Thursday, November 19, 2015

Obama's Arbitrary Approach to Arbitration

Much noise has been made in recent months about the pending Trans-Pacific Partnership (TPP) agreement currently working its way through Congress. While recent reports have indicated that the deal may have stalled in Congress, I think its still worth noting one element of the deal that reveals a startling hypocrisy from the Obama administration.

While the Consumer Financial Protection Bureau (CFPB) begins its foray into regulating the world of private arbitration clauses, a different agency of the Obama administration is taking on the opposite approach. While the CFPB's efforts are to be applauded,any improvements that may result domestically will be offset by the international devastation that would arise from a particularly nasty provision of the TPP.

A little background on arbitration:

The CFPB's rulemaking, if finalized, would be the first attempt by the federal government to crack down on the ballooning use of what are called "forced" arbitration clauses, which appear in all sorts of commercial contracts: from real estate leases, to cellphones, and cars. Forced arbitration clauses routinely are inserted into the fine print of contracts that people must sign to buy a product or service or get a job. Millions of Americans are inadvertently signing away their rights to sue the entity they are doing business with when they sign these agreements. Arbitration is a process in which a private firm is hired to settle a dispute without going to court. It was designed as a voluntary alternative to actual litigation.

While the language varies, the point of arbitration is to shield business from their customers suing them, especially through class-actions suits. Whether they know it or not (usually not), the consumer agrees to have their issues settled by a private arbitrator, who is not an appointed judge of any town, county, or state. These arbitrators are often selected by the business itself, which presents a obvious conflict-of-interest problem and stacks the deck against the consumer and their attempt at redress.

Arbitration is now a tool used by corporations large and small, to force consumers and employees to surrender their right to hold corporations accountable for wrongdoing before a real, governmental court. The main selling point of the pro-arbitration crowd is that it is "discount justice"-- consumers can get some form a redress quicker and cheaper than through the actual justice system. No need to hire one of those slimy lawyers, file a lawsuit, or appear before some crotchety old judge.

While at first glance it may seem like a more efficient system, arbitration is a way for powerful corporations to evade responsibility and rule of law. Under forced arbitration, individual consumers or employees must fight it out before a private arbitrator essentially chosen by the company that cheated or discriminated against them. Arbitrators do not need to be lawyers or follow precedent, yet their word is nearly always final and unappealable.

Nearly all forced arbitration clauses also ban class-action suits, which allow individuals to band together to bring their common claims against big corporations. Without the ability to band together, individual claims are usually too small for any one person to bother with the costs of litigation, allowing shady companies to do small amounts of harm to a large number of people without consequence. The whole false right-wing narrative about "frivolous lawsuits" has empowered the stunning growth of these clauses over the past decade.

In my view, these hidden arbitration clauses also violate the very spirit of our Constitution, which supposedly provides equal protection by, and access to, government for the redress of grievances.

So while CFPB (an agency which Obama himself signed into law) takes on the issue domestically, the White House is burning through what is left of its meager political capital to push through the widely-despised Trans-Pacific Partnership "trade" deal on the international level. At the core of the TPP is the so called "investor-state dispute settlement" (ISDS) system, which is basically a globalized arbitration panel.

These international panels grant extraordinary new rights and privileges to foreign corporations and investors that formally prioritize corporate rights over the right sovereign nations to govern their own affairs. These terms empower individual foreign corporations to skirt domestic courts and directly challenge any policy or action of a sovereign government before World Bank and UN tribunals.

Comprised of  private attorneys, the extrajudicial tribunals are authorized to order unlimited amounts of compensation for health, environmental, financial and other public interest policies that don't fit corporate interests. The amount awarded to corporations is based on the "expected future profits" that the corporation would have earned in the absence of the public policy it is attacking.

This panel would provide a super-national platform for multi-national corporations to sue sovereign governments. If a government proposes, for example, a new series of environmental regulations that impose costs on a corporation, that corporation can bring suit against the government with the ISDS, in an attempt to stop the regulation or receive compensation for compliance costs and any potential profit losses emanating from the regulation. This arrangement already exists in a more limited form at the World Trade Organization, where suits can be brought against countries who impose trade barriers.

ISDS is essentially arbitration on steroids. Just as consumers are disempowered by forced arbitration domestically, sovereign nations are disempowered by arbitration internationally. This expansion of private, unaccountable corporate power is antithetical to every democratic ideal, and is a horrifying reversal in the gradual expansion of global democracy that occurred in the 20th century.

The passage of TPP would symbolize yet another weakening of national democratic sovereignty. Democratic government would be powerless to appeal decisions of this international arbitration panel, which is controlled by neoliberal, corporate interests and ultimately not accountable to anyone. By creating a platform for corporations to overpower national governments, the TPP would codify the dominance of global corporate power, which has grown exponentially in the past 30 years.

That a former Constitutional law professor would have anything to do with such a flagrant offense to a core principle of the US Constitution is notable enough. But the fact that his White House is pushing to expand corporate-friendly arbitration on a global scale is particularly disgusting. If implemented, this panel would represent another step in the corporate globalization.

So while this scheme may seem rather odd, I don't mean to suggest that this policy incongruity is surprising. In fact, it fits right into the current dynamics of DC policymaking- make some highly visible domestic policy moves to keep people placated, while moving behind the scenes in opposite, more pernicious ways.

Thankfully, the threat of the TPP has mobilized grassroots movements and mass protests across the globe in opposition. And just about every presidential candidate, both Republican and Democrat, currently opposes the TPP. Neoliberalism may have finally gone to far. The tide may finally be turning.

Monday, November 9, 2015

Power is Money

Since bank lending creates the vast majority of the money supply, bank lending controls the vast majority of resource allocation in our economy. That’s why it is extremely important that policymakers fully understand the banking system, and why it’s so tragic that they don’t.

From a political perspective, realizing how much of the money supply, and therefore allocation and distribution of real resources is controlled by bankers, is very difficult. It is not easy to acknowledge that most economic activity is dictated not by our democratically-elected government issuing money as it spends, but by profit-chasing bankers living it up as overpaid bureaucrats. The vast majority of what we call money is not created by government spending, but by private bank lending. This realization forces one to rethink their approach to all public policy issues, since public policy always involves resource allocation in some form or another.

Every individual and every industry in this country relies on the banking system in some way, so it’s important for all of us to understand how it actually works. The first step in this process is to throw out any preconceived notions about how you thing banking works, because they are almost certainly outdated at best, and totally wrong at worst.

Recognizing banks as credit allocation utilities, and not intermediaries of preexisting savings, changes everything. All economic models get blow up once the reality of money as a measurement tool, and not a quantity the price of which is determined by supply and demand, is realized. Therefore, since most economic models treat interest rates as a reflection of the supply/demand for money, these models become useless. All the efforts by economists to derive meaning from interest rates (what is “natural”, what is the “equilibrium rate”, Taylor Rule, etc) are a complete waste of time, and distract from the necessary focus on what is happening in the real economy.  

Fiat currency is a unit of measure and a medium of exchange, and it works great in those roles. Savings of fiat should be a completely separate activity from the day to day transactions in the formal monetary economy, not artificially linked to the medium of exchange in some kind of metal commodity. Fiat costs nothing to produce, and is unlimited in supply. Its value is ultimately derived by the fact that it is the only thing that the US government will accept for tax payments, which it imposes to the tune of $3 trillion a year. You can’t pay your taxes with gold coins.

When the banking system lends money into existence, it only does so for the purposes of yielding a positive financial return. This can be a very useful incentive to drive many different types of commerce that an economy needs to thrive. But no sensible person could argue that all money creation should be directed only towards profitable enterprises. There are many things beneficial to human society that cannot be achieved under a profit motive. Public infrastructure, retirement security, education, healthcare, defense; these are all things that we acknowledge in some form need to be managed by the governmental sector, since they are both necessary to our lives, yet not always feasible when run for a profit. There is no line in our Constitution, or precedent in human history, that says that society should be solely, or even largely organized around markets.

One main example is the incorrect economic argument that government borrowing raises interest rates by “crowding out” funds that would otherwise be available for nongovernmental use. However once one realizes that the money supply is not fixed, and in fact largely influenced by bank lending, this point becomes moot. Government “borrowing” could not possibly increase the cost of bank lending, since there is nothing than the banks would otherwise use that is being “crowded out.” As previously described in this blog, bank lending is merely the creation of a new account balance for the borrower. This occurs through the simple process of a loan officer typing a number into a keyboard. Nothing pre-existing is “used” to create the loan balance; the money is simply typed into a computer, much like any email or spreadsheet, and created from nothing.

This leads us to the peculiarity of modern day discussions about political economy, both among regular Joes and the policymaking elite around the world. For some reason, public money creation is given far more attention than is necessary, while private money creation, in addition to being a much larger force that can quickly become unsustainable, is mostly ignored. The massive housing bubble in the run-up to the financial crisis was ignored by almost all the economics profession, while the public money expansion in the years after, caused by necessary increases in government debt around the world, was given disproportionate attention by the chattering classes. 

In neither period was the difference between public and private money creation ever discussed in a significant way. When he looked back at the last 30 years of economics, the UK’s Lord Adair Turner expressed his dismay that the economics profession had obsessed over fiscal policy and levels of public debt, while entirely ignoring the levels of private debt which ultimately caused the financial crisis.

The power to create money is one of the greatest powers in the world, second only to use of physical, military force. It could be argued that money creation is even more powerful, because it occurs all day, every day, in manner so mundane as to attract nearly no attention. If the US government, for example, sent Marines to point guns at bankers, mortgage brokers, builders, contractors, and construction workers, and ordered them to build 1000 new houses, the American public would rightly be horrified. But when the quasi-governmental banking system lends money into existence for mortgages (FDIC insured banks), the government insures billions of dollars of mortgages from failure (FHA/VA/FCA), then packages mortgages into securities (Fannie/Freddie), and then buys these securities (Federal Reserve), all of which has roughly the same effect as the previously described militaristic scenario, no controversy is stirred. The same public purpose was achieved, but with totally different means.

So instead of provisioning Americans with housing with use of physical force, the government supports the current monetary system in all its complex machinations. From a purely macro point of view, if power is defined as the ability to deploy real resources for a desired purpose, then both physical force and money issuance are forms of power.

Of course, I don’t mean to suggest that the government should use physical coercion to deploy the nation’s resources. Our current financial arrangements have the capability of doing this peacefully and somewhat efficiently, although improvements obviously need to be made. The first, and biggest step toward making these improvements is educating the public about how the nature of modern money and how the banking system accurately works, so voters can make informed decisions about the policy decisions that their elected officials make in this space. 

Wednesday, November 4, 2015

The Missing Link on Gun Violence

The term 'Senseless Tragedy' should never be applied to mass shootings. Its a crass capitulation to willful ignorance; a weak attempt to confront brutal reality. Mass shootings are never senseless. There is always a reason, always a force that drives men into madness- to take the lives of their fellow citizens. With every tragic mass shooting, an attempt should be made to delve into the dark minds of these killers, to find out what really drove them. But this never seems to happen. Instead, people express "shock", "horror" and "outrage", that "something must be done." Then begins the same old song and dance. The left impulsively calls for more gun control. The right reacts with insane rhetoric. And then....nothing happens.

Perhaps a new approach is needed. Perhaps we should actually take a look at what conditions in modern America, whether economic, social, or otherwise, lead men to these horrifying actions. A common reaction is to blame violence in TV, movies and video games. But this violence exists in media all over the world-- this factor needs to be ruled out, or at least moved to the back burner for now.

So what do some of the perpetrators of the worst mass shooting in recent years have in common? A quick glance reveals a stunningly obvious similarity. With one exception, the killers at Columbine, Virginia Tech, Aurora, Newtown, Isla Vista, Charleston, and Roseburg were all white, suburban, 20-something males. They were not raised in urban areas, or around street violence. They didnt necessarily have genetic mental health issues, and had no previous criminal records. These were not your typical murderers. But they were driven to sociopathy nonetheless.

However, the vast majority of gun deaths in our country dont come from mass shootings. They come from the day in, day out homicides that occur regularly in the towns and cities across America. It's a well established fact that financial stress is the number one contributor to domestic violence and divorce, which, in turn, becomes a breeding ground for gun violence.

At this point, it is nearly pointless to try and regulate the tools that lead to these shootings. The fact that Americans collectively own around 300 million guns means it will be impossible to substantively reduce their availability. And while clip limits and universal background checks may make some difference, critics of those methods accurately point out that many of the mass shooters would not have been stopped by these methods anyway.

The gun issue is beyond politically contentious. For decades, Republicans have refused to budge an inch -if the Sandy Hook horror couldn't get congressional Republicans to move on guns, absolutely nothing will. It seems to me that Democrats have already wasted enough political capital on this intractable mess . The power of the NRA's grassroots network in keeping Congress scared is the envy of all lobbying organizations in Washington. It's easy for Democrats to attack powerful business interests, because they dont actually have a large, natural constituency. But guns, unlike any other personal possession, hold a unique psychological grip over the millions of Americans who make up the NRA's membership.

At this point in the trajectory of this issue, it seems to make much mores sense to address the underlying social and economic conditions that lead young men to such acts of violence.

40 years of brutal neoliberalism has drained the country of its vitality. Maybe by destroying the middle class, wiping out upward mobility, eliminating blue-collar jobs, busting unions, neoliberalism has gutted the country and left nothing but misery in its wake.

In so many communities throughout the country, anger boils just below the surface. As humans, we thrive on potential. It is the potential of improving ones lot in life that gets most people up in the morning. The American dream of working hard and having a secure, comfortable life is more than enough for most people. And when that potential is cut off, by making jobs unavailable, by making college too expensive, by forcing people to work multiple low paying wage jobs, anger naturally ensues. When taking on debt becomes necessary to meet basic needs, when an emergency room visit costs $2500, and a years worth of medication costs more than a car, people lose hope. The dreary by-products of neoliberalism grind everyone down- some to complacency, some to exhaustion, and others, tragically, to horrifying violence.

As social animals, our states of mind are mostly relative. That's why saying that the poor/middle class in America are better off than the poor in other countries is a useless argument.  The fact that we had a middle class, and then lost it, is much more painful than if we had never had a one at all. Falling out of the middle class hurts a hell of a lot more than climbing up to it.

So what happens when a 20-something male looks into his future and sees nothing but drudgery? When the energy and hormones, which spring naturally at this age, cannot be directed towards productive paths forward, they are instead directed inward.  Social estrangement is obviously nothing new, but it can usually be assuaged by focusing on the future, on a career, or on a family. But when these channels for personal success are also blocked off, the pressure builds into internalized rage. This rage can become all-consuming. And when ubiquitous social media makes it easy to see how well other people are doing, the rage can explode outward in violent expressions.

Contrary to the NRA's inane talking point about " a good guy with a gun vs a bad guy with a gun", there is no such thing as good guys and bad guys. Just as all of us humans are capable of acts of compassion, all of us humans are capable of descending into violence. Unfortunately, the crushing reality of modern American life often leads to the latter.