
As the wealth-grabbers muscle their way into domination and control of a market, entrepreneurs face the choice of closing up shop, caving in and selling out, or becoming yet another money-grabber. Whether the product is illegal drugs or operating system software, black market alcohol or telecommunications, this is how the modern but damaged capitalist system plays out. Greed, and psychological addiction to money and power, infect the market place. Among the billionaire wealthy are those who claim they needed to do what they did in order to survive, while their employees scrape by on minimum wage. Survival for the latter means this evening's dinner, whereas survival for the former means keeping within striking distance of whoever currently tops the asset ownership list.
The problem isn't the entrepreneur who earns twice or three times, or even ten times, the average compensation of his or her employees. It's the CEO or conglomerate owner who pulls in pay and perks that are thousands and tens of thousands times the average salary of the rank-and-file. However one puts a value on what the wealth-seeker creates, it surely isn't tens of thousands times the value of what the minimum wage employee produces. Either those employees need hefty raises, or the CEO and conglomerate owner need pay cuts. For those who claim that CEO and similar pay is determined by "the market," keep in mind that few people enter that market, that it is a market frequented and controlled by a handful, and that the reciprocal and mutual treasure-dividing is out-of-bounds for most people, including the entrepreneurs who seem to think that criticism of the wealth-grabbers threatens the well-being of the wealth-creating entrepreneur.
Joe Kristan, of Tax Update Blog, commented on Mr. Pappas' post by adding "well-meanng meddlers who hobble honest wealth producers with high taxes and foolish regulation cause far more harm than dishonest wealth-seekers." Joe and I will need to agree to disagree on this one. If the wealth-grabbers didn't hobble the environment, would we not see reduced government spending on, and thus less need for taxation to fund, environmental remediation? Would we not see less need for environmental protection regulations? If the wealth-grabbers paid living wages instead of controlling markets so that a store manager was valued at 1/10,000th of the CEO, would we not see reduced government spending on, and thus less need for taxation to fund, social services? If the wealth-grabbers' companies funded the rank-and-file retirement plans as generously as they do those of the big-wigs, sould we not see reduced government spending on, and thus less need for taxation to fund, social security? Would we not see less need for deferred compensation regulation? If the greed merchants made full and fair disclosure and did not package junk into derivatives, would we not see reduced government spending on, and thus less need for taxation to fund, rescue of the afflicted? Would we not see less need for financial market regulation? The saddest part of the entire debate over wealth and taxes is that the very rich have persuaded the not-very-rich into arguing for the very arrangements that, if continued, will guarantee increasing centralization of wealth in a very few and continued destruction of the wealth-creating, make-a-living-not-a-killing entrepreneur. Increasing income tax rates, for example, on taxable incomes exceeding $1,000,000 and increasing them even more on taxable incomes exceeding $10,000,000 isn't going to hamstring the honest make-a-living entrepreneur, but it should provide some, hopefully enough, disincentive for the amassing of even larger accumulations of wealth and attendant incomes through the make-a-killing lifestyle. Given the choice between letting an elected government take the money and run things, or letting a self-appointed nobility, excuse me, oligopoly, take the money and run things, I'll vote for the former.
Mr. Pappas concludes by pointing out that "many great artists have been funded by rich patrons." Patrons, he notes, that are the "very same types he castigates as obsessive, greedy and dysfunctional." He claims that "[w]ithout a Lorenzo de Medici there would have been no Michelangelo." We don't know that. Absent a parallel universe, there's no proving nor disproving this claim. We do know there was a Michelangelo doing things before he connected with the de Medici. We do know that he eventually came to realize that repressiveness of the de Medici wasn't worth it. Surely an apologist for the de Medici might claim that THEY (not only Lorenzo but his son and others) created the art of Michelangelo. Hah. And even if it could be proven that Michelangelo would have accomplished less than he did, or nothing, it would not have justified the behaviors of the de Medici. A few centuries later, in the same European peninsula, someone discovered that making the trains run on time isn't enough to justify the greed. In the long run, wealth grabbing is a very poor idea.
I disagree with Maule on this one on multiple counts.
One disagreement harms like environmental damage and compromised worker safety associated with the conduct of business enterprises. I agree that business enterprises frequently engage in conduct that harms the environment and produces worker injuries. But, these harms would be present for the most part, whether the leadership of the businesses that cause them are fat and happy, or just getting by.
The vast majority of the revenues generated by the vast majority of businesses (at least in the "real economy") go towards producing goods and services which pay for often modest salaries for ordinary workers and often modest returns for investors some of whom are mere ordinary individuals saving for future middle class wants and needs. What we define as "profit" for either tax or accounting purposes is usually a minority of revenue, and senior executive compensation (let alone "excess senior executive compensation" by some sensible measure) is usually a small fraction of average profit and an even smaller fraction of business revenues.
In short, it is the very conduct of modern economic activity, and not its exploitative aspects, in particular, that led to the woes associated with an industrial and post-industrial era economy. Some of the most environmentally destructive businesses in the world, and often also the most hazardous to workers, are small, family owned farms, logging operations and mines owned by people who are just barely getting by as measured by their standard of living, or in relation to proxies for the ordinary working man, like the wages paid to the average factory worker.
Equally important, I think that Maule is mostly wrong about how wealth creation works. It would be nice if something like a labor theory of value (a Marxist economic theory based on the assumption that the value of a good was the sum of the labor inputs that went into make it) was supported by strong economic data. But, some of the most striking examples from the real world argue otherwise.
For example, in Zimbabwe, not in 21st century, rather than the 19th, most of the productive land in the country was owned and managed by a few thousand white plantation owners who were mostly descendants of the European colonial elites. Native Zimbawean farm workers did most of the raw labor, at modest wages. While the black majority government did not legally discriminate against its own citizens, and slavery proper was long ago abolished in name and deed in this part of Africa, the nature of the relationship between plantation owners and their workers looked a lot like the pre-Civil War American South. The government, understandably, was fed up with this situation and instituted land reform, in which land was seized from its post-colonial owners and given to farm workers by the government.
The trouble is that in Zimbabwe, the farm workers were not up to the task of managing the land. Farm production plummeted, the economy of Zimbabwe has collapsed, and the political system has dissolved into something just short of anarchy. As distasteful as the fact may be, the plantation owners knew how to run their farms, while their workers did not, and that made all the difference.
More generally, it simply is not true that "By definition, the "pursuers of great wealth" must exploit others and damage the world, for if they were not to do so, the world's resources would remain distributed among all people in rather even distribution, with variations of far less magnitude than exist today."
The most downtrodden in society both in our own domestic economy, and at a global level in the world economy, are most irrelevant to the economy than they are exploited by it. Those who don't participate in, or have a connection to, wealth creators in the economy are not given anything in our economic system, except due to charity or government intervention.
Exploitation implies that economic value is taken from some who create it to benefit others. The world certainly isn't free of exploitation. But, those who participate in creating wealth, even as "replaceable underlings" typically come out far ahead of those who aren't involved at all. For example, factory workers in early stage industrial economies and historically in places like the first Ford plant, face different risks from those who are in agricultural economies, but they often have more economic resources than their pre-industrial counterparts. Ford paid his workers more than he had to in order to get workers to fill his plants (and the automobile companies have continued that precedent for more or less their entire existence with the encouragement of industrial unions). The foreign plants to which manufacturing has been outsourced by American industrial giants have done the same, paying wages at the high end of the scale for their local economies. Proletarians have tended to be better off than peasants (this is starkly the case in modern pseudo-capitalist China and much of the rest of the Third World's sprawling megacities).
There is good reason to believe, in fact, that it is easier to restrain, regulate and redistribute earnings from the externalities created by large enterprises than it is to do the same with small enterprises. Big businesses are easier to regulate and have a harder time simply cheating on their taxes -- they manipulate and twist the tax rules, but, with rare exceptions, follow them.
It isn't that social equity isn't a proper role of government. It is one thing to say that wealthy individuals are a "but for" cause of great wealth, and quite another to say that this implies that those who have more have no obligation to share with those who have less, as a price for conducting business in an orderly society, like the United States, as opposed to one where government is ineffectual, like Somalia. But, I am no longer nearly so convinced that behind every great fortune is a great crime, as I was a couple decades ago.
Open Adoption
Evil Mommy has some choice words about the excess of skepticism afforded the institution of open adoption.
Tags At Wash Park Prophet
I don't know how to do "word clouds" of popular topics at this blog, but I can do old fashion tag frequency. The tags used five or more times at this blog are as follows (and keep in mind that his is for about half of the blog's existence; old posts are mostly untagged):
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Decent Societies
The notion that a non-democratic society can nonetheless be a "decent society" is one that bears revisiting.
Rawls (as cribbed by Wikipedia in the link above) describes "decent societies" as follows:
An article on a similar theme argues that it is not enough to look at institutions standing alone to understand how they influence economic and political development. Instead, institutions influence political and economic development in a path dependent way.
The democratic peace is secured not simply (if at all) through explicitly democratic institutions as such, but through a number of social and political norms and institutions commonly associated with democracies. In The Law of Peoples, John Rawls claims that the conditions that secure the peace between democracies can be found in his non-democratic, non-liberal 'decent' societies too. I argue that the situation is more complex than Rawls suggests, but that he is still largely correct. Since decent societies pose no special threat to global peace, then the democratic peace thesis does not justify efforts to democratize them. This argument is part of Rawls’s larger defense of decent societies.
Rawls (as cribbed by Wikipedia in the link above) describes "decent societies" as follows:
He claimed there that "well-ordered" peoples could be either "liberal" or "decent". Rawls argued that the legitimacy of a liberal international order is contingent on tolerating the latter, which differ from liberal peoples, among other ways, in that they might have state religions and deny adherents of minority faiths the right to hold positions of power within the state, and organize political participation via consultation hierarchies rather than elections. However, no well-ordered peoples may violate human rights or behave in an externally aggressive manner. States that do so are referred to as "outlaw states," "societies burdened by unfavourable conditions" and "benevolent absolutisms", and do not have the right to mutual respect and toleration possessed by liberal and decent peoples.
An article on a similar theme argues that it is not enough to look at institutions standing alone to understand how they influence economic and political development. Instead, institutions influence political and economic development in a path dependent way.
Dog's Guilty Look Not Proof
Dogs can have what is known as a "guilty look." But why? It turns out that the accusation and not the forbidden act is to blame. Researchers studied the matter and learned that dogs wrongfully accused of inappropriate behavior after being set up by researchers look just as guilty to their masters as those who are rightfully accused by their master of doing something inappropriate.
Query if the same result is true in people?
Query if the same result is true in people?
Fed Bailouts Itemized
Calculated Risk has itemized the $13.9 trillion of obligations that the Fed and other agencies are authorized to participate in as bailouts/guarantees under the various financial crisis bailout programs it is involved in at this point.
Some, like a guarantee of $3.2 trillion of money market funds against breaking the buck are extremely unlikely to result in any meaningful liability for the Fed. Another big group of programs involve buying commercial paper (i.e. short term debt obligations of large companies with good credit which used to be financed by banks). Other programs involve some risk to the Fed or even carry a significant risk of actually resulting in a loss.
It is hard to evaluate what the probable exposure of the federal government is in these programs in good, typical, bad and worse case scenarios. Realistically, it is much less than the face value of the guarantees and loans. Even if these loans went into default, the federal government players would get some return.
Some observers have called the Fed action inflationary, but there are real reasons to doubt this conclusion as well. A guarantee of an existing obligation wouldn't normally be counted as a change in the money supply. Neither would a purchase of an existing debt, which is what the TARP program was conceptualized as doing. And, the reason the Fed is buying commercial paper from private parties in the first place is that the supply of commercial paper had contracted in a comparable amount when banks and other commercial paper investors stopped making commercial paper loans. Very few of the federal government programs listed in the $13.9 trillion figure include new loans of a type that weren't being provided by the private sector prior to the financial crisis.
Also, inflation is hard to hide. It is one of those economic phenomena that is devilishly hard to understand the mechanism behind in detail, but very easy to observe on the street. Interest rate markets, retail prices and commodity prices respond very quickly to changes in the money supply even in relatively primitive economies with little or no centralized statistical monitoring. Yet, we aren't seeing soaring core consumer price index commodity prices or soaring interest rates. Other than a brief spike in interbank lending rates and a big increase in the spread between the interest rates charged to businesses with good credit and those charged to businesses with bad credit, interest rates have remained remarkably low throughout the financial crisis. Real estate and financial asset prices have collapsed, other asset prices have been fairly steady (although oil prices are starting to creep up again after economic contraction led declines), and lenders have responded to default fears by not lending rather than by increasing interest rates.
In other financial crisis news:
Industrial capacity is being used at a rate which is a record low since data were first kept in 1967. Just 68.3% of the nation's industrial capacity is being used.
April housing starts were at the lowest level since data were first kept in 1959 at 454,000. They have rebounded slightly in May to a still very low 532,000. At the peak of the housing start boom in 2006 there were about 2,250,000 housing starts. (All of the housing start data is on a seasonally adjusted annual rate basis).
Updated with analysis at about 3:40 p.m.
UPDATE TWO: 6-17-09 at 3:15 p.m.: Prices haven't deflated so much since April 1950, and core inflation for May was very low.
Some, like a guarantee of $3.2 trillion of money market funds against breaking the buck are extremely unlikely to result in any meaningful liability for the Fed. Another big group of programs involve buying commercial paper (i.e. short term debt obligations of large companies with good credit which used to be financed by banks). Other programs involve some risk to the Fed or even carry a significant risk of actually resulting in a loss.
It is hard to evaluate what the probable exposure of the federal government is in these programs in good, typical, bad and worse case scenarios. Realistically, it is much less than the face value of the guarantees and loans. Even if these loans went into default, the federal government players would get some return.
Some observers have called the Fed action inflationary, but there are real reasons to doubt this conclusion as well. A guarantee of an existing obligation wouldn't normally be counted as a change in the money supply. Neither would a purchase of an existing debt, which is what the TARP program was conceptualized as doing. And, the reason the Fed is buying commercial paper from private parties in the first place is that the supply of commercial paper had contracted in a comparable amount when banks and other commercial paper investors stopped making commercial paper loans. Very few of the federal government programs listed in the $13.9 trillion figure include new loans of a type that weren't being provided by the private sector prior to the financial crisis.
Also, inflation is hard to hide. It is one of those economic phenomena that is devilishly hard to understand the mechanism behind in detail, but very easy to observe on the street. Interest rate markets, retail prices and commodity prices respond very quickly to changes in the money supply even in relatively primitive economies with little or no centralized statistical monitoring. Yet, we aren't seeing soaring core consumer price index commodity prices or soaring interest rates. Other than a brief spike in interbank lending rates and a big increase in the spread between the interest rates charged to businesses with good credit and those charged to businesses with bad credit, interest rates have remained remarkably low throughout the financial crisis. Real estate and financial asset prices have collapsed, other asset prices have been fairly steady (although oil prices are starting to creep up again after economic contraction led declines), and lenders have responded to default fears by not lending rather than by increasing interest rates.
In other financial crisis news:
Industrial capacity is being used at a rate which is a record low since data were first kept in 1967. Just 68.3% of the nation's industrial capacity is being used.
April housing starts were at the lowest level since data were first kept in 1959 at 454,000. They have rebounded slightly in May to a still very low 532,000. At the peak of the housing start boom in 2006 there were about 2,250,000 housing starts. (All of the housing start data is on a seasonally adjusted annual rate basis).
Updated with analysis at about 3:40 p.m.
UPDATE TWO: 6-17-09 at 3:15 p.m.: Prices haven't deflated so much since April 1950, and core inflation for May was very low.
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