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If Barofsky heads the SEC I’ll work for it
Neil Barofsky visited my Occupy group, Alternative Banking, this past Sunday. He was awesome.
We discussed the credit crisis, the recent outrageous HSBC ruling which quantified the cost banks near for money laundering for terrorists and drug lords at below cost, and the hopelessness, or on a good day the hope, of having a financial and regulatory system that will eventually work.
We discussed the incentives in the HAMP set-up, which explain why very few homeowners have actually received lasting relief from unaffordable mortgages. We discussed the incentives for fraud and other criminal behavior in the absence of real punishment, that too much money is being spent pursuing insider training because that’s what people understand how to do, and we discussed the reluctance of the regulators to litigate tough cases. We talked about how change has to come from the top, because all of these organizations are super hierarchical and require political will to get things done.
In the past year I was offered a job at the SEC, working as a quant in the enforcement division. Although I want to help sort out this mess, I haven’t felt that this job, which is relatively junior, would allow me to do that meaningfully.
But I came away from the meeting with Barofsky with this feeling: if we had someone in charge at the SEC like him who could speak truth to power and who is smart enough to see through economic jargon and bullshit well enough to understand incentives for fraud and lying, then I’d work there in a heartbeat.
Let’s just hope it doesn’t take another world-wide financial crisis before we get someone like that.
On Reuters talking about Occupy
I was interviewed a couple of weeks ago and it just got posted here:
Anti-black Friday ideas? (#OWS)
I’m trying to put together a post with good suggestions for what to do on Black Friday that would not include standing in line waiting for stores to open.
Speaking as a mother of 3 smallish kids, I don’t get the present-buying frenzy thing, and it honestly seems as bad as any other addiction this country has gotten itself into. In my opinion, we’d all be better off if pot were legalized country-wide but certain categories of plastic purchases were legal only through doctor’s orders.
One idea I had: instead of buying things your family and loved ones don’t need, help people get out of debt by donating to the Rolling Jubilee. I discussed this yesterday in the #OWS Alternative Banking meeting, it’s an awesome project.
Unfortunately you can’t choose whose debt you’re buying (yet) or even what kind of debt (medical or credit card etc.) but it still is an act of kindness and generosity (towards a stranger).
It begs the question, though, why can’t we buy the debt of people we know and love and who are in deep debt problems? Why is it that debt collectors can buy this stuff but consumers can’t?
In a certain sense we can buy our own debt, actually, by negotiating directly with debt-collectors when they call us. But if a debt-collector offers to let you pay 70 cents on the dollar, it probably means he or she bought it at 20 cents on the dollar; they pay themselves and their expenses (the daily harassing phone calls) with the margin, plus they buy a bunch of peoples’ debts and only actually successfully scare some of them into paying anything.
Question for readers:
- Is there a way to get a reasonable price on someone’s debt, i.e. closer to the 20 cents figure? This may require understanding the consumer debt market really well, which I don’t.
- Are there other good alternatives to participating in Black Friday?
Free people from their debt: Rolling Jubilee (#OWS)
Do you remember the group Strike Debt? It’s an offshoot of Occupy Wall Street which came out with the Debt Resistors Operation Manual on the one-year anniversary of Occupy; I blogged about this here, very cool and inspiring.
Well, Strike Debt has come up with another awesome idea; they are fundraising $50,000 (to start with) by holding a concert called the People’s Bailout this coming Thursday, featuring Jeff Mangum of Neutral Milk Hotel, possibly my favorite band besides Bright Eyes.
Actually that’s just the beginning, a kick-off to the larger fundraising campaign called the Rolling Jubilee.
The main idea is this: once they have money, they buy people’s debts with it, much like debt collectors buy debt. It’s mostly pennies-on-the-dollar debt, because it’s late and there is only a smallish chance that, through harassment legal and illegal, they will coax the debtor or their family members to pay.
But instead of harassing people over the phone, the Strike Debt group is simply going to throw away the debt. They might even call people up to tell them they are officially absolved from their debt, but my guess is nobody will answer the phone, from previous negative conditioning.
Get tickets to the concert here, and if you can’t make it, send donations to free someone from their debt here.
In the meantime enjoy some NMH:
Money market regulation: a letter to Geithner and Schapiro from #OWS Occupy the SEC and Alternative Banking
#OWS working groups Occupy the SEC and Alternative Banking have released an open letter to Timothy Geithner, Secretary of the U.S. Treasury, and Mary Schapiro, Chairman of the SEC, calling on them to put into place reasonable regulation of money market funds (MMF’s).
Here’s the letter, I’m super proud of it. If you don’t have enough context, I give a more background below.
What are MMFs?
Money market funds make up the overall money market, which is a way for banks and businesses to finance themselves with short-term debt. It sounds really boring, but as it turns out it’s a vital issue for the functioning of the financial system.
Really simply put, money market funds invest in things like short-term corporate debt (like 30-day GM debt) or bank debt (Goldman or Chase short-term debt) and stuff like that. Their investments also include deposits and U.S. bonds.
People like you and me can put our money into money market funds via our normal big banks like Bank of America. In face I was told by my BofA banker to do this around 2007. He said it’s like a savings account, only better. If you do invest in a MMF, you’re told how much over a dollar your investments are worth. The implicit assumption then is that you never actually lose money.
What happened in the crisis?
MMF’s were involved in some of the early warning signs of the financial crisis. In August and September 2007, there was a run on subprime-related asset backed commercial paper.
In 2008, some of the funds which had invested in short-term Lehman Brother’s debt had huge problems when Lehman went down, and they “broke the buck”. This caused wide-spread panic and a bunch of money market funds had people pulling money from them.
In order to avoid a run on the MMF’s, the U.S. stepped in and guaranteed that nobody would actually lose money. It was a perfect example of something we had to do at the time, because we would literally not have had a functioning financial system given how central the money markets were at the time, in financing the shadow banking system, but something we should have figured out how to improve on by now.
This is a huge issue and needs to be dealt with before the next crisis.
What happened in 2010?
In 2010, regulators put into place rules that tightened restrictions within a fund. Things like how much cash they had to have on hand (liquidity requirements) and how long the average duration of their investments could be. This helped address the problem of what happens within a given fund when investors take their money out of that fund.
What they didn’t do in 2010 was to control systemic issues, and in particular how to make the MMF’s robust to large-scale panic.
What about Schapiro’s two MMF proposals?
More recently, Mary Schapiro, Chairman of the SEC, made two proposals to address the systemic issues. In the first proposal, instead of having the NAV’s set at one dollar, everything is allowed to float, just like every other kind of mutual fund. The industry didn’t like it, claiming it would make MMF’s less attractive.
In the second proposal, Schapiro suggesting that MMF managers keep a buffer of capital and that a new, weird lagged way for people to remove their money from their MMF’s, namely if you want to withdraw your funds you’ll only get 97%, and later (after 30 days) you’ll get 3% if the market doesn’t take a loss. If it does take a loss, will get only part of that last 3%.
The goal of this was to distribute losses more evenly, and to give people pause in times of crisis from withdrawing too quickly and causing a bank-like run.
Unfortunately, both of Schapiro’s proposals didn’t get passed by the 5 SEC Commissioners in August 2012 – it needed a majority vote, but they only got 2.
What happened when Geithner and Blackrock entered the picture?
The third, most recent proposal, comes out of the FSOC, a new meta-regulator, whose chair is Timothy Geithner. The guys proposed to the SEC in a letter dated September 27th that they should do something about money market regulation. Specifically, the FSOC letter suggests that either the SEC should go with one of Schapiro’s two ideas or a new third one.
The third one is again proposing a weird way for people to take their money out of a MMF, but this time it definitely benefits people who are “first movers”, in other words people who see a problem first and get the hell out. It depends on a parameter, called a trigger, which right now is set at 25 basis points (so 25 cents if you have $100 invested).
Specifically, if the value of the fund falls below 99.75, any withdrawal from that point on will be subject to a “withdrawal fee,” defined to be the distance between the fund’s level and 100. So if the fund is at 99.75, you have to pay a 25 cent fee and you only get out 99.50, whereas if the fund is at 99.76, you actually get out 100. So in other words, there’s an almost 50 cents difference at this critical value.
Is this third proposal really any better than either of Schapiro’s first two?
The industry and Timmy: bff’s?
Here’s something weird: on the same day the FSOC letter was published, BlackRock, which is a firm that does an enormous amount of money market managing and so stands to win or lose big on money market regulation, published an article in which they trashed Schapiro’s proposals and embellished this third one.
In other words, it looks like Geithner has been talking directly to Blackrock about how the money market regulation should be written.
In fact Geithner has seemingly invited industry insiders to talk to him at the Treasury. And now we have his proposal, which benefits insiders and also seems to have all of the unattractiveness that the other proposals had in terms of risks for normal people, i.e. non-insiders. That’s weird.
Update: in this Bloomberg article from yesterday (hat tip Matt Stoller), it looks like Geithner may be getting a fancy schmancy job at BlackRock after the election. Oh!
What’s wrong with simple?
Personally, and I say this as myself and not representing anyone else, I don’t see what’s wrong with Schapiro’s first proposal to keep the NAV floating. If there’s risk, investors should know about it, period, end of story. I don’t want the taxpayers on the hook for this kind of crap.
Occupy in the Financial Times
Lisa Pollack just wrote about Occupy yesterday in this article entitled “Occupy is Increasingly Well-informed”.
It was mostly about Alternative Banking‘s sister working group in London, Occupy Economics, and their recent event this past Monday at which Andy Haldane, Executive Director of Financial Stability at the Bank of England spoke and at which Lisa Pollack chaired the discussion. For more on that event see Lisa’s article here.
Lisa interviewed me yesterday for the article, and asked me (over the screaming of my three sons who haven’t had school in what feels like months), if I had a genie and one try, what would I wish for with respect to Occupy and Alt Banking. I decided that my wish would be that there’s no reason to meet anymore, that the regulators, politicians, economists, lobbyists and bank CEO’s, so the stewards or our financial system and the economy, all got together and decided to do their jobs (and the lobbyists just found other jobs).
Does that count as one wish?
I’m digging these events where Occupiers get to talk one-on-one with those rare regulators and insiders who know how the system works, understand that the system is rigged, and are courageous enough to be honest about it. Alternative Banking met with Sheila Bar a couple of months ago and we’ve got more very exciting meetings coming up as well.
Are healthcare costs really skyrocketing?
Yesterday we had a one-year anniversary meeting of the Alternative Banking group of Occupy Wall Street. Along with it we had excellent discussions of social security, Medicare, and ISDA, including details descriptions of how ISDA changes the rules to suit themselves and the CDS market, acting as a kind of independent system of law, which in particular means it’s not accountable to other rules of law.
Going back to our discussion on Medicare, I have a few comments and a questions for my dear readers:
I’ve been told by someone who should know that the projected “skyrocketing medical costs” which we hear so much about from politicians are based on a “cost per day in the hospital” number, i.e. as that index goes up, we assume medical costs will go up in tandem.
There’s a very good reason to consider this a biased proxy for medical costs, however. Namely, lots of things that used to be in-patient procedures (think gallbladder operations, which used to require a huge operation and many days of ICU care) are now out-patient procedures, so they don’t require a full day in the hospital.
This is increasingly true for various procedures – what used to take many days in the hospital recovering now takes fewer (or they kick you out sooner anyway). The result is that, on average, you only get to stay a whole day in the hospital if something’s majorly wrong with you, so yes the costs there are much higher. Thus the biased proxy.
A better index of cost would be: the cost of the average person’s medical expenses per year.
First question: Is this indeed how people calculate projected medical costs? It’s surprisingly hard to find a reference. That’s a bad sign. I’d really love a reference.
Next, I have a separate pet theory on why we are so willing to believe whatever we’re told about medical costs.
I’ve been planning for months to write a venty post about medical bills and HMO insurance paper mix-ups (update: wait, I did in fact write this post already). Specifically, it’s my opinion that the system is intentionally complicated so that people will end up paying stuff they shouldn’t just because they can’t figure out who to appeal to.
Note that even the idea of appealing to authority for a medical bill presumes that you’ve had a good education and experience dealing with formality. As a former customer service representative at a financial risk software company, I’m definitely qualified, but I can’t believe that the average person in this country isn’t overwhelmed by the prospect. It’s outrageous.
Part of this fear and anxiety stems from the fact that the numbers on the insurance claims are so inflated – $1200 to be seen for a dislocated finger being put into a splint, things like that. Why does that happen? I’m not sure, but I believe those are fake numbers that nobody actually pays, or at least nobody with insurance.
Second question: Why are the numbers on insurance claims so inflated? Who pays those actual numbers?
On to my theory: by extension of the above byzantine system of insurance claims and inflated prices for everything, we’re essentially primed for the line coming from politicians, who themselves (of course) lean on experts who “have studied this,” that health care costs are skyrocketing and that we can’t possibly allow “entitlements” to continue to grow the way they have been. A couple of comments:
- As was pointed out here (hat tip Deb), the fact that the numbers are already inflated so much, especially in comparison to other countries, should mean that they will tend to go down in the future, not up, as people travel away from our country to pay less. This is of course already happening.
- Even so, psychologically, we are ready for those numbers to say anything at all. $120,000 for a splint? Ok, sounds good, I hope I’m covered.
- Next, it’s certainly true that with technological advances come expensive techniques, especially for end-of-life and neonatal procedures. But on the other hand technology is also making normal, mid-life procedures (gallbladders removal) much cheaper.
- I would love to see a few histograms on this data, based on age of patient or prevalence of problem.
- I’d guess such histograms would show us the following: the overall costs structure is becoming much more fat-tailed, as the uncommon but expensive procedures are being used, but the mean costs could easily be going down, or could be projected to go down once more doctors and hospitals have invested in these technologies. Of course I have no idea if this is true.
Third question: Anyone know where such data can be found so I can draw me some histograms?
Final notes:
- The baby boomers are a large group, and they’re retiring and getting sick. But they’re not 10 times bigger than other generations, and the “exponential growth” we’ve been hearing about doesn’t get explained by this alone.
- Assume for a moment that medical costs are rising but not skyrocketing, which is my guess. Why would people (read: politicians) be so eager to exaggerate this?
Bad news wish list
You know that feeling you get when, a few years after you went to a wedding of your friends, you find out they’re getting a divorce?
It’s not a nice feeling. It’s work for you, and nasty work at that: you have to go back over your memories of those two in the past years, where you’d been projecting happiness and contentment all this time, and replace it with argument and bitterness. Not to mention the sorrow and sympathy you naturally bestow on your friends.
If it happens enough times, which it has to me, then going to weddings at all is kind of a funereal affair. I no longer project happy thoughts towards the newly married couple. If anything I worry for them and cross my fingers, hoping for the best. You may even say I’ve lost my faith in the institution.
Considering this, I can kind of understand why some religions don’t allow divorce. If you don’t allow it, then the bad news will never come out, and you won’t have to retroactively fit your internal model of other people’s lives to reality. You can go on blithely assuming everyone’s doing great. While we’re at it, no kids are getting neglected or abused because we don’t talk about that kind of thing.
By way of unreasonable analogy, I’d like to discuss the lack of conversation we’ve seen by the presidential campaigns on both sides about the state of the financial system. I’m starting to think it’s part of the religion of politicians that they never talk about this stuff, because they treat it as an embarrassing failure along the lines of a catholic divorce.
Or maybe I don’t have to be so philosophical about it- is it religion, or is it just money?
I had trouble following much about the two national conventions, because it made me so incensed that nothing was really being discussed, and that it was all so full of shit. But one thing I managed to glean from the coverage of the “events” being sponsored by the various lobbyist groups at the two conventions is that, whereas most lobbyists sponsor events at one of the conventions, like the NRA sponsors something at the Republican convention and the unions sponsor stuff at the Democratic convention, the financial lobbyists sponsor huge swanky events at both.
I interpret this to mean that they are paying to not be discussed as a platform issue. They seem to have paid enough, because I don’t hear anything from the Romney camp about shit Obama has or hasn’t done, or shit Geithner has or hasn’t done.
In fact, there’s a “Stories I’d like to See” column in Reuters column entitled “Tales of a TARP built to benefit bankers, and waiting for CEOs to pay the price”, and written by Stephen Brill, which discusses this exact issue in the context of Neil Barofsky’s book Bailout, which I blogged about here. From the column:
A presidential campaign that wanted to call out the Obama administration for being too friendly to Wall Street and the banks at the expense of Main Street would be using Bailout as the cheat sheet that keeps on giving. But with the Romney campaign’s attack coming from the opposite direction – that the president and his team have killed the economy by shackling Wall Street – and with Romney on record in favor of allowing the mortgage crisis to “bottom out” with no government intervention, the former Massachusetts governor and his team have no use for Bailout.
The second half of the article is really good, asking very commonsensical question about the recent settlement BofA got from the SEC for blatantly lying to shareholders around the time they acquired Merrill Lynch. Specifically the author notes that the (current) shareholders are left paying the (2008) shareholders, which is dumb, but the asshole Ken Lewis, who actually lied doesn’t seem to be getting into any trouble at all. From the column:
And, as long as we’re talking about harm done to shareholders, why wouldn’t we now see a new, post-settlement shareholders’ suit not against the company but targeted only at Lewis and some of his former colleagues who got Bank of America into this jam in the first place and just caused it to pay out $2.4 billion? (The plaintiffs here could be any current shareholders, because they are the ones who are writing the $2.4 billion check.) Again, did the company indemnify Lewis and other executives against shareholder suits, meaning that if a shareholder now sues Lewis over this $2.4 billion settlement, the shareholder is once again only suing himself?
Can someone please sort this out?
I really like this idea, that we have a list of topics for people to sort out, even though it’s going to be bad news. What other topics should we ask for on our bad news wish list?
Student loans are a regressive tax
I don’t think this approach of looking at student loans is new, but it’s new to me. A friend of mine mentioned this to me over the weekend.
For simplicity, assume everyone goes to college. Next, assume they all go to similar colleges – similar in cost and in quality. We will revisit these assumptions later. Finally, assume that costs of college keep going up the way they’re going and that student loan interest rates stay high.
What this means when you put it all together is that sufficiently rich people, or more likely their parents, will pay a one-time very large fee to attend college, but then they’ll be done with it. The rest of the people will be stuck paying monthly fees that will never go away. Moreover, because the interest rates are pretty high, the total amount non-rich people pay over their lifetime is substantially more than what rich people pay.
This is essentially a regressive tax, whereby poor people pay more than rich people.
Other points:
- The government student loans don’t have interest rates that are extremely high, but there’s a limit of how much you can borrow with that program, which leads many people even now to borrow privately at much higher rates.
- In the case of government-backed student loans this “tax” is essentially going to the government. In the case of private student loans, the private creditors are receiving the tax.
- Since you can’t discharge student debt via bankruptcy, even private student debt, it really is a life-long tax. It’s even true that if you haven’t paid off your student debt by the time you retire, your social security payments get cut.
- What about our assumptions that all schools have the same quality? Not true. Rich people tend to go to better schools. This means the poor are paying a tax for an inferior service. Of course, it’s also true that truly elite schools like Harvard have excellent financial support for their poorer students. This means there’s a two-tier school system if you’re poor: you can go to a normal school and pay tax, or you can excel and get into an elite school and it will be free.
- What about our assumption that all schools have the same cost? Of course not true; we can look for better quality education for a reasonable price.
- What about our assumption that everyone goes to college? Not true, but it’s still true that going to college and finishing sets you up for far better wage earning than if you only have a high school diploma. And although going to college and not finishing may not, nobody think they’re the ones who won’t finish.
Conclusion: Either we have to keep costs down or we have to make college government-subsidized or we have to make student loan interest rates really low or we have to offset this regressive tax with a highly progressive income tax.
High frequency trading: how it happened, what’s wrong with it, and what we should do
High frequency trading (HFT) is in the news. Politicians and regulators are thinking of doing something to slow stuff down. The problem is, it’s really complicated to understand it in depth and to add rules in a nuanced way. Instead we have to do something pretty simple and stupid if we want to do anything.
How it happened
In some ways HFT is the inevitable consequence of market forces – one has an advantage when one makes a good decision more quickly, so there was always going to be some pressure to speed up trading, to get that technological edge on the competition.
But there was something more at work here too. The NYSE exchange used to be a non-profit mutual, co-owned by every broker who worked there. When it transformed to a profit-seeking enterprise, and when other exchanges popped up in competition with it was the beginning of the age of HFT.
All of a sudden, to make an extra buck, it made sense to allow someone to be closer and have better access, for a hefty fee. And there was competition among the various exchanges for that excellent access. Eventually this market for exchange access culminated in the concept of co-location, whereby trading firms were allowed to put their trading algorithms on servers in the same room as the servers that executed the trades. This avoids those pesky speed-of-light issues when sitting across the street from the executing servers.
Not surprisingly, this has allowed the execution of trades to get into the mind-splittingly small timeframe of double-digit microseconds. That’s microseconds, where from wikipedia: “One microsecond is to one second as one second is to 11.54 days.”
What’s wrong with it
Turns out, when things get this fast, sometimes mistakes happen. Sometimes errors occur. I’m writing in the third-person passive voice because we are no longer talking directly about human involvement, or even, typically, a single algorithm, but rather the combination of a sea of algorithms which together can do unexpected things.
People know about the so-called “flash crash” and more recently Knight Capital’s trading debacle where an algorithm at opening bell went crazy with orders. But people on the inside, if you point out these events, might counter that “normal people didn’t lose money” at these events. The weirdness was mostly fixed after the fact, and anyway pension funds, which is where most normal people’s money lives, don’t ever trade in the thin opening bell market.
But there’s another, less well known example from September 30th, 2008, when the House rejected the bailout, shorting stocks were illegal, and the Dow dropped 778 points. The prices as such common big-ticket stocks such as Google plummeted and, in this case, pension funds lost big money. It’s true that some transactions were later nulled, but not all of them.
This happened because the market makers of the time had largely pulled their models out of the market after shorting became illegal – there was no “do this algorithm except make sure you’re never short” button on the algorithm, so once the rule was called, the traders could only turn it all of completely. As a result, the liquidity wasn’t there and the pension funds, thinking they were being smart to do their big trades at close, instead got completely walloped.
Keep this in mind, before you go blaming the politicians on this one because the immediate cause was the short-sighted short-selling ban: the HFT firms regularly pull out of the market in times of stress, or when they’re updating their algorithms, or just whenever they want. In other words, it’s liquidity when you need it least.
Moreover, just because two out of three times were relatively benign for the 99%, we should not conclude that there’s nothing potentially disastrous going on. The flash crash and Knight Capital have had impact, namely they serve as events which erode our trust in the system as a whole. The 2008 episode on top of that proved that yes, we can be the victims of the out-of-control machines fighting against each other.
Quite aside from the instability of the system, and how regular people get screwed by insiders (because after all, that’s not a new story at all, it’s just a new technology for an old story), let’s talk about resources. How much money and resources are being put into the HFT arena and how could those resources otherwise be used?
Putting aside the actual energy consumed by the industry, which is certainly non-trivial, let’s focus for a moment on money. It has been estimated that overall, HFT firms post about $80 billion in profits yearly, and that they make on the order of 10% profit on their technology investments. That would mean that there’s in the order of $800 billion being invested in HFT each year. Even if we highball the return at 25%, we still have more than $300 billion invested in this stuff.
And to what end?
Is that how much it’s really worth the small investor to have decreased bid-ask spreads when they go long Apple because they think the new iPhone will sell? What else could we be doing with $800 billion dollars? A couple of years of this could sell off all of the student debt in this country.
What should be done
Germany has recently announced a half-second minimum for posting an share order. This is eons in current time frames, and would drastically change how trading is done. They also want HFT algorithms to be registered with them. You know, so people can keep tabs on the algorithms and understand what they’re doing and how they might interact with each other.
Um, what? As a former quant, let me just say: this will not work. Not a chance in hell. If I want to obfuscate the actual goals of a model I’ve written, that’s easier than actually explaining it. Moreover, the half-second rule may sound good but it just means it’s a harder system to game, not that it won’t be gameable.
Other ideas have been brought forth as to how to slow down trading, but in the end it’s really hard to do: if you put in delays, there’s always going to be an algorithm employed which decides whose trade actually happens first, and so there will always be some advantage to speed, or to gaming the algorithm. It would be interesting but academically challenging to come up with a simple enough rule that would actually discourage people from engaging in technological warfare.
The only sure-fire way to make people think harder about trading so quickly and so often is a simple tax on transactions, often referred to as a Tobin Tax. This would make people have sufficient amount of faith in their trade to pay the tax on top of the expected value of the trade.
And we can’t just implement such a tax on one market, like they do for equities in London. It has to be on all exhange-traded markets, and moreover all reasonable markets should be exchange-traded.
Oh, and while I’m smoking crack, let me also say that when exchanges are found to have given certain of their customers better access to prices, the punishments for such illegal insider information should be more than $5 million dollars.
We are the 47%
A wee moment of silence for the Romney campaign: you gave your life for the sake of an honest national conversation about class warfare. Do not think you died in vain.
The Debt Resistors’ Operation Manual
A newer group grown out of Occupy called Strike Debt is making waves with their newly released Debt Resistors’ Operation Manual, available to read here with commentary from Naked Capitalism’s Yves Smith and available for download as a pdf here.
Their goal is compelling, and they state it in their manifesto on page 2:
We gave the banks the power to create money because they promised to use it to help us live healthier and more prosperous lives—not to turn us into frightened peons. They broke that promise. We are under no moral obligation to keep our promises to liars and thieves. In fact, we are morally obligated to find a way to stop this system rather than continuing to perpetuate it.
This collective act of resistance may be the only way of salvaging democracy because the campaign to plunge the world into debt is a calculated attack on the very possibility of democracy. It is an assault on our homes, our families, our communities and on the planet’s fragile ecosystems—all of which are being destroyed by endless production to pay back creditors who have done nothing to earn the wealth they demand we make for them.
To the financial establishment of the world, we have only one thing to say: We owe you nothing. To our friends, our families, our communities, to humanity and to the natural world that makes our lives possible, we owe you everything. Every dollar we take from a fraudulent subprime mortgage speculator, every dollar we withhold from the collection agency is a tiny piece of our own lives and freedom that we can give back to our communities, to those we love and we respect. These are acts of debt resistance, which come in many other forms as well: fighting for free education and healthcare, defending a foreclosed home, demanding higher wages and providing mutual aid.
Here’s what I love about this manual and this Occupy group:
- They position the current debt and money situation as a system that is changeable and that, if it isn’t working for the 99%, should be changed. Too often people assume that nothing can be done.
- They explain things about debt, credit scores, and legal rights in plain English.
- They give real advice to people with different kinds of problems. For example, here’s an excerpt for people battling a mistake in their credit report:
- They also give advice on: understanding your medical bills, disputing incorrect bills, negotiating with credit card companies, and fighting for universal health care.
- They give background on why there’s so much student debt and mortgage debt and what the consequences of default are or could be.
- They talk about odious municipal debt, and give some background on that seedy side of finance.
- They describe predatory services for the underbanked like check-cashing services and payday lenders – they also explain in detail how to default on payday loans.
- They explain pre-paid debit cards and their possibilities.
- They talk about debt collectors and what you need to know to deal with them.
- They explain the ways to declare bankruptcy and the consequences of bankruptcy.
They explicitly create solidarity with all kinds of debtors with this conclusion: 
The threat of large-scale debt resistance is a great idea for putting pressure on the creditors to at least negotiate reasonably, as they already negotiate when large companies want to. It basically levels the playing field that already exists, i.e. addresses the double standards we have with respect to debt when we compare corporations to people (see my posts here and here for example).
In spite of this potential power in debt resistance, I have historically had reservations about the idea of asking a bunch of people, especially young people, to default on their debt, because I’m concerned for them individually – the banks, debt collection agencies, and other creditors have all the power in this situation – see this New York Times article from this morning if you don’t believe that.
Here’s the thing though: this manual does an exceptional job of educating people about the actual consequences of default, so they can understand what their options are and what they’d be getting into if they join a resistance movement. It’s actual information, written for struggling people, the very people who need this advice.
Thank you, Strike Debt, we needed this. I’m going to try to make it tomorrow morning for the protest.
Occupy Wall Street is one year old
It’s an exciting weekend here in New York: Monday is the one-year anniversary of the occupation of Zuccotti Park. And even though I didn’t know about the original occupation for a few days, when FogOfWar gave his first account of it here on mathbabe, and even though the Alternative Banking group didn’t start until October 19th, it still makes me super proud to think about how much impact the overall movement has had in a year.
Mind you, there are a couple of very worrying things, especially about this weekend. For example, the NYPD ultimately used paramilitary force to clear Zuccotti and they seem to continue to be overbearing in their methods now: they are working with the Zuccotti Park management company in unconstitutional ways and they have all sorts of checkpoints set up for the weekend.
I think I know why Bloomberg and other mayors are afraid of us. We are the only thing balancing the current regime, both sides of which are entirely bought by the financial lobbyists. Some people I’ve talked to, including my son, think Occupy should form a political party. I can see some interesting reasons for and against; I’ll follow up with a post with them soon.
I don’t think it’s a silly idea, in any case. In this article entitled “How the Occupy movement may yet lead America”, author Reihan Salam says:
One year on, the encampments that had sprung up in Lower Manhattan and in cities, college campuses and foreclosed homes across the country have for the most part been abandoned. And so at least some observers are inclined to think, or to hope, that the Occupy movement has been of little consequence. That would be a mistake. Occupy’s enduring significance lies not in the fact that some small number of direct actions continue under its banner, or that activists have made plans to commemorate “S17” in a series of new protests. Rather, Occupy succeeded in expanding the boundaries of our political conversation, creating new possibilities for the American left.
As our slow-motion economic crisis grinds on, it is worth asking: How might these possibilities be realized? For some, Occupy was a liberating experience of collective effervescence and of being one with a crowd. As one friend put it, it was “the unspeakable joy of taking to the streets, taking spaces, exploring new relations and environments” that resonated most. For others, it created a new sense of cross-class solidarity. Jeremy Kessler, a legal historian who covered the Occupy movement for the leftist literary journal N + 1 and the New Republic, senses that it has already shaped the political consciousness of younger left-liberals. “There is more skepticism towards the elite liberal consensus,” and so, “for instance, there is more support for the Chicago teachers union and more wariness towards anti-union reformers.” Ideological battle lines have in this sense grown sharper. Yet it is still not clear where Occupy, and the left, will go next.
Hear, hear – well said, although I don’t think it’s necessarily “leftist” to want a system that’s not rigged. In any case, I consider it my job as an individual, and as a member of the Alternative Banking group, to add fuel to that fire of skepticism.
We need to know there’s a war going on, and it’s against us, and we’re losing. We are the 99%.
To that end, as I’ve announced before, we have created the 52 Shades of Greed card deck, which is fully funded and has a blurb in the New York Times‘s City Room.
Videos and a love note
A quick post today because I gotta get these kids off to their first day of school. WOOHOOO!!
- I just learned about this video which was made at the first DataKind datadive I went to (it was called Data Without Borders then). The datadive coverage is in the first 6 minutes. It’s timely because I’m doing it again this coming weekend with NYC Parks data. I hope I see you there!
- Next, please check out my friend and fellow occupier Katya’s two videos, which she produced herself: here and here. She has a gift, no?
- Finally, readers, thanks for all the awesome comments lately (and always). I really appreciate the feedback and the thought you’ve put into them, and I’ve been learning a lot. Plus I have a lot of books to read based on your suggestions.
52 Shades of Greed cards fundraiser now up: please help! (#OWS)
The 52 Shades of Greed card deck fundraiser has begun. It’s a joint project of Alternative Banking and a collection of 26 artists and illustrators (you can learn more about the team here).
We’re trying to raise $15,000 to pay for the printing costs and the art. If we raise more money we will try to hold an art show, with talks about the financial system by Alt Banking folk.
Here’s my favorite card, it’s Larry Summers, the king of hearts:
Note he’s a liquidity fairy (I blogged about that here). Or wait, maybe it’s Jamie Dimon, jack of clubs:
Please go to the fundraiser and donate now! You can get the cards as well as other goodies. Amazing!
Fair versus equal
In this multimedia presentation, Alan Honick explores the concept of fairness with archaeologist Brian Hayden. It’s entitled “The Evolution of Fairness”, and it’s published by Pacific Standard Magazine.
It’s a series of small writings and short videos which studies evidence of the emergence of inequality in the archaeological record of fishing at a place called Keatley Creek in British Columbia. While it isn’t the most convenient thing to go through, it’s worth the effort. Here are the highlights for me:
When the main concern of the people living at Keatley Creek was subsistence, their society was egalitarian – they shared everything and it wasn’t okay to hoard. Specifically, anyone found trying to game the system was ejected from society, which typically meant death.
As fishing technology improved, the average person could provide for themselves in normal times quite easily, and private ownership became acceptable and common. Those who game the system were no longer ejected, partly because the definitions were different.
At this point, Hayden suggests, people began to do things in small groups that seemed perfectly fair (“I’ll give you 20 fish loaves if you let me marry your daughter” or “Come to my feast tonight and invite me to your feast next week”) and moreover seemed like a private arrangement, until it became sufficiently widespread so that two things happened:
- The guys who didn’t have or couldn’t borrow 20 fish loaves couldn’t get married, or similarly the guys who couldn’t afford to serve a feast never entered into the feast-sharing ritual, and
- The truly rich guys would sometimes have a feast for everyone, which meant the poorer would “get something for nothing” and everyone would gain. Another way of saying this is that the poorer people would allow themselves to be coopted into the unequal system by the price of this free food. Those people who didn’t give feasts or cooperate with the free feasts were outcasts.
An interesting thing happened when Hayden goes to villages in the Mayan Highlands in Mexico and Guatemala which has similar size and social structure as the one on Keatley Creek (see the video on this page). He interviewed people about how the “rich” behaved in times of starvation. Did they take on a managerial role? Did they share and help out in bad times? This is referred to as “communitarian”.
Turns out, no, they exploited the people in the village in the hopes of having better status by the time things got better. They sold maize at exorbitant prices, took outrageous amounts of land for maize, etc. The driving force was individual self-interest.
The overall narrative describes the shifting definition of fairness as things became less and less equal, and how eventually the elite, who essentially got to define fairness, didn’t need to listen to the objections of the poor at all, because they had no power.
Sound familiar?
The author Alan Honick concludes by looking at our society and asks whether campaign finance laws, and Citizens United, is that different in effect from what we saw happening on Keatley Creek. He also points out that, because we humans are so individually obsessed with increasing our status, we can’t seem to get together to address really important issues such as global warming.
Stuff you might want to know about
I have a backlog of things to tell you about that I think are either awesome or scary but important:
- In the awesome category, my friend Anupam just started a new company that helps get volunteers get connected with animal shelters. It’s called BarkLoudly , and you can learn more about it here.
- Again in the awesome category, there’s been progress on seeing if scientific claims can be reproduced. This is for lab experiments, which I’d think would be harder than what I want to do for data models, but what do I know. It’s called The Reproducibility Initiative, run by the Science Exchange, and you can also read about it in this article from Slate.
- On the scary side, read this article by my friend Moe on the questionable constitutionality of student debt laws in this country, and this article on how hard it is to get rid of student debt even through the “undue hardship” route, which involves a “certainty of hopelessness” test. Outrageous.
- Also in the scary category, an argument against the new pill for HIV, written by an entertaining blogger.
Citigroup’s plutonomy memos
Maybe I’m the last person who’s hearing about the Citigroup “plutonomy memos”, but they’re blowning me away.
Wait, now that I look around, I see that Yves Smith at Naked Capitalism posted about this on October 15, 2009, almost three years ago, and called for people to protest the annual meetings of the American Bankers Association. Man, that’s awesome.
So yeah, I’m a bit late.
But just in case you didn’t hear about the plutonomy memos (h/t Nicholas Levis), which were featured on Michael Moore’s “Capitalism: a Love Story” as well, then you’ll have to read this post immediately and watch Bill Moyer’s clip at the end as well.
The basic story, if you’re still here, is that certain “global strategists” inside Citigroup drafted some advice about investing based on their observation that rich people have all the money and power. They even invented a new word for this, namely “plutonomy.” This excerpt from one of the three memos kind of sums it up:
We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization… Since we think the plutonomy is here, is going to get stronger… It is a good time to switch out of stocks that sell to the masses and back to the plutonomy basket.
The lawyers for Citigroup keep trying to make people take down the memos, but they’re easy to find once you know to look for them. Just google it.
Nothing that surprising, economically speaking, except for maybe the fact that their reaction, far from being outrage, is something bordering on gleeful. But they aren’t totally complacent:
Low-end developed market labor might not have much economic power, but it does have equal voting power with the rich.
This equal voting power seems to be a pretty serious concern for their plans. They go on to say:
A third threat comes from the potential social backlash. To use Rawls-ian analysis, the invisible hand stops working. Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Pluto-participant. Why kill it off, if you can join it? In a sense this is the embodiment of the “American dream”. But if voters feel they cannot participate, they are more likely to divide up the wealth pie, rather than aspire to being truly rich.
Could the plutonomies die because the dream is dead, because enough of society does not believe they can participate? The answer is of course yes. But we suspect this is a threat more clearly felt during recessions, and periods of falling wealth, than when average citizens feel that they are better off. There are signs around the world that society is unhappy with plutonomy – judging by how tight electoral races are.
But as yet, there seems little political fight being born out on this battleground.
This explains to me why Occupy was treated the way it was by Bloomberg’s cops and the entrenched media like the New York Times (and nationally) – the idea that people are opting out and no longer believe they have a chance of being a Pluto-participant is essentially the most threatening thing they can think of. Interestingly, they also say this:
A related threat comes from the backlash to “Robber-barron” economies. The
population at large might still endorse the concept of plutonomy but feel they have lost out to unfair rules. In a sense, this backlash has been epitomized by the media coverage and actual prosecution of high-profile ex-CEOs who presided over financial misappropriation. This “backlash” seems to be something that comes with bull markets and their subsequent collapse. To this end, the cleaning up of business practice, by high-profile champions of fair play, might actually prolong plutonomy.
This is what Dodd-Frank has done, to some extent: a law that makes things seem like they’re getting better, or at least confuses people long enough so they lose their fighting spirit.
Finally, from the third memo:
➤ What could go wrong?
Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more ‘equitable’ share of wealth.
Note the perspective: what could go wrong. Lest we wonder who inititated class warfare.
#OWS update
I’m happy to show you that Alternative Banking now has a working blog, thanks to a newer member Nicholas Levis. He blogged recently about a Reality Sandwich event I went to last Wednesday, where David Graeber, author of Debt: the first 5000 years was speaking. Interesting and stimulating.
We also have a playing card project called “52 Shades of Greed” which is coming out soon. Check out some of the amazing art here.
Finally, we are about to launch a Kickstarter campaign for our “move your money” app, as soon as I figure out how to accept the money without doing something illegal. Please tell me if you have experience with such things!
More exciting things in the works which I can’t talk about yet. I’ll keep you updated.
Someone didn’t get the memo about regulatory capture
So there’s this guy named Benjamin Lawsky, and he’s the New York State Superintendent of Financial Services. Last week he blew open a case against a British bank named Standard Chartered for money laundering and doing business with Iran.
The other regulators don’t like his style one bit, even though he managed to force Standard Chartered to pay $340 million for their misdeeds, as well as look like bad guys. I’ll get back to why the other regulators are pissed but first a bit more on the settlement.
What’s not cool about a fine is that nobody goes to jail and they continue business as usual, hopefully without the money laundering (their stock has mostly recovered as well).
What is cool about the $340 million fine is that it took almost no time compared to other settlements with banks (a nine month investigation before the blowup last week) and that it’s actually pretty big – bigger, for example, then the proposed settlement SEC is making with Citigroup which judge Rackoff blocked for shorting their clients in 2008 and not admitting wrongdoing.
In this case of Standard Chartered, they may not be admitting wrongdoing but we’ve all already read the evidence, as well as the smoking gun email:
The business chugged along even after the banking unit’s chief executive in the Americas warned in a 2006 memo that the company and its management might be vulnerable to “catastrophic reputational damage” and “serious criminal liability.”
According to the regulatory order, a bank official in London replied: “You f- Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”
[Aside: do you think, being a polite Brit, that this guy actually wrote "f-" in his email?]
Back to the other regulators. They are so used to working for the banks, it is inconceivable to them to publicize damning evidence before giving the heads up to the bank in question looking for a quiet settlement. That’s the way they do things. And then they never get much money, and nobody ever goes to jail. Oh, and it takes forever.
They argue that this is because they don’t have enough resources to go the distance with lawyers, but it’s also because their approach is so weak.
So naturally they’ve been pretty upset that Lawsky has balls when they don’t, especially since he doesn’t have nearly the resources that the SEC has.
My favorite ridiculous argument against Lawsky and his approach came from this article I read yesterday on Reuters. It stipulates that Lawsky is creating an environment where there’s a possibility of regulatory arbitrage. From the article:
But a central lesson of the financial crisis was the need for regulators to better cooperate and share information. Working at cross purposes creates opportunities for what’s known as “regulatory arbitrage,” whereby banks circumvent regulations by exploiting rivalries among their various overseers.
Um, what? That whole mindset is clearly off.
The goal would be the regulators get to decide who’s the bad guy, not the banks. And don’t tell me loopholes in the regulatory structure are introduced by having a regulator willing to do his job without sucking everybody’s dick first. Please.
And if I’m a regulator, and if it would work better to share my information with Lawsky to do my job as a regulator, you better believe I’m willing to share it with him if I can get credit alongside him for exposing illegal activities. That is, if I really want to expose illegal activities.
52 Shades of Greed card decks now available for purchase!
