Sunday, January 27, 2008

the Urge to Cheat

A news story this week out of Los Angeles reports that federal investigators applied for search warrants to follow up on suspicions of illicit activity at four museums.

It was alleged in affidavits related to the search warrants that staff at two museums looked at artifacts in the possession of a smuggler and meet with the sellers of stolen goods, knowing that the objects headed their museums might be tainted.

In an odd twist of fate, one collection of materials acquired by the Pacific Asia Museum came from Ban Chiang in Thailand, a bronze age site that I discovered in 1966.

Patty Gerstenblith, a law professor, commented that “by not thinking about what they buy, they are putting money into an international network of smugglers, looters, thieves and destroyers. As educational institutions, museums have a responsibility to look beyond that particular object that they may be acquiring.”

In short, overlooking all the circumstances, not taking long-term factors into account, is unethical for museums and their staff as well.

It seems that the urge to cheat, to profit selfishly at the expense of others, is not limited to participants in business and market transactions.

Friday, January 18, 2008

Another corporate scandal – this time its worse!

On January 17th, Merrill Lynch announced its largest loss ever – US$9.8 billion dollars for the 4th quarter of 2007. This came as a result of a write down of the value of certain assets held by the company – US$16.7 billion loss in book value. The assets had been purchased as part of the subprime mortgage bonanza of a few years ago.

The subprime “bonanza” first turned into a “mess” then to a “crisis” and now has pushed the entire US economy to the tipping point of “recession”.

Wall Street stock prices are down – the necessary consequence of any major market miscalculation by business. President Bush is suddenly talking of a huge financial stimulus package from the federal government budget into the pockets of American consumers. When Republicans talk about dumping billions of federal dollars into consumer hands, you know they are worried about prospects for economic well-being.

These results should come as no surprise. We are living through yet another cycle of irresponsible corporate decision-making. Bad ethics – selfish exploitation of immediate advantage in disregard of long-term consequences – has once again led to bad economics.

The mismanagement of subprime lending has all the hallmarks of a classic business scandal. Truth about risk was not made transparent; too much capital was invested seeking easy returns causing an excess of activity which, self-evidently could not be sustained; and wheeler-dealers seeing fees drove the process.

On the other hand, this business scandal does not have the features of intentional fraud in manipulation of earnings reports that marked the Enron/WorldCom era. Nevertheless, it has resulted from the same character flaws in decision-making as the previous episode of financial malfeasance.

Products were prepared to be sold in our financial markets to meet investor appetite.

Then it was stock in supposedly high-growth companies. Now it was supposedly low risk, higher return mortgage products.

The dysfunction in both scandals was intentionally separating those who carried the risk from those who stood to profit, a violation of fundamental equitable principles of capitalism. In capitalism, those who hope to get the lion’s share of returns should shoulder the lion’s share of risk.

In Enron/WorldCom, risk was put on purchasers of stock and returns were earned by insiders. In the subprime mess, risk was put on low-income, poor credit rated mortgage borrowers and on the purchasers of interests in derivatives collateralized by such subprime mortgages. Fees were earned by originators of the mortgages and sellers of the derivatives who assumed no long term risk of loss.

This pushing off of risk to those who either could not bear it or who did not know about it was socially irresponsible corporate behavior.

In both the subprime mess and in Enron/WorldCom, the perpetrators of the scandals were the best and the brightest minds in our financial markets.

It is only just that now some investment chickens have come home to roost with Bear Sterns, Citibank and Merrill Lynch. But at a serious cost to the rest of us who are entirely innocent and don’t deserve to live in stressful economic conditions not of our own making.

The Enron/WorldCom cycle of scandal did not pose as much of a threat to average Americans as this malfeasance in the use of capital has. Housing prices are down; the equity wealth of most Americans is therefore down; consumer spending is down with impact on production and employment; the economic is facing a general recession.

Tuesday, January 1, 2008

2007 - a year of transition

What strikes me in looking back on 2007 are the fundamental geo-political trends that emerged more clearly in view. These forces are to me natural; they embody potentials and demands deep within natural and human reality; they are to be ignored at our peril for they will not go away.

Some are new and some are re-emerging, shaking off past constraints and containments.

We saw an acceleration of the break-up of the 19th century international order of nation states.

The European Union is becoming a new force in history, larger and more powerful than any previous integration of European peoples under the Romans, Charlemagne, Napoleon or Hitler. The effective presence of the EU is embodied in its single currency the Euro, which by the end of the year was worth more than the US dollar.

Tribalism returned in Kosovo, Iraq with rival Sunni, Shi’a and Kurdish zones of control, the fragmentation of Somalia, regionalism in Georgia, the division of the Palestinians into two rival zones of control, breakdown in Lebanon, presidential rivalries in Kenya, the success of Scottish nationalists – even perhaps the political division of the United States into Red and Blue states, mimicking the old division between Union and Confederacy during the Civil War. Thinking in terms of tribal rivalries provides a compelling explanation of the unremitting tension between Israel and the Palestinians allied with Hezbollah.

Religious fundamentalism within Islam is also a kind of tribalism where loyalty is to the brotherhood, the band, the sect and not to wider, more inclusive, pluralistic communities.

Convergence around cultures, ethnic identities, religions rather than citizenship in 19th century states and empires is the predominant driver of politics.

In its own way, economic globalization and the continual expansion of a single, integrated financial system is taking power away from political elites administering national state structures. The world’s financial centers are nodes in one network, doing business 24 hours a day.

To make the point, Islamic banking, once seen as sectarian and inappropriate for the rational pursuit of profit, is being absorbed into the world’s financial system.

The decline of the dollar is another marker of a changing global order. The United States spends too much on the wrong things, adding to its indebtedness; it is losing ground relative to other fecund centers of economic wealth and growth.

This past year saw the end of the Bush/Blair/Howard imperial attempt to impose a political order in Iraq. Blair left office, Howard was rejected by Australian voters, and Bush is sliding to the end of his term as president without the trappings of accomplishment as a world leader. The Iraqis are making their own destiny through ethnic and sectarian cleansing and the end game as they want it looks like some form of partition – an arrangement that perhaps should have been made right after World War I in the breakup of the Ottoman Empire at the hands of the British and the French.

Oddly, last year saw the definitive rise of Russia and China as great national power, very much in the 19th century pattern of hegemonic advance. Russia under Putin is orderly and growing in economic power after its long experiment with Communist internationalism.

Similarly, China has recovered from 150 years of weakness under the Manchu’s and war lord leaders and from its experiment with Mao’s form of Communism. It is once again a great regional power militarily and a rising world power intellectually and economically.

The parallel rise of Russia and China has an inevitable feel about it.

In Latin America, 2007 did not bring to the fore any significant trend, only further oscillation between conservative and populist (colonialist and nativist) approaches to political and social justice. Populism advanced under Chavez of Venezuela with his oil money, Morales in Bolivia, and Lopez-Obrador in Mexico. But the tide of populism hit a beach wall of opposition. Lopez-Obrador narrowly lost the presidential election; Chavez lost a referendum designed to make him a Napoleonic caudillo for life and Morales’s effort to revise Bolivia’s constitution was stalled.

Latin America still needs to find a balance way towards growth and middle-class social sensibility.

Overriding all the ups and downs of elite politics was global warming. Great natural forces heating up the climate. Under the specter of climate change, worries about political order and who’s on first base seem trivial.