100 Treatises

Google… The One, True God?

I recently came across a very iconoclastic new religion. Maybe I’ve been using search engines too much…

“Breaking” the Banks

The FT runs an interesting piece today advocating a three-way split for financial institutions. Rather than the simpler two-way division between investment and commercial banking that many, including the Bank of England’s Mervyn King, have proposed, a three-way division would allow for the separation not just of the “casino” (investment banks, market makers) from the “utility” (commercial/ retail banks), but also from the “customers of the casino” (asset management).

By spinning off the asset management and proprietary trading component, the thinking goes, the investment banking sector would be subject to less risk (which means, ultimately, less risk for taxpayers) and would eliminate the potential for conflicts of interest that arise when a financial entity both makes a market and trades in that market. The asset management companies could then be cut loose to compete more directly and transparently with other firms of a similar type, like hedge funds and mutual funds.

Now, aside from the obvious fact that none of these constructive solutions seem to have a prayer of being seriously entertained by policymakers—either in the US or the UK or even in the European continent—it does raise the important question of just how much breaking up is too much? Should we then go a step further and separate trading desks that trade in equity markets from those that trade in bond markets? And then those trading investment-grade bonds from those trading junk bonds? How about separating banks that take deposits from firms from those that take deposits from individual people?

I’m not saying that any of these things is necessarily the logical extension of the three-way split proposed, but I am raising the question: what is the basic, fundamental standard that tells us when two activities should be separated and when they should not?

I absolutely think that at least a two-way split between depository institutions and riskier financial institutions is necessary. But beyond that, what is the proper operative standard? I don’t necessarily have all the answers. But unless we think critically and proactively at a philosophical or theoretical level, rather than respond reactively to the current circumstances, we can be guaranteed that in 10 or 20 years when new types of business practices have arisen and new types of financial instruments have been developed, we will be staring crisis in the face once again.

Obama’s Chance at Afghan Infamy

Obama risks escalating an unwinnable war

If Obama sends more troops to Afghanistan, it will be the worst mistake of his presidency. The reason for this is quite simple: the United States is on a suicide mission in Afghanistan. Since, as I have said, the American leadership does not adequately understand the nature or character of Afghan society (such as it is), “winning” is not just extremely difficult—it is a logical impossibility. By “winning” I mean the US ensuring that Afghanistan is stable and prosperous to the point that it cannot be a safe haven for Al Qaeda and similar Islamic terrorist groups. This, I say, is a logical impossibility as long as the American approach is, as it is now, grounded in considerations of troop levels, tactical strikes and counterterrorism and counterinsurgency operations, rather than considerations of culture, social order, identity and sovereignty.

The Nation has several pieces recently that begin to chip away at issues such as ethnic divisions and the myth of an Al-Qaeda safe haven. On the ethnic issue, for example, Selig Harrison says

One factor of special sensitivity and importance that receives almost no attention either in the public debate about Afghanistan or in the internal policy battles of the Obama administration may well be the most important of all: the domination of the Afghan armed forces, police, secret police and intelligence agencies by leaders of the Tajik ethnic minority, who use their US-backed power in Kabul to lord it over their historic Pashtun rivals.

Aside from the fact that most in the American leadership structure probably think “Pashtun” is an ice cream flavor, it is obvious that there is a whole realm of questions and considerations that policymakers haven’t even contemplated, and aren’t showing signs of doing so any time soon.

Finally, let’s consider the extraordinarily pathetic and woodenheaded preoccupation with whether the “sacrifices of our dead troops have been in vain.” It is understandable to be concerned about that issue from a moral or cultural point of view. But those who use the question of whether they died in vain as a starting point—or any point—in an argument to support more escalations and surges and putting more soldiers at risk adopt such an intellectually abominable and ludicrous way of thinking as to prove they are entirely bereft of any rationality on this issue, much less credibility. I don’t give a damn about someone’s preconceived notions of “honor” or “victory.” I give a damn about human beings.

The dead troops are dead. The living troops aren’t yet. We can’t do anything about the dead troops, from a policy perspective, but we can see to it that more brave soldiers aren’t needlessly put in harm’s way, simply because corrupt and morally rudderless politicians who have made certain statements need to cover their asses. And I haven’t even begun to talk about Pakistan.

Financial Regulation: New Battery, Same Car

Well, as if on cue, just as I finished writing my previous post on the lack of effective action or reflection on the part of our political “leaders” vis-à-vis the economic crisis, the New York Times reports that Obama and the Democrats are considering legislation to rein in institutions that are “too big to fail”. These are certainly positive developments. If the state is more capable of seizing or taking control of large institutions (or their assets and liabilities) that pose a systemic risk before they fail and wreak havoc, this can only help the stability of financial markets and the real economy.

However, given the government’s track record when it comes to effective regulation and conflicts of interest, it would be foolish to think that we have turned a meaningful corner, if for no other reason that no one is seriously considering re-imposing the division between commercial banking and investment banking. And if the Democrats aren’t considering it (corrupted as they are by Wall Street), then the Republicans sure won’t.

While the Democrats are busy blindly defending the Obama administration at every opportunity—regardless of its actual economic policies, or lack thereof—the Republicans are quickly descending into a conflict between a corporate welfare, antiunion establishment elite and a blindly laissez-faire antiunion popular movement. To put it mildly, neither holds out much hope of critically reexamining the assumptions of perfect free markets that have ruled for the last 30 years in the US. And so we wait to see how bad future economic policy will be: bad, really bad, or really, really bad.

The Supply and Demand for Idiots

Maybe "idiots" is too harsh...well, maybe not

When it comes to the current economic crisis, conservatives and Republicans argue (stupidly) that it resulted from excessive state intervention in the economy, with the government forcing banks to lend to people who couldn’t afford it. Meanwhile, liberals and Democrats argue (stupidly) that it resulted from the “Bush economic policies” whatever that means. Listening to this back-and-forth, one would think that the issue is whether (1) a few percentage points off the top marginal income tax rate, or (2) some bad loans to poor people are responsible for a worldwide meltdown that saw the Dow Jones lose half its value in a matter of months, millions of people lose their jobs, and hundreds of billions of dollars of global wealth evaporate. As usual, the Republicans and Democrats give us a fascinating and inspiring debate.

Most of the Republicans and Democrats couldn’t explain what GDP means if their life depended on it (GDP? Is that a lobbying organization I should be aware of??), much less the concepts of marginal utility, equilibrium price or opportunity cost—all of which are fundamental ideas in economics. But they sure could give you a lecture on why “socialism” is so evil that it is the economic system that runs the fourth circle of hell. (Never mind the fact that we’ve been successfully using it in the US for decades.) Or that we need urgently to start a new government program to hand out money to some obscure segment of society—even if it means bankrupting the treasury!

Normally, a recession of this magnitude would prompt some serious soul searching on all sides of the economic policy debate. We would see real questioning of deeply-held assumptions on the part of economists and the field of economics in general. We would see both left and right take a good, hard look at the kinds of policies they stand for, and the real-world consequences those policies have wrought.

Instead, we see the same old, same old. It’s politics as usual—socialist healthcare this, Fox News that—and continued economic know-nothingness all around. The UDA (unmitigated debt agenda) liberals are losing support, and the Republicans are starting to gain ground. Great. I can’t wait to trade one philosophically bankrupt party for another.