Too Big to Fix

“Looking back, one sees that the crisis was inevitable, if for no other reason than that these too-big-to-fail firms would push the boundaries until there was a crisis.”
 —Thomas Hoenig, Federal Deposit Insurance Corporation director

A strange thing happened to me a couple of years ago. I filled out a direct debit mandate to pay my monthly cell (or mobile, as it’s called here) phone bill. Soon after, a not-insignificant sum of money (that I did not owe) was taken out of my checking account by the mobile phone company.

I rang up the company to inform them of their error, and they advised me to fill out a certain form with my bank. I trustingly attempted to follow this advice only to learn that the form was for seeking reimbursement through my bank’s insurance. Needless to say, the bank had no interest in having their insurance pay for a mistake (or theft) that had nothing to do with them. I went back to the mobile phone company, where I met nothing but resistance—to the point where I had to have a proper row with the fellow I was dealing with. But no matter how much I argued with him, he insisted that there was no way to rectify the error. At one point, he finally burst forth with, “My hands are tied. You Americans have made everything so bloody complicated with your damned Sarbox.”

In the end, I threatened to register a complaint with the Irish Commission for Communications Regulation, and a few days later the money was restored to my bank account, as mysteriously as it had disappeared. To this day, however, I have never figured out exactly what Sarbox (the Sarbanes–Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act) had to do with my mobile phone account.

Sarbox imposed all kinds of reporting requirements on American companies and companies wanting to do business in America. It was a reaction to a number of business scandals, notably the collapse of Enron. It had a major impact on the way businesses operate, and it is the reason I always laugh when Democrats try to paint the Bush Administration as some kind of period of massive “deregulation.”

Whatever problems Sarbox was designed to solve, it obviously didn’t work because at the end of the Bush Administration we had a major financial crisis. The solution for this was another major round of regulation, in the form of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. So did that finally fix the country’s financial problems? Does that piece of legislation make another financial crisis less likely?

If you believe that a fundamental problem of the economy is that financial institutions have grown too large, through mergers and acquisitions, only to end up requiring taxpayers to bail them out when they get into trouble because they are Too Big To Fail, then the answer would have to be a resounding no.

An analysis by Hester Peirce and Robert Greene of George Mason University shows that the United States’s bank assets have become even more concentrated in the wake of Sarbox and Dodd-Frank. In 2000 the five largest banks held 30.1 percent of the country’s banking assets, and small banks (those with $10 billion or less in assets) held 27.5 percent. In 2013, the five largest held 46.6 percent and the small banks held 18.6 percent. The small banks’ share of domestic deposits dropped by 9.8 percent just in the period following the passage of Dodd-Frank.

Is this something that would have happened, even without the passage of those two major bills? Almost certainly not, since it is the added cost of complying with government regulations that is driving smaller banks out of business. “The Dodd-Frank Act, passed in 2010, imposes a new set of regulations that are disproportionately burdensome to small banks,” write Peirce and Greene, “Moreover, by designating the largest financial institutions as ‘systemically important,’ Dodd-Frank creates a market expectation that designated firms are too big to fail and generates funding and other competitive advantages for the largest US banks.”

In other words, with Dodd-Frank the government is already laying the groundwork for the next big bailout and, in so doing, is issuing what may be a self-fulfilling prophecy. Having too many assets concentrated in a few large banks makes a financial crisis more likely, as explained in the quote above by FDIC director Thomas Hoenig. When a small bank gets into trouble, it mainly affects the owners of the bank. When a huge bank or a group of huge banks get into trouble, they have an incentive to make things even worse because they know they can get bailed out. If the politicians were truly serious about avoiding another financial crisis, they would be putting limits on the size of banks rather than providing incentives for them to grow even larger.

When you see this happen over and over again, it becomes depressing. It is only a matter of time until the next big business failure ends up hurting employees, shareholders and ultimately the taxpayers who will fund the inevitable bailout. The “solution” will then once again be a major voluminous bill named after another pair of politicians, adding yet another layer of regulations and requirements. Those who favor the bill will be styled as courageous and looking out for the little guy. Those who refuse to go along will be painted as uncaring and in the pocket of fat cats.

Is there any silver lining at all? Well, here’s something. I just heard a rumor that the mobile phone company that tried to rob me might be swallowed up by a larger company.

Land of Dreamers

“The credibility of the organization is in serious question by any credible observer. The record of the OAS in Venezuela is an embarrassment.”
 —José Miguel Vivanco, director of the Americas division of Human Rights Watch

In February a 17-year-old girl was attacked and robbed in San Cristóbal, a Venezuelan city on the border with Colombia. It was the kind of unfortunate incident that could and does happen in virtually any city in the world on any given evening. But in San Cristóbal it was the straw that broke the camel’s back.

Since the previous year the city’s University of the Andes’s Botanical Gardens had become overrun by drug dealers and criminals. This was part of a national trend that has resulted in Venezuela having one of the highest crime rates in the world. In San Cristóbal many of the criminals’ victims were students, and they lobbied for better security—in vain. After the February 3 attack, word of it spread and the next day students came out to protest. The police response was to arrest protestors and send them to a detention center hundreds of miles away in a city called Coro, where they were reportedly mistreated.

The student response was more protests—not only in San Cristóbal but across the country, including the capital Caracas. They’ve been going on ever since. Government forces have pushed back with force, using tear gas and water cannons. As of this writing, the reported death toll is 36. The government’s political opponents were quick to jump on the protest bandwagon. The most prominent was 42-year-old politician and economist Leopoldo López, and he was soon put behind bars by the government.

Obviously, the protests are not simply about unhappiness over the crime rate. Under the administrations of the late Hugo Chavez and his successor Nicolás Maduro, oil-rich Venezuela is an economic basket case. Inflation is sky high and shoppers at markets face queues at times numbering more than a thousand. Maduro, who not only lacks his mentor’s charisma (which was always lost on me) but is clearly incompetent, won election to the presidency only narrowly and not without suspicions. And, given the government’s tight control on the media, the election could hardly have been considered very fair in any event.

According to reporting by The Wall Street Journal’s Mary Anastasia O’Grady, the masked thugs on motorcycles who have been inflicting the most harm on the protestors are paramilitaries organized by the Chavista government.

One suspects that the situation in Venezuela would have gotten more worldwide attention if not for the even more dramatic events involving Ukraine. Reporting in the general international press has been sketchy at best. Some reports I have heard paint the student protestors as “middle class” or “conservative,” suggesting a bourgeois-vs.-poor narrative.

A rare high-profile mention of the situation came during the Academy Awards ceremony a few weeks ago when Best Supporting Actor Jared Leto expressed solidarity in his acceptance speech with “the dreamers” in Ukraine and Venezuela. Fellow actors Kevin Spacey and Forest Whitaker later tweeted their criticism of the Venezuelan government. Previously vocal Hollywood supporters of Chavez—Sean Penn, Danny Glover, Michael Moore—stayed silent. A photo showing Penn—who has deservedly earned praise for his relief work in Haiti—holding a sign in Spanish supporting Maduro showed up on Twitter, but it was pretty obvious that it had been composed à la Photoshop. More significant was criticism from musicians Willie Colón and, especially, Rubén Blades, whose political activist credentials are impeccable. Clearly stung, Maduro insisted on television that Blades had been misled by fascists. According to none other than Madonna (in a February tweet), “Fascism is alive and thriving in Venezuela” and “Maduro is not familiar with the phrase ‘Human Rights’!”

Events in Venezuela have divided Latin American countries. The protests have been ignored by the Organization of American States, which met in Washington on Friday. In an unusual move, Panama made Venezuelan opposition lawmaker María Corina Machado a temporary member of its delegation so that she could address the body, but delegates voted not to include her in the formal agenda. After hours of arguing, she was finally allowed to speak briefly in an ad hoc capacity. The delegates also took the unusual step, in a 22-to-11 vote, of barring the media from the session. The U.S., Canada, Mexico, Guatemala, Panama, Peru, Honduras, Costa Rica, Colombia, Paraguay and Chile supported her appearance. Brazil, Bolivia, Nicaragua, Ecuador, Argentina and various Caribbean countries joined Venezuela in opposition. Her plea for a resolution demanding that Venezuela release its political prisoners and respect freedom of speech went nowhere. Machado’s supporters fear that she could face arrest after her return to Venezuela.

Brazil’s rebuke of Machado apparently reflects the fact that Brazil is heavily invested in the Venezuelan economy. But it is a sad irony, given that Brazilian president Dilma Rousseff herself was once a student leader who stood up to authority and who, as a result, was tortured by her country’s military.

In the end, a lot of people choose sides based on ideology rather than on respect for democracy or human rights. That is how yesterday’s firebrand who used to fight authority can, later in life, become the defender of authority that abuses its power.

If you find that thought as depressing as I do, then you may take some pleasure from the YouTube video on this page of the Peruvian newspaper El Comercio. Filmed last week at a debate at the Pontifical Catholic University of Chile in Santiago, it went viral in South America. A young Venezuelan woman is applauded by the audience when she tears into leftist Senator Alejandro Navarro, a defender of the Chavista regime. After telling of a journalist friend who was threatened for writing about the government, she yells at the senator, “Go live in Venezuela. I give it to you, I give you my home.”

Even if you don’t understand Spanish, her body language says it all.

Luck of the Irish

“For you stole Trevelyan’s corn
So the young might see the morn.
Now a prison ship lies waiting in the bay.”
 —Pete St. John, “The Fields of Athenry”

People who make a living at political discourse have their pet phrases intended to invalidate what the other side says.

For example, conservative commentators will be quick to accuse the other side of “playing the race card.” The aim is to equate the mere suggestion of racism with an effort to shut down debate. In other words, it’s an attempt to undermine the other side’s argument by suggesting that the other side cannot make its points on the merits.

Pundits on the left have their pet phrases as well. One that I heard a lot last week was “dog whistle.” This is an accusation that conservatives are making an appeal to racists by speaking in a code that the racists are able to understand. The term refers to whistles that emit a frequency too high for humans to hear but which animals can hear.

There was an eruption of “dog whistle” mentioning last week after Wisconsin Congressman Paul Ryan went on Bill Bennett’s radio show and attributed chronic poverty in America to a “tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working or learning to value the culture of work.”

The reaction came fast and furious. California Congresswoman Barbara Lee responded, “Let’s be clear, when Mr. Ryan says ‘inner city,’ when he says, ‘culture,’ these are simply code words for what he really means: ‘black.’” Left-of-center columnists couldn’t get to their keyboards fast enough to echo her sentiments. Ana Marie Cox wrote in The Guardian that “it matters less if Ryan himself is racist or not—what matters is that his statements and actions don’t do anything to challenge or change racism in other people.” The The New York Times’s Paul Krugman wrote that “since conservatives can’t bring themselves to acknowledge the reality of what’s happening to opportunity in America, they’re left with nothing but that old-time dog whistle.”

And, frankly, as a target for such comments, Ryan definitely made himself low-hanging fruit. He acknowledged as much by later apologizing for being “inarticulate” and insisting that his comments were directed at society as whole and not at a specific group. He fell into the trap, as politicians sometimes do, of tailoring his words to a particular audience and forgetting that the rest of the country could hear him as well. Bennett’s listeners may not have minded his comments, but it never sounds good, when you are trying to solve a problem, to appear to be blaming the victim.

The rejoinder to Ryan that really caught my attention, however, was a piece in Sunday’s New York Times, written by Timothy Egan, the paper’s Pacific Northwest correspondent. In honor of St. Patrick’s Day, Egan drew a comparison between the Irish-American Ryan and Charles Edward Trevelyan, the British government’s assistant treasury secretary in charge of administering famine relief for Ireland in the 1840s. Egan has a gift for painting human suffering with words (he won a National Book Award for The Worst Hard Time: The Untold Story of Those Who Survived the Great American Dust Bowl), and he used that gift to evoke the “skeletal people, dying en masse, the hollow-bellied children scrounging for nettles and blackberries” of the Irish Famine and, in so doing, tie them to Congressman Ryan.

Trevelyan is a villain here in Ireland to this day. He is immortalized in the lyrics of the folk ballad “The Fields of Athenry.” Trevelyan was not coy about what he really thought. Here is a sample: “The greatest evil we have to face is not the physical evil of the famine, but the moral evil of the selfish, perverse and turbulent character of the Irish people.” It would be hard to find such a direct attack on the moral character of an entire group of people today—i.e. one that does not need decoding by those adept at detecting dog whistles—unless maybe you read what is written about Republicans on the pages of The New York Times or The Guardian.

Egan generously allows, “There is no comparison, of course, between the de facto genocide that resulted from British policy, and conservative criticism of modern American poverty programs.” But then he goes on to drive home the comparison anyway.

See what is going on here? The discussion is less about what works and doesn’t work in solving the problem of poverty than about who cares and who doesn’t care. Yes, it’s wrong to imply that people are poor because they are too lazy to work, but isn’t it also wrong to imply that a politician who wants to find a way to increase participation in the economy is at heart genocidal?

Egan makes one telling historical slip in his attack on Ryan. In referring to “language that English Tories used to justify indifference to an epic tragedy,” he gives the impression that Trevelyan served a Conservative government. He was actually part of a Whig government. The Whig Party (precursor to the modern Liberal Party) had abolished slavery in the British Empire and enacted Catholic emancipation, but when it came to the Irish Famine its laissez-faire economic philosophy prevailed.

It turns out that Trevelyan was the quintessential government bureaucrat. He spent his whole career as a civil servant and colonial administrator. Apart from his association with the Irish Famine, he is chiefly remembered for co-authoring a landmark report called The Organisation of the Permanent Civil Service. His distasteful attitude towards the Irish aside, it doesn’t appear that he deliberately intended for people to starve, only that he was massively and tragically incompetent. The lesson here may not be that the English are inherently evil but that you really don’t want to be in the position of needing the government—any government—to save you.

What was excruciating for the starving Irish was the fact that stores of food were being shipped out to paying customers. While you can by no means compare the current California drought to the Irish Famine, you do hear a faint echo of that frustration in the anguished complaints of Central Valley farmers today who say that water which could have been diverted to reservoirs during wet years was flushed out to sea by government bureaucrats in a bid to preserve a species of bait fish.

Despite its tragic history of colonialism, famines and poverty, Ireland provides encouragement to other peoples in similar straits. Just a few generations after the time of Trevelyan, Ireland’s economy prospered to the point that it became the envy of many European countries. There are still problems and the vaunted Celtic Tiger had a massive collapse, but there is still no comparison today to the low standard of living of just a few decades ago. How did the Irish turn around their fortunes so quickly?

If you ask ordinary Irish people that question, they will mention European Union investment money and the luring of international corporations to the country. But one answer I hear over and over in particular would bring a smile to Paul Ryan. People say it is because of a culture of hard work.