Free Riders

An age old problem in human society is the free loader problem. Economists prefer to phrase it as the “Free Rider Problem” so as not to drag in those icky moral and cultural issues. I prefer to use the more appropriate phrase, “free loader” as that’s the real problem. People unable to provide for themselves are not a problem, even for poor human societies. Every society, not matter how rich, is plagued by a slice of humanity that chooses to live off the labor of others, even when alternatives are available to them.

The better term may be the “entitlement problem” but that one has been claimed for other purposes. An example I like to use is the pizza problem. In my youth a friend had a roommate, who was from a very wealthy family. Having grown up unaware of the restraints the rest of us faced, he had a sense of entitlement. He just expected people to wait on him. Whenever we ordered a pizza, this guy would eat more than his share and never chip in for the bill, unless asked. He seemed oblivious to the fact that food cost money and the rest of us had to concern ourselves with the fact we lacked an abundant supply of money.

That’s one side of the entitlement coin. Spend any time around the very rich and you bump into this. When I worked for a Congressman in my youth, he and his family were often stymied by mundane things like buying gas. They never carried cash and did not have credit cards. Someone else was always there to pay the bill so when caught needing to actually pay for something, they would be stumped. The thing about it is there was always someone there to solve the problem for them. A sense of entitlement can carry you a long way in society.

The other side of the coin is the underclass.It is generally assumed by the ruling class that the lower class is just too dumb to do anything other than be poor. That’s often the case. There are a lot of very stupid people in the ghetto. But, they are not so stupid that they cannot provide for themselves. Instead of investing their time into middle-class pursuits, they work the welfare system, learning all the ways to maximize their return, while minimizing their investment. After all, they are entitled.

That’s the thing you see with the under-class. They view themselves as dependent and they can’t imagine things arranged any other way. Government and the rich people who run it owe them free housing, free food, free booze and so forth. In a weird way the under-class is like modern hunter-gatherers. They forage around their environment, in this case the ghetto and the custodial state that supports it, for the necessities to live. Every once in a while, the males engage in violent conflict with males from other tribes. Afterwards, they get high, eat and screw.

The point of all this is humans have been trying to figure out how best to handle the free rider problem since forever and we still struggle with it. The best way we have discovered is to have everyone pay their own way. A radical idea that has been tried in a few places with surprising success. Colonial New England is probably our best example locally. People were expected to pay their own way, take care of their families and not be a burden on their neighbors. Charity existed, but it existed with lots of strings. Those strings were intended to discourage you from needing charity. I used to live near an old almshouse from the 18th century, for example.

All that was considered crazy so we have struggled to come up with better answers. A good example how the struggle is going is Net neutrality. For reasons he most certainly does not understand, President Obama is pushing for the FCC to arbitrarily force ISP’s to treat all traffic the same.

President Obama urged the US government to adopt tighter regulations on broadband service in an effort to preserve “a free and open Internet.”

In a statement released Monday, Obama called on the Federal Communications Commission to enforce the principle of treating all Internet traffic the same way, known in shorthand as Net neutrality. That means treating broadband services like utilities, the president said, so that Internet service providers would be unable “to restrict the best access or to pick winners and losers in the online marketplace for services and ideas.”

Obama wades into a contentious debate that has raged over how to treat Internet traffic, which has only heated up as the FCC works to prepare an official guideline. Those rules were expected to be made available later this year, though reports now claim they may be delayed until early 2015. The debate has centered on whether broadband should be placed under Title II regulation under the Telecommunications Act, which already tightly controls phone services.

Proponents argue that Title II regulation would ensure the free and fair flow of traffic across the Internet. Opponents, however, believe the reorientation would mean onerous rules that would limit investment in the infrastructure and in new services, and that toll roads of sorts would provide better service to companies that can support their higher traffic volumes. But that in turn has created widespread concern that ISPs could throttle service in some instances, intentionally slowing some content streams and speeding others.

The problem is the Internet is not a utility. A utility is a special sort of monopoly that provides a specific product that is the same for all customers. Rich people get the same electricity as poor people. The utility charges by the unit at the same rate for all users. The Internet is a wildly varied service that is valuable only because of a millions of other businesses that sells products and services over the Internet. But, there are loads of companies transferring their costs to people who do not use their service, via the miracle of the cable bill. Facebook is the most obvious example.

The problem we have is a variation on the classic Tragedy of the Commons. The public, through their governments, allowed private industry to use public resources to construct the Internet, including the massive cable TV network. In many cases, these companies were paid to build out infrastructure. All of them rely on free access to public roads and sidewalks to maintain their networks, like any other utility. Unlike the electric grid, the Internet is a virtual market place, The ISP charges rent to anyone who sets up shop and charges access to anyone who wants to buy products offered on-line.

Well, sort of.

I pay much more for Internet service that I probably should, given my usage. I don’t watch movies on-line or listen to music on-line very often. The guy down the road has a bunch of kids who each use ten times the bandwidth I use. Their Internet bill is the same as mine. The costs are socialized so he can get cheap movies and I can get expensive e-mails. Much like the cable bill, we have a inverse of the utility model. Instead of metered billing, everyone pays the same, regardless of usage. The ISP’s want to implement what amounts to metered billing, like a utility, except the government is trying to stop them, because they say they are a utility.

Stop Trying To Sell Me Stuff

Over Labor Day I was at the Boston College – UMass football game. The crowd was small, maybe 30K, but it could have been less. It was a “home game” for UMass so the Boston College fans were maybe half the crowd. Labor Day in Boston is not a great time to hold a sporting event, but for some reason they did it anyway.

The small crowd meant I could get the full marketing blast from the people who run the sports facility. That means the blasting of music, video ads everywhere and constant haranguing by the public address man to pay attention to a sponsor. I think even toilet breaks were brought to us by some corporate sponsor.

This is why live sporting events struggle to maintain attendance. Across all sports attendance is flagging. Sports marketing people always think more is better, so we get more and more marketing. More video boards. More screaming PA guys. More rock music. More side crap to draw our attention away from the game to pay attention to something or other brought to us by MegaCorp. The argument in favor of this is that sitting at home has become so good, they have to make going to the game like home, but with more ads. Always more ads.

I had club seats for the game so we went inside to avoid being screamed at by the PA guy and the deafening rock music. I asked someone about this nonsense and they told me that young people like it. That’s the catch all of all marketing campaigns. Young people like it. There’s never any evidence of this, but marketing people always say it.

The fact that young people have no money is never mentioned. No one ever points out that the blaring music is thirty years old and the young people make sport of it when outside of earshot. But, it’s hardly the point. The point is no area of daily life can be free of marketing.

No matter what it is, if people like it, the dreary dickheads from the business schools will demand they ruin it with ads no one watches. This letter to the editor in the Roanoke Times gets to the heart of the matter. Being told by some dimwit when to cheer and where to look is insulting. Adults can tolerate a little of it, but there are limits.

The same is true of the barrage of ads. Everyone gets that marketing dollars are a part of the business. The teams cannot live on the billions in ticket and merchandise sales, so they have to “leverage” their fan base in order to “monetize” the popularity of their sport and maximize their market position.

It used to be that commercial TV had ads because the service was free. You got the free service because they got to sell airtime to people trying to sell you stuff. Pay cable was supposed to be commercial free. Now it is not only packed with ads, they sell your personal data to marketing firms who use it to sell you crap on your phone or your browser. The whole racket now is to get you to pay them to send you ads. Sports fans are rationally forgoing the attendance costs because they can at least change the channel when the ads are jammed in their face during the game if they on their couch.

This is how it goes when everything is based on the madness of growth. It’s not enough to be a stable, profitable business. You can’t because the people in charge are systematically eroding those profits with currency manipulation. Your costs keep going up because your money keeps losing value. In 1984, I could get into the Red Sox game and have a beer for $10.00. The ticket was $6 for a bleacher seat and a beer was $3.50. If I did not want a beer, I could get a couple of dogs and maybe a coke, if I had some change. Adjust for inflation and that ten bucks gets half a beer today, as long as it is domestic. At the football game over Labor Day, I paid ten bucks for a slice of pizza.

That means everyone all the time has to be raising prices, lowering value and finding new customers. Big operations like football teams have to charge for everything. Breathing will soon be taxed. We’re not far from the day when the toilets will have credit card readers. The other option will be standing their watching ads while you wait for the hopper. Before you can sit, you’ll have to fill out a marketing survey.

This has to end. By that I mean, it cannot go on like this forever. I’m saturated. I can take no more. Even those with a higher threshold for this stuff have a finite amount of time and money. The stone will run out of blood eventually. Then what?

 

Protection Rackets

Much of what is called the “new economy” is just an updated version of the old economy. Netflix, for example, transfers their infrastructure costs onto you, even if you don’t use their service. Their streaming service relies on the Internet and the cost of growing bandwidth is in your cable bill. Facebook exists because they don’t have to pay to put their site on your PC. You pay for it. Cost shifting is a big part of the new economy and in some cases it is outright extortion.

First the chefs of a small Italian restaurant got mad at online review site Yelp. Instead of trying to get better reviews, they decided to take a different approach: get terrible ones.

The campaign helped Botte Bistro get a rating of one out of five stars, as more than 1,000 reviewers left hundreds of tongue-in-cheek reviews panning the Richmond, California, eatery, said chef Michele Massimo, adding that it boosted business.

It was the latest protest among businesses who for years have complained that Yelp was extorting them by raising or dropping ratings depending on whether they advertised with the Internet’s most popular review site.

Yelp has persistently denied those claims on its website, in court and at every opportunity when the question is put publicly to the company.

“It wouldn’t pass the straight face test,” Yelp spokesman Vince Sullitto said of the extortion claims.

Sullitto said Yelp attracts millions of viewers and sells advertising to 80,000 businesses because of the site’s credibility with consumers. Sullitto said many of the company’s critics are businesses that have received bad reviews.

Last month, the 9th U.S. Circuit Court of Appeals tossed out a lawsuit filed by several businesses claiming Yelp extorted them by removing positive reviews after advertising sales pitches were turned down.

The court is one rung below the U.S. Supreme Court and the ruling could have been a definitive one for Yelp.

Instead, it served to fuel the company’s critics because the court said that, even if Yelp did manipulate reviews to penalize businesses, the practice would not constitute extortion.

The court said it found no evidence of manipulation and that it was ruling narrowly only on the question of extortion. Nonetheless, the company’s critics said the ruling supported their claims.

Even before the 9th Circuit ruling, Yelp was battling two lawsuits filed by company investors who make similar extortion claims.

The suits, filed in San Francisco federal court over the summer, allege that the company’s stock traded at artificially inflated prices because the “company tried to sell services designed to suppress negative reviews or make them go away” and then lied about it.

The company has yet to formally respond to the lawsuits in court, but says it will fight these legal actions as well.

Last year, a lawyer serving as a small-claims judge in San Diego likened Yelp to a “modern-day version of the Mafia going to stores and saying, ‘You want to not be bothered? You want to not have incidents in your store? Pay us protection money.'”

This is not a new thing. Trade magazines have played the same game for years. Good reviews could make or break a product and the way to ensure it was to buy ads in the trade magazines. At the same time, writers would know they better play ball and say nice things about the products from their advertisers. It was not a formal arrangement, just a natural one. Everyone had an interest in promoting the product.

Yelp and other review sites have simply expanded the model to the Internet and every consumer business. Proving they are manipulating their rankings is never going to be easy, but it is hard to imagine they are not doing it. The bias will always be in favor of their customers who are the people sending them money, not the dingbats writing reviews. That’s what “new economy” types often forget. The customer is the guy writing the checks and he always comes first. In this case, the review site will look out for those businesses that pay for ads.

Information Asymmetry

I’ve written in the past that public debt will one day be banned in the reforms that come after the great collapse. I’m half joking about the great collapse stuff, but history says we are due for a Bronze Age Collapse. The reason I think the banning of public debt will be on the list of reforms is we keep seeing these stories about American cities being swallowed up by debt payments.

Among the many ideas the Chicago Teachers Union have come up with over the years to save big money or generate gobs of new revenue for our cash-strapped city, a favorite involves what they like to call “toxic” interest-rate swaps deals.

Here’s the perennial claim, which is making a comeback as CTU President Karen Lewis contemplates a run for mayor:

The city and the school system have thrown away hundreds of millions of dollars after being duped by big banks into signing deals that locked in excessive interest payments. If only the city would take legal action, CTU again argued in a letter to the mayor last month, the money could be recouped and spent on city services and in classrooms.

Cities went out and made deals with Wall Street that looked good in the moment. They freed up cash to buy votes and pay off cronies. States did similar things with synthetic debt instruments like tobacco bonds. All across the country we see examples of states and municipalities struggling with bad debts. That’s not bad debt owed to them but bad debts incurred by previous administrations.

The libertarians simply shrug and say they should suffer. The neocons produce 5,000 page plans to restructure the debt using more synthetic securities cooked up by their brethren on Wall Street. Liberals want ta debt jubilee. That’s merely a short term fix that destroys the bond markets for a generation. If the court ever did such a thing, the world financial system would collapse in a hour because of the trillions of derivatives that would be effected.

In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case.

The men on Wall Street who broker these deals are super smart and know their business better than anyone, other than maybe the guys at the other banks doing the same deals. The folks running pension funds are either men and women lacking the smarts to work at the big banks or they are not sociopaths. They are usually beholden to the local pols and therefore share their short term motives. They are easy pickings for the sharpies on Wall Street.

There’s no fixing this. In fact, we used to know this. Pension fund managers used to spend their days reading the newspaper and banging their secretaries because all they had to do was buy T-Bills and high end corporate bonds. Then the economics professions lowered interest rates to zero and suddenly the guys with bad comb overs had to start playing the market and doing interest swap deals .

The solution is a simple one. Ban borrowing by municipal governments. This solves the temptation to play games with public money and public debt. If Chicago had to budget based solely on its tax base, you would have a different city. Karen Lewis would not be head of the teacher union, because there would  not be a teacher union. You can afford barnacles like Karen Lewis when someone else is paying her salary.

The Nation State

Economists are the near perfect example of the aphorism “a man good with a hammer sees all the world as a nail.” They are convinced that the totality of life on earth can be packed into one of their spreadsheets. The idea that people might not want the most efficient or most cost effective thing is alien to the mind of the economist. Despite mountains of obvious examples in daily life, they insist that people are moist robots, acting out of self-interest. Despite that, this post is worth the read.

Before the late 18th century there were no real nation states. … If you travelled across Europe, no one asked for your passport at borders; neither passports nor borders as we know them existed. People had ethnic and cultural identities, but these didn’t really define the political entity they lived in. …

Agrarian societies required little actual governing. Nine people in 10 were peasants who had to farm or starve, so were largely self-organising. Government intervened to take its cut, enforce basic criminal law and keep the peace within its undisputed territories. Otherwise its main role was to fight to keep those territories, or acquire more. … Many eastern European immigrants arriving in the US in the 19th century could say what village they came from, but not what country: it didn’t matter to them. … Ancient empires are coloured on modern maps as if they had firm borders, but they didn’t. Moreover, people and territories often came under different jurisdictions for different purposes.

Such loose control, says Bar-Yam, meant pre-modern political units were only capable of scaling up a few simple actions such as growing food, fighting battles, collecting tribute and keeping order. …

The industrial revolution … demanded a different kind of government. … “In 1800 almost nobody in France thought of themselves as French. By 1900 they all did.” … Unlike farming, industry needs steel, coal and other resources which are not uniformly distributed, so many micro-states were no longer viable. Meanwhile, empires became unwieldy as they industrialised and needed more actual governing. So in 19th-century Europe, micro-states fused and empires split.

The author is confusing a lot of things here. There were nation states before anyone thought of inventing passports. The British had a clear sense of national identity by the time of the Thirty Years War and most argue that the 100 Years War was the birth of nationalism. Certainly the French and English saw themselves as nations by the the 17th century. When you look at how people identified with the local polity, the Romans clearly had a firm understanding of citizenship.

That said, the idea of nationalism is a recent development. The English and French caught the fever first and then the Spanish and Italians. The Swedes had a national identity in the Thirty Years War. Central and Eastern Europe, however, were late to the game. Outside of China, India and Japan the rest of the world still struggles with the concept. If not for the West forcing these concepts on the people of Africa and the Middle East, tribalism would still be the natural method of self-organization.

Agrarian societies are not in need of a large public works projects, at least not the simple sort of farming in place for thousands of years. Maybe large scale irrigation would have been helpful, but farming adapted to the land. Road maintenance for getting crops to market would have been useful and the Romans did a lot of it, but the European model worked just as well.

As a result, in purely agrarian societies, there was never an economic need for coordinating loads of people into creating publicly held assets. The pillaging of France by the English in the 100 Years War, did change the economy, creating a demand for talent to build and maintain large estates. That probably sowed the seeds for later economic innovation like road building an irrigation projects.

Industrial societies, on the other hand, need large scale public works and that can happen in two ways. One is with the lash in low trust societies. The other is through coordinated cooperation in higher trust societies. A group of people can come together for mutual economic benefit and hire a bunch of men to do the work that the rich guys need done. There is obvious exploitation here, but it is not slavery.

It is important to note that the Industrial Revolution did not start in Africa or the Fertile Crescent. The elements for industrialization were in place in England, which is why it started there first. The combination of demographics, social structure and limited political institutions built on a national identity allowed large scale economic operations to flourish in England before anywhere else.

As industrialization flowed on to the continent, the countries with “far-reaching bureaucracies needed to run complex industrialized societies” were the last to industrialize. In the case of Russia, industrialization destroyed the “far-reaching bureaucracies” needed to maintain order. The riots and revolts of the 19th century in central Europe were largely due to the collision of these existing “far-reaching bureaucracies” and the changing economics.

These new nation states were justified not merely as economically efficient, but as the fulfilment of their inhabitants’ national destiny. A succession of historians has nonetheless concluded that it was the states that defined their respective nations, and not the other way around. …

“nation building” … required the creation of an ideology of nationalism that emotionally equated the nation with people’s Dunbar circle of family and friends. That in turn relied heavily on mass communication technologies. … Nationalist feelings … arose after mass-market books standardised vernaculars and created linguistic communities. Newspapers allowed people to learn about events of common concern, creating a large “horizontal” community that was previously impossible. National identity was also deliberately fostered by state-funded mass education.

The key factor driving this ideological process, Maleševic says, was an underlying structural one: the development of far-reaching bureaucracies needed to run complex industrialised societies. For example, says Breuilly, in the 1880s Prussia became the first government to pay unemployment benefits. At first they were paid only in a worker’s native village, where identification was not a problem. As people migrated for work, benefits were made available anywhere in Prussia. “It wasn’t until then that they had to establish who a Prussian was,” he says, and they needed bureaucracy to do it. Citizenship papers, censuses and policed borders followed.

Again, national identity came to France in the 15th century. Early in the war, English armies would be stocked with all sorts, as well as English. Similarly, the armies loyal the French King were stocked with Scots, English and French. By the end of the war this was no longer true. The French fought for France and the English fought for England. French national identity is what drove France’s involvement in the Thirty Years War two centuries later. The idea that nationalism was born in the Industrial Revolution is at odds with history.

It is fair to argue that the Industrial Age allowed for the industrialization of the state. The managerial revolution is why we have a managerial class. I suppose one can argue that this then let nationalism sweep the continent. A better answer is that the barbarism of the Thirty Years War ended Christianity as the organizing force on European elites. Nationalism filled the void, eventually giving the people a new foundation myth and a sense of destiny. Still, the Industrial Age certainly helped accelerate the modern bureaucratic state along with the spread of various Rousseau-ist cults as a organizing philosophies.

Banksters

The beginning of the end of the Roman Republic was when the ruling class loss respect for and the willingness to abide by their own rules. Scholars don’t frame it like that because it’s hard and boring. Instead they focus on economic changes like the flood of slave labor after the defeat of Carthage and Corinth. Alternatively, the political changes make for nice stories because the characters are interesting. The road off the cliff, however, started with the loss of respect for the spirit of the laws and customs.

The point when our politicians stopped punishing criminal financiers will similarly be looked at as an inflection point. There was a time when politicians and wealthy members of the ruling elite faced criminal punishment for breaking the law. Nixon was run out of DC for talking about what Obama boasts of doing. Michael Milken went to jail for two years for what is common today on Wall Street. A great trivia question is how many bankers went to jail for the sub prime mortgage scandal. The answer is zero.

This article on Bloomberg points this out.

Yesterday, we looked at why bankers weren’t busted for crimes committed during the financial crisis. Political corruption, prosecutorial malfeasance, rewritten legislation and cowardice on the part of government officials were among the many reasons.

But I saved the biggest reason so many financial felons escaped justice for today: They dumped the cost of their criminal activities on you, the shareholder (never mind the taxpayer).

Corporate executives theoretically work for the owners of the company, namely, the shareholders. But there is an agency problem in that owners can’t closely manage and object to the actions of these executives. Collective owners, such as mutual funds, seem to have no interest in doing so. What we end up with is a management class that works for itself instead of on behalf of the owners of the publicly traded banks. Many of these executives committed crimes; got big bonuses for doing so; and paid huge fines using shareholder assets (i.e., company cash), helping them avoid prosecution.

As for claims like those of white-collar crime defense attorney Mark F. Pomerantz, that “the executives running companies like Bank of America, Citigroup and JP Morgan were not committing criminal acts,” they simply are implausible if not laughable. Consider a brief survey of some of the more egregious acts of wrongdoing:

Foreclosure fraud: Of all the crimes committed during the financial crisis and in its aftermath, this is one that should have been the easiest to identify and prosecute.

Any bank that owns a mortgage with the debtor in default must follow a simple set of legal steps in order to foreclose. The procedure is time consuming, specific to each state’s laws and involves lawyers, so foreclosures are expensive. Hey, it is the cost of issuing credit, and a simple reality of the rule of law. There are no shortcuts.

Except the banks took many short cuts and did so on purpose and with the goal of improperly expediting the process. They failed to review the documents of the mortgages they were foreclosing on, then told courts they had. They didn’t verify information, but claimed to have done so in sworn affidavits. They hired $8 an hour burger-flippers to “robosign” these documents, pretending the underlying legal work had been done. They knowingly used falsified records, some of which they bought en masse. They were aided by a company called DocX, which had a price list of fabricated documents for use in court. (DocX, by the way, was eventually indicted on charges of mortgage fraud).

After creating phony dossiers on borrowers, the banks signed and notarized affidavits stating they had taken all of the legal steps. In many cases, even the notarizations were fakes. Submitting a falsified notarized affidavit to a court is perjury and fraud.

Of course, the burger-flippers who did the paperwork didn’t think up the whole scheme — someone much higher did. Somewhere between these low-level workers and the chief executive officer were managers who masterminded robosigning. So far, just one midlevel executive has been convicted at Bank of America, while scores of others have gone untouched.

Mortgage underwriting: Then there are the crimes committed in mortgage underwriting, where defects were knowingly ignored. The FBI investigated these cases early on, but investigators never moved forward with prosecutions.

Maybe the scale of the financial penalties bank agreed to pay had something to do with this inaction. Bank of America, for instance, using shareholder money, paid $16.65 billion to settle allegations of fraudulent mortgage originations, securitizations and servicing. One can’t help think that this money bought immunity from prosecution for executives.

Money Laundering: Banks have been laundering staggering sums of money for drug dealers and terrorists. Hey, there are big bucks in high net worth narco-terrorists. Awash in cash, drug cartels relied on big banks to launder their ill-gotten money. Apparently, it was just good business to grab a slice of that pie. However, these are deeply offensive, very illegal activities, and deserve not just penalties, but jail time.

How much of this dirty money made its way through the banks? One analysis estimates that $1.6 trillion of tainted proceeds has been laundered through major money-center banks around the world.

A U.S. Senate report linked HSBC to drug lords and terrorists, leading to a record $1.9 billion fine. The Federal Reserve faulted Citigroup over its controls, allowing money laundering to go on. And Wells Fargo admitted to laundering money for Mexican drug gangs.

• Market manipulation: We haven’t even gotten to the manipulation of markets in violation of U.S and international law. Whether it was aluminum or Libor rates, prices were either improperly manipulated or illegally rigged, with knowledge of the bank executives and the traders they employed and supervised. Let’s not forget manipulating the multitrillion dollar derivatives market.

Fraud, skimming and bid-rigging: Then there is just good old-fashioned fraud and bid-rigging: State Street Bank was accused of skimming money off of the pension transactions it handled while BNY Mellon was accused of skimming money for “fictitious” foreign-currency costs for pension funds.

Accounting fraud: We could spend months discussing how some executives at banks cooked their books, but really, this is so well known that it hardly merits mention.

So next time you hear the claim that “there were no crimes committed by bankers,” just remember that this may be the biggest lie of the 21st century.
That’s a strong and accurate indictment. When you add in the multiple LIBOR scandals and the ISDAfix scandal, the image we get is of a rapacious bandit class rampaging through the world financial system like pirates. Theft, graft and corruption will always be a part of the financial class. Banks attract bank robbers and the banking system will always attract grifters and confidence men. It is the duty of the civil authorities to police the financial system and punish the people who commit crimes.
If there’s going to be a reform of the ruling class, it has to start with the bandit problem on Wall Street. The reforms following the Great Depression ended for a generation the type of spiritual corruption we see today. Those reforms were not perfect, but they gave an advantage to the type of men who put their reputation and their firms reputation ahead of quick profits. Top to bottom the modern financial firm is filled with men who would gladly murder their mother for a bigger bonus check.
The answer lies in those reforms a century ago. Separating commercial banking from investment banking is where it must start. The former is vital to a strong economy, while the latter is just gambling and popular only in good times. Similarly, retail banking should be separate from commercial banking. A firm offering boat loans and second mortgages should not be financing factory expansion and land acquisition. They have different regulatory needs and different degrees of transparency.
For any of this to happen, the ruling class has to abandon the idea that you can have a civil society based on purely transactional relationships. When all relationships are measured purely on monetary terms in the moment, there’s no reason to be honest in your dealings with others. Completely bankrupting the other guy is fine because you win the deal. Squeezing your vendors into poverty is acceptable, even if it destroys your ability to do business down the road. All that matter is the here and now. That’s a recipe for a low-trust society, not western civilization.

The Breakdown of Order

Way back in the olden thymes, bankers went crazy and we ended up with the S&L Crisis. Bank fraud, bubbles, busts and system collapse are regular features of banking. The reason is simple. Banks attract bank robbers. The role of government is to police the banks, arrest the robbers when they find them and then make examples of those bank robbers by putting them in cages for long periods. It is not perfect, but it keeps the banking system of a nation working in an orderly fashion.

In the Clinton years, that all changed. We stopped putting bankers in jail. In fact, we stopped arresting them entirely. Instead, it is a free-for-all in finance. Here’s yet another story of systematic bank fraud that will result in no action by the government.

Derivatives regulators told the U.S. Justice Department they’ve found evidence of criminal behavior following an investigation into banks’ alleged manipulation of ISDAfix, a benchmark used to set rates for trillions of dollars of financial products.

The U.S. Commodity Futures Trading Commission, which first sent subpoenas to the world’s largest banks in November 2012 to determine whether ISDAfix was rigged, has flagged its findings to prosecutors, according to a person familiar with the matter. The CFTC’s enforcement powers are confined to bringing civil, not criminal, cases. It isn’t clear who the CFTC suspects broke the law.

Benchmarks like ISDAfix, which is used to track prices on interest-rate swaps, serve as the foundation of global finance, helping pension funds determine their future obligations and lenders decide how much to charge borrowers. Regulators around the world are probing allegations that measures used to set prices in gold, oil, interest rates and currencies were rigged by banks and brokers wanting to pad their profits while cheating their clients and other investors.

Last week, the Alaska Electrical Pension Fund accused 13 banks including Barclays Plc (BARC), Bank of America Corp. and Citigroup Inc. (C) as well as broker ICAP Plc (IAP) of conspiring to manipulate ISDAfix. The U.K. Financial Conduct Authority is also looking into allegations of wrongdoing involving the benchmark.

Representatives of the Justice Department, CFTC, Barclays, Bank of America, Citigroup and ICAP declined to comment.

This is not just a few guys stealing. This is systematic theft of public monies by the world’s largest banks. This does not happen without the top level managers knowing and directing it. None of these people can plead ignorance or say that this is an unexpected and un intend consequence. It’s done on purpose.

Bloomberg News, citing a person with knowledge of the matter, was the first to report last year that the CFTC found evidence traders at Wall Street banks instructed ICAP brokers to buy or sell as many interest-rate swaps as necessary to rig ISDAfix by moving it to a predetermined level. Doing so helped banks reap millions of dollars in trading profits, costing companies and pension funds, the person said at the time.

Brokers on the ICAP desk, nicknamed “Treasure Island” because of the large salaries and bonuses they were paid, negotiate swaps trades on behalf of banks. Until this year, the dollar-denominated version of the ISDAfix rate was set daily by ICAP based on data submissions from banks. Amid the CFTC investigation, ICAP lost that central role. The International Swaps & Derivatives Association Inc., or ISDA, picked Thomson Reuters Corp. to take over that job this year.

Deferred prosecution settlements between regulators and banks including UBS AG and Barclays related to London interbank offered rate rigging have compelled firms to hand over information in the ISDAfix and currency probes to avoid criminal prosecution in the Libor case.

The term “deferred prosecution” is a neologism that means no prosecution. If you are a young gun working your way up in finance, you see no risk to this behavior. If you get caught, your bosses cover it up, you keep the money and maybe you have to change firms as a “punishment.” Start putting these guys on The Farm and we suddenly get a new respect not only for the law, but the spirit of the law.

Redlining

One of the great benefits of old age is accepting the fact we never learn from our mistakes. Those of us who do learn are not important enough to matter. All the important people have the memory of a kitten. Thus we see stories like this over and over, despite allegedly having learned our lesson.

Drawn in thick marker along the map of upstate New York, the line snaked down the Niagara River and zigzagged east to outline a swath of Buffalo and its surrounding neighborhoods.

But one area of the city — neighborhoods in east Buffalo, where more than 75 percent of the city’s African-American population lives — was explicitly excluded, cut off from access to mortgage credit.

That map, ringed by a line, is at the center of a sweeping investigation by the New York attorney general, Eric T. Schneiderman, into whether banks are “redlining” — deliberately choking off mortgage lending to predominantly minority communities — people briefed on the matter said.

The investigation was expected to reach its first target as early as Tuesday, the people said, with Mr. Schneiderman’s office taking aim at Evans Bank, a regional lender whose business in the Buffalo area dates to 1920, accusing it of denying mortgages to African-Americans regardless of their credit.

The case, expected to accuse Evans Bank of violating the Fair Housing Act — a federal law intended to ensure equal access to credit — is a harbinger of other lawsuits that could be brought against some of the nation’s largest banks, several people briefed on the investigations said.

We nearly blew up civilization with insane lending rules in the last decade. That stampede to the cliff’s edge began with lawsuits claiming the banks were not lending to black people. Here we are again, doing the same thing expecting a different result.

In the suit, expected to be filed in state court, prosecutors were to outline how, since 2009, Evans Bancorp has created a map that defined the “trade area,” places in the Buffalo metropolitan region where the bank would make mortgages and other loans. The bank, prosecutors contend, deliberately excised much of Buffalo’s East Side.

Rival banks, the authorities said, lent to neighborhoods on the East Side at a far higher rate than Evans Bank, suggesting that the lending patterns did not stem from a dearth of willing minority borrowers.

If the bank actually had a map with a red line around the black neighborhoods, then they deserve what they get. That’s just stupid. If they simply refused to market to poor neighborhoods based on credit bureau reports, then that’s their business. The fact that the other banks were charging “far higher rates” says this bank is not interested in high risk lending. That’s why banks charge high rates. The risk is high. That’s news to the NY Times, but not to people with an IQ above room temperature.

That unequal access to credit, the authorities say, threatens to exacerbate the country’s yawning wealth gap. Part of the problem is that the foreclosure crisis disproportionately affected black and Hispanic communities, wiping out billions of dollars of housing wealth, federal mortgage data shows.

Mortgage lending is critical, the authorities say, to bolster homeownership — a cornerstone of upward mobility — in minority communities still trying to dig out from the recession. Denied access to credit, state and federal authorities warn, minority communities are helpless to address problems like boarded-up homes, foreclosures and blight that have long ravaged neighborhoods.

You cannot help but wonder if the writer is mildly retarded. People with high default rates should not be getting loans. The reason is they have no money. That’s why they defaulted on the loans.

As far as those boarded up homes, that’s the fault of the same “authorities” whining about inequality. Those homes should be condemned and bulldozed. But, the rich guys who own them give generously to those authorities complaining about the wealth gap. Alternatively, the homes can be condemned and taken by eminent domain and then sold off to developers. But then the prices would go up and the poor would be moved out so the children of rich white liberals can live in crime free hipster-villes.

More TED Talks

As I wrote in another post, I think the Ted Talks site will keep me supplied with material for years to come. The attraction is the shallowness that is weirdly masquerading as high brow intellectualism. It’s a post-modern version of the old Three Stooges bit Swingin’ the Alphabet. Well, if it were on purpose. Lampooning high culture can be quite clever, when it is done on purpose. The TED Talk crowd is doing it by accident. This one on inequality is funny to me for some reason.

The great inequality of income and wealth in the world, and within the United States, is deeply troubling. It seems, even to many of us who benefit from this inequality, that something should be done to reduce or eliminate it. But why should we think this? What are the strongest reasons for trying to bring about greater equality of income and wealth?

One obvious reason for redistributing resources from the rich to the poor is simply that this is a way of making the poor better off. In his TED Talk on “effective altruism,” Peter Singer advances powerful reasons of this kind for voluntary redistribution: Many people in the world are poor, and the improvement in their lives that richer people can bring about by giving money is enormous by comparison with the small sacrifice that this would involve.

How much you want to bet that T. M. Scanlon, the guy responsible for those lines, gives next to nothing to charity? The people most troubled about the poor tend to do the least for the poor. That’s unfair of me, I know, but I’m not a nice person. As to his query, that answer has been supplied a million times in a million places. Lefty gets comfortably set in the upper middle-class and then starts to feel guilty. Lacking any sense of self-awareness, they declare it a “deeply troubling” social problem, which means more laws and more taxes on the rest of us.

Amazingly, the idea that there may be a reason why some people have nothing and others have extra is never mentioned in these disquisitions on inequality. I see poor people every day. I can give a lot of reasons for it. I’ve been to some dirt poor countries. In five minutes I can point out a dozen reasons why they are poor. Giving these people money is not solving anything. Once again, the people who are most concerned about poverty know the least about poor people.

Further along, the reasons he gives for wanting to force you to do something about inequality (as long as it does not cost him time or money) are interesting.

1. Economic inequality can give wealthier people an unacceptable degree of control over the lives of others.

If wealth is very unevenly distributed in a society, wealthy people often end up in control of many aspects of the lives of poorer citizens: over where and how they can work, what they can buy, and in general what their lives will be like. As an example, ownership of a public media outlet, such as a newspaper or a television channel, can give control over how others in the society view themselves and their lives, and how they understand their society.

Where has this ever been otherwise? Name a newspaper of any size owned by poor people. Name a poor person owned TV station. How about a government staffed with hobos? Under every imagined form of government in human history, the rulers have been in charge of the ruled. That’s why they are called rulers. They also have more stuff, more food and power over the lives of the ruled.

2. Economic inequality can undermine the fairness of political institutions.

If those who hold political offices must depend on large contributions for their campaigns, they will be more responsive to the interests and demands of wealthy contributors, and those who are not rich will not be fairly represented.

Steve Sailer likes to point out that liberals forget they have been in charge for close to a century. For forty years in America we have had laws against rich people making big contributions to office holders. In that time the influence of the rich has grown so much that government pretty much caters to them exclusively. Europe has seen a similar results. Maybe that’s a clue?

3. Economic inequality undermines the fairness of the economic system itself.

Economic inequality makes it difficult, if not impossible, to create equality of opportunity. Income inequality means that some children will enter the workforce much better prepared than others. And people with few assets find it harder to access the first small steps to larger opportunities, such as a loan to start a business or pay for an advanced degree.

Again, when has this ever been otherwise? The various Marxist schemes that professor Scanlon prefers have produced exactly this result. In fact, they were exaggerated under communism.

4. Workers, as participants in a scheme of cooperation that produces national income, have a claim to a fair share of what they have helped to produce.

What constitutes a fair share is of course controversial. One answer is provided by John Rawls’ Difference Principle, according to which inequalities in wealth and income are permissible if and only if these inequalities could not be reduced without worsening the position of those who are worst-off. You don’t have to accept this exact principle, though, in order to believe that if an economy is producing an increasing level of goods and services, then all those who participate in producing these benefits — workers as well as others — should share in the result.

But what did they produce? In my neighborhood, there are households that have not produced anything but mayhem for generations. In some of our more vibrant neighborhoods, there are three generations of some households in the same state prison. How about the guy who sells meth for a living? He may not be a burden on the state, as far welfare and prison costs, but he is burden on society. What’s his share?

The trouble with these disquisitions on inequality is not that they are mere sentimentality. The trouble is the sentiment is imaginary. No one really believes inequality is a problem, save for maybe a few bitter Marxists in your local state college faculty lounge. These are those old rancid hippies who have posters of Che Guevara on their office wall. No, the people who prattle on about inequality simply wish to replace the current inequalities that don’t favor them with a new set that do favor them.

You’ll note that the people convulsed by Piketty’s book are the managerial classes. These are the maidservants and coat holders for the ruling elite. A guy like T. M. Scanlon looks at a Mitt Romney and wonders how this boob got to be a billionaire. An Elizabeth Warren, making calls to beg for campaign cash wonders why she, a Harvard professor, should be begging these rich bastards for money. The credentialed members of the managerial class want more power and thus they complain about inequality.

It’s a Cult

I’ve been calling American Liberalism a cult for a long time. I get some grief for it from normal people, because they think I’m engaging in name calling. The word cult has some baggage. We typically think of cults having a charming leader. That leader is more than a little nuts and eventually leads his followers to a Jonestown like end. The messianic nature of American Liberalism is not always obvious, but it’s right there if look hard at the Left.

Modern times and the trendiness of the Left means their various beliefs burst forth for a while and then recede into the background, only to come around again with a new marketing pitch. State rationed health care is a good example. The American Left has been dreaming of it since they discovered Bismark. Every ten years or so they have a new way to pitch having their cult decide how much and how often you get medical treatment.

The cultish properties of American Progressives is clear in the story of ObamaCare. It was supposed to be the final step into the Eden of free health care for all. The rank and file members of the Cult of Modern Liberalism were convinced that a fountain of unlimited health care was hidden away somewhere, maybe next to the golden plates Joseph Smith found out west. If they could slay the evil insurance monsters that guard it, the people would be free to dip their cups into it and get all the health care they desired – free! They used different words, but that was the sales pitch and they truly believed it. They still do.

Then reality, that thing that does not go away when you stop believing in it, came roaring into the room. Millions saw their policies canceled. I’m on my third cancellation. Rates went up and the public went crazy. As was described in When Prophecy Fails, the Left was at first stunned into silence. The disconfirmation was soul crushing. Instead of Eden, the result was chaos. Then, the faithful rallied and they are now ready to proselytize once again.

You’re looking at the biggest story involving the federal budget and a crucial one for the future of the American economy. Every year for the last six years in a row, the Congressional Budget Office has reduced its estimate for how much the federal government will need to spend on Medicare in coming years. The latest reduction came in a report from the budget office on Wednesday morning.

The changes are big. The difference between the current estimate for Medicare’s 2019 budget and the estimate for the 2019 budget four years ago is about $95 billion. That sum is greater than the government is expected to spend that year on unemployment insurance, welfare and Amtrak — combined. It’s equal to about one-fifth of the expected Pentagon budget in 2019. Widely discussed policy changes, like raising the estate tax, would generate just a tiny fraction of the budget savings relative to the recent changes in Medicare’s spending estimates.

In more concrete terms, the reduced estimates mean that the federal government’s long-term budget deficit is considerably less severe than commonly thought just a few years ago. The country still faces a projected deficit in future decades, thanks mostly to the retirement of the baby boomers and the high cost of medical care, but it is not likely to require the level of fiscal pain that many assumed several years ago.

The reduced estimates are also an indication of what’s happening in the overall health care system. Even as more people are getting access to health insurance, the costs of caring for individual patients is growing at a super-slow rate. That means that health care, which has eaten into salary gains for years and driven up debt and bankruptcies, may be starting to stabilize as a share of national spending.

You see? The prophesies were true! The prophesies were true! The Great Pumpkin will bring free health care for all!

Keep in my that this what “data driven journalism” really means. It is the old time religion sprinkled with statistics. To the faithful, “data” are a topping, like jimmies on an ice cream sundae. The “data” presented here are both fanciful and useless. The threat to Medicare is not cost per patient. The threat is the number of patients when the Boomer retirement is in full bloom. Driving the cost per patient down a few bucks is nothing when the number of patients is growing geometrically.

But, that’s how it goes in a cult. They need to believe and so they will always believe. It took 100 million corpses and 150 years for Communism to finally die. In my youth, American lefties would say that communism was never really tried and that Bolshevism was not true Marxism. I don’t think they were ever convinced to drop it. The Left just decided to go with Cultural Marxism, figuring the economics would take care of itself.