Relevant and even prescient commentary on news, politics and the economy.

Slow arm of the law

The slow arm of the law in relation to the grand scale of privitization of government bureaucracy stands in sharp contrast to rules about wiretapping and such. Some of this is understandable, but I have seen no proposals. If this is to be the practice, are’nt we a little slow?

As recently as Oct. 3, Defense Secretary Robert M. Gates indicated that no decision had been made on how to apply the new language. In other statements, Pentagon officials have suggested that they would apply the military code to Defense Department contractors. That could leave contractors working for other agencies, such as Blackwater, outside military law.

Neither the Pentagon or the U.S. Embassy in Baghdad responded to requests for comment.

In any case, military lawyers have yet to determine how to put the new language into effect. Among the questions they are wrestling with are these: What categories of crimes should it cover? How should it treat employees who are not American citizens? What are the chances that the provision would be upheld by the Supreme Court?

“There’s also a very open constitutional question about whether we can try civilians in military courts,” said Laura Dickinson, a professor of law at the University of Connecticut and an expert on laws that govern private contractors in conflict zones. Traditionally, there has been resistance to doing so, but Ms. Dickinson said she believes a case could be made that private security contractors authorized to use force would be covered by the code of military justice.

The options under civilian law are little better. The most likely way to prosecute would be through the Military Extraterritorial Jurisdiction Act, which allows the extension of federal law to civilians supporting military operations. Mr. Horton, the Columbia lecturer, said he believed that “a sound basis” existed for using the act to prosecute security contractors.

However, trying a criminal case in federal court requires guarantees that no one has tampered with the evidence. Because a defendant has the right to cross-examine witnesses, foreign witnesses would have to be transported to the United States.

Robert Litt, a former federal prosecutor and deputy assistant attorney general in the Justice Department’s criminal division, said that if anything like the Blackwater shootings occurred in the United States, “within minutes you would have police there securing the crime scene, interviewing witnesses.”

“You’ll have a secure chain of evidence,” he added. “All that requires people on the scene almost simultaneously.”

Several legal experts said that evidence gathered by Iraqi investigators and turned over to the Americans, even within days, would probably be suspect.

Another law that might be applicable is one covering contractors in areas that could be defined as American territory, such as a military base or the Green Zone. But the Blackwater security contractors in the Sept. 16 shootings were in neither place.

It appears the Blackwater ‘issue’ makes for a small proxy skirmish for Maliki, and a possible wedge to actually gain some independence for the sovereign government. Tactical moves for them, but what of US law and order?

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Free market demands rational choice making

WebMD carried this warning about certain foods.

Oct. 10, 2007 — Check your freezer for Banquet or generic store-brand turkey or chicken not-ready-to-eat pot pies with “P-9” printed on the side of the package.

If you have any those pot pie products, the U.S. Department of Agriculture (USDA) says to throw them out or don’t eat them as health officials investigate a multi-state salmonella outbreak.

Salmonella bacteria can cause diarrhea, fever, and abdominal cramps. Most people recover within a week without treatment, but serious complications can occur. Infants, elders, and people with weak immune systems are more likely to become severely ill from salmonella.

The USDA, CDC, and state health officials are investigating at least 139 cases of salmonella in 30 states that were reported this year and that may be related to the pot pies. At least 20 people have been hospitalized in connection with the outbreak, according to the CDC.

There have been shouting headlines about recalls in the press concerning various products. Assuming we are in a trickier environment now in determining safety of products, how is information to be handled to help the consumer know a problem exists?

Home Depot advertizes eco-products but also had to recall spray product that stayed on the shelves after the company recalled product because of the link to respitory problems when used as directed, and accepted the supplier (American) claim it had re-configured the active ingredient, which was actually not accurate. But old product also remained on shelves. Other examples include oscillating fans.

So inventory safety can be tough to monitor even within the US. What of global markets when the same product could have been made in two or three counties (generic drugs).

My apologies to Home Depot for picking on them. This is a global issue.

Not every recall is earth shattering news, but how is a consumer in a free market economy to make the rational decisions to conform to the rational behavior that market theory demands?

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Crunch time ahead?

American Prospect has published an article by Robert Kuttner on parallels between 1929 and 2007.

In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.
Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.
Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials – excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.
The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.
There is good evidence – and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo – that even much of the boom of the late 1990s was built substantially on asset bubbles. [“Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s”]
A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank – e.g. Morgan or Chase – as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks – part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed’s discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn’t paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction – assuming perpetually rising asset prices – so in a credit crisis they can act as net de-stabilizers.
A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn’t work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.
The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business – the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.
Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today’s derivatives on which technical traders make their fortunes.
By contrast, in the traditional banking system a bank examiner could look at a bank’s loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today’s examiner is not able to value a lot of the paper held by banks, and must rely on the banks’ own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.

A last parallel is ideological – the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government’s main job is to protect property rights, and otherwise just get out of the way.

We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America’s squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.

What caught my eye is also what I have found in Adam Smith.
“Regulated, transparent, and reliable” markets. Even if he met self-regulated, he was a moral philosopher as well.

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Angry Bear Nominations List

National Council of Teachers of English
gives awards for double-speak, an Orwell, just like an Oscar only better.

The NCTE Public Language Award Committee is now seeking nominations for this year’s Doublespeak Award, which is given to a glaring example of deceptive language by a public spokesperson. The words must originate from an American.

While I was not going to use this just yet because I was looking for better sourcing than provided at the NCTE site, I changed my mind because of some of the recent posts.

I propose a collection of economic double-speak, providing some sort of award from Angry Bear, as cool as the one on Dancing for the Stars. No invectives allowed since we are family oriented. This is an undeveloped idea, so is rather primitive, but maybe as an initial trial ballon it is okay. All econ schools allowed.

Some of the award restrictions would include rules about:

1. Transcripts that have been edited, instead of accurate.
2. Links with the quote to help establish context.
3. Extra point for some reasonable background material as links.
4. Name calling must be done on the margins, not the text.

I realize no one listens to English teachers in or out of school, but an Angry Bear nominations list is fun to think about.

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Watch the media reactions

I have read that American Conservative magazine published by Pat Buchanan will release this issue Oct. 8 on General Patraeus.

Whether or not it actually is published this way, this is just an alert for readers to watch what happens in the media when General Patraeus is named with no respect. Sort of a random caveat. No prediction from me.

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More on water resources and GATS

OMB Watch has posted a notice on something we rarely think about, and take for granted.

The Raw Sewage Overflow Right-to-Know Act (H.R. 2452), introduced by Reps. Tim Bishop (D-NY) and Frank LoBiondo (R-NJ) on May 23, requires sewage treatment facilities to notify the public, public health officials and any other downstream “affected entities” when there is a sewage overflow within 24 hours of the incident. A Senate companion bill (S. 2080) was introduced by Sen. Frank Lautenberg☼ (D-NJ) on Sept. 20.
The long-standing but little-known problem of sewage spillage in waterways is a major cause of illnesses stemming from waterborne contaminants. American Rivers, a national advocacy organization, estimates that over 850 billion gallons of raw sewage are released every year. Rainstorms easily overwhelm sewage systems, and broken or clogged pipes contribute to the 23,000-75,000 raw sewage overflows every year. Federal clean water funding has plummeted under the Bush administration, and the already strained sewage systems further deteriorate every year. EPA estimates between 1.8 million and 3.5 million people become sick due to recreational contact with sewage-contaminated water. With no national requirement for public notification, the majority of states do not have regulations or policies in place, and most Americans have no idea when it is not safe to be in the water.

In the GATS agreements, sewerage is part of an industry that comes under accessible categories for international and national privatization, while purifying drinking water does not. But it is part of the aging infrastructure that is rarely mentioned, and one wonders how much it is worth.

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Bureau of Public Debt

Bureau of Public Debt is something I missed in the news.

If you would like to help reduce the national debt, make your check payable to the Bureau of the Public Debt. In the memo section, note that it’s a gift to reduce the Debt Held by the Public. Mail your check to: Attn Dept G, Bureau of the Public Debt, P. O. Box 2188, Parkersburg, WV 26106-2188.

I am not sure about my own reactions and have no more time today. Any reactions?

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Do you know what SPP is?

What is the SPP US and SPP Canada? Many agreements in one.

One point of view is the notion of The Shock Doctrine.

The timing of The Shock Doctrine’s release in Canada is very relevant here because it just hosted a summit with George Bush and Mexican President Calderon to meet with Prime Minister Steven Harper to talk about the Security and Prosperity Partnership of North America (SPP) which is basically like NAFTA-plus — NAFTA plus security issues. The SPP is an example of the shock doctrine I outline in the sense that this was an agenda that would have been unspeakable in terms of integration with the United States before 9/11, and in the panic after — in that shock — the SPP agenda moved forward in technocratic circles, and it was presented as a done deal.
Once Canadians began learning about the SPP, they started rejecting it, and then they had this summit, where it was announced that, “Don’t worry, nothing’s going to happen here.” But they said in the final press conference at the summit in Montebello, Quebec, at the end of August that the one exception that they would push for the SPP to be pushed through is if there’s a disaster — if there’s an avian flu outbreak or a terrorist attack or a natural disaster — then they would implement tightened integration between security forces in all these countries.
In Canada this was front-page news — in the U.S., it wasn’t reported on. When my book came out a week later people saw the connections immediately. They realized that what the Canadian government was saying was, the next time there’s a disaster, we will use it as a moment of opportunity to push through these policies that you’re rejecting where there isn’t a disaster going on.

Let us see, the list is reasonable. Then it must mean the huge changes occurring here become continental in scope.

Posse Comitatus
Procurement procedures DOD
Personnel procedures DOD, State
Trade agreements on water resources
Trade agreements on oil, coal and methane development
Homeland security survellance procedures

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Update on WTO GATS, gambling, and Antigua

The Register provides an update to the tiny Antigua case.

The case originated back in 2003 after the prosecution of Jay Cohen, an expatriate American who ran a sportsbook out of Antigua called the World Sports Exchange, and ended up doing time in a federal prison – in Las Vegas, of all places – for violation of the Wire Act. The high profile prosecution led the Antiguan authorities to file a formal complaint with the WTO, because the US continued to allow US companies to offer various forms of remote domestic gambling while aggressively prosecuting Antiguan companies under legislation originally drafted to fight the mob. A fuller treatment of the case can be found here, but, suffice to say, the WTO sided with the Antiguans.

The ramifications of that defeat are still rippling around the world, and major American trading partners such as the EU and Japan have begun lining up behind the Antiguans in defense of WTO principles. Potential damages are really starting to pile up – the AP reported today that EU online gambling firms are pressing for $100 bil in damages.

Traditional trade sanctions would do little for a small country like Antigua, so the WTO rules allow smaller countries the option of suspending their own WTO commitments, and the Antiguans have been threatening to suspend their intellectual property obligations to the US. That in turn ultimately caught the attention of powerful Silicon Valley and Hollywood interests, and last week the mainstream American press suddenly discovered that something important was happening.

Antigua filed a claim with the WTO for $3.4 bil to compensate the little island nation for the economic fallout resulting from repeated American legal attacks on Antigua-based internet gambling providers. The US has countered with an offer of – ahem – $500,000. The EU, however, is the largest and most dynamic online gambling market in the world, and the US is trying to buy that claim out by offering to liberalize such dynamic, hot-growth economic sectors as warehousing and storage services.

JohnA sent the link. The Register has links to past articles on the progression of the case if interested.

As industry chases entry into markets, notice the small ripples like Intellectual Property rights of a case like Antigua grows large when the crack in the dike is opened for bigger players, and the bargaining begins to widen openings. The US has of course played the same way.

Will the changes catch regular people off guard? I imagine most people in the revolutionary Renaissance and Enlightenment period missed the enormity of change as they went about making a living. Most of us do. Of course, what is actionable information in this regard?

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In the words of a founder

Thomas Jefferson wrote a dire warning about banks and debt:

‘If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless. I sincerely believe the banking institutions (having the issuing power of money) are more dangerous to liberty than standing armies. My zeal against these institutions was so warm and open at the establishment of the Bank of the United States (Hamilton’s foreign system), that I was derided as a maniac by the tribe of bank mongers who were seeking to filch from the public.’

Some problems are intractable and somewhere in between what we think they will be. Seems like we are still hashing this out to some degree.

Update: The opinion was deleted to let Thomas Jefferson talk for himself.

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