Saturday, August 22, 2015

One Ugly Week in Global Finance (Deflation 2015 Update)

Nevertheless, that was probably not the worst news of the week. In fact, the US stock market is late to the real horror show--which is a deflationary vortex that is rapidly spreading throughout the global economy, particularly in Asia and emerging markets. Consider the following news from last week:

1) On Monday morning the WSJ reported: "Japan’s economy contracted in the second quarter as overseas demand for Japanese goods slumped and households spent less, raising the possibility the government will act to bolster an anemic recovery. Japan’s gross domestic product shrank 1.6% on an annualized basis in the April-June quarter, according to data released Monday by the Cabinet Office." Japan teeters toward recession.

2) On Monday the FT reported that: "Russia, Turkey, Malaysia and Taiwan headed a lengthening list of emerging market countries seeing their currencies pummelled by markets’ continued fixation with China’s slowdown and an imminent US rate rise." Emerging market currency devaluations means more exported deflation worldwide.

3) On Tuesday USA Today reported that China's main stock index "plunged more than 6% . . . and other Asian markets also declined as investors appeared to show a delayed reaction to news that China's market regulator would allow market forces to play a greater role in determining stock prices.The mainland China stock benchmark's 6.2% drop to 3,748.16 was its biggest decline in three weeks. The index fell 8.5% in late July as worries about China's ability to maintain high economic growth levels undermined investor confidence." China's stock market crash now mirrors the Crash of 1929.

4) On Wednesday USA Today reported that: "The stock market closed lower Wednesday after minutes from the Federal Reserve's last policy meeting showed the central bank was 'approaching' its first rate hike in nearly a decade. . . .The Dow Jones industrial average ended down 162 points" and "[t]he energy sector was the hardest hit as oil prices tumbled about 4% after a government report showed that U.S. crude stockpiles rose. U.S. benchmark crude fell $1.82 to $40.80 a barrel." Oil prices now stand at a six year low threatening a huge part of the global economy with an oil depression.

5) On Thursday CNBC reported that "China, which is at the heart of the region's deflation challenge, has seen 41 consecutive months of falling producer - or wholesale - prices. In July, the country's producer prices index (PPI) fell 5.4 percent from a year earlier, the worst reading since late 2009, during the aftermath of the global financial crisis. Over the past nine months, PPI deflation pressures have reached nine out of ten economies in the region." Virtually all of Asia is now in a "deflationary funk."

6) Yesterday Bloomberg reported that: "The Bloomberg Commodity Index of 22 raw materials dropped Wednesday to its lowest since 2002, paced this year by declines in nickel, sugar, and crude oil" and that "[s]lumping prices for raw materials have wiped out $2.05 trillion from the shares of mining and oil companies since the middle of last year." Emerging markets now face a "death spiral" of falling commodity prices and falling currencies.

7) Yesterday the WSJ reported that: "[t]he Caixin China Manufacturing Purchasing Managers' Index . . . fell to a 77-month low in August." This private survey contradicts official sources and proves China is in much worse shape than previously thought.

All of this highlights that serious deflation haunts the global economy with China, Japan and other emerging markets suffering serious economic slowdowns accompanied by severe crashes in the market price of almost all commodities. Now, these nations are exporting deflation through falling currencies which effectively slash prices on everything they produce. This constitutes a serious threat to the global economy.  On top of those problems, Greece and the Eurozone are still a mess.

This blog first discussed this "perfect storm" of financial threats on December 12, 2014 and again on December 14, 2014. At that time I bemoaned the lack of any effective mechanism for sound fiscal and monetary stimulus for the global economy. I have made the same point with respect to the Eurozone. I wrote a law review article (a book review of Globalization and its Discontents by Joseph Stiglitz) on this point in 2003, and I addressed this flaw in global financial architecture in Lawless Capitalism. I have also blogged on pro-growth reforms that would help lift the global economy out of its structural deflationary malaise, such as empowering people to move freely to their highest and best use or banking currency reserves.

The other major problem with all these extreme market moves relates to the world's unregulated and opaque derivatives markets. Here, the question of the day relates to the exposure of the megabanks to the oil patch, the emerging market sector and China. My bet is that the megabanks booked big profits on all that soon-to-be distressed debt and now face the losses from those derivatives deals. If so, this meltdowm in Asia and the energy sector is about to hit home on Wall Street and our dysfunctional financial sector. Think MF Global or the London Whale.

Right now, the US economy does not face any Doomsday threat; but, that can change quickly if it turns out our oil sector collapses or the megabanks must book huge losses on derivatives transactions involving commodities, Asia or emerging markets.

Wednesday, August 19, 2015

High Inequality and Deflation 2015: Rigged Globalization

The above chart shows the massive cash hoarding undertaken in order to influence the price of exports from developing countries. While the crash of 2008 momentarily slowed the growth of world currency reserves, they promptly soared after mid-2009 as nations desperately sought to grow through exports at the expense of the price-competitiveness of other nations.

Of course, the best nation for consumption and imports is by far the USA so it is only natural that exporting nations seek to accumulate dollars to make their manufacturing sector more price competitive in dollar terms, as depicted above, showing about 2/3 of all reserves are held in dollar denominated instruments.

Today currency reserves amount to about $12 trillion--and thus represent a substantial use of the world's total capital. Essentially, developing nations face incentives to buy dollars in order to weaken their currency and strengthen the dollar because reserves subsidize the export sector of their economies. The US dollar is the ideal reserve currency because the market for dollar assets is deep and liquid.

In theory, and to some degree in practice, currency reserves serve a legitimate purpose for developing countries. Countries accumulating foreign currency reserves can use them to defend the value of their currency in the event their currency is subject to speculative attack or any financial crisis causes currency disruptions. By selling foreign currency reserves, such as dollars, they can restrict the supply of their own national currency and cause it increase in value relative to the dollar. It can be very important to defend the value of a national currency because the vast majority of international debt is denominated in dollars. This means that if a currency dives in value relative to the dollar debt burdens can increase often dramatically. As a result nations cannot allow the value of their currency to dive or public and private debt burdens can spiral out of control and a financial crisis may ensue.

Fine. But, economists have shown again and again that the degree of reserve accumulation cannot be explained by the need to defend  a currency's value in time of crisis. Instead, they have identified 20 nations that clearly accumulate currency reserves to lower the cost of their exports to the US and other developed nations. This currency manipulation through constant accumulation of dollar reserves is highly costly to the global economy.

According to Maurice Obstfeld and Kenneth Rogoff the accumulation of currency reserves was "intimately connected" to the financial crisis because it allowed the US "to borrow cheaply abroad and thereby finance its unsustainable housing bubble." The stronger dollar meant lower cost exports, lower inflation and thus lower interest rates. The constant purchase of dollar denominated assets (no country holds actual currency as currency reserves opting instead for the safest and most liquid dollar-denominated assets) also lower interest rates in the US as well as the developed world. I explained this dynamic in detail in chapter 4 of Lawless Capitalism.

Today, this festering problem with our global economy appears to be spawning global deflation throughout emerging markets and even into China and Japan. Basically, by accumulating reserves central banks in exporting countries divert investment from their own economies in order to purchase low-yielding debt of developing countries. Over the long term this suppressed investments hobbles their growth.

Meanwhile, in the developed world, currency reserves mean more debt and fewer jobs as is evident (see chart above demonstrating the role of the Euro in reserves). In the US and the Eurozone, economists estimate that the entire output gap experienced since the financial crisis can be attributed to currency reserves. Experts estimate that the US alone has lost up to 5.8 million jobs.

Thus growing currency reserves are a powerful deflationary force.

As Nobel laureate Joesph Stiglitz stated in 2010: "the UN Commission of Experts on Reforms of the International Monetary and Financial System highlighted the ways in which the dollar reserve system contributed to global financial instability and a weak global economy. While many of its arguments were already well known—Triffin had noted that the reserve currency country got increasingly in debt as others’ held more of its IOU’s as part of their reserves,and Keynes had noted that the build-up of reserves by surplus countries led to weaknesses in global aggregate demand—the crisis gave them increased salience." Stiglitz also argues there is a remarkably "simple" solution to this issue--to expand the use of special drawing rights issued by the IMF. This would serve as a mechanism for broadening the burden of the reserve currency.

I extended this concept to argue in favor of a more aggressive investment approach for these reserves by creating a global development bank for currency reserves to fund infrastructure projects like schools, universities, water supplies, green energy platforms, and to actualize economic human rights.

Nevertheless, such common sense solutions have gained no traction in the wake of the financial crisis. Instead, as is evident in the chart above reserve accumulation has proceeded apace. Why?

High Inequality. When a small group controls massive wealth they can dictate law for their profit regardless of costs to society as a whole. This irrational model of globalization fattens transnational corporate profits--and by extension executive compensation. They produce cheap in China and sell cheap in the US because the dollar is the reserve currency. I formalized this basic point in American Corporate Governance Law and Globalization.

In sum, globalization has been hijacked and sabotaged by powerful interests in the US that profit from the deflationary forces unleashed by the constant accumulation of massive currency reserves.

Tuesday, August 11, 2015

High Inequality and Deflation 2015: The Problem of Too Much Savings

Today, China devalued its currency, effectively cutting the price on everything it produces. It was the largest devaluation out of China in 21 years. It is just the latest sign of spreading deflationary pressures. It will probably get much worse from here.

A potentially historic deflationary vortex threatens to engulf the world. In fact, a recent survey of financial experts found that an overwhelming majority think that deflation is a much larger worry than inflation. Worse, the Fed seems determined to raise interest rates notwithstanding the deepening slowdown behind falling prices. The Fed seems oblivious to the fact that despite massive monetary stimulus, a deflationary spiral simply cannot be discounted.

This blog has long covered the deflationary forces gripping the global economy on a step by step basis. That vortex is manifestly forming today as evidenced by the oil and commodities crash, the apparent crash in China, the increasing deflationary pressure emanating from the Eurozone and Japan, negative interest rates worldwide, collapsing emerging market exchange rates, and a world awash in debt and debt defaults. Today, it is fair to say that world economy hangs by a thread above a vortext of deflationary forces. What are the roots of this deflationary threat?

Perhaps the most deflationary force in the world today is very high economic inequality in the US. I will support and defend this proposition in a series of blog posts, starting with this one.

The first problem with high economic inequality is that the marginal propensity to consume is much higher for the middle class and lower classes than for the very wealthy. High inequality therefore leads to too much savings.

The very wealthy save much more of their income. This means that as the very wealthy control more of the nation's GDP, and today they control a historically high amount of GDP (as demonstrated in the chart at right), the more national income than diverted from growth stimulating consumption and toward savings. Too much savings leads to savings gluts and bubbles because massive income is diverted from consumption to savings but too many consumers are deprived of the ability to pursue growth-enhancing innovation. That leads to too much savings and not enough productive investment opportunities.

At the same time, more global GDP has been diverted from consumption to savings by the continuing growth of globalization and China as the world's manufacturer. The savings rate in China is about 50 percent, compared to 18 percent for the US. India saves nearly twice as much as the US. So every time jobs move from the US in search of cheaper labor it leads to higher corporate profits for the top income earners here who enjoy dividends and incentive bonus compensation as well as more savings in developing economies such as China or India. The net result is a massive transfer of global demand to less stimulative savings. This point is more fully documented in Chapter 4 of my book Lawless Capitalism, entitled "Rigged Globalization."

In a forthcoming post, I will discuss the highly dysfunctional global financial system that is supposed to channel savings to productive investment but does not. The point here is simply that massive money is drained from the economy to fund a highly sub-optimal global economic system and distribution of income, and that is highly deflationary.

ADDENDUM (AUG. 12, 2015):

“As investors realise yet another recession beckons, without any normalisation of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.” China's currency devaluation could spark "tidal wave of deflation," Guardian (quoting Société Générale economist Albert Edwards).

Thursday, July 30, 2015

Law For Black Lives Matter

On July 31st and August 1st, 2015 in Harlem, NY, the Black Lives Matter movement is moving aggressively into the legal arena at the Law For Black Lives conference.  Sponsored by the Center for Constitutional Rights and the Bertha Foundation, "#Law4BlackLives is a national gathering of lawyers, law students, legal workers, and jailhouse lawyers who are committed to building a world where #BlackLivesMatter.  More than a meeting or a conference, this gathering is a call to action for legal advocates from diverse parts of the country to join together and spend a day dreaming about how we can support the growing Movement For Black Lives.  This space will prioritize the voices and leadership of people of color, most importantly Black lawyers and legal advocates."

Events on Thursday, July 30 - Friday, July 31 will be held at the Riverside Church in Harlem (490 Riverside Dr, New York, NY 10027).

Events on Saturday, August 1 will be held at Columbia University (Lerner Hall - 2920 Broadway, New York, NY 10027).

Sunday, July 5, 2015

A Historic "No" to Austerity in Greece

The decisive Greek vote today to reject the depression economics of the IMF and its Eurozone partners may well prove to be an important watershed in history. One needs only passing familiarity with European history to understand why.

Before 1945, the entire continent seemed locked in an endless spiral of wars that continually and increasingly wrecked havoc on the people and economies of Europe. From Waterloo and Verdun to Stalingrad and Auschwitz, Europe seemed destined to find new ways to kill more people and seemed ready to march off to bloodbath after bloodbath.

After World War II, a new order emerged that found open war in Europe to simply be too costly to consider. Instead of risking being dragged into more European conflicts, the USA helped transform Western Europe into a capitalist powerhouse through the Marshall Plan, named after World War II General and Secretary of State George C. Marshall, pictured at right.

When the Soviet Union and communism fell in the late 1980s and early 1990s, the United States remained as the sole superpower. Under the umbrella of that power and NATO, European wars vanished and progressive European integration led to economic prosperity and stability. Most of Eastern Europe joined NATO and the western capitalist order. The Euro was introduced in 1999 in 11 Eurozone nations. All was well in Europe through 2008.

When the US allowed its financial sector to engage in an orgy of senseless mortgage lending and to peddle these loans fraudulently across the world in the cause of massive short term compensation payments to a handful of financial elites, credit markets ultimately collapsed in spectacular fashion in 2008. Suddenly, newly risk-averse credit markets realized that not all Eurozone debt carried the same risk of default, and that Greece was not in fact Germany when it came to credit risk. Interest rates in Greece, and other Southern European nations soared, leading to a new credit crisis in Europe and economic downturns throughout the Eurozone. For example, here is a comparison between Greek interest rates and German interest rates from before the introduction of the Euro through today:

In 2010, it became clear that Greece and other nations needed help in managing their debt burden and the IMF, the European Central Bank and Eurozone nations bailed-out Eurozone members flirting with default. Unfortunately, the bailouts suffered from two major problems.

First, rather than following standard economic teaching about how to address an economic crisis through fiscal and monetary expansion the bailouts imposed severe, even ridiculous austerity upon the nations in crisis. Predictably, unemployment soared and depressions struck the entire Southern periphery of the Eurozone. Debt burdens increased rather than decreased in response. How bad was the economic contraction arising from the austerity? Consider the graph below which shows unemployment in Greece soaring under austerity, to unprecedented highs:

Second, the bailout money never really helped the Greek people (or other people in the Eurozone), but instead was used to protect the largest German and French banks from losses as a result of the unsustainable nature of the Greek Debt. About 77 percent of all of the bailout money ended up in the pockets of the European megabanks.

The vote today to reject any further austerity measures was nothing short of a democracy rejecting further economic oppression at the hands of foreign bureaucrats that they did not elect. It was a predictable political backlash that was first discussed on this blog over six months ago. When given a choice people will vote against depression economics and loss of sovereignty to unelected foreign bureaucrats every time.

Yet this creates new risks for Europe. First, the more Greece is alienated from the Europe the more likely it is that will fall into a closer relationship with Russia, undermining NATO. Second, if the EU and IMF cannot save Greece and offers only ill-founded measures sure to exacerbate any financial crisis for any Eurozone member, then Italy, Spain and Portugal will certainly come under economic and financial pressure as the next dominoes to potentially fall. Third, the political risks of the Eurozone crisis now threaten to spiral out of control as the increasing pain inflicted upon the Greek people seems likely to backfire on the Eurozone and cause deep skepticism throughout the voting public from Britain to France to Spain.

In sum, the vote today for Greece to reject further austerity as demanded by the Eurozone and the IMF promises to rock financial markets, create economic headwinds worldwide, destabilize NATO, and put enhanced pressure on the political and economic foundations of the entire European project.

If this goes wrong, as appears almost certain now, the exit of Greece from the Eurozone may result in costs that will prove many times higher than debt relief for Greece and a massive new Marshall Plan for all of Southern Europe to create jobs for all and positive economic growth. Such investment would reduce debt burdens by spurring growth. And, the world desperately needs growth today.

Monday, June 29, 2015

Greek Default!

The Greek government will almost surely default tomorrow, Tuesday 30 June 2015. Today, the government closed the banks in Greece, imposed capital controls so that money cannot leave the system and closed the stockmarket in Athens. In short, Greece is a mess and threatens to impose a Lehman type financial crisis on the global economy, if not worse.

It is very difficult to say how great of a financial shock this will be to the global economy. But, billions and billions in market value has been lost just in the few short hours since the crisis exploded into its current phase. Eurozone banks lost $56 billion in just one trading day.  Those billions in lost wealth could have given Greece a real lifeline to economic growth.

The current approach to the Greek debt crisis is therefore a deeply negative sum game. The losses to the global economy dwarf the costs to fix Greece and the Eurozone in general. The Eurozone should have pursued powerful fiscal and monetary stimulus to repair the Eurozone, not austerity which we now know predictably led to unnecessary pain and misery for the Greek people and the entire global economy.

The IMF, ECB and Eurozone will be responsible for the greatest financial miscalculation in history if they do not act now to reverse their inexplicable and indefensible approach to excessive debt in the Eurozone periphery. They need to give Greece time to determine if there is a potential deal that can be implemented and they need to get serious about growth. Anti-growth austerity must end now. This must occur immediately.

These financial sleepwalkers risk throwing the entire global economy into chaos in a major blunder akin to World War I.

Sunday, June 28, 2015

Slavery's Long Shadow

Paul Krugman
Nobel winning economist Paul Krugman provides thoughtful commentary on economic inequality in the United States and our willingness to continue to tolerate it.  In the New York Times, Krugman recently published "Slavery's Long Shadow" and argues that race plays the preeminent role in our nation's welfare policies and attitudes:

"Yet racial hatred is still a potent force in our society, as we’ve just been reminded to our horror. And I’m sorry to say this, but the racial divide is still a defining feature of our political economy, the reason America is unique among advanced nations in its harsh treatment of the less fortunate and its willingness to tolerate unnecessary suffering among its citizens."

Krugman continues by analyzing Nixon and Reagan's "Southern strategy" in dividing the South based on cultural and racial issues and notes that of the 22 states that have refused Obamacare for its citizens since 2012, 80% are former slave states.  Why?  The answer per Krugman lies in the racialization of poverty and welfare in the U.S., as exacerbated by Nixon/Reagan/Bush racial coding.

Wednesday, May 6, 2015

Clinton Finds Religion (too late) on Mass Incarceration

White House file photo - public domain
Admitting that policies he championed while in the White House led to unconscionable mass incarceration in the United States, former President Bill Clinton expressed regret recently that he signed specific legislation during his Presidency.  Most onerous as identified by Clinton were the "three strikes" laws and life sentence mandates for certain crimes that were passed under his signature.  Clinton states in retrospect that "The problem is the way [the legislation] was written and implemented [a]s we cast too wide a net and we had too many people in prison. . . .  And we wound up . . . putting so many people in prison that there wasn't enough money left to educate them, train them for new jobs and increase the chances when they came out so they could live productive lives."

Hillary Clinton, also finding enlightenment on the subject (as she supported three strikes policies as First Lady), has begun campaigning for President on the promise that mass incarceration needs to end and saner prison policies must be adopted across the country.  She states:  "Keeping them behind bars does little to reduce crime, but it does a lot to tear apart families . . . . Our prisons and our jails are now our mental health institutions."  Clinton continues"I saw how families could be and were torn apart by excessive incarceration. I saw the toll on children growing up in homes shattered by poverty and prison."

Now that the Clinton's have found religion on prison policy and mass incarceration, can we expect national and state leaders to continue to legislate from a "reducing prison populations" perspective rather than the sophomoric "tough on crime" stance that led to so many wrong-headed laws and policies in the past?  This blog has long maintained that mass incarceration must be dealt with forthrightly and that carceral policy must be reformed if we are to reach our economic potential as a nation.

Hat tip to Kyle Noone, 2L, Indiana Tech Law School

Monday, April 27, 2015

Can "Conscious Capitalism" and Profit Maximization Coexist?

Can corporate executives of public companies practice conscious capitalism without running afoul of shareholder expectations?  The current CEO of the "Container Store" Kip Tindell is currently in the trenches as that question confronts him directly. 

According to Bloomberg:  "A few years ago, the CEO of the Container Store, Kip Tindell, wanted to expand the chain beyond big metropolitan areas into smaller cities, but he also wanted to offer more employees stock in the company. Financing that with debt, additional private equity, or by selling the company were not acceptable options so he decided the best option was to take the company public.

Tindell’s personal philosophy is crucial to the company’s identity. He adheres to a model for conducting business without any trade-offs: Pay employees well and treat them with respect; consider suppliers and customers as family; have fun. This sort of management model has been called conscious capitalism. Companies that practice conscious capitalism are supposed to have a higher purpose. Costco aspires to this ethic, as do public companies such as, Starbucks, Southwest Airlines, and Whole Foods Market."

As expected, when profits were sky high, conscious capitalism was fine with shareholders, but as profits have stagnated in recent years, Tindell is facing criticism and scrutiny from them as prizing employee satisfaction and supplier familiarity should not substitute for shareholder gain, at least to some of the shareholders. 

Again, as reported by Bloomberg BusinessWeek:  "Most executives who practice conscious capitalism confront the tension between those measuring in months and those measuring in years. Tindell has been trimming costs, though not salaries, and looking for other ways to increase productivity in the stores. Growth presents challenges, too. It’s possible that the impulse, and the means, to organize a home isn’t as strong in the less affluent cities and suburbs where the company is expanding. The company's gross profit margin is still high, but if sales don't improve Tindell will be in a difficult position. His principles won't substitute for a better plan."

Short of organizing as a Benefit Corporation or a L3C, can Tindell practice capitalism consciously and keep shareholders happy?

Sunday, April 19, 2015

Shareholder Litigation "War" in Delaware

As asked recently in DealB%k of the New York Times: "Delaware is going to war over shareholder litigation, but will shareholders or corporations emerge victorious?" There may soon be changes in the landscape of corporate law in the United States. Delaware, home to many U.S. corporations, is considering three amendments to its laws that will reduce and deter shareholder litigation. The first purportedly tramples the rights of shareholders of an acquired company to argue in court that the takeover price was too low. This proposal would limit small shareholder claims by banning all appraisal rights of shareholders, “if the aggregate amount of claims asserted were less than 1 percent of the outstanding shares or $1 million in total.”

The second proposed change would allow Delaware companies to amend their bylaws, without shareholder permission, to require that all claims brought against it be litigated in Delaware.  This may hamstring plaintiffs in their efforts to hold corporations accountable for injuries that occur throughout the nation.  The third and most questionable change “would ban fee-shifting bylaws, which require the loser in fiduciary duty litigation to pay the fees and expenses ofboth sides.”  This proposed amendment to current law could bring shareholder class-action to a stalemate, because plaintiff’s attorneys will be deterred from filing meritorious cases, based on a fear that they would be stuck with millions of dollars in legal fees if they lose.

Again, according to Dealb%k commenting on the proposed fee-shifting rule: "It’s all a bit curious because losers already pay in the United States if their suits are frivolous. Because courts can already award attorneys’ fees, fee-shifting bylaws run the risk of deterring valid claims.  While the Delaware Legislature and the corporate bar are dealing with these issues as three different problems, they are, in fact, related. Each is aimed at altering the ability of shareholders to bring suit. Perhaps a better approach would be a thoughtful discourse on how all of these proposals work or don’t work together and whether they would curtail shareholders’ rights too much."

For many Delaware corporations these proposed changes may be appealing, but for shareholders the potential outcomes of these changes could derail efforts to vindicate the limited rights that they currently possess.

** This post was co-drafted by 2L Shawn Good of the Indiana Tech Law School and Dean andré douglas pond cummings

Thursday, April 9, 2015

Executed for a Broken Taillight (in 2015?)

The Corporate Justice Blog often takes up issues of wrongheaded carceral policy and the need for  policing reform in the United States.  Ultimately, for us, the issues of discrimination in policing and the perverse incentives inherent in for-profit incarceration are not just social justice issues, but also economic issues and portend a difficult economic road ahead if we as a nation cannot get out in front of these very real  and very old problems.

Take for example the killing of Walter Scott in North Charleston, South Carolina.  Before the video became public, the story told by police officer Michael Slager was one of justified killing.  "He took my taser" was his tagline and "I was in fear for my life" would have been the testimony, just as it was for a carefully-coached officer Darren Wilson in Ferguson.  However, here, the video simply cannot support a story of "stolen taser" and "fear for life."  The video shows Officer Slager shooting a slowly running away Walter Scott in the back eight times.  Any reasonable viewing of the video shows a calm and callous Slager not only firing eight times without giving further chase, but then that Slager later picks something up that was at his feet when shooting, carries it to the prone Scott and drops it down next to the body (the taser?).  Officer Slager has been charged with murder.  Video is here.

Friend of the Corporate Justice Blog Law Professor and Vice-Provost Dorothy Brown discusses the events above and deconstructs them for CNN in "Did Cops Learn From Mistakes of Ferguson?" posted earlier today.  Professor Brown writes:

"This time the stage was set in North Charleston, South Carolina, a city of about 100,000 people. Walter Scott was stopped by Officer Michael Slager for a broken taillight, and within minutes Scott was dead. According to the incident report, Slager said: "Shots fired, and the subject is down. He took my Taser." His attorney at the time, David Aylor, said that Slager "felt threatened and reached for his department-issued firearm and fired his weapon."

But then came the video.

We watched in horror as we saw Slager shoot Scott in the back multiple times. Then we saw Slager pick up something from one location and place it near Scott's lifeless body. On Tuesday, the officer was arrested on murder charges. North Charleston police Chief Eddie Driggers told reporters, "I have watched the video, and I was sickened by what I saw." Apparently so was Slager's attorney, who announced after the video was made public that he was no longer representing the officer."

As we argue repeatedly in this blog space, the United States must get it right by reforming carceral policy in this nation and figuring out a different and better way to police our citizens.  We have suggestions . . .

Tuesday, March 24, 2015

Diversity Among Women In The Executive Suite Is Extremely Lacking At Fortune 500 Companies

I just wanted to share a link to an article highlighting the dearth of diversity among female leaders of Fortune 500 Companies.  This article is timely and telling.  We still have a long way to go to ensure that women fill the executive suite of American companies.  I hope that you enjoy!  Please share your thoughts.  Here it goes:

Wednesday, March 18, 2015

New Legal and Regulatory Terrain for Enterprise-wide Risk Management

On Friday, March 20th, 2015, the Loyola University Chicago School of Law and the Loyola University Chicago Quinlan School of Business will sponsor a day-long conference aimed at assessing the new terrain introduced to the financial industry by Dodd-Frank's Enterprise Risk Management (ERM) requirements under Regulation YY.  The conference, "New Legal and Regulatory Terrain for ERN: Outlook for Companies and Risk Managers," is sponsored by Jones Day, KPMG and Quarles & Brady.

Topics that will be tackled during panel presentations include:

ERM After the Financial Crisis;

Enhanced Prudential Standards: Impact on Banks, Non-Financial Companies and the Capital Markets

The Risk Committee and CRO: The Role of Ethics in Meeting Regulatory Compliance;

Outlook for ERM: Perspectives from Financial Firm Executives and Market Experts; and

Risk Based Capital and Related Requirements: How is Regulation YY Simply Basel Principles Brought Ashore?

President Obama Signs the Dodd-Frank Act
The Conference keynotes will be delivered by Jeffrey Cohodes, the Chief Risk Officer for Northern Trust, entitled:  "Why This CRO Sleeps Well at Night" and Martin Pfinsgraff, Senior Deputy Controller for Large Bank Supervision - Office of the Comptroller of the Currency, entitled "Supervision Matters: How Heightened Standards Get Operationalized."

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!

Sunday, December 14, 2014

The Powerful Menace of Debt-Deflation 2014

Global PPI
Debt-deflation poses the ultimate threat of economic pain. At its worst, the very viability (politically and economically) of capitalism itself can be called into question under the pain of debt-deflation. The Great Depression furnishes the most painful example of debt-deflation thus far in modern capitalist economies. In the US, unemployment soared to 25 percent and in the election of 1932 the communist and socialist parties attracted 1 million votes.

Why is debt-deflation so dangerous?

First, in a deflationary reality, people will rationally slow down all spending, constantly delaying purchases of all sorts to take advantage of lower prices. This spending slow-down then spirals, as firms respond to lower revenues by slashing costs, especially employees. As unemployment increases spending necessarily falls further, necessitating more spending cuts in the business sector. In an economy where about 70 percent of all economic activity is consumer-driven, as ours is today, it is easy to see that the threat of deflation can quickly spiral out of control leading to massive unemployment and macroeconomic pain for all.

Second, once deflation takes root, investment is bound to falter. During the Great Depression investment plunged by over 80 percent between 1929 and 1933. Falling prices, unemployment and reduced consumption simply do not inspire investment. Risk aversion becomes the norm as creditors will even accept negative interest rates as investment opportunities shrivel away and currency becomes more valuable over time. These negative rates both reflect and amplify dire investment options and ultimately lead to financial disintermediation as people opt for cash rather than even bank deposits. The withdrawal of capital from the economy then operates to further restrict growth.

Third, and most ominously, consider debt in a deflationary environment. Debt taken out in a non-deflationary environment (often during a bubble) becomes unsustainable in a deflationary environment because dollars by definition become more valuable and scarce. So, debt burdens soar in real terms. Defaults necessarily soar too, and the financial sector then succumbs to losses. Capital freezes, much like what occurred in the wake of the Lehman failure in 2008. Highly indebted societies feel the greatest macroeconomic pain from debt-deflation.

Three simple steps toward macroeconomic catastrophe.

Of course, it could never happen today, right? Wrong--it is happening as you read. As the chart above shows, the world has been flirting with deflation for years. Even before the oil price plunge of recent weeks, as The Economist shows, virtually the entire developed world was already perched on a deflationary precipice. Deflationary pressures are growing dramatically, as I demonstrated last week with this blog post.

Most particularly, the recent plunge in crude oil constitutes the greatest deflationary shock to the global economy since the failure of Lehman Brothers. A huge part of the decline is demand driven, as the International Energy Agency and others continually cut demand estimates, including on Friday which led to the stock market carnage. The price of oil is simply now in a free fall:

In fact, late last week the price fell off the above chart to $57 per barrel. The price drop reflects massive economic slow-downs across the world especially China, Germany, the Eurozone in general, and Japan. Now oil and other commodity price plunges are dragging nations like Norway, Russia, Venezuela, Nigeria into recessions. The deflationary spiral has begun. This deflationary price spiral bodes ill for the global economy.

Far worse, however, is its impact on asset values and accompanying losses in the financial sector. For example, both Russian and Venezuelan bonds seem headed for default. Energy now constitutes 16 per cent of the US junk bond market, up from 4 percent ten years ago. So, high yield debt markets are silently crashing. The fear is now spreading beyond energy. In fact, the flight to safety has turned into a mad rush--as evidenced by plunging yields in US Treasury debt.

So where precisely in the financial sector will those losses fall. Only the great derivatives wizard knows for sure but a good place to guess is the US megabanks who control 95% of the derivatives market in the US, as I will discuss in my next post.

Can this all be averted? Of course, through vigorous and broad based monetary and fiscal stimulus. I will address these mainstream solutions in a subsequent post.

Friday, December 12, 2014

Greece and a Gathering Perfect Storm in Financial Markets

Events have turned suddenly around the world in a way that promises to spawn macroeconomic disruptions. Basically, several powerful deflationary pressures now grip the global economy. Let me simply survey the worst storms that seem to be emerging around the world:

1) Greece and the possibility of a Grexit from the Euro Zone is back in the news. The Greek Prime Minister has called a snap election that could derail the bailout of Greek debt. The Athens financial markets literally crashed in the wake of this development. The Parliament in Athens will vote first on December 17, and if the government loses there then a general election will follow shortly thereafter. Worst case scenario: months of uncertainty followed by catastrophe.

2) The Euro Zone is in terrible shape and appears to be worsening. The ECB appears totally sidelined by the Germans at this point. It would be hard to imagine that the Euro Zone could withstand an event like a Greek exit from the Euro Zone. Even without an exit, it seems destined to suffer a recession and to export deflation worldwide. This is a key reason commodity prices are crashing.

3) China apparently racked up a mountain of bad debts that initially helped fuel its stellar growth but now leaves it with a massive hangover of underutilized assets and loan defaults. The future is not looking good across the Pacific. China is also exporting deflation as its slowdown (of unknown proportions) is clearly causing commodity prices to plunge across the world.

4) In fact, the Bank of International Settlements recently warned that many nations (Russia, Venezuela and a host of others) and private firms face declining revenues and soaring debt burdens because commodity revenues are shrinking as dollar-denominated debt increases in cost due to a surging dollar that is a natural outcome of the commodity bust. This could lead to a rash of defaults.

5) Meanwhile, in the US a dramatic fall in oil prices poses an existential threat to the highest growing part of our economy--energy. Jobs in the oil patch account for virtually all job growth in America over the past five years and new jobs beyond energy pay little. Much of the American high yield debt market is centered in the oil patch. With oil in a literal free fall this sector of the US economy may well be doomed. Can the US economy withstand the job losses and loan defaults implicit in very cheap energy?

There are more threats. Banks across the world still need to deleverage, raise capital and therefore reduce lending. Ukraine faces financial collapse. These problems are manageable alone. The above issues are in combination far more dangerous.

All of this suggests that despite an apparently buoyant US  stock market (now standing at 17,411) caution must temper any optimism. "This week's financial headlines sound like a recap of the horror stories of the last six years." There is an increasing probability that a major financial crisis looms as deflationary pressures overwhelm an increasingly fragile global economy.