Thursday, December 24, 2009

How Goldman secretly bet on the U.S. housing crash | McClatchy

Here is some interesting reading for the holidays. This article makes one wonder about accountability and conflict of interest on Wall Street.
Have a Merry Christmas and a Prosperous New Year.
How Goldman secretly bet on the U.S. housing crash McClatchy

Tuesday, December 15, 2009

Thursday, December 3, 2009

Gold & Harmonic Price Confluence

* right click the chart for a larger view in a new tab or window *

SPOT GOLD 1975-2009: The chart shown above indicates that there is a confluence of price harmonics @ the 1240-1260 area.

1.50X 1976 low -1980 high $1242

1.618X 1980 high -1999 low $1238

2.00X 1999 low - 2006 high $1208

1.272X 1999 low - 2008 high $1246

1.618X 2008 high - 2008 low $1252

The orange fan lines emanating from the 1976 low and touching various high and low pivots between 1980 and 1990 have indicated support and resistance during the bull market from 1999. There is a 3 point fan-line indicating resistance in the 1225-1250 area.

The gold market is becoming overbought and could find substantial resistance just above the recent price of 1220.

Thursday, November 12, 2009

The Failure of Business Schools.

Aristotle distinguishes between two categories of virtue: intellectual and moral. These virtues are differentiated in line with his perception of the soul. Intellectual virtue includes scientific knowledge (episteme), technical understanding (techne), intuitive reason and practical and philosophic wisdom. Business schools tend to concentrate on episteme and techne in order to inculcate students with the most up to date tools in which to enter a competitive and profit oriented social paradigm. The intellectual virtues acquired are a consequence of teaching and can only blossom through experience, whereas moral virtue is acquired by habituation. The exercise of intellectual virtue allows us to make choices that are based on understanding, practical wisdom and good sense—resulting in judgments that are fair and equitable. Intellectual virtues are required to allow for the habituation of moral virtue which in turn facilitates actions that are aimed towards attainment of an end which all men have in common—happiness (eudemonia). Rational deliberation using the intellectual virtues and actions that incorporate moral virtue are the means by which this end is attained. I believe this is where our education system—not exclusively business schools—fail to indoctrinate students towards recognizing the teleological nature of mankind.

In his critique of modernity MacIntyre (1984) points out that society has lost the concept of a teleological purpose to life and, in lieu of pursuing eudaimonia, has directed the actions of man towards a tainted and shortsighted goal—one directed towards the fulfillment of self-interest with little or no consideration directed towards the community. The cultural milieu of emotivism has produced a society where moral judgment is not grounded n any rational method but merely results from the projection of personal preferences in the most convincing of manners. Emotivism can be best understood by the embodiment of what is the moral life through the roles archetypal characters play in society. MacIntyre utilizes three typical characters to present his argument: the rich aesthete, the manager and the therapist. It is in the role of manager that we find the rationale of producing graduates of business schools. “The manager represents in his character the obliteration of the distinction between manipulative and non-manipulative social relations” (MacIntyre 1984: 30). The manager treats ends as given, concentrating his intellectual skills on technique and effectiveness.

While business schools have excelled at producing graduates that demonstrate competence in engineering investment products based on complex mathematical models (derivatives, ETFs, Swaps etc.) and implementing their exceptional ability at marketing and optimizing productivity, little has been done to enlighten the student as to how to use his/her acquired intellectual virtues in a manner which promotes morality. Although students leave the university environment excelling with intellectual resources, there is no attempt being made to demonstrate how these attributes can be used to habituate excellence of character that serve to better oneself and the community. Business schools tend to minimize their responsibility to indoctrinate students with a sense of moral obligation or a proclivity towards the pursuit of moral excellence. Since business practices take place within a corporate community, business ethics education should focus on the role and responsibilities of an individual within such a community. Although it can be argued that ethics cannot be ‘taught’—it is a cop-out that virtue cannot be taught. It is the connection between intellectual virtue and moral virtue that our business schools have chosen to shirk.
I believe that professors of business ethics provide an essential aspect to the education of future captains of industry and that the subject of business ethics should be taken much more seriously by those who are responsible for the determination of the curriculum at business schools. Too often business ethics courses are considered by students to be an annoying but necessary elective that is required for graduation. Practical reasoning and business ethics should be requisite courses at all business schools and the importance of them should be stressed so as to compel the student to comprehend the vital connection between intellectual virtue and moral virtue.

Thursday, September 17, 2009

Have The American People Forsaken Capitalism?

It is with some bemusement that I watch the various factions in Washington, Wall Street and, of course, the media expound on the issue of ‘the socialization’ of America. Radical pundits on the right warn of the dire consequences of President Obama’s ‘apocalyptic’ move toward the political equivalence of Hitler’s Third Reich or Stalin’s despotic communist regime. Rush Limbaugh in his infinite wisdom stated: "This is a full-fledged attack on capitalism, and the leftist Democrats have been seeking this for the longest time…"

On the other side of the debate, politically engaged documentary maker Michael Moore warns of the evils of capitalism while contradictorily lamenting over the free enterprise economy of the 1950s—contrasting it to the recent debacle instigated by the financial alchemists of Wall Street. Although Limbaugh and Moore (feels weird to type those names so close together) represent the fringe of the debate, the more moderate voices have made compelling arguments in defense of their respective positions with regard to the state of political economy in America. But perhaps both factions are mistaken: The warning of impending socialism at the hands of the Obama Administration or the call for socialism to save us all from the evils of capitalism is missing the point. Could it be, as many headlines suggest, that the America people are abandoning capitalism?—or—is capitalism abandoning ‘The People”?

% of Stock Market held by Institutional Investors


Direct Ownership of Stock held by American Households
Since the 1950s individual ownership of equity in American corporations has declined precipitously and has been replaced by institutional ownership—mostly comprised of pension funds and money management firms, including mutual funds. As a result of the institutionalization of participation in the free market economy individuals have forfeited their right to participate directly in the process of corporate governance. The result of this change in participation has placed the onus of accountability and responsibility on the fiduciaries that are entrusted to manage individuals’ savings. As has been referred to in the previous blogs, Adam Smith opined that “being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.” Circumstances on Wall Street attest to the validity of Smith’s insightful observation and have highlighted the conflicts of interest inherent in managed financial services. For instance, fees associated with managing money have been shown to have a significant detrimental effect on returns over both the short term and long term horizons, while being a tempting reward for accumulating vast amounts of money under administration. For example, $10000 earning a compounded rate of 8% for 25 years will become $68500, whereas, if you deduct a 1.5% annual management fee the result is $48300. Conflict of interest, which can lead to a violation of the expected level of loyalty in a fiduciary relationship, is difficult to avoid in the securities industry since conflict plays an integral role in the economic nature of the business. John Boatright in his recent book Ethics in Finance summarizes the ubiquitous conflict of interest dilemma:
“The inhabitants of Wall Street are motivated primarily by self-interest and can be induced to serve any master only within limits. The challenge, therefore, is not to prevent conflicts of interest in financial services but to manage them in a workable financial system” (Boatright 2008: 51).

Another problem of entrusting ones savings to a management firm stems from the fact that there has been increasing pressure on money managers to focus on investment strategies that concentrate short-term returns in equity markets, rather than traditional long-term investing based on durable intrinsic corporate value. In a 2005 WSJ article John C. Bogle points out that from 1950 to 1965, equity mutual funds turned over their portfolios at an average rate of 17% per year; in 1990-2005, the turnover rate averaged 91% per year. In earlier decades ‘Joe Public’ would take pride in having his shares of GM, IBM, General Electric etc. in a safety deposit box at his local bank or in safekeeping at the regional brokerage house. Today, Joe Public’s savings are abstract holdings being managed by ‘experts’ in a distant locale. The individual’s intimate connection with American free enterprise has vanished into the annals of investment history. It seems that Wall Street has replaced investing in America's future with speculating on America's credit.

A relatively recent development threatening the conventional concept of capitalism is the advent of Sovereign Wealth Funds. (SWF) SWFs are becoming a major force in international capital markets and will become increasingly important as globalization becomes an entrenched reality affecting both the culture and economy of many nations. Tremendous international wealth transfers, as exhibited by the recent global econometrics, portend further pressures being placed upon the structure of corporate ownership. This in combination with the foreign exchange reserves being held by countries such as China ($2132 billion) will continue to diminish the levels of direct domestic participation of the individual in the free market system

The cover story of Business Week in September 2000, during the boom times before the bust, indicated that Americans think business has gained too much power over too many aspects of their lives. Deregulation, globalization and corporate consolidation have contributed to the concerns expressed by individuals. It can be safely assumed that in light of the 2008 financial meltdown, individuals’ trepidation toward corporate control of their lives has only increased. Further aggravating the diminution of individual participation in the economy is the increased predominance of corporate lobbyists who have influenced politicians to the extent that government legislation often equates to de facto corporate policy, superseding policies directed towards the enhanced well-being of the individual.

The concept of free market capitalism envisioned by Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations was intended to enhance the lives of individuals by facilitating the pursuit of ones own self interest, encouraging innovation through the division of labour and distributing wealth through freedom of trade. Smith did not intend that globalized corporate conglomerates were the ‘shopkeepers’ when he stated that: "To found a great empire for the sole purpose of raising up a people of customers, may at first sight, appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers." Smith would have contested the contemporary capitalist paradigm due to the concentration of economic power and the diminished role of the individual in the distribution of the wealth gernerated by free markets. He certainly would not have considered a corporate plutocracy as being the equivalent of a shopkeeper. Smith would likely concur with Noam Chomsky's view on who are the antagonists of individual liberty:
"An array of mega-corporations, often linked to one another by strategic alliances, administering a global economy which is in fact a kind of a corporate mercantilism tending toward oligopoly in most sectors, heavily reliant on state power to socialize risk and cost and to subdue recalcitrant elements."

Libertarians are ideologically committed to the belief that individual liberty is both the intrinsic and normative primary concern of a free society. It is bewildering to see the right wing of the American political spectrum, who claim to embrace the principles of liberal individualism, condone the Darwinian transformation of a system of free market capitalism—intended by Adam Smith to distribute wealth amongst hard working innovative individuals—into an economic system that marginalizes and alienates the individual from the economic process.. The American people have not abandoned capitalism: Capitalism has abandoned the American people—abetted by the politicians they elected to represent their collective and individual interests.

Tuesday, September 8, 2009

Credit Rating Agencies and the Abandonment of Excellence

As the ramifications of the 2008 financial panic continue to illustrate the extent of the damage inflicted upon the global economy, it is indeed reassuring to see that Wall Street has not lost its sense of humour. The hilarity stems from the fact that desperate, yet imaginative, lawyers on behalf of the major credit rating agencies (CRA) presented arguments that investors can’t sue the firms over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights. A U.S. District Judge in New York rejected the arguments, forcing them and Morgan Stanley, which was also sued, to respond to fraud charges in a class-action by investors claiming the raters hid the risks of securities linked to subprime mortgages. Anyone familiar with the workings of Wall Street knows that—like lunches—nothing is ‘free’. If the judge had accepted the defense argument, an entirely knew cottage industry could have sprung to life—perhaps it would be coined as “Slippery Slope Defense Attorneys.” Financial Advisors that enticed clients to invest in ‘unsuitable investments’—the catch all phrase for contraventions of fiduciary duties—could claim that the opinion was just the FA exercising his right to free speech. The CPA firm, after signing off on the financial statements of a bogus company, could clamber into court with their attorney claiming that rendering their opinion was simply a matter of applying their first amendment rights. Perhaps the once venerable Arthur Andersen would still exist if this bizarre legal strategy had been accepted by the courts.

Blaming the credit rating agencies for the demise of the commercial mortgage-backed securities (CMBS) market and the ensuing destruction that occurred in global financial markets is pointless since there is ample culpability to be apportioned throughout the social order. However, the individuals who contributed to the alleged transgressions of the CRAs exemplify the individual’s role in creating the moral morass that has permeated Western culture.

Many of the executives of the CRAs have the designation CFA after their name. Attaining the esteemed designation of Chartered Financial Analyst is acknowledgment that an individual has the utmost level of knowledge in the securities industry. To become a CFA, an individual must not only demonstrate superior knowledge of advanced investment strategies and financial acumen, but he must also exhibit acute awareness of the ethical dimensions affecting the investment industry. An important goal of CFA Institute is to ensure that the organization and its members develop, promote, and follow the highest ethical standards in the investment industry. The CFA Institute Code of Ethics and Standards of Professional Conduct is a set of principles that define the professional conduct that the CFA Institute expects from its members. Rules and standards of practice are admirable initiatives and should be vigorously promoted, but perhaps Plato best expressed the reality of regulation in society: “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.”

To become a CFA one has to be adept in what Aristotle would call techne (technical knowledge or skill of a craft) and areté (virtue or excellence as defined as a mean between two extremes of excess and defect in regard to an action determined by rational principles.) It would appear that some executives of the CRAs did not only demonstrate a lack of techne—whether by intent or by ineptitude—but at the same time totally disregarded the concept of areté—whether induced by malicious intent or imposed necessity.

For the credit ratings agencies, techne or effectiveness, manifests itself as a drive towards maximized profitability accomplished via ruthless competitiveness. Wall Street, which has become exclusively directed by consequentialist principles, has found a substitute ethical base in the concept of effectiveness. In commerce today the ‘ethic of effectiveness’ concerns itself with ‘getting the job done’ and is often achieved in a Darwinian or Hobbesian manner. Profit maximization has become the exclusive factor in management decisions. The concept of ‘good’ has become solely based on effective achievement of a defined external goal without consideration being given to the virtue of excellence—areté.

From an Aristotelian perspective, individuals and corporations have a telos or end. For individuals this means achieving a good life partially through rewarding, fulfilling work and contribution to the polis.(community). The ‘good’ for a corporation consists in contributing to making the good life possible for the community’s members through the generation of wealth, creation of employment and provision of services. Our life narrative is what connects the individual to the community. How we conduct our lives, honing our intellectual virtues whilst habituating our moral virtues, will determine our life’s narrative. An individual’s narrative is a crucial factor in sustaining the traditions of the community since our individuality is both socially constituted and socially situated. We are all members of several communities, whether it is situated in an individual company, neighborhood or town, as part of a social institution or in society as a whole. Our self-interest is for the most part identical to the larger interests of the group and when an individual’s actions reflect an imbalance between effectiveness and excellence the community as a whole inevitably suffers. If the intellectual virtue of techne is not balanced with the moral virtue of areté, skill will become corrupted and the individual will ultimately succumb to the vices of excess and/or deficiency.

It is ironic that the CRAs were ostensibly promoting a service that was critical in providing information to allow the investment community to construct balanced portfolios of CMBS, while the individuals responsible in providing this information neglected to find a balance of intellectual and moral virtue in their professional lives. These imbalances—both in the resultant CMBS portfolios and in the character of CRA executives—were significantly instrumental in triggering the largest loss of wealth the global community has ever experienced—an event that will reoccur with increasing devastation until the concept of areté is habituated in the actions of individuals in financial community.

Thursday, September 3, 2009

Bank Executives & The Concept of Risk Reward

Imagine the following scenario: You are an avid supporter of your hometown professional hockey team and over the last several years the general manager initiated a policy of trading away his skilled defensive players in order to produce a team with highly innovative but undisciplined offensive players. Upon enacting this new initiative, the team not only fails to make the playoffs but finishes the season at the bottom of the league standings. As expected the team’s failure was due to a total lack of defense leaving the team vulnerable to any offensive attack from the opposing teams. Furthermore, suppose at the end of the season it became known that while the average player on the team was earning $1.9 million per season, the General Manager was earning a salary of $606 million. Furthermore, imagine if when the season finished the team announced that due to the team’s poor performance that there would be a surcharge on ticket prices that would effective triple the cost to attend a game for years to follow. Would you be outraged? Would you demand that the manager be fired, or at the very least, adjust his compensation to reflect his performance? In all likelihood there would be insurrection and a boycott of the team.

However, this is not how Wall Street works according to the 16th Annual Executive Compensation Survey published September 2nd 2008 by the Washington based Institute for Policy Studies (IPS). In 2008, the year taxpayers rescued the financial industry, chief executives at the top 20 financial recipients of bailout dollars earned 37 percent more than their CEO counterparts elsewhere in the U.S. economy. The pay gap between CEOs and rank-and-file employees has also continued to extend: in 2008, according to the study, top executives averaged 319 times more in pay than the average American worker, compared to 30 to 40 times in the 1980s. CEOs at the 20 top bailout banks earned 436 times more. Is there anything wrong with this picture?

CEO Compensation/Average worker wage.

Libertarians, such as Robert Nozick, appealing to his Wilt Chamberlain analogy, would claim that there is nothing wrong with bankers receiving this level of compensation since it is a rationally achieved outcome as a consequence of the free market mechanism. He would claim that “no end state principle or distributional patterned principle of justice can be continuously realized without continuous interference with people’s lives”—which would be antithetical to his concept of liberty. (Nozick 1974) The problem here is that, shareholders of the bank and ultimately the citizens who bailed them out did not participate in any explicitly rational process in allocating the funds to the executives. The concept of the pursuit of rational self-interst is different than the rationalization of self-love. Nozick's argument that the compensation packages are a result of the free market competitive process to retain skilled talent tends to become farcical when the consequences of their 'skills' are assessed. If these talented gentlemen did this to the global financial system, it boogles the mind to imagine what 'less skilled' talent would have done. It is disheartening to note that morality is not considered a 'skill set' on Wall Street.

Friedrich Hayek, the quintessential proponent of free markets and liberal principles, defends rising social inequality as the opportunity cost of maintaining an efficient market order. However in The Mirage of Social Justice (1982/93) he makes an interesting comment:
It has of course to be admitted that the manner in which the benefits and burdens are apportioned by the market mechanism would in many instances have to be regarded as very unjust if it were the result of a deliberate allocation to particular people. But this is not the case. Those shares are the outcome of a process the effect of which on particular people was neither intended nor foreseen by anyone.

Does the granting of stock options and 'generous' compensation packages qualify as 'deliberate allocations to particular people'? When individuals grant themselves options-- ironically, as an incentive to ensure the growth of the company-- on a stock that they are largely responsible for destroying, it is tantamount to the actions of some backwater stock promoter. Where has the concept of risk reward gone, or does that just apply to the general public. Is this concept not one of the prinicples of free markets? You lose you pay: You win you play...or does this basic tenet not apply to the individuals at the helm of the financial system? You cannot claim that these financial virtuosos dont have chutzpah!

Adam Smith did not have a great deal of respect for managers of joint stock companies, describing to a tee the recent actions of Wall Streets bankers.

The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it.

As far as the wages of labour is concerned, Smith tied one’s wages to the amount of trust place in him by other citizens:

We trust our health to the physician: our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in the society which so important a trust requires. The long time and the great expense which must be laid out in their education, when combined with this circumstance, necessarily enhance still further the price of their labour.

What happens when that trust is tarnished? Does an individual or individuals who have squandered trillions of depositor’s money still command the trust of the investing public? —especially when they are picking up the bill in the form of a taxpayer bailout, which their great grandchildren could possibly still be paying off.

Clearly, self regulation has proven ineffective in scrutinizing the actions of many of Wall Street’s policies and business models, while at the same time, politicians have proven incompetent and/or reluctant at confronting the abuses of trust perpetrated by companies who have been bailed out by the taxpayer. It is time shareholders of these corporations assert their rights of ownership and demand that some semblance of responsibility and accountability be maintained if executives of failed banks are to continue to reap benefits from a system that they have virtually destroyed. Unfortunately the shareholders of many of the rescued financial institutions are now represented by politicians who are busy hastening the ideological polarization of American society in the venue of healthcare.

Thursday, August 27, 2009

Health Insurers: Are they really that greedy?

It is in vogue to berate and ridicule the ‘greedy’ insurance companies as the debate rages about health care reform. Democrats in Congress, led by Henry Waxman, have asked the nation’s principal health insurers to provide details on executive pay, spending on entertainment, and other financial records—however it appears that they are not that adamant about receiving data on the earnings of these companies. President Obama has vilified insurers as being the parties responsible for bankrupting families and making care unattainable for millions.

They say a picture is worth a thousand words: Perhaps the graphs shown here will reveal that it may not be the insurer's 'insatiable greed' that is responsible for the escalating costs of health care.

Return on Assets is a measure of a company's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage. This comparative graphic reveals that the health insurer’s return is modest-perhaps even miniscule—compared to other sectors of the economy. In fact, the health care insurers rank below all of the other sectors depicted. (Note the relative ratios of the pharmaceutical and medical equipment companies)

Return on Equity is a measure of how well a company used reinvested earnings to generate additional earnings. Once again the graph illustrates that the health care industry has lower returns when compared to other sectors of the economy.

Net Profit Margin is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. This statistic is usually used when comparing companies within the same sector but when being used to compare different sectors other considerations such as the ratios illustrated above should also be considered.

These ratios certainly suggest that the health care industry is not making the grotesque profits some politicians would have you believe. While the fringe of the conservative camp makes preposterous claims about death panels, euthanasia and the impending arrival of National Socialism, the liberal faction are just as culpable with their hyperbole and unjustified witch hunting: One side uses fear mongering while the other side uses vilification. Fortunately the truth is revealed by resolute individuals who have the patience and fortitude to allow the loony contingent on both sides to be heard. As is typically the case, the truth is usually expressed by those who exercise the virtues of tolerance, integrity and courage.

Saturday, August 22, 2009

Healthcare: America's Moral Dilemma

In the previous blog, a case was made for the encouragement and acceptance of open and free debate concerning issues of social importance in a liberal society. The crucial outcome of expressing diverse opinions is the realization of truth. In addition to finding truth, open deliberation is instrumental in attaining a consensus or common ground amongst opposing factions. This seems to be the case in the progressively more raucous health care debate. It would appear that parties on both sides of the debate seem to agree that healthcare is a moral imperative.
Former Senator Rick Santorum stated in an interview with Greta Van Susteren that the health care issue is in fact a “moral obligation” but he also stressed that the provision of healthcare to the uninsured should not be undertaken by the government. Conservative political pundit Larry Elder also acknowledged that health care was a “moral imperative” but “not a constitutional right”. These statements which were both aired on Fox News were in response to President Obama’s recently convened conference call, on which he spoke to thousands of faith leaders about health care as a moral and ethical issue.
So it seems that there may be a vestige of common ground between what can be best described as combatants in this impassioned and vitally important American debate.
But the question remains as to how this moral obligation to provide health care to the uninsured members of the community—to be your brother’s keeper--should be best delivered.
The conservative camp contends that this ‘obligation’ is best accomplished by means of the free market economic system that is currently in place. The Obama bloc suggests that it is the responsibility of the government to make healthcare available to those who are not currently able to access affordable healthcare.
If the concept of a moral imperative is taken to mean a duty or responsibility, moreover, a social responsibility, then the arena of the private sector may be the wrong place in which to expect a solution to providing healthcare to those who cannot afford it. The champion of neoliberal economics Milton Friedman states that the doctrine of social responsibility is a "fundamentally subversive doctrine in a free society, and … that in such a society, there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." It is difficult to reconcile how the current for profit health care paradigm, operated by corporations, would be able to justify providing healthcare to citizens who cannot afford health insurance or are disqualified from acquiring insurance. It seems perplexing and paradoxical that the Christian right, who by definition embrace the concept of benevolence, condone the status quo.

Moral imperatives are often difficult to resolve in the culture of egoistic individualism that is the fundamental nature of America’s perception of liberty. Citizens are identified as autonomous, self-interested—their motivation derived from concern for their own welfare and that of their immediate family. In this view, it is extremely difficult to justify the government imposing itself, via a government operated healthcare plan, on its citizens, who value their liberty and independence with such verve. Increased taxation accompanied with the economic inefficiencies inherent in demonstrably inept government bureaucracies will not be tolerated by the public unless they are willing to abandon the liberal individualism that places such important value of the pursuit of private interest and autonomy. Unless there has been a paradigm shift in the political ideology of the American electorate, the ‘public option’ seems to be unpalatable. The incongruity here is that Obama received 52.9% of the popular vote. Was the electorate misled by Obama’s campaign rhetoric or is the population prepared to accept a move to the political centre?

Where does this leave the debate? It seems clear that the current corporate based economic paradigm is ideologically incapable of providing for those in need of healthcare since any form of benevolence is deemed to be a form of intrusive tax, ergo, an uninvited diminution of shareholders return on investment. The role of the government to supply healthcare to those in need seems to be antithetical to the American ethos—whose constituents value the notion of individual autonomy and the unfettered pursuit of self interest. If the current economic institution of corporate based capitalism and the political institution that adheres to the political philosophy of liberal individualism are incapable of providing for the downtrodden and marginalized members of society, is there another social institution that can make healthcare available to this segment of society.

David Hume stated that “no qualities are more entitled to the general good-will and approbation of mankind than benevolence and humanity, friendship and gratitude, natural affection and public spirit, or whatever proceeds from a tender sympathy with others, and a generous concern for our kind and species.” His close friend and iconic proponent of free market economics Adam Smith generally agrees:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.

Clearly it can be argued that even the most hardened individual can have empathy for his fellow man. The often cited Kaiser ABC poll on healthcare suggests that Americans are willing to help their fellow countrymen but when asked if they would you be willing to pay more—either in higher health insurance premiums or higher taxes—in order to increase the number of Americans who have health insurance, 54% to 41% were opposed. So as it stands, Americans do exhibit compassion to those in need but are not willing to part with their income or assets to accomplish this benevolent gesture. Is there another social institution that can fill this gaping requirement?

Perhaps the answer lies in non-profit organizations such as the various religious institutions and charitable foundations that have demonstrated a proclivity to offer healthcare to those in need. Unlike investor-owned organizations, which are economically driven, nonprofit health care organizations are obligated to meet society’s needs for medical education and research and to advocate for and meet the needs of the most vulnerable members of their communities. Health care, like education, is a "public good" or "social service", essential to human dignity and the pursuit of happiness. The Alliance for Advancing Non-profit Health Care cites three important aspects of healthcare:
• A healthy society rests on the health of its citizens.• Health care needs differ locally and are best prioritized and addressedwithin the political, social and economic fabric of each community.• Government cannot and should not try to meet all of society’s needs,and "running things" is generally best left to the private sector.

Perhaps it is time that the economic and political institutions of American relinquish their grip on healthcare and allow regional non-profit organizations—funded through the compassion of America’s affluent citizens and institutions— to be given the opportunity to provide a service that preserves human dignity and advances the well-being of the nation. This would entail insurance companies to surrender at least part of their franchise on a very profitable aspect of their business model. Corporate healthcare PACS would not likely allow this to be undertaken without hostile resistance. Government mandarins, intent on adding to their legislative power and influence would similarly vehemently oppose relinquishing their grasp on power. America’s healthcare system is headed towards a catastrophe: if something inventive and revolutionary is not undertaken soon, the nation will find itself in a crisis that will test the resolve of every one of its citizens and institutions. Perhaps the time has come for the American people to consider Aristotle's notion of the Golden Mean and strike a balance between the pursuit of self interest, which is protected by the Constitution, and, the virtue of benevolence which is an integral attribute of an individual's conscience. This balance may, in the long term, ensure the sustainability of the community that facilitates the liberty and pursuit of happiness that is so heartily treasured. Fulfilling one's moral imperative may be requisite in guaranteeing the liberty accorded to them in their constitution.

Tuesday, August 18, 2009

The Value of Mendacity

The American healthcare debate is becoming increasingly bitter as diverse opinions emanate from all corners of the nation—if not the world. The oft-irrational harangues of the likes of Glenn Beck—who incidentally represents an exemplification of why America should have universal mental healthcare—and the fallacious statements of Sarah Palin with her ‘death panel’ fear mongering have certainly enlivened the debate if not desecrated it to a degree. However, proclamations from the peripheries of the political spectrum should be accommodated because these statements, although at times distasteful and counterfactual, demonstrate that the right of free speech is vital to the functionality of democracy.

It is a fundamental tenet of a deliberative democracy that free and open discussion, even those based on exaggeration and misrepresentation of facts, are acknowledged because they are vitally instrumental in ascertaining ‘the truth’. The outrageous and seemingly preposterous statements being made in the debate on healthcare—by both parties—serve an important purpose: It stimulates further debate and through this process the truth will inevitably become apparent. John Stuart Mill sums this condition up concisely.

In politics, again, it is almost a commonplace, that a party of order or stability, and a party of progress or reform, are both necessary elements of a healthy state of political life; until the one or the other shall have so enlarged its mental grasp as to be a party equally of order and of progress, knowing and distinguishing what is fit to be preserved from what ought to be swept away. Each of these modes of thinking derives its utility from the deficiencies of the other; but it is in a great measure the opposition of the other that keeps each within the limits of reason and sanity. Unless opinions favorable to democracy and to aristocracy, to property and to equality, to co-operation and to competition, to luxury and to abstinence, to sociality and individuality, to liberty and discipline, and all the other standing antagonisms of practical life, are expressed with equal freedom, and enforced and defended with equal talent and energy, there is no chance of both elements obtaining their due; one scale is sure to go up, and the other down. Truth, in the great practical concerns of life, is so much a question of the reconciling and combining of opposites, that very few have minds sufficiently capacious and impartial to make the adjustment with an approach to correctness, and it has to be made by the rough process of a struggle between combatants fighting under hostile banners. On any of the great open questions just enumerated, if either of the two opinions has a better claim than the other, not merely to be tolerated, but to be encouraged and countenanced, it is the one which happens at the particular time and place to be in a minority. That is the opinion which, for the time being, represents the neglected interests, the side of human well-being which is in danger of obtaining less than its share. I am aware that there is not, in this country, any intolerance of differences of opinion on most of these topics. They are adduced to show, by admitted and multiplied examples, the universality of the fact, that only through diversity of opinion is there, in the existing state of human intellect, a chance of fair play to all sides of the truth. When there are persons to be found, who form an exception to the apparent unanimity of the world on any subject, even if the world is in the right, it is always probable that dissentients have something worth hearing to say for themselves, and that truth would lose something by their silence. ON LIBERTY: CHAPTER II: OF THE LIBERTY OF THOUGHT AND DISCUSSION
Although followers of the debate—which there are too few of—may find some actions and statements repugnant, it is important to remind oneself that through the dissemination of seemingly preposterous statements the truth of the matter will be elucidated so that in the end an informed and hopefully just resolution will be ascertained.

Thursday, July 30, 2009

How to become unpopular: Become President!

Approval minus Disapproval: Blue: Inauguration Red: Six Months in office
Difference in Net Popularity: Inauguration to Six Months in Office

President's Popularity during Entire Term

Data Source: The American Presidency Project

Much ado has been made regarding President Obama’s current decline in the polls. Health care, racial profiling and a host of other issues has resulted in the President’s decline in various opinion polls. Is this a rare occurrence seldom endured by other chiefs of state? Apparently not! The graphs depict the rise or most commonly the waning of a President’s popularity as reality sets in during the first six months in office. It is exceedingly rare that a President’s popularity rises during this period. George W. Bush’s popularity was declining rapidly until September 11th 2001 when the attack on America caused a surge of patriotism resulting in the Bush White House popularity to soar. Gerald Ford's popularity took a nosedive after he assumed office. (his statistics are not included since he was never elected after a campaign.) Even Ronald Reagan's numbers declined as the 1981-1982 recession became reality. George H.W. Bush's popularity actually rose during the first 6 months but this was larger due to the fact that at the time of his inauguration there was a significant undecided aspect to his polling numbers. All Presidents since Truman, except Clinton, were less popular at the end of their term than when they took office.

The platforms that are presented during the election campaign are usually met with enthusiasm—hence the victorious outcome for the President-elect. However, once the legislative process begins debating campaign promises the bi-partisan nature of the legislative process begins to take its toll on the public opinion.

Reminiscent of President Clinton’s first six months, health care has had an adverse effect on the Obama White House. Health Care has proven to be a extraordinary divisive policy that incites emotional debate on all sides and is exaggerated by the obsession the media has with the issue. This is not to say that the media should ignore such a fundamental issue concerning the American people, but partisan hyperbole and political gamesmanship only exasperates the dissension and causes both opponents and proponents to become further polarized—however—it apparently is very effective at selling media advertising.

Tuesday, July 28, 2009

Adam Smith’s Invisible Hand or Wall Street’s Slight of Hand?

Most traders are well aware of the current ruckus taking place concerning ‘flash orders’ which is a subset of HFT or high frequency trading programs. Flash orders essentially allow a party to execute marketable orders in-house when that market is not at the national best bid or offer, instead of routing those orders to rival markets.

Opponents of the practice claim that flash orders create a two-tiered market, giving professionals receiving the flashes a significant advantage over other investors. Getco, a market maker firm, states that non-public quotes could "negatively affect the broader market, including retail investors who rely on the NBBO (National Best Bid & Offer) to ensure that their orders obtain the best, reasonably available price,"

Proponents of the trading strategy such as William O'Brien, CEO of Direct Edge counters the criticism claiming that the ELP (Enhanced Liquidity Provider) program gives participants a choice about how they want their order flow handled, and enables customers to lower their market-impact and transaction costs. O’Brien also asserts that the strategy effectively democratizes access to dark liquidity sources by enabling retail customers to choose to interact with that liquidity to seek larger-size executions and potentially better prices."

Several years ago Robert Greifeld President and Chief Executive Officer of The NASDAQ Stock Market, Inc. stated:

“Quality of execution is the measure by which we judge a market… We believe investors want to have a say in what constitutes best execution, which can mean different things at different times to the same investor. Best execution can at varying times be about speed, price, certainty of fill or market impact… Technology is not an end in and of itself but a vehicle that allows us to provide not only speed, but transparency. Technology allows all buying and selling interest to be displayed globally – at multiple levels. It means buyers and sellers in all markets are visible to all interested parties all the time. The markets were traditionally closed, but over time they have become completely open."

The controversy hinges on the notion of transparency in the market place. Several questions are raised:

  • Is there a two tiered system at work in today’s markets, giving advantage to firms with the technology to unfairly manipulate markets?

  • Conversely, is high frequency trading yet advancement in trading that technology has brought to the market place?

  • Is the practice the same as 'front running' a stock?

  • Are firms like Goldman Sachs and Direct Edge merely pursuing their self–interest consequently resulting in a fairer market place due to the power of Adam Smith’s famous ‘invisible hand’?

  • Is 'Flash Trading' a legitimate enhancement to market liquidity or is it an furtive arbitrage strategy?

  • Is this strategy a Wall Street ‘slight of hand’ that will result in unfair advantage and inequity in the free market paradigm?

  • Is this an area where more market regulation is warranted inorder to protect the investing public?

  • Does the individual retail trader, trading for his own account, stand a chance in todays high-tech market place?

Tuesday, July 7, 2009

Charity in Truth

On June 29 2009 Benedict XVI issued his third encyclical focusing on the economy. It is the position of the Church that economic activity is not something that is fundamentally opposed to society although the instruments of economics and finance can have deleterious effects when the individuals who are in command are motivated solely by avarice. It is not the instruments of finance that is the basis of the harm but it is man’s fallacious reason that is the root cause of destructive and socially destabilizing consequences. The men and women who manage financial matters must take ownership of their actions by demonstrating both responsibility and accountability.

These views put forward by Pope Benedict XVI should not only be heeded by followers of the Catholic faith, which incidently I am not, but should be embraced by all who concur that virtue and excellence play an important part in morality.

Republican Response
Bloomberg comment on Democrats
"Caritas in veritate" - Encyclical Letter of His Holiness Benedict XVI

On The Market Economy

"In a climate of mutual trust, the market is the economic institution that permits encounter between persons, inasmuch as they are economic subjects who make use of contracts to regulate their relations as they exchange goods and services of equivalent value between them, in order to satisfy their needs and desires. The market is subject to the principles of so-called commutative justice, which regulates the relations of giving and receiving between parties to a transaction. But the social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well. Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. And today it is this trust which has ceased to exist, and the loss of trust is a grave loss. It was timely when Paul VI in Populorum Progressio insisted that the economic system itself would benefit from the wide-ranging practice of justice, inasmuch as the first to gain from the development of poor countries would be rich ones. According to the Pope, it was not just a matter of correcting dysfunctions through assistance. The poor are not to be considered a “burden”, but a resource, even from the purely economic point of view. It is nevertheless erroneous to hold that the market economy has an inbuilt need for a quota of poverty and underdevelopment in order to function at its best. It is in the interests of the market to promote emancipation, but in order to do so effectively, it cannot rely only on itself, because it is not able to produce by itself something that lies outside its competence. It must draw its moral energies from other subjects that are capable of generating them."

Note: It is interesting to compare this position to Milton Friedman's philosophy expressed in The New York Times Magazine, September 13, 1970.

On Ethics and Finance

"Striving to meet the deepest moral needs of the person also has important and beneficial repercussions at the level of economics. The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centred. Today we hear much talk of ethics in the world of economy, finance and business. Research centres and seminars in business ethics are on the rise; the system of ethical certification is spreading throughout the developed world as part of the movement of ideas associated with the responsibilities of business towards society. Banks are proposing “ethical” accounts and investment funds. “Ethical financing” is being developed, especially through micro-credit and, more generally, micro-finance. These processes are praiseworthy and deserve much support. Their positive effects are also being felt in the less developed areas of the world. It would be advisable, however, to develop a sound criterion of discernment, since the adjective “ethical” can be abused. When the word is used generically, it can lend itself to any number of interpretations, even to the point where it includes decisions and choices contrary to justice and authentic human welfare.
Much in fact depends on the underlying system of morality. On this subject the Church's social doctrine can make a specific contribution, since it is based on man's creation “in the image of God” (Gen 1:27), a datum which gives rise to the inviolable dignity of the human person and the transcendent value of natural moral norms. When business ethics prescinds from these two pillars, it inevitably risks losing its distinctive nature and it falls prey to forms of exploitation; more specifically, it risks becoming subservient to existing economic and financial systems rather than correcting their dysfunctional aspects. Among other things, it risks being used to justify the financing of projects that are in reality unethical. The word “ethical”, then, should not be used to make ideological distinctions, as if to suggest that initiatives not formally so designated would not be ethical. Efforts are needed — and it is essential to say this — not only to create “ethical” sectors or segments of the economy or the world of finance, but to ensure that the whole economy — the whole of finance — is ethical, not merely by virtue of an external label, but by its respect for requirements intrinsic to its very nature. The Church's social teaching is quite clear on the subject, recalling that the economy, in all its branches, constitutes a sector of human activity"

On Globalization & Corporate Social Responsibilty

"Today's international economic scene, marked by grave deviations and failures, requires a profoundly new way of understanding business enterprise. Old models are disappearing, but promising new ones are taking shape on the horizon. Without doubt, one of the greatest risks for businesses is that they are almost exclusively answerable to their investors, thereby limiting their social value. Owing to their growth in scale and the need for more and more capital, it is becoming increasingly rare for business enterprises to be in the hands of a stable director who feels responsible in the long term, not just the short term, for the life and the results of his company, and it is becoming increasingly rare for businesses to depend on a single territory. Moreover, the so-called outsourcing of production can weaken the company's sense of responsibility towards the stakeholders — namely the workers, the suppliers, the consumers, the natural environment and broader society — in favour of the shareholders, who are not tied to a specific geographical area and who therefore enjoy extraordinary mobility. Today's international capital market offers great freedom of action. Yet there is also increasing awareness of the need for greater social responsibility on the part of business. Even if the ethical considerations that currently inform debate on the social responsibility of the corporate world are not all acceptable from the perspective of the Church's social doctrine, there is nevertheless a growing conviction that business management cannot concern itself only with the interests of the proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference. In recent years a new cosmopolitan class of managers has emerged, who are often answerable only to the shareholders generally consisting of anonymous funds which de facto determine their remuneration."

Friday, July 3, 2009

Visa, Debt and Cycles.

Click to enlarge chart

Four charts encapsulate the state of the economy from the standpoint of the consumer's position to sustain consumer growth. The first BankAmericard (now Visa) bank credit card was introduced in 1958, shortly after American Express issued their first card earlier that year. Since that time consumers have learned to use their credit card as WMCs. (Weapons of Mass Consumption). Without the fuel to keep the engines of consumption purring, the WMCs could easily become WMDs. Incidentally, Visa had its initial public offering in March of 2008, just as the vanguards of Wall Street were beginning to crumble. You cant say that some dont know how to time the markets accurately!!!!!!!
Visa (V: NYSE) is at an interesting price-time juncture from a technical perspective. Monitoring the behaviour of this corporation's 'chart' may serve as an excellent harbinger of future events for the economic recovery--or lack thereof.
Chart : Bigcharts,com

Wednesday, July 1, 2009

Dany Heatley & The Loss of Excellence in Sport

The bottom line with regard to the ‘Heatley Affair’ is that Dany Heatley epitomizes the spoiled brat attitude that many of the NHL’s superstars seem to have acquired since professional sports salaries became exponentially more ridiculous. Mr. Molloy’s apologetic musings in The Ottawa Citizen concerning Mr. Heatley does little to quell the indignation felt towards the ‘superstar’. The people Mr. Molloy is attempting to convince to cut Heatley a little slack are, by and large, hard working individuals who find it next to impossible to take their families to professional hockey games due to the prohibitive expense involved. Granted, this onus does not fall entirely towards the players since the owners and the league executives must also bear responsibility for the restrictive environment that asinine salaries have created.

However, aside from the purely economic grievances expressed, many fans are becoming increasingly troubled by the lack of responsibility and commitment that athletes exhibit when they sign multi-million dollar contracts.
Gone are the days of dedicating oneself to achieving the common goal shared by both parties, especially if one’s fragile ego is bruised in the process. True aficionados of athletic competition recognize and appreciate both the physical abilities that make an athlete great as well as the excellence of character that differentiates a truly great athlete. Mr. Heatley has done himself a disservice by failing to pursue a career that is defined by excellence of character—failing to practice the virtues of loyalty, integrity and dedication to a common cause. The ‘Heatley Affair’is an unfortunate example of a truly skilled player succumbing to the selfishness that afflicts a individual's chosen craft when it is not enhanced by an accompanying quest for excellence. Ironically, Mr. Heatley’s participation in the Olympic Games should have familiarized him with the notion of athletic excellence envisioned by, the originators of the Olympic Games, the Greeks of The Golden Age.

Thursday, June 25, 2009

Morality and Market Regulation

Finance is one of the most heavily regulated sectors of Canadian society. This is due to the fact that the expectation of fairness is paramount to the upholding of confidence through the persistent viability and efficiency of capital markets. The financial services industry is arguably the most visible face of finance to ordinary citizens; it is an industry that impacts the well-being of not only direct participants in the markets, but also affects many third parties such as stakeholders and other community groups. Provincial regulators and securities commissions seek to instill confidence and trust in financial services organizations through legislation and the consequent regulations that derive from such enactment of law. However, as Boatright states: “The law is a rather crude instrument, and it is not suited for regulating all aspects of financial activities, especially those that cannot be reduced to precise rules” (Boatright 2008: 9). It seems that after a deleterious financial incident seizes the public’s attention, legislators rush to implement new regulations and laws to curb deviant behavior. Some concerned citizens are left with the impression that the operative adage on Bay Street is “if it is not deemed illegal, then it is morally okay.” For the vast majority of participants in the financial services industry this is simply not the case. The management of investment firms realize that the companies and individuals to which they provide their services expect not only compliance with the laws but also implicitly demand ethical treatment. What then is the connection between law and morality in the case of the securities industry?
It must be stressed that there is a difference between compliance and ethics. CSI Global Education Inc. (CSI) is the educational body of IIROC and has the exclusive mandate to provide many of the courses and exams required to work within the securities industry in Canada. The following is stated in the Conducts and Practices Handbook Course (CPHC):
Compliance is, basically following the rules, whether those rules are legal requirements or firm policies. Ethics involve not only complying with the letter of the law but also complying with the spirit of the law. Therefore, ethics goes beyond prescribed behavior, and address situations where rules are not clear or are contradictory. It is possible to take an action that is unethical, even though one is complying strictly with the rules. (CSI 2007: 1.2)

MacIntyre asserts that “…regulation which is concerned with the safety or quality of goods and services is not itself and expression of any particular moral standpoint, but is rather a substitute for morality at just those points in our social fabric where we no longer possess adequate moral resources” (MacIntyre 1980: 31). Although MacIntyre is clearly supportive of regulation, he recognizes the ‘systematic inconsistencies’ in our conceptions of justice.
On the one hand, we tend to think of morality positively, where citizens pursue human goods through the notion of community, family, the workplace and other social relationships. We conduct ourselves in a fashion that positively contributes, through participation and communication, in the community: the pursuit of good for all of its members is a common priority of all individuals. On the other hand, we view our social milieu as one of self interest and ceaseless competing desires amongst individuals and rival groups. This negative view holds that self satisfaction and the resultant conflicts that ensue require that we should be protected from each other. In regard to the former view of justice, MacIntyre claims: “From the standpoint that envisages the goal of political society as the creation and maintenance of communities, we do indeed need a system of public law, but only as a system of last resort” (MacIntyre 1980: 32). Using medical malpractice suits as an example, MacIntyre suggests that these legal actions do not rise due to greater negligence on the part of the medical profession but because of the breakdown in trust between physician and patient. The erosion of the moral relationships between individuals has resulted in the law being relied upon much more frequently instead of a social vehicle of last resort.
Where protection from others is paramount, reliance on the law is not an action of last resort but a primary instrument in the functioning of society. MacIntyre explains:
[W]hen law is thought of in the second way, as a device for protection of one against another, then fear or self-interest become the dominating motives…When the law is in good working order it is not when everyone is obeying the law from fear, or when everyone is obeying the law from calculated self-interest. It is when obedience to law expresses a genuine allegiance to law. Thus it is precisely when the law is least needed, when it is least invoked, that it is in its best working order. When by contrast there is continuous resort to the law, it is generally a sign that moral relations have to some large degree broken down. It is a sign that the motives which make us invoke the law are those of fear and self-interest. And when fear and self-interest have been brought into play, law itself tends to be morally discredited. (MacIntyre 1980: 32-33)

At the time of this paper being written, global markets are experiencing the consequences of a combination of factors, predominately the catastrophic sub-prime loan fiasco and ensuing banking crisis in the United States. This financial debacle and other factors including the speculative bubble in the commodities markets, lead by petroleum products, have resulted in a period of extreme volatility and uncertainty in financial markets. In the early stages of the aftermath of the global monetary crisis, investment firms have been denounced for participating in devious sales practices and implementing deceptive investment policies. It should be noted that transgressions of ethical expectations and regulatory statutes are frequent in the final stages of markets cycles, only to surface as the ensuing downturn gains momentum.
Financial markets are cyclical in nature, ostensibly being driven by the aggregate psychology of the investing public
[2]. History has repeatedly demonstrated that mass psychology manifests periodically as hysterias, driven by both fear and/or greed, which is invariably accompanied by deceitful and fraudulent behavior on the part of unethical parties participating in financial markets. The hope and optimism of rising markets develops into a period of exuberant euphoria, which is characterized by excessive acquisitiveness and blatant disregard for risk. Inevitably the ‘boom’ is followed by the ‘bust’ or descending market prices but not before predatory firms and individuals exploit the naiveté of investors who are typically overcome by avarice in the distribution stage of the market cycle. The declines are often dramatic, punctuated by periods of panic with culmination of the bear phrase occurring in an environment of acrimonious fear and despair amongst the investing public. In a setting where exploitation of investors by parties with malevolent intentions is prevalent, securities regulation can only operate under the conditions of the protection of self-interest and fear. Unfortunately, without the investing public having a general knowledge of what causes periods in the market where securities laws are typically transgressed, securities regulation is only effective in a reactive manner. Galbraith summarizes this point:
What have not been sufficiently analyzed are the features common to these episodes, the things that signal their certain return and have thus the considerable practical value of aiding understanding and prediction. Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns.... There is protection only in a clear perception of the characteristics common to these flights into what must be conservatively described as mass insanity. (Galbraith 1993: 1-2)

The crash of 1987 is a good case in point. After the crash in October 1987 the blame was directed towards several parties including the federal government for running such large deficits. Program trading and portfolio insurance were also condemned for their adverse effect on short-term market behavior. Diminutive mention was attributed to the orgy of speculation that led up to the fateful day of October 19th, 1987. The insider trading scandals involving Dennis Levine and Ivan Boesky which led to the indictment of Michael Milken of Drexel Burnham Lambert, were merely symptoms of the speculative bubble that had been forming during the mid 1980s. The markets had succumbed to the vices of fear and greed, subsequently demonstrating that existing regulations were not able to deter reckless and immoral behavior.
A more recent example has had a devastating effect on the global economy. Easy credit for the American housing market led to the inevitable financial bubble that like all other ‘manias’ was bound to crash. Initially, small regional lenders of residential mortgages began to experience an increase in defaults on sub-prime mortgages and non-traditional mortgages.
[3] The problem began to mushroom when high risk mortgages that were being bundled, ostensibly to lower risk to the securities firms and their clients, began to collapse in value. These mortgage backed securities being held typically by investment banks and hedge funds were flaunted as being of ‘investment grade’ due to the diversification of the bundling process and risk management strategies utilizing derivative products. The entire process began to unravel, directly leading to the collapse (to date) of Countrywide Financial, Fannie Mae, Freddie Mac, Bear Stearns, AIG Insurance and Lehman Brothers.[4] The financial crisis presently enveloping Wall Street was allowed to get to unmanageable proportions due to the dubious sales practices of residential mortgage brokers and the faulty ‘financial engineering’ of mortgage backed securities that relied on the apparent sophistication and expertise of Wall Street money managers. As shall be demonstrated below, the alleged expertise of financial professionals resulted in what Alan Greenspan terms a ‘once in a century’ financial crisis. Once again the regulators were caught in a position of being reactive to the economic crisis as a result of unbridled avarice and short sightedness.
MacIntyre summarized the role of regulation in society as follows:
The result: regulation is the best we can do… I see it as a minimal device that has been developed in order to compensate for the grave defects of a culture where the fabric of morality is being torn apart and where government cannot act in the ways that we would want it to if moral community were a real possibility. Regulation is a necessary makeshift. Churchill once said that democracy is the worst form of government except for all others. Regulation, it seems to me, deserves a similar verdict. (MacIntyre 1980: 33)

[1] On December 11, 2008 the Securities and Exchange Commission ("SEC") charged Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC. with securities fraud for an alleged massive Ponzi scheme perpetrated on their advisory clients. According to the U.S. Attorney's office, Madoff admitted to defrauding clients for up to $50 billion in a massive Ponzi scheme that was committed over a number of years. Madoff conducted an investment advisory business providing investment services for wealthy clients, institutions, schools, and charities. Madoff's services were marketed as providing steady double-digit returns even in the most turbulent of markets.
Sometime in 2005, according to the SEC suit, Madoff's investment-advisory business morphed into a Ponzi scheme, taking new money from investors to pay off existing clients who wanted to cash out. As the market declined precipitously in the autumn of 2008, Madoff continued to report to investors that his funds were up which would have been a relatively remarkable performance. During the same time, the stocks of the Standard & Poor's 500, where Madoff supposedly did most of his trading, had dropped a weighted average of 37.7%.
Despite his gains, a growing number of investors began asking Madoff for their money back. In the first week of December 2008, according to the SEC suit, Madoff told a senior executive that there had been requests from clients for $7 billion in redemptions. Soon after, Madoff met with his two sons to tell them the advisory business was a fraud — "a giant Ponzi scheme,"— and was nearly bankrupt. The sons reportedly contacted their lawyer, who then alerted federal authorities to the fraud. Before being caught, Madoff was working on a scheme to dole out his funds' remaining $300 million to the firm's employees and his family members. For details of the complaint against Madoff see:

[2] An abundance of research and analysis of stock market cycles is available through both commercial and academic sources: (Galbraith 1993: Graham 1973: Shefrin 2002: Herbst and Slinkman 1984: Bauman and Miller 1995)
[3]Subprime mortgages are those lent to people with poor credit who might not otherwise qualify for loans. Non-traditional mortgages include those with adjustable interest rates, interest-only payments and other enticements.

[4] Fannie Mae and Freddie Mac were the largest American purchasers of mortgages. They were taken over by the U.S. federal government on Sept. 8, 2008, as the two mortgage giants struggled with deep losses and investors lost confidence. Bear Stearns and Lehman Brothers were investment banks that offered strategic advisory services for mergers, acquisitions, and other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. Bear Stearns was acquired by JPMorgan Chase in March 2008 after becoming illiquid due to loses in the Mortgage Backed Securities markets. Lehman Brothers suffered the same fate in September 2008 but was allowed to file for bankruptcy protection. On the same day Merrill Lynch was acquitted by Bank of America possibly averting yet another bankruptcy of a major Wall Street firm.

[5] MacIntyre’s position that regulation is a ‘necessary makeshift’ implies that it does have an important role to fulfill in a just society. The relative strength of the Canadian banking system as compared to other countries affected by the current economic crisis (2009) aptly demonstrates that effective and efficient regulatory systems stabilize the financial environment to a greater degree than the laissez faire attitude adopted by American financial regulators.

The Blame Game

I am all for the minimal participation of government in the private sector, since it has been indisputably demonstrated that the efficiency of the free market is far superior to the unproductive and incompetent functioning of the bureaucratic legislative based institutions.
As to whether the government is solely responsible for the sub-prime crisis remains and will continue to be an item of debate for many many years to come. In my opinion there is ample blame to be spread around.
Certainly, the promotion and encouragement by the government to expand the housing market was based on ridiculous assumptions and was the consequence of the grasping for power by many of the elected officials in both the congress and executive branch of government and incidentally both political parties.
There is no doubt that many politicians bare some the blame for the inflating of the asset bubble in the US housing market. But the responsibility for this mess cannot be only ascribed to the likes of Barney Frank, Chris Dodd and a host of other incompetent and megalomaniacal individuals who are not exclusively Democrats.
Alan Greenspan is certainly complicit in this fiasco. He has done nothing except bail his corporate buddies out since October 19th 1987 when he gave Wall Street a blank cheque to stave off a collapse of the investment firms.
That fiasco was perpetrated by rogue traders and investment bankers who made appalling and unrealistic assumptions using derivatives as a vehicle to increase returns under the guise of portfolio protection…déjà vu perhaps.
The portfolio insurance was not done at the request of Washington just as I doubt that there was an explicit request by legislators to market Wall Street’s financial alchemy to unsuspecting foreigners…condoned perhaps…but there is little evidence that Washington actually promoted such activity—instead they choose to ignore it. Since Greenspan took over at the Fed, he has done nothing but abuse monetary policy and tainted the originally valid and effective policies espoused by the monetarist economists that led the Reagan revolution. A continuing pattern of tacit bail-outs by way of irresponsible and economically incongruous interest rate policy and money creation acted as a band-aid solution to an ever increasing unsustainable economic environment in the USA . This became the status quo as evidenced by the 2000 hi-tech melt-down. The Feds are clearly complicit in this catastrophe.
The culpability does not end there. Wall Street obviously must take some responsibility for the consequences of creating and sustaining an atmosphere of insatiable greed that was founded on economic assumptions that were unreasonable at best but could be better described as irrational and fundamentally self-destructive. Long term sustainability and legitimacy of the financial arena did not really matter to the architects of the investment products that put, not only the bank system in jeopardy, but also affected the entire population. When children are allowed to play on their own and it becomes apparent that their behaviour has become dangerous to others and more importantly self-destructive in nature, the people that are responsible for them must demonstrate some oversight so that their behavior does not result in irreparable damage to all concerned. In a free market it is imperative that some self-regulatory body or a government sponsored regulatory body assume this role. Washington (SEC) and the Stock Exchange’s self regulatory bodies choose to ignore the high jinks being conducted by Wall Street. As you alluded to, regulation is essential for the efficient and fair functioning of the free market. This did not happen!!!!
The regional banks and mortgage corporations that allowed and even condoned the reckless use of mortgage debt obviously bare responsibility as well.
While it is true that banks and mortgage corporations were encouraged to lend, that does not excuse the fact that the executives threw caution to the wind and lent money based on ridiculous assumptions in an unrelenting quest for short term profits in a economic milieu that had become void of all logic, responsibility and accountability. The executives that were generously compensated for their mismanagement surely bare a slice of responsibility.
Individuals, who were overcome by temptation, greed and living beyond their means also must accept responsibility for the consequences of an atmosphere of blatant consumption and blind ambition. In a free society it is the onus of the individual to make decisions that reflect a rational and accountable standard of living. A society driven by insatiable consumption, financed through the assumption that all will continue to be well is not only irresponsible but allows the seeds to be sewn for the type of fiasco that America now faces. In a culture where liberal individualism is the ethos, it is only prudent that these individuals take responsibility for there actions. Evidently, this has turned out to be not the case.
There is abundant blame to allocate to all facets of society, not only to government but to corporate citizens as well as individuals.
With respect to the likes of GM and Chrysler, it is a fundamental error to bail these entities out. THEY SHOULD BE ALLOWED TO FAIL and subsequently allow the pieces fall where they may, which will undoubtedly result in a reallocation of resources in other sectors of the economy, albeit not without some severe pain for individuals and corporations. These failures have been on the horizon for many years. Management and Labour unions bare responsibility for this since they allowed the business model to become irrational and unsustainable. When the auto industry derives most of its cash flow from financial activities it is a sign that the core of the industry—production—has become secondary in nature and that the competitive edge will be lost to business entities that focus on the core function—the production of quality automobiles. The workers and executives of the auto industry did not heed the basic principles of industrial production; instead they focused on short term financial gain at the expense of the long term viability of the industry. Allow them to pay the ultimate price.
In a school yard when the bullies take over, it is only appropriate that supervision must be increased to protect not only the innocent but to ensure the continued existence of a safe and cooperative environment. Likewise in a society that has lost its moral grounding and has devolved into a predatory and unsustainable mode of existence, it is not a surprise that increased scrutiny and regulation increases with the objective of perpetuating a mode of existence that has proven to be the most efficient and effective economic
model: that being free market capitalism. America ’s move to the left is a direct result of the abuse of the liberties that made the nation great.
Culpability is not the issue. The important point that must be acknowledged is that America has suffered a severe decline in morality. This is evidenced in many facets of society, not only in the financial arena.
corporations and individuals must learn to conduct themselves with not only effectiveness but to also incorporate a sense of excellence in their activities. While effectiveness results in optimal production, consumption and material comforts: its essential counterpart—excellence of character is essential for the sustainability of a society that has contributed so much to mankind.