Financial regulation sounds a whole lot like high school


I finally got around to listening to This American Life’s radio piece about Carmen Segarra and her secret recordings while working for the Federal Reserve Bank of New York. Even if the subject of financial regulation doesn’t typically blow your socks off, I’d highly recommend listening to the podcast, which features TAL’s typically tremendous mix of information and entertainment. At the very least, read the transcript.

The episode is about something called “regulatory capture”, which is a phenomenon we see in a lot of industries, particularly finance and banking. As the piece puts it, regulatory capture is a lot like when there’s “a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him”.

Why does this happen? We often point to the “revolving door” separating industry and regulation, where people bounce back and forth between the private sector and the regulatory agencies, dulling their incentive to be tough on the companies they’re regulating now but might work for in the future. But the piece seems to suggest there’s something more purely psychological than that at play.

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Environment to economy: Let’s not fight


A new report by the Global Commission on the Economy and Climate has gotten a lot of attention in the press recently. It finds that:

[T]he choice we face is not between “business and usual” and climate action, but between alternative pathways of growth: one that exacerbates climate risk, and another that reduces it. The evidence presented in this report suggests that the low-carbon growth path can lead to as much prosperity as the high carbon one, especially when account is taken of its multiple other benefits: from greater energy security, to cleaner air and improved health.

This is good news, as it helps bolster the intellectual argument for action and quiet the arguments of the “it’s too expensive” crowd, which claims that the adjustments necessary to avert catastrophic climate change would be too painful for the economy to be feasible. As the report finds, when you add in all the secondary benefits of a less carbon-intensive global economy — lower healthcare costs as a result of cleaner air, for instance — the total cost to the economy of acting is actually quite small, or maybe even zero.

While the report is justifiably making news and being celebrated by environmental advocates for its findings, its important to note that the economic argument for action on climate change is not new. Environmental economists have understood for a long time that while there may be some short-run costs involved in adjusting our global economy to avoid climate change, these short-run costs are small in comparison to the much more severe climate-related costs down the line if we do nothing.

In other words, the choice between good economics and good environmental policy is the ultimate false dichotomy; the two are one and the same. Continue reading

Do we really have to keep buying useless junk to keep the economy going?

Warning: This one is nerdier than normal*.

This blog’s last post, “The happiness scam”, got an unusual amount of attention. I think the issues of materialism, consumerism, and greed and their toxic effects on our wellbeing must resonate with readers. If so, that’s something that needs to be celebrated. We may have a long way to go, but the spark of discussion seems to have been lit.

One of the most common responses I tend to receive after writing a post like that is: Isn’t our whole economy based on consumerism? Won’t the whole thing collapse like a house of cards if we all stop buying useless junk?

I’ve kinda broached this topic before, but I think it’s time it deserves it’s own post. Somehow it became a popular meme, especially within my generation, that the American economy (or maybe even the whole modern-day global economy? I dunno) is based on nothing of substance, and that rampant spending is the only thing holding up a giant economic pyramid scheme. But this is (mostly) wrong.
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The happiness scam

Rainn Wilson, the comedic actor best know as “Dwight” from The Office, delivered a brilliant commencement speech to the graduating class at USC a couple of months ago. For those who aren’t aware, Wilson is one of the world’s best-known Baha’is, and has never been shy about broaching the topic of spirituality, especially with young people. Here he was at his best.

The topic of the speech was, more or less, how simply “pursuing happiness” can leave us feeling empty and unsatisfied, and how an attitude of selflessness can bring us a deeper feeling of fulfillment. Here’s an excerpt (a long one, but worth reading in its entirety):

Happiness is so fleeting. It’s like an amusement park ride. It’s like cotton candy. I mean, it looks so amazing: It’s delightful and fluffy and pink and you joyously eat it and then almost immediately regret your decision. Your fingers are sticky the rest of the day, and you’re undergoing an almost immediate insulin crash from the half pound of sugar that you just sucked down. You’re hungry again almost immediately and you begin the chase again for ingestible happiness right away. Happiness in our contemporary culture is something to be chased, something that’s just around the corner, something outside of ourselves. There’s a kind of a “if then” proposition about happiness. For instance: “If I get a job at a top law firm then I will be happy.” “If I get married to the perfect man or woman then I will be happy.” “If I can become more popular then I will he happy…” etc. It’s the whole point of commercialism, too, and materialism. If you buy this car, eat this cheeseburger, wear these jeans, use these headphones, then you will be happy. And you know what? Buy the jeans, eat the cheeseburger, the result is never happiness. Joy or contentment. It’s always the same. We’re never satisfied. It never meets our needs fulfills our standards. We’re left empty, wanting something more. It’s cotton candy. Fleeting, sticky, unsatisfying….

Volunteering, helping, showing kindness, sacrificing your time and energy, giving selflessly, these are the things that will give you the greatest human flourishing. And what a strange dichotomy in this “me me me” culture we live in. Focus on yourself: you’ll find only misery, grasping, depression, emptiness, dissatisfaction. Focus on helping others: joy, contentment, gratitude, happiness… So go forth young men and women spiritual beings all, with your pieces of paper, your souls and your hearts, go forth and undertake our new national motto, “life liberty and the pursuit of service”, and your lives will be the richer for it.

This is potentially tricky territory — I mean, the speaker is basically telling young people at one of the happiest moments of their lives not to strive to be happy — and I truly admire his courage. But the main message here should not be controversial. That’s because, as pointed out in the speech, science actually confirms that acts of selflessness tend to lead to greater happiness. (Nevermind that it represents a core teaching of nearly every religion.) And yet, from my perspective the fact that selflessness, rather than selfishness, is more likely to lead to fulfillment and life satisfaction gets a shamelessly low level of attention in the modern discourse. Instead, we are hit with a steady stream of messages preaching the opposite, including the semi-sarcastic-yet-inescapably-depressing image below, which I captured at our local mall food court:

Spiritual enlightenment was never so easy nor delicious

In the same tradition as the religious faiths founded before it, the Baha’i Faith in countless passages warns us not to rely on the material world for fulfillment. One of my favorite passages written by Baha’u’llah is this one (which I’ve shared before), which compares the world itself to a desert mirage:

The world is but a show, vain and empty, a mere nothing, bearing the semblance of reality… Verily I say, the world is like the vapor in a desert, which the thirsty dreameth to be water and striveth after it with all his might, until when he cometh unto it, he findeth it to be mere illusion.

For us to look to something bigger than the world around us is not an unnatural act or suppressing our natural selves. The human being’s true nature, Baha’u’llah teaches, is more noble than that. In the same passage as the one above, He compares the childish obsession with our material lives with a fallen bird:

Ye are even as the bird which soareth, with the full force of its mighty wings and with complete and joyous confidence, through the immensity of the heavens, until, impelled to satisfy its hunger, it turneth longingly to the water and clay of the earth below it, and, having been entrapped in the mesh of its desire, findeth itself impotent to resume its flight to the realms whence it came. Powerless to shake off the burden weighing on its sullied wings, that bird, hitherto an inmate of the heavens, is now forced to seek a dwelling-place upon the dust.

Why is this so difficult for us to learn? How come we feel compelled to chase after things that are so ineffective in delivering real happiness? It’s universally acknowledged that true happiness can’t easily be achieved with material things. And yet, we still keep reaching for the cotton candy.

Free advice on children’s books from a bona fide expert

There hasn’t been much blogging these days, for which I felt it necessary to issue an apology. The excuse I’ll use (for everything, really) is that my wife and I had our second child recently, and life has predictably been turned upside down. Things will normalize as far as this blog goes in due time, I promise.

Having baby #2 has brought the expected burst of joy, with an entirely new set of challenges. The biggest is the predictable jealousy of our two-and-a-half year-old son for his new baby sister. We’re not too concerned, as everyone tells us this is normal. We actually see it as an opportunity for him to experience some healthy heartbreak and learn that he’s not the center of the universe. Nonetheless, for the time being he’s been an absolute menace, with lots of tantrums (the sight of mom nursing another baby is a usual source of emotional devastation).

A lifesaver for our older one has been books, especially at night time. My wife is constantly on the prowl for good children’s books, and it’s a credit to her that our son is so fond of reading at such a young age. Consequently, I’ve become something of an expert on children’s literature, like most parents I suppose. Honestly, most of the genre is just crap, in my experience, though I understand that I’m not exactly the target audience. (After re-reading those “Mister” books for the first time in nearly three decades, for instance, I now fully believe them to have been written and illustrated by a 3rd grader during recess.) However, there are a couple of books in particular that are just superb at explaining complex social concepts to kids, including some economic themes that we adults routinely gloss over or fail to address entirely. It might seem corny to look to children’s books for economic wisdom, but “corny” has never stopped me on this blog before, so bear with me.

The first I’ll mention is Little Blue Truck Leads the Way by Alice Schertle. It tells the story of a little blue truck who ventures into the tall, fast city, only to find that all the other vehicles are in a terrible, aggressive rush. Everyone is so stressed and hurried that the city streets eventually grind to a halt, and no one can get anywhere. Finally, all the vehicles recognize the wisdom of the Little Blue Truck, who teaches everyone to wait patiently and form an orderly line, allowing others to go first.


The beauty of this book is not just that it teaches kids to respect order and not barge ahead of others. It’s that it acknowledges the limits to the importance of economic efficiency. The problem with the big city, it seems, is not just that it’s chaotic, but that it’s miserable. All of the vehicles, in their scramble to get ahead, are stressed, angry, and frustrated. (Sounds like my morning commute into Manhattan.) When everyone slows down a bit, the city is able to relax and breathe, adding value to its residents’ lives in ways that can’t easily be measured. This is an important point that is lost on a lot of us adults; in our quest for efficiency and productivity, we sometimes unwittingly sacrifice subtle things that are vital for our own welfare. This is a point I’ve been thinking of writing about on this blog for a while now, but like a lot of things, it’s probably best left to art.

The second book is Just So Thankful, by Mercer Mayer (from that “Critter” series that a lot of us became acquainted with as kids). It follows a kid who’s bummed out that his parents won’t buy him a particular toy, and who grows jealous of the new kid in school, “H.H.”, who’s super rich and seems to have every toy (as well as servants, a mansion, and a swimming pool). When H.H. comes over to Critter’s modest house to play one day, the rich kid ends up having a blast enjoying the little things — helping out with dinner, playing with he family puppy, getting his shoes eaten up by the dog — and shows Critter how good he truly has it, despite the fact that his family isn’t rich.


There is no shortage of art seeking to explain that material possessions aren’t what make us happy, that “the best things in life are free”. But this book does more than that, which is to emphasize that people of all economic backgrounds — rich, poor, whatever — derive happiness from the same things in life. H.H. arrives at Critter’s house with excitement about seemingly mundane but valuable things, like having a family cookout. Far from snobby about his wealth, we find when H.H. is stripped of his butler and cell phone and Super Streak Scooter, he’s just another normal kid who enjoys the same thing as everyone else.

Anyway, those are my children’s book recommendations. If you’re a parent, you should get them for your kids. If not, you might still get them and read them on your own. Just think twice before doing so in public, because that might seem creepy. About as creepy as a grown man writing emotionally about children’s literature on an economics blog.


In the fight between capitalism and business, capitalism is getting whupped

Godzilla vs Mr. Bill

I recently finished reading Chrystia Freeland’s Plutocrats, which is about the world’s rising elite class and the enormous buildup of wealth at the top of the spectrum. Easily the most satisfying part of the book is towards the end, when she discusses the potential impact of this phenomenon for our economy and our democracy. Here she shares a brilliant quote from Luigi Zingales, an economics professor at UChicago’s Booth School of Business, which I felt compelled to share:

True capitalism lacks a strong lobby. That assertion might appear strange in light of the billions of dollars firms spend lobbying Congress in America, but that is exactly the point. Most lobbying seeks to tilt the playing field in one direction or another, not to level it. Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition. Open competition forces established firms to prove their competence again and again; strong successful market players therefore often use their muscle to restrict such competition, and to strengthen their positions. As a result, serious tensions emerge between a pro-market agenda and a pro-business one.

Industry has been throwing its weight around to the detriment or the larger marketplace — and to society in general — for decades, if not longer. As Zingales describes, this includes purposefully stifling open competition, and in doing so hurting other companies operating in the marketplace, as well as the consumers who would otherwise benefit from the better quality and prices that a competitive market would bring. To take one recent example we’ve already covered here on this blog, the lines separating media companies, political lobbyists/fundraisers, and government policymaking have been blurred, possibly paving the way for regulators to sign off on ever-growing oligopolies, and thus crowding out efficient competition from smaller firms. In other words… cable is too frigging expensive!

But beyond just stifling competition, there are innumerable ways that businesses and industry groups distort the free market with their political power. More than fifty years ago, Eisenhower prophetically warned of the “military industrial complex”, where an industry that stood to profit from war would skew the nation towards unnecessary debts and perpetual conflict. There are countless corollaries today in other industries. Big banks lobby against financial regulation, strengthening their bottom lines while potentially increasing the likelihood of another devastating financial crisis. Producers of fossil fuels quietly spend huge sums trying to confuse the scientific debate on climate change, holding the price of carbon emissions inefficiently low while the earth gradually warms. The farm lobby assiduously maintains the political backing for agricultural subsidies year after year, paid out of the pocket of the US Treasury.  Each case is an example of “extracting rents”, in economics speak. That is, a small and powerful minority with political power extracting value from the broader society and keeping it for itself, all the while compromising the efficiency of the free market.

This is not capitalism, or certainly not “true capitalism”, as Zingales puts it. True capitalism can be, and should be, ethical and egalitarian in its principles. And with the right rules and regulations, it can lead to generally fair and stable outcomes for society (see America for about thirty years following WWII). But not many people can spot the difference between “true capitalism” and what I’d call “rigged capitalism”, and most people nowadays appear hopelessly resigned to the latter.

Guess what? Progress is messy

Federal Troops Occupy Mare Favela Ahead of World CupBloomberg recently published an interesting article about Dembore Silva, a young Brazilian slum-dweller, and his uniquely entrepreneurial plans for the upcoming World Cup:

The 26-year-old is renting his studio apartment in Brazil’s biggest slum for the month-long duration of the soccer World Cup that ends July 13. He’s expecting to collect 4,000 reais ($1,719)… He plans to use the cash to buy a motorbike to supplement his income of 1,500 reais a month by ferrying people up to Rocinha, a hillside district of 70,000 that overlooks some of Rio’s beaches. “I could make an extra 1,000 reais if I had a bike.”

Silva’s plan isn’t just a cute World Cup story. It captures an important truth about development, which is that for many of the world’s poor, the path towards a more dignified quality of life is often paved with messy, uncomfortable choices.

This truth often gives us in the developed world a feeling of shock and guilt. It should: Basically, this young man plans to vacate his own home so that a rich tourist from abroad can drink, party and watch soccer, probably spending way more in a few weeks than what Silva makes in an entire year. Of course, by developing country standards Silva’s story is pretty tame; for many others, the choices are much more heartbreaking.

Like I touched upon in a blog post last year, the uncomfortable truth is that this is how economic progress happens. Specifically, people in poor countries seek to invest in themselves or in their children towards reaching a better life, even if the path between point A and point B is less than ideal. In this case, 1) a young man thinks about ways to raise his income; 2) he concludes that he needs a motorbike to boost his tourism business; 3) he decides that in order to fund this investment he’ll need cash (he can’t just walk into a bank, silly); and 4) World Cup!

I bring this up because I’ve encountered dozens of well-meaning, morally conscious individuals — many of them Baha’is — who seem to think it’s best to block these types of choices from happening, I guess because they find those choices repugnant. It’s highly commendable to desire to live in a world in which this doesn’t happen, but to respond to such a desire by actually taking away choices isn’t productive. Along the way towards declaring “No more sweatshops!”, we tend to ignore an obvious fact: Some poor lady in the developing world has it so bad in life, her alternatives so dismal, that she actually chooses to spend 12 hours a day in a poorly-ventilated room sowing buttons onto dress shirts.

Our goal as a human race should be to expand and improve the choices available to the world’s poor, not to limit them. For instance, had Silva lived in a place with properly functioning financial markets, he could have simply borrowed the 4,000 reais and paid off the loan with his increased income, with the bank taking on the risk that the borrower can’t pay back the loan. This is a basic economic tool that’s regrettably out of reach for many in the developing world, and there are numerous efforts — most notably the microfinance movement — underway to try and solve the problem.

But for a young man living in the slums, there’s no bank around the corner standing ready to make everything that easy. There are lots of people in the development field working on this, but right now the reality is that we’re just not there yet. Meanwhile, the World Cup comes around only once in a lifetime, and so does the opportunity to cash in on a tourist desperate for a place to stay. It’s all well and good to lament the existence of slums in the first place, and even better to try and do something about it. But for now, the slum dweller eager to sacrifice, work, and invest his way to a better life deserves our admiration, as well as a simple promise to stay out of his way.

The fine line between risk and patriotism

NYSE American flagWhen my dad asks me what he should invest in, I answer as I would for any man in his early 70s: Anyone of retirement age (in my dad’s case, gradually easing into a kind of semi-retirement) should take very little risk. If you’ve worked your whole life to build enough money for your golden years, the last thing you want to do is risk it all. So safe things like short-term Treasury bills make a lot more sense than going all in on stocks.

I learned this basic truth when I was a twenty-year-old one summer working for a retail brokerage office. I also learned that if a financial advisor failed to recognize his client’s proper risk profile and was too reckless with his recommendations, that financial advisor and his firm could be sued for damages. This point was further pounded into my brain several years later as I earned my regulatory certifications to work in the financial industry, and went through tireless bank compliance modules. You get the point: It’s kind of a big deal not to take risks with the money of a person who doesn’t fit the risky profile.

For that reason, when I overheard the following conversation on a financial news show one morning, blaring in the background from one of the trading floor TV monitors as I settled in to work, something didn’t feel quite right. The conversation was between one of the show’s regular anchors and its guest for the day, a former top executive of a major American auto manufacturer who was preaching optimism over the US stock market.

Host: How old are you?

Guest: 82.

Host: You’re 82 and you’re investing in equities! Every financial advisor in the world, right, says that you’ve gotta buy bonds when your sixty-plus because, God forbid, you lose your capital. Eighty-two years old and you’re confident enough to invest in the stock market.

Guest: I’ve got a very good investment advisor, my father lived well into his mid-90s, I’m healthier at this point than my dad was…

Host: You’re not afraid of the capital risk?

Guest: No, hell no. Nothing ventured, nothing gained. I have a fairly expensive lifestyle. I’ve own airplanes and a lot of cars, stuff like that, so I’ve gotta keep the money flowing.

Host: I’m gonna rip my shirt off and paint an American flag on my chest right now. That’s great.

The most remarkable thing about this conversation is not that a man in his early 80s with, I assume, hundreds of millions of dollars in net worth, feels he has to stay invested in risky assets to fund his “fairly expensive lifestyle”. No, the most remarkable thing is the host’s “American flag on my chest” response. What, exactly, does an old man taking on an unusual amount of financial risk have to do with America?

I suppose there is a spirit of risk-taking and pushing the envelope that’s part of our historical narrative as a country — from Colombus, to the Puritans, to the Western settlers, to Neil Armstrong, to Steve Jobs. But at what point does good-old-fashioned American risk-taking become good-old-fashioned American financial recklessness?

What’s wrong with the world: Cable M&A edition

I’ve never been particularly fond of my cable company, wherever I’ve moved to. Like many, I’m sure, I’ve wondered why cable has gotten so expensive ($80/month or more for TV alone now seems routine) while the service often seems so unaccommodating (the infamous “4-hour window” for appointments is now a punchline). I’ve also wondered why, in almost every place I’ve lived, there are only one or two cable companies offering service, rather than multiple providers competing with one another on the basis of price or quality. Are there massive “economies of scale” in the cable service provider industry, like there are for energy companies or jumbo jet manufacturers, such that it would make sense to have just a handful of really big players in the market? Is cable a “natural” monopoly, the rare case in which a single company dominating an industry actually makes economic sense? I really don’t know.

The good news is that it’s not my job to figure out if there’s too little competition in cable. (That’s good, because I’m pretty busy these days.) In fact, we have multiple federal government offices for this, all charged with the responsibility of blocking inefficient monopolies and protecting the consumer from a lack of competition.

The bad news is that there is no way to know if those offices are in fact acting in the public interest, or if they’ve been influenced by political forces. That’s why I almost lost my egg sandwich last Thursday morning reading this article from the Washington Post, about media giant Comcast’s proposed merger with Time Warner Cable. On the subject of whether or not the merger would be approved by regulators, it reads (emphasis added):

[Comcast’s] executives are veteran negotiators with federal regulators, having won approval of the NBC Universal deal even when it was protested by many lawmakers and consumer interest groups. Its executive vice president… is a longtime Democratic insider who has hosted fundraisers for Obama and the Democratic National Committee. Earlier this week, he was invited with his wife to the White House state dinner for the president of France.

The point of this post is not to heap shame on Comcast’s leadership, the President, or his political party. Regular readers of this blog know that I have never sought to point a finger at specific individuals or political groups. This site is about identifying the moral disease and discussing its cure, not bickering over who’s more deeply infected.

I don’t know whether or not this merger should be approved. But that’s the point: I shouldn’t have to figure it out. I should have the trust in our democratic system that the right people will, in fact, make this judgement on the basis of the welfare of nation, not political backscratching.

This is a widespread problem, bigger than one company, bigger than one industry, bigger than one person, bigger than one party. When political self interest gets in the way of government making and enforcing policies for the common good, we should call it what it is: immoral and corrupt. That this is such a common reality that we barely bat an eyelash when it happens is especially sad.

Greed as epidemic, from Wall Street to Main Street

batch of dollarsLast month the New York Times published a fascinating and much talked about op-ed by Sam Polk, a former derivatives trader turned socially-conscious entrepreneur. If there’s such a thing as a must read, this would be it.

In Polk’s piece, he talks about his time on Wall Street and what he believes was his out of control addiction to money. There are countless passages that are worthy of pasting here, but here’s just a sample:

At 25, I could go to any restaurant in Manhattan — Per Se, Le Bernardin — just by picking up the phone and calling one of my brokers, who ingratiate themselves to traders by entertaining with unlimited expense accounts. I could be second row at the Knicks-Lakers game just by hinting to a broker I might be interested in going. The satisfaction wasn’t just about the money. It was about the power. Because of how smart and successful I was, it was someone else’s job to make me happy.

Still, I was nagged by envy… I wanted a billion dollars. It’s staggering to think that in the course of five years, I’d gone from being thrilled at my first bonus — $40,000 — to being disappointed when, my second year at the hedge fund, I was paid “only” $1.5 million…

Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class.

Polk’s depiction of Wall Street’s culture of voracious greed sounds like a Scorcese-like fantasy. But it’s hardly an exaggeration.

Like I’ve mentioned on this blog before, I work in the investment banking industry, but in research. All that means is that I’m a kind of glorified front-office nerd who works in tandem with bankers, traders, and salespeople, and who’s often called upon to discuss the markets with hotshot portfolio managers. Research isn’t compensated like those other job functions (I’ll get to that in a minute), but we’re close enough to the action to understand the cultural current that runs through a trading floor or a dazzlingly decorated hedge fund meeting room.

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