Monday, January 26, 2015

The Political Reality of Syriza and the Political Sustainability of Capitalism

The stubborn insistence of the Eurozone authorities on unending austerity in the face of an epic economic downturn blew up in Europe's face yesterday with the political triumph of Syriza, and its leader Alex Tsipras.

Syriza is a coalition of left and radical left parties that now controls the Greek Parliament.  They have promised Greek voters a negotiated write-down of Greece's massive sovereign debt and an end to austerity in Greece; others in the Eurozone say that is simply not possible. Greece thus now poses a major threat to stability in the Eurozone, a risk I raised in a blog post in December and in a series of posts over the past few years.

Here is how the characterizes Syriza's platform:
A Syriza victory marks an astonishing upset of Europe’s political order, which decades ago settled into an orthodox centrism while many in Syriza describe themselves as Marxists. It emboldens the challenges of other radical parties, from the right-wing National Front in France to the newly formed left-wing Podemos party in Spain, and it sets Greece on a collision course with Germany and its other eurozone rescuers.

And, this is how the Economist sees a potential path to the dreaded Grexit from the Eurozone:
A Grexit could happen if Syriza, the left-wing opposition party led by Alexis Tsipras, which is currently ahead in the polls, wins the election and confronts Greece’s creditors with demands they find incompatible with Greece staying in the monetary union. A political decision to expel Greece could be enforced by the European Central Bank cutting off Greek banks from its liquidity operations and payments system. 
The same Economist article also lays out an alternative scenario whereby a Grexit is avoided. The key point, however, is that in coming weeks Greece and Germany are going to be playing "chicken" with the Eurozone. Any miscalculation on either side could lead to Greek exiting the Eurozone.

Photograph of Barry EichengreenOf course, everyone knows that at the first sign of Grexit, all those holding Euros in Greece would face temptations to move their money to safer place lest they be forced to accept Drachmas (sure to lose value) in exchange for their Euros. Further, those holding Euros in Spain, Italy, Portugal and other troubled Euro nations would need to confront the reality that Eurozone membership is not inviolable, and they too would move their cash to safer climes. If enough cash moves fast enough then banks will fail throughout the Eurozone and that means a financial crisis is apt to result. Then loses would be distributed through the non-transparent and government subsidized derivatives markets to who knows which banks.

Renown international economist Barry Eichengreen believes the ensuing crisis would be "Lehman squared." It is very hard to disagree with Professor Eichengreen and his analysis is in accordance with mainstream economic thinking. The only good news is that Mario Draghi foamed the runway last Thursday through his massive $1 trillion quantitative easing program. Still that will likely not prove enough to stem a panic-induced contagion across the periphery of the Eurozone--at best it will simply mitigate the inevitable downturn a bit.

Greece currently faces billions in debt repayments this year. The next payments are due March 1, with more due in the summer. The Greek banking system is basically kept afloat right now only with ECB support. The government debt burden amounts to over 170 percent of GDP. Unemployment is 28 percent and GDP has plunged 26 percent since the onset of the crisis. Youth unemployment is over 50 percent. These numbers reflect a true humanitarian nightmare with little real economic hope for Greece, particularly its youth. While I am always suspicious of leftist solutions to anything (think North Korea or compare old West Germany to Old East Germany), one can hardly blame the Greeks for responding to severe economic pain in the same manner that US voters did in 1932.

They voted for uncertainty over certain economic pain. It could have been worse. Consider Germany in the 1930s, or Russia in the depths of the manifest misery of World War I.
Economist CC c      c
Capitalism must be defended politically by governing elites to assure its viability at the polls. This means that growth-retarding elites must be disempowered under the rule of of law from entrenching their own privileges at the expense of a true competitive meritocracy. Real economic growth must be permitted based upon the talents and innovations of a fully empowered population. Growth and opportunity must be broadly shared to assure maximum political viability. Crony capitalism whereby law and markets are rigged in favor of the few is ultimately politically doomed.

Unfortunately, with respect to Greece, it appears the aid rendered by the troika (ECB, IMF and Eurozone) ultimately aimed to buy time for Eurozone banks and gave little thought to the well-being of the people of Greece. Instead, they (particularly Germany) prescribed poison. Now, the Eurozone must deal with the political whirlwind of that ill-starred decision.

Wednesday, January 21, 2015

New Study Adds to Evidence that Diversity Furthers Entrepreneurship and Innovation

This blog has long advocated the financial and macroeconomic benefits of cultural and cognitive diversity. The basic premise is that differing perspectives results in knowledge elaboration for firms and when properly embraced through appropriate policies and best practices these diverse perspectives can drive innovation. This approach to diversity defines these differing perspectives very broadly--whether arising from gender, race, or even profession--and thereby demands inclusion for all even (in an underrepresented institutional context) white males. As I wrote in 2000, in Diversity and the Boardroom: "properly managed diversity can bring merit in a facially neutral manner." Or as a recent post on concludes: "diversity management in America’s corporations can no longer be viewed as an expense, but rather as a strategic investment in the future." Strong empirical evidence supports the case for diversity. "Whether talking about creativity, innovation, or productivity, research in Western Europe and the US regularly finds support for a ‘diversity dividend.’"

Yet another recent study demonstrates the power of cultural diversity. Specifically, a new working paper shows:
the impact of cultural diversity on the entrepreneurial performance of UK regions. We focus on two largely overlooked factors, the measurement of diversity, and the skills composition of diverse populations. First, more than demonstrating the importance of cultural diversity for entrepreneurship, we show that the type of cultural diversity measured is a decisive factor. Second, the skill composition of diverse populations is also key. Diversity amongst the ranks of the highly skilled exerts the strongest impact upon start-up intensities. The empirical investigation employs spatial regression techniques and carriers out several robustness checks, including instrumental variables specifications, to corroborate our findings.
In other words diversity drives innovation and entrepreneurial activity, particularly when cultural diversity is measured by highly skilled recent immigrants. This idea is hardly new. Nevertheless, this study reaches a very refined conclusion that even within the findings linking diversity to entrepreneurial outcomes, it is the influence of recent immigrants with skills that exerts the strongest influence on new business formation. The policy prescription is very clear: we should immediately open the borders of our nation widely to skilled immigrants. Unfortunately, Congress is sentencing our nation to a second rate economy by keeping the level of skilled immigration to the US too low. "While the United States allows unrestricted flows of capital into the country, known as foreign direct investment, Congress has limited the flow of modern-day capital -- skilled engineers and tech workers -- by capping H-1B visas at a level that American technology companies know is far too low." Currently there are bills pending in Congress that take steps in the right direction. I advocate even more aggressive steps, such as open immigration for all persons with a college degree.

The US is suffering from a dangerous decline in business start-ups. For the first time in history the number of businesses closing in America exceeds the number of start-ups. This is unacceptable for a nation that has traditionally led the world in innovation and entrepreneurial activity.

In fact, according to the OECD, the US lags almost the entire developed world in employer enterprise birth rates, as shown on the chart above. We must do more to foster entrepreneurship in the US and opening the borders for entrepreneurs and highly skilled workers is one sensible way to achieve this. Those in favor of free market capitalism must also favor the elimination of barriers on the free movement of human resources--especially skilled workers.

Wednesday, January 7, 2015

Law and Policing Reform

photo courtesy of Wikimedia Commons and Fibonacci Blue
Law professor and writer David Danté Troutt has imagined a safer and more just policing policy in the United States in his recent The Nation article "Is Racial Justice Possible in America?"  With the recent deaths of Michael Brown, Eric Garner and Tamir Rice at the hands of police officers, Troutt suggests that we need to change the way we think about police brutality raising our disdain for such behavior to the level of our abhorrence of pedophilia, rape, and domestic assault.  Troutt suggests reform policies which we must consider adopting if the U.S. is to end the scourge of police violence and the killing of unarmed African American citizens. 

Per Troutt: "We probably don’t need another national conversation about race as much as we need one about law reform. And let’s be clear: justice is far from impossible to imagine. What’s required is more constructive policing methods to rebuild trust:

§ Cops must wear cameras and microphones to preempt exculpatory storytelling.

§ Cops must be well trained in avoiding implicit bias, so they don’t dehumanize the public they serve. In fact, judges should be urged to allow juries to hear evidence of implicit bias among police officers.

§ Police departments must finally keep reliable records on their use of deadly force so we can stop guessing at the numbers.

§ Prosecutors should more aggressively seek manslaughter charges rather than murder charges, so that lethal mistakes don’t go unpunished.

§ The appointment of special prosecutors in questionable cases should be routine, to avoid the conflict of interest between prosecutors and police.

And when the local politics are insurmountable, we need an amended federal statute with a legal standard that cherishes the protection of life—the greatest civil right. These reforms would bring a lot less shooting and a lot more accountability. That would bring us closer to justice."

Sunday, January 4, 2015

What Does The Great Derivatives Wizard Know?

This blog has long argued against the non-transparent and highly subsidized derivatives activities of the megabanks while also recognizing the legitimate role of derivatives in facilitating risk management. Most recently, I suggested that any financial losses arising from turmoil in Greece, Russia or the global oil collapse could land in surprising places thanks to the derivatives markets.

Derivatives allow megabanks to sell their government backing to third parties for a lower price than what would be implied by the third party simply investing in government bonds. The megabanks under-price the risk of their derivatives transactions because ultimately the US taxpayer (and by extension the economy as a whole) bears the costs not executives at the megabanks who make millions no matter what.

Recently, the megabanks used their prodigious political power to short-circuit the efforts of lawmakers to curb the derivatives activities of the megabanks under the Dodd-Frank Act. The megabanks managed to insert a provision in an omnibus funding bill that effectively repealed the Dodd-Frank mandate that federally insured banks "push-out" their riskiest derivatives activities to other megabank affiliates. Due to their express federal insurance the bank subsidiaries enjoy higher credit ratings than the megabanks as a whole.

This stealth repeal of part of Dodd-Frank means that the banks now offer a safer, less risky derivatives product to their counterparties. That, in turn, means more pricing power, greater megabank profits and higher bonus payments to senior management.

Some megabank apologists suggest that this all matters little or that it is all about technical rules beyond comprehension. Do not buy that sanguine story. Essentially this dispute is about whether the riskiest derivatives--including credit default swaps (CDS) like those that sank AIG in 2008--can be housed in federally insured depository institutions. Huge sums are at stake. Jamie Dimon himself lobbied for this partial repeal of Dodd-Frank. Citigroup apparently drafted the bill. According to the Vice Chairman of the FDIC: "There is about $10.4 trillion in notional CDS exposure that would have been subject to the push-out, and one insured bank owns $4.6 trillion of that exposure. That is three times the amount of notional CDS AIG had when it was bailed out at a cost of $85 billion." In other words, the very derivatives (credit default swaps) that figured so prominently in the 2008 financial collapse are subject to this partial repeal, but in far greater amounts.

Government subsidies like those available to insured depository institutions should not extend to support risky derivatives transactions. The only logic behind this partial repeal is for megabank CEOs to garner excess compensation for taking on too much risk and the raw political power that the megabanks now hold in Washington.

Given the incestuous relationship of derivatives traders (a small number of global banks dominate the market) why did this regulatory indulgence make it to the top of their agenda now? Do the megabanks know something about their exposure to Greece, Russia, and the oil collapse that makes federal backing of their riskiest derivatives particularly urgent?

Thursday, January 1, 2015

Happy New Year

Following an eventful 2014, we at the Corporate Justice Blog wish all of our readers and supporters a happy and healthy 2015.  As has been the case since our inception in 2008, we endeavor to highlight corporate injustice and promote corporate justice, a concept that we believe challenges corporations and corporate leaders to "do no harm" in their pursuit of profits and shareholder gain.  Corporations, as fictional persons, have an obligation to contribute positively to the communities in which they do business, be it local, regional, national or global.  We hope for a bright and fair 2015.  We appreciate your support and comment.  Happy new year!