Pollution, Race, and Poverty

Under a common conception of free-market capitalism, firms should do whatever they can – legally – to maximize value for shareholders, which often means maximizing profits. As long as firms do not bear the costs of the externalities they create – like air pollution – they will continue to create them. That’s all taken as a given.

What is a little more sinister, yet still completely legal, is where they will create them. Even in the absence of cash costs per ton of pollution, the effective costs to polluters will vary from place to place; those costs show up in the political difficulty of getting permits to build and operate facilities, the degree of environmental regulation, the likelihood of local muckraking journalists writing unpleasant exposes, the ability of the local populace to bring political pressure to bear, and so on. The net effect is that the low-cost places to put pollution tend to be communities with relatively less political power – in this country, communities of minorities and the poor. 

A team of researchers from the University of Massachusetts-Amherst and USC recently released a new report, “Justice in the Air,” that quantifies the disparate environmental impact of toxic air pollution on minorities and the poor, by firm and by facility. Michael Ash and Jim Boyce also have a working paper that describes the data sources and the methodology.

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All About Optics (Predicting Stress Test Outcomes)

The bank stress tests are beginning to create a perception problem, but not – as you might think – for banks.  Rather the issue is top level Administration officials’ own optics (spin jargon for how we think about our rulers).

At one level, the government’s approach to banks – delay doing anything until the economy stabilizes – is working out nicely.  This is the counterpart of the macroeconomic Summers Strategy and in principle it is brilliant. “Don’t just do something, stand there,” is great advice in any crisis – eventually everything bottoms out and you can take the credit, justified or not (unless an election catches up with you first; check with Herbert Hoover.)

But American bankers apparently just cannot cooperate by lying low, keeping their mouths shut, and refraining from anything that looks like picking other people’s pockets. Continue reading “All About Optics (Predicting Stress Test Outcomes)” →

Comment Etiquette

I am surprised and a little impressed, but not happy, about the lengths some people will go to to promote their views in our comments. I’ve noticed two disturbing bits of behavior recently. One is “replying” to the first comment on a long comment stream in order to boost your own comment up to the top of the page, when you are not responding to that first comment substantively. The second is posting comments under multiple identities in order to agree with yourself or, worse, to insult or attack other commenters. On one recent post, one person posted eight comments under five different names, only two of which were substantive.

There are various measures I could take to try to solve this problem, but all of them will create overhead for the community as a whole. So please stop.

Guest Post: Size Really Does Matter

This guest post was contributed by Lawrence Baxter, a member of the faculty at Duke Law School and formerly a divisional executive in a large banking organization. He takes a look inside the large mergers that created the behemoth financial institutions we know today, and the assumptions that encouraged and allowed those mergers.

A friend recently observed to me that he had maintained zero interest in banks and banking all his life—until the past year.  Now everyone is engaged in a swirl of emotions and punditry as we focus as experts, taxpayers or consumers on almost every dimension of the financial crisis, from bailouts to complex executive compensation schemes.  Yet throughout the commotion we have not lost our faith in one quintessential American value:  bigger is better.  How quickly we forget such disasters as Daimler Chrysler and Travelers-Citicorp, even as we hail Chrysler-Fiat.

True, a consequence of great scale has informed the public policy debate on banks:  what do we do with a financial institutions that is “too big to fail”?  Yet answers to this question have, for the most part, turned on whether a particular company should be allowed to fail, or be propped up by government action.  The underlying pathology receives only passing attention.   Why do we let these institutions get so large in the first place?  Is it not likely that many of the institutions requiring massive injections of public capital and other forms of subsidization and public assistance are, and have been for some time, simply too big to manage?

America’s obsession with bigness has led us to assume glibly that organizational growth, vertical and lateral, is a natural consequence of business success and must be respected, even celebrated.  Armies of consultants, lawyers and investment bankers devote their businesses to the science of corporate enlargement, encouraged by economists who celebrate not only economies of scale, but even “economies of super scale.”  Ken Thompson, then CEO of one of the most venerated banks in the United States, Wachovia, spoke for an industry when he declared in 2006, at the very moment the company was making its fatal acquisition of Golden West Financial, that ““[c]onsolidation continues to make economic sense.  Done right, size enhances competitive power.  With economies of scale, a company can better afford the technology and longer branch hours that customers demand.”*

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Stress Tests for Beginners

The big news on the banking front this week will be the public release of the stress test results, currently scheduled for Thursday (originally it was supposed to be today). Over at The Hearing, I wrote an overview post recapping the context for the stress tests and the current dilemma the administration faces: whether to keep quiet about the details, and risk undermining the credibility of the exercise, or whether to release signficant bank-specific information, and risk undermining the reputation of certain weak banks. 

There is nothing wrong with the concept of the stress tests, and arguably regulators should have been doing them constantly as the crisis worsened, so that this particular iteration would not create such a political challenge. The idea is that not only do you want to know how much capital a bank has right now, but you want to know how much capital it will have left if the economy continues to get worse. If you did this analysis in a way that was credible with the market, it would go a long way toward restoring confidence in the financial system, since the current lack of confidence is based on people’s not trusting the information they are getting.

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The Need for New Antitrust Laws

The great corporations which we have grown to speak of rather loosely as trusts are the creatures of the State, and the State not only has the right to control them, but it is duty bound to control them wherever the need of such control is shown.

Theodore Roosevelt, “Address at Providence,” 1902 (emphasis added)

By “creatures of the State,” Roosevelt meant not that corporations were created by the state, but that their existence and power existed because of and in concert with the state. A few years ago, someone reading this quotation would have probably thought first of Halliburton; today, it evokes the large banks that are too big to fail.

That quotation was pointed out to us by Zephyr Teachout, a law professor at Duke, who has been proposing new antitrust laws aimed at reducing the political power of large firms.

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Ponzi Schemes Of The Caribbean (A Weekend Comment Competition)

The IMF has just released a new working paper, with more detail than you likely ever wanted to know about how Ponzi schemes work – particularly in and around the Caribbean.

Ponzi schemes are everywhere and, at least in some environments, new versions arrive frequently.  But why are they so hard to prevent and shut down once they appear?  The paper contains some strong hints, albeit couched in very diplomatic language.

The comment competition is: what, if anything, does the failure of governments to shut down blatant Ponzi schemes imply about the prospects for a potential “macro-prudential” system/market-stability regulator implementing cycle-proof rules in the United States?  Is there a better way to prevent the kind of behavior that led to our current financial crisis?

Zombie Oligarchs

At this stage in any economic stabilization process, the state-sponsored lifeboat for oligarchs starts to get a little crowded.  Governments don’t have enough resources to save everyone, and not all major borrowers can have their debts rolled over.  In emerging markets, it’s usually the shortage of foreign exchange that sets a limit on government largesse (see the start of our Atlantic article for more detail on this cycle); in the US and other industrial countries, it’s more complicated – mostly about constraints around bailout politics (Lorenzo Bini Smaghi made this point effectively in the fall).

The survival-failure decision is taken at the highest level.  In April 2008, after the failure of Bear Stearns, Dick Fuld had dinner with Hank Paulson and reportedly concluded, “We [Lehman] have a huge brand with Treasury.” As the broader problems within the financial system worsened, this proved worth less than he thought.

Fuld is still in shock, and seething. How could Paulson let Lehman go? “Until the day they put me in the ground, I will wonder [why we weren’t saved],” he told Congress.

This week, Daniel Bouton resigned from running SocGen, in the face of what he called “incessant” verbal attacks – a reference presumably to lack of support from Mr. Sarkozy; it’s not good when the President of France calls your proposed pay package “a scandal”.  And Ken Lewis may take a further battering – due in part to not being the best-connected with top people in Washington. Continue reading “Zombie Oligarchs” →

Bankruptcy Cramdowns Defeated in Senate

President Obama, he of the 68% approval rating, asked Congress to allow bankruptcy judges to reduce the principal amounts of mortgages on primary residences (they can already modify almost all other loans in bankruptcy). The goal was to pressure mortgage lenders, or the investors who now own those mortgages, to modify the mortgages themselves to give homeowners a better option than foreclosure. Because, you know, we have a housing foreclosure crisis going on. But after passing the House, the measure got only 45 votes in the Senate, with zero Republican support and twelve Democrats defecting.

Banks campaigned against the measure by – get this – threatening that it would destabilize financial markets. The New York Times reported:

A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.” 

Translation: banks are weak; weak banks are dangerous; therefore Congress should not do things that might be bad for banks.

According to the Washington Post:

[Senator Richard] Durbin negotiated with Bank of America, J.P. Morgan Chase and Wells Fargo for weeks, hoping their support would bridge the gap. Even after the proposal was weakened significantly, the financial services industry refused to sign on.

I know the main legitimate argument against bankruptcy cramdowns: it increases the riskiness of mortgages, and therefore mortgage rates would have to go up a little for everyone. (Which sounds fine with me.) But the way this issue played out had nothing to do with what would be best for the country as a whole; it had everything to do with what the banks wanted. 

Instead of bankruptcy cramdowns, the Times reports that the banks got a reduction in the insurance premiums they will pay the FDIC for deposit insurance – which is like a group of car owners voting themselves lower premiums on their auto insurance. But because there is zero chance the government will let insured depositors lose money, any shortfall in the premiums paid by banks to the FDIC will be made up by the taxpayer.  

Not that this should surprise anyone.

By James Kwak

GDP Growth Rates for Beginners

For a complete list of Beginners articles, see Financial Crisis for Beginners.

My post about French sociology got a wide range of comments, ranging from “Without a doubt, your best post yet” to “Reading this post made me think, for the first time, of ignoring Baseline Scenario from now on,” which I guess indicates we have a wide range of readers. In any case, for today I’m returning to something much more mundane: GDP growth rates. Like many Beginners articles, this one starts out with some basics, and then gets (a little) more interesting, but its main goal is to help you decipher the news that you already read.

To a casual reader, yesterday’s GDP announcement was that Gross Domestic Product (an aggregate measure of economic activity) fell by 6.1% or, more precisely, at an annual rate of 6.1%. What does this mean?

For those of you who have never visited the BEA website, this is what the raw numbers look like. (They give you  columns B and E, I calculated the rest.) Note that this is all in 2000 dollars, so inflation has been taken out.

gdp1

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The People v. The Flu

In Plagues and Peoples, published in 1976, William McNeill argued that human history can be thought of as the co-evolution of our societies and the “microparasites” to which we are prone.  The emergence of settled agriculture, major historial movements of people, and industrialization all brought with them new or more intense diseases.  Eventually, most societies figured out how to survive – but of course some didn’t (see Jared Diamond‘s work for details) and many people died young along the way.

You don’t need to buy McNeill’s full view in order to take away the following point.  We have to invest and innovate to stay ahead of disease – there is no sense in which these are likely to be completely “conquered” – because they change as we do.  Investments are needed not just in the relevant science, but also in how it is used to combat potential epidemics – as well as more general endemic disease.

As I argue this morning on the NYT’s Economix, regarding the current swine H1N1 flu outbreak, global public health officials are doing much better than our friends who watch over financial systems.  In terms of reaction speed, communications, and the legitimacy of response agencies, economics has much to learn from the people who fight against epidemics. Continue reading “The People v. The Flu” →

The Importance of Battlefield Nuclear Weapons

I’ve been writing a lot about the game of chicken recently, most often in connection with the GM and Chrysler bailouts. On the Chrysler front, the game is in its last hours. Even after a consortium of large banks agreed to the proposed debt-for-equity swap, some smaller hedge funds are holding out for more money, and even the extra $250 million that Treasury agreed to kick in seems unlikely to keep Chrysler out of bankruptcy.

The problem is that bankruptcy is the only weapon Chrysler and Treasury have in this fight, and it’s a strategic nuclear weapon. Bankruptcy is the only threat that can get the bondholders to agree to a swap; but because a bankruptcy carries some risk of destroying Chrysler (because control will lie in the hands of a bankruptcy judge – not Chrysler, Treasury, the UAW, or Fiat), and taking hundreds of thousands of jobs with it, everyone knows that Treasury would prefer not to use it. The bondholders are betting that they can use Treasury’s fear of a bankruptcy to extract better terms at the last minute. (And it’s even possible that the large banks agreed to the swap knowing they could count on the smaller, less politically exposed hedge funds to veto it.) But Treasury may still press the button, because it needs to make a statement in advance of the bigger GM confrontation scheduled for a month from now.

But there’s a much bigger, slower game going on at the same time, and the administration’s basic problem is the same: all it has is strategic nuclear weapons that it absolutely does not want to use. The New York Times had an article today about how “a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system.”  It didn’t have a lot of new information, but it summarized the outlines of the game.

Continue reading “The Importance of Battlefield Nuclear Weapons” →

Pierre Bourdieu, Tim Geithner, and Cultural Capital

France in the 1960s and 1970s was the source of a tremendous amount of new philosophical, literary, and critical thinking – Foucault, Derrida, Lévi-Strauss, Baudrillard, Barthes, etc. But in my opinion, the most important member of that intellectual generation was the sociologist Pierre Bourdieu. In Distinction, Bourdieu’s best-known work, he described how economic class is reinforced by cultural capital: economic elites create cultural distinctions, and pass on to their children the ability to make those distinctions, in order to use cultural sophistication as a means of perpetuating class dominance. This may sound abstract, but think about the example that is the subject of Bourdieu’s The Love of Art: museums. Upper-class parents take their children to fine art museums and teach them how to talk about Rembrandt, Monet, and Picasso; later in college, job interviews, and cocktail parties, the ability to talk about Rembrandt, Monet, and Picasso is one of the markers that people use, consciously or unconsciously, to identify people as being from their own tribe. (Note that democratizing museums – making them open to anyone – doesn’t undermine cultural capital, because the key is not looking at paintings, but learning how to talk about them.)

We used the term “cultural capital” in our Atlantic article as a way of describing the influence of Wall Street over Washington. By this, we meant that one of the primary means by which Wall Street got its way in Washington was by creating and propagating the understanding – among sophisticated, educated, cultured people, as opposed to “populists” or the “rabble” that showed up at anti-globalization protests – that what was good for Wall Street was good for the country as a whole. We didn’t mean to say that old-fashioned campaign contributions and lobbying did not play an important role. (We did, however, say that we thought out-and-out corruption of the Jack Abramoff variety was probably a minor factor – not because we have any insider knowledge one way or the other, but simply because such criminal behavior was simply unnecessary given the other levers available.) But I don’t think that implicit quid pro quo bargaining is a sufficient explanation, because I believe it entirely possible that there are honest politicians and civil servants who really, truly believe that they are acting in the public interest when they come to the aid of the largest banks.

Tim Geithner may very well be such a man.

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