Who will mourn local newspapers?
By John Gapper
They say that journalists prefer bad news to good news. There is plenty of that close to home.
This is becoming a terrible week for the US newspaper industry. On Monday, the Tribune Company, which owns the Chicago Tribune and the Los Angeles Times, filed for bankruptcy. The New York Times Company followed by saying it might mortgage its Renzo Piano-designed headquarters building by Times Square to reduce debt.
The recession has turned the long, slow decline of newspapers into a brisk fall. On Tuesday, I dropped into a UBS investor conference in New York to catch Gary Pruitt, chief executive of the McClatchy newspaper chain, calling its results “lousy”. At this rate, US newspapers will be lucky to make it to the weekend.
Many American journalists, facing job losses and the death of an industry they loved, regard it as a tragedy not just for them but for society. They fear that television, radio and blogs can never replace what newspapers provided for readers.
Bill Keller, executive editor of The New York Times, put the point succinctly to National Public Radio earlier this month: “Good journalism does not come cheap. And, therefore, you’re not going to find a lot of blogs or non-profit websites that are going to build a Baghdad bureau.”
Up to a point, Lord Keller. The failure of papers will deprive US readers – and those in countries where similar forces are at work – of plenty of useful information. But, let us face it, the industry also plays host to an immense amount of duplication and self-indulgence.
The internet brought trouble for regional and city papers not only because it gave an outlet to bloggers, and broke the monopoly they had on classified and display advertising, but because it let Philadelphians, for example, peruse publications other than the Inquirer.
There are things you can only learn about Philadelphia from the Inquirer, or Chicago from the Tribune, or Miami from the Herald. If they went away, they would also take with them a check on local abuses of political power, as the phone-tapped desire of Rod Blagojevich, the governor of Illinois, to get his critics on the Tribune fired shows.
Nor is it obvious that such coverage could be produced by internet sites instead. In theory, information about local events can be just as efficiently distributed online as in print – in some ways, better. In practice, papers’ dominance of local print advertising brought them a revenue base that is unlikely to be replicated.
This week, I had a chat with Joel Kramer, the founder of MinnPost, a news and analysis internet site devoted to politics and civic affairs in Minneapolis and St Paul. He was formerly publisher of the Minneapolis Star Tribune, which has cut jobs as it gets financially squeezed.
MinnPost is among a new breed of non-profit sites, including Voice of San Diego and ProPublica, which are trying to fill the gap left by the decline of city papers. He raised $1.5m (including $250,000 from himself) to start the site, which employs six editors and pays freelances to write.
It does some valuable work. But Mr Kramer admits that it functions more as a “complement” to the Star Tribune and its rival, the Pioneer Press, than as a substitute. He says that it tries to add depth and analysis to stories that are already in the news more than dig up news itself.
As Mr Keller says, reporting is expensive. It requires someone to get on the phone, gather information, balance conflicting views of what has just occurred, and present the result. Papers have done this basic work for cities and states for so long that we take it for granted.
Other aspects of US journalism will not, however, be missed. Some things, such as sports scores and weather forecasts, can be collated in a more timely and user-friendly way online. In addition, there is a swath of national and foreign coverage that is no longer needed.
There used to be a logic to the Chicago Tribune or the Miami Herald having large Washington bureaux and even foreign correspondents. People who lived in those places could not access The New York Times or The Washington Post online and relied instead on the local paper.
These days, they can do so free, which eliminates the need for a lot of coverage to be duplicated. Aggregation sites such as Google News have shone a harsh spotlight on the overlap and repetition in national coverage in hundreds of newspapers.
I am sure US citizens would lose something if fewer papers or wire services covered national affairs. But would it really be insufficient for society if five or six organisations (including Reuters and Bloomberg) competed to cover, for example, the Federal Reserve? I doubt it.
The question for national and international reporting is not whether city papers survive but whether news organisations such as The New York Times do. Clearly, if they did not, and blogs were left alone to provide coverage of Washington and Iraq, there would be a problem.
The honest answer is: we do not know. The New York Times, with its thriving online readership and global clout, seems in better shape than The New York Times Company, which has been indifferently managed by the Sulzberger family. A change of ownership might fix that.
My working assumption, in more ways than one, is that consolidation – or, more accurately, eradication – of local newspapers will strengthen the editorial position of the remaining elite: The New York Times, The Wall Street Journal, Bloomberg, the Financial Times etc.
I also assume that this elite will find some way to cover its costs. Here’s hoping, anyway.
Blago-What? Never Heard of Him.
What did Obama know, when did he know it, and should anyone care?
When the 111th Congress convenes next month, the Democrats may have only 57 senators. It now appears that as a result of Gov. Rod Blagojevich’s efforts to sell President-elect Obama’s erstwhile seat, Blagojevich may not be able to give it away. As the Chicago Tribune reports from the state capital:
Legislative leaders already launched plans to strip Blagojevich, a Democrat, of his power to fill President-elect Barack Obama’s vacant U.S. Senate seat that the governor allegedly put up for sale.
Senate President Emil Jones (D-Chicago) and House Speaker Michael Madigan (D-Chicago) called for lawmakers to pass legislation early next week to allow for a special election to choose Obama’s successor. But there’s some question as to whether such a move would pass legal muster. . . .
Ironically, any legislation passed to take away Blagojevich’s appointment power would have another hurdle: the governor himself. Blagojevich could sign a bill, veto it or sit on it for a couple of months, a move that would leave Illinoisans with only one U.S. senator.
Until such legislation is enacted, Blagojevich retains the power to fill the seat. But he may find he has difficulty exercising that authority–for who in his right mind would accept such a tainted appointment? He could appoint himself–as he allegedly suggested in conversations wiretapped by the FBI–but that may not look so good before a jury.
Thus it seems the only way the seat can be filled by Jan. 3 is if Blagojevich steps aside, clearing the way for Lt. Gov. Pat Quinn to become governor and appoint Obama’s successor. That, however, would require Blagojevich to heed the calls of everyone in the world to resign. Could they sweeten the pot with a nice severance package?
Meanwhile, what effect will this home-state scandal have on the new president? The wire services offer drastically different opinions. “Obama Seen Untouched by Illinois Governor Charges,” says a Reuters headline:
President-elect Barack Obama’s decision to keep a distance from his state’s governor, who was arrested on corruption charges on Tuesday, should enable him to escape becoming tainted by the scandal, analysts said. . . .
Obama is not related to the corruption pattern in Chicago,” said political scientist Dick Simpson of the University of Illinois in Chicago. “He has not been pressing for any person to replace him in his Senate seat.”
U.S. Attorney Patrick Fitzgerald, announcing the charges, also said Obama was in no way implicated.
But the Associated Press headline disagrees: “Analysis: Ill. Governor Scandal Could Dog Obama.” Our first thought: Malia and Sasha will be awfully disappointed if this turns out to be their puppy. But seriously:
Obama isn’t accused of anything. But the fact that Illinois Gov. Rod Blagojevich, a fellow Democrat, has been charged with trying to sell Obama’s now-vacant Senate post gives political opponents an opening to try to link him to the scandal. A slew of questions remain. The investigation is still under way. And the ultimate impact on Obama is far from certain.
Come to think of it, that AP “analysis” is just empty verbiage. It might as well have been headlined “Anything Can Happen, and It Probably Will,” even though that would have deprived us of a canine gag.
Still, there was an intriguing bit of backpedaling by an Obama aide. On Nov. 23, ABC’s Jake Tapper reports, senior adviser David Axelrod, in an interview on Chicago’s WFLD-TV, said of the president-elect:
I know he’s talked to the governor and there are a whole range of names many of which have surfaced, and I think he has a fondness for a lot of them.
Last night Alexrod released the following statement:
I was mistaken when I told an interviewer last month that the President-elect has spoken directly to Governor Blagojevich about the Senate vacancy. They did not then or at any time discuss the subject.
One of these statements is false, but which one? The intuitive, if cynical, answer is yesterday’s. It is imperative now for Obama to remain unsullied by the scandal, whereas 2½ weeks ago there was no reason for Axelrod not to tell the truth.
Postelection news reports are contradictory as well. On Nov. 5 KHQA-TV in Quincy, Ill., reported Obama and Blagojevich were about to meet:
Now that Barack Obama will be moving to the White House, his seat in the U.S. Senate representing Illinois will have to be filled.
That’s one of Obama’s first priorities today.
He’s meeting with Governor Rod Blagojevich this afternoon in Chicago to discuss it.
Even if Obama did talk to Blagojevich about the Senate appointment, there is no reason to think this would incriminate the president-elect. In fact, statements attributed to the governor in the criminal complaint make clear, in rather vivid language, that he was frustrated by Obama’s refusal to play ball and reward Blagojevich for appointing “Senate Candidate 1”:
ROD BLAGOJEVICH said that the consultants (Advisor B and another consultant are believed to be on the call at that time) are telling him that he has to “suck it up” for two years and do nothing and give this “m—–f—er [the President-elect] his senator. F— him. For nothing? F— him.” ROD BLAGOJEVICH states that he will put “[Senate Candidate 4]” in the Senate “before I just give f—ing [Senate Candidate 1] a f—ing Senate seat and I don’t get anything.” (Senate Candidate 4 is a Deputy Governor of the State of Illinois). . . .
ROD BLAGOJEVICH states that he will appoint “[Senate Candidate 1] . . . but if they feel like they can do this and not f—ing give me anything . . . then I’ll f—ing go [Senate Candidate 5].”
This conversation is alleged to have taken place on Nov. 10. Unless Blagojevich subsequently charmed Obama and his representatives into cooperating, Jim Lindgren would seem to have it right: “If true, these allegations hint that Obama or his transition team were victims of an extortion/bribery attempt” (our emphasis).
Does that rule out the possibility that Axelrod is now lying in order to cover up communications between Obama and Blagojevich? Not necessarily. Being a victim of a crime or other offense can, after all, be embarrassing. Wouldn’t it be ironic if Obama got caught up in scandal by trying to conceal facts that were not the least bit incriminating, merely for the sake of pride?
This isn’t the first time Rod Blagojevich has attracted the attention of federal investigators. Blogger Steve Bartin quotes from a Chicago Tribune report published Oct. 24, 1996, when Blagojevich was a U.S. House candidate, about his relationship with father-in-law Dick Mell, a Chicago alderman:
Mell put Blagojevich on his City Council payroll, and in 1990, Rod and Patti married.
Blagojevich stayed on the city payroll, with a short break for campaigning, until joining the legislature in 1993. The stint paid him about $83,000.
The specifics of what Blagojevich did for that money are elusive, and public records provide little clarification.
The issue is highly charged because federal investigators have questioned a handful of Mell’s office workers–all of whom have denied wrongdoing–as part of a sweeping probe into alleged City Council ghost payrolling, the time-worn practice of collecting a public paycheck but doing little or no work.
Blagojevich said he hasn’t been questioned, but Mell still has collected affidavits attesting to Blagojevich’s hard work.
What did Blagojevich do? It’s hard to pin down because of the slippery but legal system of City Council employment that lets people be paid by one committee and work elsewhere.
City records show that Blagojevich was paid by four separate council committees within two months in 1989. Records show he worked for the legislative reference bureau for 1½ years.
William Donaldson, head of the Mell-controlled legislative reference bureau, an arm of the City Council that helps draft ordinances, said Blagojevich “did very good work” and filled a full-time position on his staff.
But Blagojevich says he never worked there, not even for a day. Instead, he said he always worked as a part-time aide to Mell out of the ward office, organizing community events and giving free legal advice to constituents.
Blagojevich won the House race, defeating Michael Flanagan, a Republican who in 1994 had upset incumbent Dan Rostenkowski, then under indictment in connection with the House post office scandal, in a heavily Democratic district. (Rostenkowski pleaded guilty to mail fraud, spent 15 months in prison, and received a pardon from President Clinton.)
Blagojevich left the House in 2002 when he sought the governorship. His replacement? Rahm Emanuel, soon to be President Obama’s chief of staff.
Europe OK’s ‘Torture’
Writing in Policy Review, John Rosenthal tells a tale of police abuse from 21st-century Germany:
In the Frankfurt police headquarters, the atmosphere is tense. Deputy Police Chief Wolfgang Daschner is losing patience. On the previous day, his officers arrested one Magnus Gäfgen, a 27-year-old law student. Gäfgen is suspected of having kidnapped 11-year-old Jakob von Metzler, son of the banker Friedrich von Metzler. Two days earlier, Gäfgen had personally collected a 1-million-euro ransom payment. But there is no sign of the boy and Gäfgen has refused to give police interrogators accurate information about his whereabouts. A police psychologist, observing the questioning, describes Gäfgen’s responses as a “pack of lies” [Lügengebäude]. Deputy Police Chief Daschner fears that Jakob’s life may be in danger. In a memorandum, he writes: “We need to ascertain without delay where the boy is being held. While respecting the principle of proportionality, the police have an obligation to take all measures in their power to save the child’s life.”
Daschner decides to act. He dispatches police inspector Ortwin Ennigkeit to the office in which Gäfgen is being held for interrogation. Ennigkeit’s assignment: to make Gäfgen talk–if necessary by threat of torture. Indeed, Daschner has resolved not only to threaten Gäfgen with pain, but to carry out the threat if his prisoner is not otherwise forthcoming. A doctor has been found to supervise the proceedings.
In the interrogation room, Ennigkeit tells Gäfgen that a “special officer” is on his way. If Gäfgen does not tell Ennigkeit where the boy is, the “special officer” will “make him feel pain that he will not forget.” On Gäfgen’s own account, the formula is still more menacing: the officer “will make you feel pain like you have never felt before.” “Nobody can help you here,” Ennigkeit tells him, according to Gäfgen’s testimony. “We can do whatever we want with you.” On Gäfgen’s account, moreover, Ennigkeit already begins to rough him up: shaking him so violently that his head bangs against the wall and hitting him in the chest hard enough to leave a bruise over his collarbone. Gäfgen’s testimony is consistent with the tenor of Daschner’s instructions, which, on Daschner’s own admission, called for the “use of direct force” [Anwendung unmittelbaren Zwangs].
Gäfgen broke and told police where he had buried Jakob’s body. That was October 2002:
In June 2005, the child-murderer and law student Magnus Gäfgen lodged a complaint against Germany with the European Court of Human Rights (ECHR). In his complaint, Gäfgen accused Germany of having violated his rights under the European Convention on Human Rights and, more specifically, of having violated the prohibition on torture contained in Article 3 of the Convention.
On June 30, 2008, the European Court of Human Rights rejected Gäfgen’s complaint and cleared Germany of the charge of tolerating torture.
Also in October 2002, interrogators at Guantanamo Bay asked for permission to use similar methods on al Qaeda terrorist Mohammed al-Qahtani. The Pentagon said no.
Now that Barack Obama has won the presidency, perhaps it is time for American interrogators to revise their practices to bring them into line with European ones.
Hold Me Tight, Deer Jesus
Rosacea-afflicted caribou are the latest target of the war on Christmas, Raleigh’s WRAL-TV reports from Wilmington, N.C.:
“Rudolph the Red-Nosed Reindeer” caused a stir at a New Hanover County school. A parent complained about the song’s religious reference and got it pulled from her child’s kindergarten Christmas show at Murrayville Elementary School.
The song was pulled “because it had the word Christmas in it,” said Rick Holliday, assistant school superintendent.
A Jewish mother, who didn’t want her name published, objected to what she called “religious overtones” in the song. So the principal agreed to pull it from the program.
After other parents complained, “school board members, administrators and attorneys listened closely to the song’s lyrics and decided the song was secular.” Ironically, caribou, like moose, are kosher if slaughtered properly.
The real outrage about this story, though, is that the school district is so anti-Christian that it forces the poor assistant superintendent to call himself “Holliday.”
Let’s Cut Cap-Gains Taxes on Auto Investments
Then the private sector can do the ‘bailout.’
The din of clattering metal echoes through the halls of our capital: panhandlers! Erstwhile captains of the automobile industry, having foregone their Learjets, now don the tattered rags of beggars as they seek congressional approval for a $34 billion bailout of the Big Three automobile companies.
Our United States Congress of lawyers, doctors, diplomats, retired military officers and career politicians — along with their staffs of intelligent young political science majors and MBAs — now finds itself poring over “business plans” submitted this week by Ford, GM and Chrysler. People who have never before in their lives seen — no less implemented — a business plan are now trying to decide if these companies will succeed by means of a “capital infusion” with various imposed preconditions and negotiate what we taxpayers (investors) should be getting for our money. Something is wrong with this picture.
If we as a society place a public premium on “saving” the automobile industry from its default reorganization under Chapter 7 or Chapter 11 bankruptcy — which has been good enough for the steel and airline industries, among others — then a better manner in which to express that premium might be to establish special tax consideration for those who are willing to take on the risk. One way of doing that is to provide an exemption from capital-gains taxation on all debt or equity instruments used in the next six months to invest in the troubled auto makers.
By waiving the future capital-gains tax on all investments in the automobile industry, we enhance the projected return models and therefore the likely occurrence of a privately funded “bailout.” There are turnaround firms and funds, and they are experts at what needs to be done. Tax exemption for gains would certainly get their attention. It also wouldn’t cost taxpayers anything because it only forgoes future government revenues that wouldn’t exist absent this incentive.
At the very least, my constituents in Colorado won’t find themselves as limited partners in a private equity fund run by Congress making speculative investments in flagging automobile manufacturers and who knows what else with their taxpayer money. And Congress can focus on issues more directly related to its core competencies and the necessary role of government, such as how to make training accessible to workers who might be transitioning between industries.
At best, the tax incentive would lead to a far more efficient investment than anything Congress can negotiate. Such a tax incentive could save jobs, make our automobile industry more competitive and viable, and earn tax-free return on capital for the savvy investors who step up. If it works in this particular case to incentivize additional risk-taking through a capital-gains tax exemption, it may indeed work in other cases or, I dare say, across the entire U.S. economy.
Most members of Congress and staffers on the Hill are smart people, but we should not pretend that we are better at what are so clearly other people’s jobs. One of the tremendously difficult tasks that we are ill-equipped to successfully orchestrate is restoring these three failing companies to health. As one of the members of Congress with a strong business background, I know what I don’t know in business. While I hold my colleagues in great esteem, I doubt their abilities as turnaround artists are very much superior to mine. Any pretension of a government bailout being a good deal for taxpayers should be abandoned for the insincere (or perhaps ignorant) rhetoric that it is.
Among the reasons I ran for Congress, one was to make government work. Let’s get government back to doing the work of government. Reading business plans and making investments is the job of equity funds and turnaround specialists, not members of Congress.
Bush and Detroit
A bailout that won’t enhance the Republican’s legacy.
It’s easy to see why Congressional Democrats and an Obama Administration would be eager to bail out Detroit auto makers in exchange for an equity stake and a chance to dictate business decisions. Democrats want Detroit to stop making big cars that run on gasoline, and they hope to protect their friends at the United Auto Workers. The mystery is why President Bush would go along for this ride.
This is all the more puzzling given that the President was once a principled opponent of precisely the kind of taxpayer bailout he now seems prepared to accept. Asked by the Journal about a possible Detroit bailout in an Oval Office interview in January 2006, Mr. Bush said General Motors and Ford might instead try to produce “a product that’s relevant.” For good measure, he added that “I think it’s very important for the market to function.”
Nobody can argue that this was a case in which the market didn’t function. Ford, GM and Chrysler were in obvious trouble long before the current credit panic. The companies were bleeding cash and piling up liabilities when the rest of the U.S. economy was posting solid quarterly gains. They were losing market share as their foreign competitors — building cars in the U.S., with American workers — were gaining. Yes, they were hampered by fuel-efficiency standards that forced them to build cars, at U.S. plants with UAW contracts, that they couldn’t sell. But those fuel standards also applied to Honda, and in any case won’t be eased under the terms of this bailout.
Nor can it be argued that a rescue for Detroit is of a piece with the financial services bailout. Without credit, no market can function, as millions of Americans looking for loans are now discovering. The provision of public capital to the banking system through the Troubled Asset Relief Program was unfortunate but necessary as a way to prevent a larger, global financial collapse.
Last we checked, consumers had options other than a Buick, Mercury or Chrysler Sebring if they needed a new car. Bankruptcy for any of the Big Three would exacerbate the recession and mean pain for laid-off workers and their families, but it poses no systemic risk to the U.S. economy. It also offers the companies the legal protection to modify labor and other contracts, or to sell their businesses in some economically rational way, rather than postpone the day of reckoning for another few years, at huge taxpayer expense.
No wonder, then, that polls show Americans opposing a Detroit bailout by 61% to 36%, according to a CNN survey last week. That margin is probably higher among the voters who twice put Mr. Bush in office and might expect him to govern according to some discernible conservative principle. When Harry Truman seized steel mills in 1952, at least he had the excuse of having the Korean War to prosecute. In the current bailout debate, the Administration hasn’t even been able to bargain for passage of a Colombian or Korean free-trade agreement.
Mr. Bush is holding out for terms, and some kind of “master” or “czar,” that could prod the companies to restructure. The White House also wants to remove the demand in the draft Democratic bill that the companies not challenge “state” (read: California) fuel-efficiency rules that would doom the companies to pursue the same loss-making strategies that got them to their current pass. That’s certainly helpful as far as it goes. But the problem with this bailout is its premise as well as its details.
Bailing out companies because they claim to be uniquely American sets a precedent for every other poorly managed and politically connected U.S. industry. As for a car-industry “czar,” note how quickly House Speaker Nancy Pelosi rejected the idea of former General Electric CEO Jack Welch for the job. She wants a “public sector” type who will impose the decisions that Congress wants. A bankruptcy judge would have a much more independent hand.
It’s also becoming increasingly clear that the real goal of Democrats isn’t to save jobs per se, but to tell Detroit what cars to make and how to make them. The goal is to turn GM and the rest into Big Green Machines that will stop making SUVs and trucks and start making small cars that run on something other than carbon fuel. If consumers don’t want to drive them, well, the next step will be to impose subsidies or penalties and taxes to coerce them to do so. Giving the federal government an equity stake could also lead to protectionism, as the politicians attempt to shield Detroit’s mismanaged assets from competition by citing the interests of the UAW, the environment, or some other “social” good that has nothing to do with making cars Americans will want to drive.
None of these measures will save Detroit in any real commercial sense. For precedents, consult the history of France’s Renault, S.A., or perhaps of Jawaharlal Nehru’s industrial policies in postwar socialist India. But a bailout will harm consumers, harm the auto industry as a whole, put taxpayers on the hook indefinitely, and bring the U.S. commitment to market principles further into doubt.
If this is how Barack Obama wants to begin his Presidency, so be it. But Mr. Bush will not enhance his legacy by helping Congress and the Sierra Club nationalize Detroit.
The economy is an a state of disrepair. But rather than dwell on the gloomy outlook, Uwe Bott, president and CEO of Cross-Border Finance, argues that now is the ideal time to re-evaluate and re-structure global financial policy. He offers his suggestions here.
As we are staring into the abyss of economic collapse and as we are understandably pre-occupied with stop-gap measures to contain the decline in both depth and breadth, we must recognize the tremendous opportunity that lies before us.
We are given the chance to reflect on the basic assumptions of our economic model. Accordingly, we are provided with the chance to make global structural adjustments at a scale rarely afforded to a generation.
Let me propose some resolutions:
1) Let us contain private-sector communism.
The last 20 years have been marked by the unparalleled magnitude and number of mergers and acquisitions in the real economy. Some of these M&A activities have created companies with the necessary economies-of-scale. By and large, though, they have produced unmanageable and often inefficient conglomerates.
However, the defeat of Big Steel by so-called mini-mills in the United States should lead us to question even some of our most basic assumptions about “natural monopolies” or “economies-of-scale.”
The chairman of General Motors admitted as much when he stated: “In practically all of our activities, we seem to suffer from the inertia resulting from our size.” Admittedly, the chairman quoted was Alfred Sloan, and he made this statement in 1941 at a hearing in the U.S. Congress on the concentration of economic power.
In his usual wit, Ross Perot — who served as a director on the board of GM — put it this way in 1988: “At GM, if you see a snake, the first thing you do is hire a consultant on snakes. Then you get a committee on snakes, and then you discuss it for a couple of years. The most likely course of action — nothing. You figure the snake hasn’t bitten anybody yet, so you let him crawl around the factory floor.”
This is a scathing condemnation of concentration of economic power and the inefficiencies of conglomerates.
Of course, we all knew this. In fact, our capitalist model is based and dependent on a competitive and transparent market. The proliferation of national and sometimes global monopolies/oligopolies has introduced unreasonable risks and inefficiencies to the proper functioning of the global market.
It should be recalled that antitrust legislation, which exists in many countries, was designed to protect consumers, to create efficient markets and to avoid systemic risk. The proper enforcement of such antitrust legislation also ensures the effectiveness of our fiscal and monetary policy tools. The more we digress from the ideal market model, the less potent these tools become. Our current policy conundrum is living proof.
Diffusion of power
2) While we must undo the oligopolistic structure of our real economy, the diffusion of power in the financial sector is of even greater importance — because the latter functions as the circulatory system of the real economy.
Yet, during this time of crisis, regulators and treasury departments are doing the opposite by advocating the merger of one systemically important, bad bank with another. By so doing, they are building banks that are no longer “too big to fail” — but instead “too big to save.”
This is a recipe for disaster. After all, a little over two months ago, near-defunct Wachovia Bank and Citigroup apparently got the official blessing for their shot-gun wedding, a deal which fell apart days later when Wells Fargo made a counter offer. It was not before long that Citigroup itself had to be bailed out by the U.S. government.
Large financial conglomerates which have mushroomed over the last ten years are creating an unacceptable systemic risk. It has become increasingly apparent that even the best-intentioned management simply does not have an informed view of the risk exposure of their one-stop shops.
Concentration of power in the financial sector also further enhances homogenization of risk management techniques, which leads to instant systemic failure when event risk materializes.
Double bubble burst
3) We must rethink the major policy objectives of the central bank model. Price stability is the key goal for many central banks. This is interpreted to mean a fight against consumer price inflation. In the United States, this dogmatic self-restraint induced a double bubble in housing and consumption that is at the heart of the current crisis.
Central banks should develop methodologies to measure asset price inflation and to counter such inflation, if observed, with monetary policy.
Balancing the books
4) A global financial market must be regulated and supervised by a global regulatory and supervisory body. As a first step, though, each jurisdiction must streamline its own regulatory and supervisory framework
From a regulatory perspective, we might embrace three core tenets: No more off-balance sheet accounting, no more offshore banking and no more non-bank banks.
We should also resist the calls for abandoning fair value accounting. It is hardly prudent to change the rules of the game in order to create a more favorable appearance of the balance sheets of our financial institutions.
As far as supervision is concerned, it should be brought under one umbrella covering banks, investment banks, hedge funds, insurance companies and other non-bank banks. This means that we look at the financial system in a holistic way.
Once such streamlining at the national level has been concluded, such national oversight should be integrated into a global oversight regime. This requires international standardization of regulation which will be politically difficult, but it will have the benefit of reducing regulatory arbitrage — both between industries and between countries. It will also require the establishment of an effective global supervisory body, at least for systemically important institutions.
Opportunity of a lifetime
These are just some proposals to make use of this unique opportunity to redesign our economic and financial model. Some are provocative, some controversial. Some have a proven record, others are innovative and new. All of them are intended to stimulate a discussion aimed at creating a stable economic and financial equilibrium.