Today is the Future of Economics
When even Alan Greenspan, the epitome of Ayn Rand's Objectivist philosophy, says that unregulated markets created the current financial problem, it's safe to say that unregulated, winner-take-all, cowboy capitalism is dead as a serious policy recommendation.
Its results are harmful to most of the population. It is entirely predictable that income maldistribution and criminal behavior will follow the introduction of cowboy capital.
But, what is the alternative?
Right now, serious politicians are crafting laws and regulations to restrain some of the poor behavior of free markets. Sadly, they are doing so in an intellectually handicapped framework. As a result their actions may be less than effective.
This is an attempt to create a framework for policy.
GOAL
The overriding goals and first priorities of any new policies and regulations should be to protect consumers from harm, to create jobs for the population and to correct income and wealth maldistributions so that a tolerable level of well being is provided throughout the society.
Part of securing this goal is to recognize that providing the means to create additional capital to the already wealthy in the hopes that they will use that capital to create more jobs is a foolish hope.
The world already has too much capital - there are more goods being produced than consumers have the ability to buy. It is time to reduce the amount of capital and to increase the wages of workers.
MARKETS
Markets wherein entrepreneurs use capital to create businesses and jobs are necessary in any modern economy. Without markets, a society is likely reduced to barter and subsistence farming.
But, markets are inherently flawed and require supervision to ensure the common good. The philosophy that equates the freedom to create wealth with the betterment of the entire society is a myth. We have seen the results of believing that myth again and again.
Managing markets for the common good allows for reasonable profits and entrepreneurial incentives.
But, that market supervision prohibits and punishes criminal behavior, monopolies and maldistribution of income and wealth.
FINANCIAL MARKETS
Commercial banks and investment brokers of every kind created the current situation because of ineffective market supervision.
What should effective supervision look like?
Any effective market control should allow for the global interdependency of financial markets.
Currency exchange markets operate virtually in cyberspace and around the clock pretty much unsupervised.
Capital routinely seeks safety and returns globally without concerns about borders except as borders affect risk.
FINANCIAL TRADE ORGANIZATION [FTO]
Create the FTO. Give it the task to write international standards for bank management, bank lending and investment disclosure and control.
Seek membership of all developed economies in the FTO and allow any developing country to join.
Central banks of FTO members reinstall or create separations between commercial banking activities and investing activities. Commercial banks are constrained from selling investment assets, definition to follow.
Central banks take responsibility to manage commercial banks with regard to lending standards, management competence and balance sheet ratios. The central bank has the power to institute changes in bank management where required in its judgment.
Central banks and deposit insurance agencies guarantee all deposits in commercial banks regulated by the CB and guarantee all loans to member banks. To prevent the moral hazard problem, bank principals' deposits are exempt from the deposit guarantee and they are forbidden to borrow from their bank.
FTO members create an SEC type disclosure process for ALL investment properties. This will eliminate derivatives.
The goal of the FTO is universal membership and compliance. A compromise which attracts more members should be taken. Capital will seek the greatest reward, smallest risk location. If the regulation system is not consistent in every country, then capital will find the weak link.
INTERNATIONAL TRADE
Free [unregulated] trade brings the good and the bad of unregulated markets wherever it is tried: economic growth, criminal behavior and poor income distribution.
The philosophy behind it rests on the idea of a general world equilibrium where every consumer in every country is well off.
This is a pipe dream. It will never happen. Policies which support that idea create the evils of unregulated markets.
Each country must manage its trade to take advantage of the benefits and avoid the problems trade brings.
Trade should be encouraged. It should be managed so that there is neither a deficit nor a surplus from trade, i. e., the current account balances in each country are even every year. A country should not buy more from other countries than it sells to them, as measured in currency. See my article on balanced trade at www.mkeever.com
Consumers should be protected from dangerous imports. Hypothetically only, if China were to allow melamine in dairy products - which it does not - then any country which prohibits melamine in dairy products has the right to ban the import of diary products from China without penalty.
If the WTO requires a country to allow Chinese dairy imports, then the WTO should be scrapped.
***************************
The above is only a start toward a rational economic policy framework.
Mike McKeever
McKeever Institute of Economic Policy Analysis
www.mkeever.com
October 28, 2008
Permission to reproduce in whole or part with attribution is hereby granted.
Tuesday, October 28, 2008
Monday, October 20, 2008
Too Dumb - 9, McCain asks Contribution from Russian UN Delegation
See the story:
http://en.rian.ru/russia/20081020/117842524.html
http://en.rian.ru/russia/20081020/117842524.html
Sunday, October 19, 2008
Too Dumb - 8, Gazprom in Alaska
'As Palin assails Russia, Gazprom meets with Alaskan officials'
see the story: http://www.iht.com/articles/2008/10/14/business/gazprom.php
see the story: http://www.iht.com/articles/2008/10/14/business/gazprom.php
Monday, October 6, 2008
Corruption and Regulation
CORRUPTION AND REGULATION - A LAYMAN'S PERSPECTIVE
Perhaps it was Karl Marx who predicted that the capitalist and communist economic systems would converge someday.
That day seems to be coming closer and closer with recent events trending toward increasing market and administrative regulation in the USA as a capitalist beacon and Russia as the former home of socialism.
In Russia President Medvedev is fighting corruption since he thinks that it hinders economic growth. In the USA, unregulated free market actions have created a financial panic that has created demands for stricter regulation from Democrats, Republicans, CEO's, the SEC and the general public.
Russian Sergey Vadimovich Stepashin, chairman of the Russian Federation Comptroller's Office, has proposed a comprehensive corruption elimination campaign, according to an interview article in the Rossiyskaya Gazeta, September 24, 2008 by Tatyana Panina.
He singled out Russian Law No N94-FZ "On Distribution of Orders for the Delivery of Goods, the Performance of Work, and the Rendering of Services for State and Municipal Needs" as providing opportunities for corrupt behavior.
In the United States, Christopher Cox the Chairman of the Securities and Exchange Commission [SEC] has blamed a lack of regulation for the current financial crisis. ['S.E.C. Concedes Oversight Flaws Fueled Collapse', By STEPHEN LABATON, New York Times Published: September 26, 2008]
The question naturally arises: What is regulation? It's an important topic that needs a lot of discussion.
I'll try to provide an overview from a layman's, i.e., not a lawyer, point of view. Perhaps a Western economic student's perspective will be useful - even though it may contain a few legal blunders.
REGULATION OF BANKS AND FINANCIAL FIRMS
In 21st Century economies, banks and financial institutions control part of the country's money supply. Thus, regulating them correctly is a national security matter - poorly or crookedly managed banks can harm the country.
Any firm which manages a part of the country's money supply should be examined regularly by the Central Bank or other appropriate institution to be sure it is being run soundly and honestly.
If the bank examiners conclude that the bank or firm has problems, the examiners should insist that the problems be corrected. Failure to correct the problems will lead to the bank being closed and its assets sold to another bank.
This is a case where separation of powers and extensive processes to ensure fairness to accused individuals can be compromised in the interests of the country.
MARKET REGULATION OF UTILITIES AND MONOPOLIES
In a market economy where most goods and services are provided by private, for-profit enterprises, sometimes firms are granted a monopoly by the state in providing a specific product or service. The economic justification for the monopoly is that the economies of scale compared to the size of the market dictate that a monopoly can be more efficient. In other words, the amount of investment to get the lowest cost is so high that a company will make the investment only if it can get a sufficient volume of business. This usually happens in utilities like electricity, garbage collection, sewer and water systems and so forth.
The economic problem is that any monopoly has an incentive to raise the price too high in order to make high profits. This then defeats the purpose of granting the monopoly in the first place.
Before some deregulations in the USA, many state governments created Public Utility Commissions [PUC's] which regulated utility monopolies. The basic idea is that before the firm can change any price or service level, it has to justify that change to its PUC. Failure to secure approval meant that the firm would be fined the total amount ot the inappropriate price or service level. This took away the firm's economic incentive to cheat - what's the point in cheating if you will lose any gain to a fine?
The PUC's based their decisions on allowing a return on investment [ROI] sufficient to attract capital for expansion and no more. If a company needs to pay 10% on bonds or loans to get the money for the expansion, then the PUC allowed a price to be set which made a 10% ROI likely.
In exchange the firm received a safe and steady market but was prevented from risky and possibly more profitable ventures. Investors received a certain income with little growth possibilities. The system worked fine until deregulation.
Most PUC members were elected by voters under their enabling legislation.
REGULATING INDIVIDUAL BEHAVIOR WITH CRIMINAL LAWS
Making regulation effective in preventing bad behavior by individuals requires that the rules are clear, specific and indisputable. After all, a person prosecuted under such a law stands to lose considerable wealth and/or freedom if convicted. He can be expected to mount a vigorous defense.
First Principle - Prevent Bad Behavior
Effective regulation tries to prevent specific behaviors, whether by individuals acting alone or for a company, bureau or government or behaviors by such organizations as a matter of organization policy.
Second Principle - Describe Bad Behavior
This creates a need for a detailed description of each behavior to be prevented. After all, how can a person or organization be accused of behaving badly if the behavior is not listed as prohibited behavior?
It is critical to describe the prohibited acts specifically so that there is little room for judgment. Such phrases as 'corruption' or 'bribery' are too vague to use in a law. Perhaps a phrase is useful such as: 'An individual employee granting an exemption to a legal requirement for an applicant in exchange for a payment of money or goods to the individual granting the exemption.'
In practice, this means that no behavior can be prohibited until that behavior is described and listed as prohibited. So, if taking a bribe for a favor is described and prohibited in a law passed on January 1, 2009, I cannot be prosecuted for taking a bribe on December 31, 2008. Of course, I can be prosecuted on January 3, 2009 for granting the favor that day, assuming that granting a favor has been described as prohibited behavior.
Third Principle - Describe Specific Punishments for Bad Behavior
The instrument which describes behavior as bad will also specify what is the punishment for the behavior. This may be a range of possible punishments, but the range of possible penalties should be specified. Failure to do so creates another problem where corruption can enter: negotiating or bribing away the punishments.
Fourth Principle - Separation of Powers
This is a Western approach; but, it seems to have merit in difficult areas like corruption.
Entities which participate in the identification and punishment of corrupt behavior should be different entities. For example, suppose a criminal law exists which states that a national government bureau employee who takes money or property and provides an exemption for an applicant to the bureau is guilty of a crime and will be fined a sum of money and be fired from the bureau.
Ideally, the national government's prosecutor prepares a case against the employee with all the relevant facts. The prosecutor's office then presents the case to a national government judge who listens to the prosecution and the defense, then makes a determination of innocence or guilt and assigns the punishment.
If the prosecutor's office also has the power to determine the guilt or innocence, the process is more likely to be viewed as corrupt and is also more susceptible to corruption since only one person has to be bribe.
Fifth Principle - Laws Conform to the Jurisdiction
The above example concerns a national or federal law, prosecutor and judge. If the case concerned a city law, then the prosecution would proceed under a city law with a city prosecutor and judge.
City judges cannot prosecute federal crimes and federal judges cannot decide offenses against city laws.
Sixth Principle - Separate Powers Chosen Separately
While one part of the prosecution process can be chosen by one part of the government, the other part should be chosen differently. For example, federal prosecutors can be appointed by the federal government directly, but federal judges should be either elected in a national election or appointed by the government subject to confirmation by the legislature.
I hope that we will see a lot of discussion about this important topic.
Perhaps it was Karl Marx who predicted that the capitalist and communist economic systems would converge someday.
That day seems to be coming closer and closer with recent events trending toward increasing market and administrative regulation in the USA as a capitalist beacon and Russia as the former home of socialism.
In Russia President Medvedev is fighting corruption since he thinks that it hinders economic growth. In the USA, unregulated free market actions have created a financial panic that has created demands for stricter regulation from Democrats, Republicans, CEO's, the SEC and the general public.
Russian Sergey Vadimovich Stepashin, chairman of the Russian Federation Comptroller's Office, has proposed a comprehensive corruption elimination campaign, according to an interview article in the Rossiyskaya Gazeta, September 24, 2008 by Tatyana Panina.
He singled out Russian Law No N94-FZ "On Distribution of Orders for the Delivery of Goods, the Performance of Work, and the Rendering of Services for State and Municipal Needs" as providing opportunities for corrupt behavior.
In the United States, Christopher Cox the Chairman of the Securities and Exchange Commission [SEC] has blamed a lack of regulation for the current financial crisis. ['S.E.C. Concedes Oversight Flaws Fueled Collapse', By STEPHEN LABATON, New York Times Published: September 26, 2008]
The question naturally arises: What is regulation? It's an important topic that needs a lot of discussion.
I'll try to provide an overview from a layman's, i.e., not a lawyer, point of view. Perhaps a Western economic student's perspective will be useful - even though it may contain a few legal blunders.
REGULATION OF BANKS AND FINANCIAL FIRMS
In 21st Century economies, banks and financial institutions control part of the country's money supply. Thus, regulating them correctly is a national security matter - poorly or crookedly managed banks can harm the country.
Any firm which manages a part of the country's money supply should be examined regularly by the Central Bank or other appropriate institution to be sure it is being run soundly and honestly.
If the bank examiners conclude that the bank or firm has problems, the examiners should insist that the problems be corrected. Failure to correct the problems will lead to the bank being closed and its assets sold to another bank.
This is a case where separation of powers and extensive processes to ensure fairness to accused individuals can be compromised in the interests of the country.
MARKET REGULATION OF UTILITIES AND MONOPOLIES
In a market economy where most goods and services are provided by private, for-profit enterprises, sometimes firms are granted a monopoly by the state in providing a specific product or service. The economic justification for the monopoly is that the economies of scale compared to the size of the market dictate that a monopoly can be more efficient. In other words, the amount of investment to get the lowest cost is so high that a company will make the investment only if it can get a sufficient volume of business. This usually happens in utilities like electricity, garbage collection, sewer and water systems and so forth.
The economic problem is that any monopoly has an incentive to raise the price too high in order to make high profits. This then defeats the purpose of granting the monopoly in the first place.
Before some deregulations in the USA, many state governments created Public Utility Commissions [PUC's] which regulated utility monopolies. The basic idea is that before the firm can change any price or service level, it has to justify that change to its PUC. Failure to secure approval meant that the firm would be fined the total amount ot the inappropriate price or service level. This took away the firm's economic incentive to cheat - what's the point in cheating if you will lose any gain to a fine?
The PUC's based their decisions on allowing a return on investment [ROI] sufficient to attract capital for expansion and no more. If a company needs to pay 10% on bonds or loans to get the money for the expansion, then the PUC allowed a price to be set which made a 10% ROI likely.
In exchange the firm received a safe and steady market but was prevented from risky and possibly more profitable ventures. Investors received a certain income with little growth possibilities. The system worked fine until deregulation.
Most PUC members were elected by voters under their enabling legislation.
REGULATING INDIVIDUAL BEHAVIOR WITH CRIMINAL LAWS
Making regulation effective in preventing bad behavior by individuals requires that the rules are clear, specific and indisputable. After all, a person prosecuted under such a law stands to lose considerable wealth and/or freedom if convicted. He can be expected to mount a vigorous defense.
First Principle - Prevent Bad Behavior
Effective regulation tries to prevent specific behaviors, whether by individuals acting alone or for a company, bureau or government or behaviors by such organizations as a matter of organization policy.
Second Principle - Describe Bad Behavior
This creates a need for a detailed description of each behavior to be prevented. After all, how can a person or organization be accused of behaving badly if the behavior is not listed as prohibited behavior?
It is critical to describe the prohibited acts specifically so that there is little room for judgment. Such phrases as 'corruption' or 'bribery' are too vague to use in a law. Perhaps a phrase is useful such as: 'An individual employee granting an exemption to a legal requirement for an applicant in exchange for a payment of money or goods to the individual granting the exemption.'
In practice, this means that no behavior can be prohibited until that behavior is described and listed as prohibited. So, if taking a bribe for a favor is described and prohibited in a law passed on January 1, 2009, I cannot be prosecuted for taking a bribe on December 31, 2008. Of course, I can be prosecuted on January 3, 2009 for granting the favor that day, assuming that granting a favor has been described as prohibited behavior.
Third Principle - Describe Specific Punishments for Bad Behavior
The instrument which describes behavior as bad will also specify what is the punishment for the behavior. This may be a range of possible punishments, but the range of possible penalties should be specified. Failure to do so creates another problem where corruption can enter: negotiating or bribing away the punishments.
Fourth Principle - Separation of Powers
This is a Western approach; but, it seems to have merit in difficult areas like corruption.
Entities which participate in the identification and punishment of corrupt behavior should be different entities. For example, suppose a criminal law exists which states that a national government bureau employee who takes money or property and provides an exemption for an applicant to the bureau is guilty of a crime and will be fined a sum of money and be fired from the bureau.
Ideally, the national government's prosecutor prepares a case against the employee with all the relevant facts. The prosecutor's office then presents the case to a national government judge who listens to the prosecution and the defense, then makes a determination of innocence or guilt and assigns the punishment.
If the prosecutor's office also has the power to determine the guilt or innocence, the process is more likely to be viewed as corrupt and is also more susceptible to corruption since only one person has to be bribe.
Fifth Principle - Laws Conform to the Jurisdiction
The above example concerns a national or federal law, prosecutor and judge. If the case concerned a city law, then the prosecution would proceed under a city law with a city prosecutor and judge.
City judges cannot prosecute federal crimes and federal judges cannot decide offenses against city laws.
Sixth Principle - Separate Powers Chosen Separately
While one part of the prosecution process can be chosen by one part of the government, the other part should be chosen differently. For example, federal prosecutors can be appointed by the federal government directly, but federal judges should be either elected in a national election or appointed by the government subject to confirmation by the legislature.
I hope that we will see a lot of discussion about this important topic.
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