Saturday, February 28, 2009

Same Old Same Old

Recently there was a lot of speculation that last fall's whipping over the Economic Statement had caused Stephen Harper to change his stripes. He was supposed to have turned into a kinder, gentler Harper. Ha. Recent events show that he plans to use the same bully tactics in this parliament as he did in the last, threatening elections without any willingness to seek the support of parliament. Plus, he hasn't softened at all in his attempts to ruin our justice system by copying the tragically unsuccessful tactics used in the US.

Harper's inability to adapt gives us an advantage. We have been through this before, and so it should be easier to counteract. Also, surely Canadians are fed up with his hyperpartisan behavior. The coalition failed to make the case that it is the majority of MPs who hold the power, not the party that has formed a minority government. We need to make that case now.


Monday, February 23, 2009

Okay, NOW I'm Angry

I've been reading a series of articles in the Washington Post about the financial crisis, called What Went Wrong. Among all the usual details of greed and insane right-wing anti-regulation ideology, one small fact really jumped out at me: one regulatory board, the Office of Thrift Supervision (OTS) was so lax in its oversight that financial institutions found ways to switch their business so they could be regulated by it.

The OTS is the agency that regulates Savings & Loans.

For those who don't remember, the American Savings & Loan crisis of 1986-1991 was so severe that it cost the US over $160B in bailouts and other costs. It was a cause of years of US budget deficits and was a factor in the 1990-1991 recession. Millions of Americans lost their investments and/or their jobs. At the time it was just about the worst financial disaster imaginable.

We were told that the situation had been corrected so nothing like this could ever happen again. In the "Financial Institutions Reform, Recovery and Enforcement Act of 1989" several reforms were put in place. One was the creation of the OTS.

According to an article in the WaPo series (Banking Regulator Played Advocate Over Enforcer: Agency let lenders grow out of control, then fail):
* The OTS referred to the banks it regulated as "customers."
* It referred to subprime mortagages as "innovations."
* After a major bank failed in 2001 the OTS director admitted to congress that its regulation was too lax, but deregulation continued at an enhanced pace.
* Many of the OTS-regulated banks, such as Countrywide and Washington Mutual, are among the biggest bank failures in history.

The reason for the insanity at OTS? OTS is essentially partly privatized: it is funded by assessments on the banks it regulates, with the most of its budget coming directly from the banks. The banks were its customers. The entire problem was systemic, preventable, and foreseeable. And it wasn't like screwing up O-rings on the space shuttle: the Republican-dominated congress that forced all this deregulation on the country did it to enrich their donors.

They could have paid for regulation by increasing taxes and it could have been exactly the same cost to the banks as lower taxes plus regulatory fees, but the ideology dictates that taxes be low and services be paid by user fees. It's one of those subtle differences that spells the difference between a system that works and a system that fails, in this case spectacularly.


Saturday, February 21, 2009

Deglob, Reglob?

For several years, disagrements at the WTO and other international organizations have been leading to pessimism about the sustainability of an integrated world economy.

Less than a year ago, peaking oil prices caused a lot of buzz that high transportation costs would spell the end of globalization.

This week, even the Economist is saying that the "integration of the world economy is in retreat on almost every front."

Criticism of globalization is rising everywhere. One China anlayst summed up the growing frustration in China by saying, "globalization was largely a fraud where Americans could endlessly consume and Chinese factories could endlessly manufacture without any adherence to economic fundamentals and creating a false and bloated version of prosperity and rising living standards."

The thing is, globalization is both desirable and necessary, and we simply can't go back. Without globalization rich countries still trade with each other, but poor countries are shut out or are unequal partners in any agreements they can get into. The WTO brings everyone to the table and even gives vetos to every member country, thus greatly reducing the ability of G20 countries to call all the shots.

Globalization increases prosperity for everyone and it levels the playing field, but it is also just an institutionalization of what is going to happen anyway. The only way global trade is going to stop is if civilization fails and we return to the dark ages. We are an integrated world. Some sorts of trade may become less affordable, but the movement of goods, capital, people and ideas will continue.

I'm for globalization, but I'd like to see some very major tweaks in the way we institutionalize it. We need better mechanisms for democratic control of economic activity. Globalization should be about responsible world governance, not a new way for national elites to circumvent their local laws to further enrich themselves. There should be more transparency and accountability. Globalization was supposed to make the world less vulnerable to business cycles, but it seems that the opposite has happened: world organizations should address this issue explicitly. In addition, transport should truly reflect costs, including the massive pollution caused by ships.


First Man Standing

As a percentage of GDP, China enacted the biggest fiscal stimulus of any major economy, and it has already started to pay off: some analysts are now describing a V-shaped economic recovery there (unlike the US and Canada, which are still in the lower portion of an L).

As Canada and the US got stuck in political ideology that led us to dick around with programs that are too slow and include too much non-stimulative tax cuts, the autocrats in China were able to act decisively and do exactly what needed to be done.

I can't explain why western media is all about doom and gloom for China, when the opposite seems to be the case. (viz today's Globe article predicting mass political unrest due to unemployment in China, or yesterday's pessimistic Forbes article.) I can just say that there is reason to think that they're wrong, although Chinese economic recovery is not yet a given (they spent $600B on the first stimulus shock, and if their recovery suffers a reversal they may be out of bullets).

That China is poised to lead the world in economic recovery is very significant. As one China analyst notes, "to become a superpower, you really don’t need to have a plan for world domination. You only need to be the last man standing when everyone else has already collapsed." Or more accurately, the first man back on his feet.

Although it's early days, tangible results of China's success may already be starting to show: the economically devastated Taiwan is starting to soften on relations with China; the US, which under George Bush had a policy of isolating China and strengthening ties with India, is now reaching out to China.

But more interesting than the future of superpowerdom (and in any event, as I have argued before, demographics and other factors favor the continued supremacy of the US) are the shorter term effects of China pulling out of the recession first. Increased industrial activity in China will most likely cause an increase in oil prices: the west is currently not in an inflationary period only because of low oil prices, and we could get hit hard if our belated stimulus packages kick in just as there is other inflationary pressure. I would like to think that our governments are planning for this sort of contingency, but there hasn't been much evidence of that so far... they are in reactive mode, and always seem to be reacting to circumstances six months or a year in the past.

UPDATE (October 22, 2009): Chinese economic policy was so successful that China is expected to have 9% growth this year, according to the Financial Times.


Thursday, February 19, 2009

Tale of Two Divas

What are the synonyms for opposite? ...antipodal, antithetical, contrary, counter, counterpole, diametrically opposed, different, differing, dissimilar, diverse, polar, unalike, unsimilar. None quite captures the range of difference between two sopranos I saw last weekend.

First, Diva1. The Metropolitan Opera's production of Thais was all about a diva at the height of her career. Renee Fleming's voice is incredible. She's young and slender and fit. The Met PR machine has made Fleming into an opera supersuperstar: last year they made her the host of their Met HD program and featured her in Met ads; this year she was the centerpiece of the opening gala; and finally the Met hyped this production to the hilt, making it clear to the world that it reserves Thais for the greats. (They last mounted it 30 years ago with Beverly Sills in the leading role.) They hired a couture designer to make a series of magnificent gowns for Fleming, and they created magnificent blond wigs for her - normally a handsome woman, in Thais she is glamorous and beautiful. The direction was all about her. They cut a few corners in the plot to keep the attention firmly on the diva. They even threw in a few extra flourishes: at one point she raced up a flight of stairs, struck a pose, belted out a couple of high Cs and raced back down; in the final death scene, instead of being in the narrow convent bed that the plot calls for she is inexplicably ensconced on a throne raised above the stage.

To put all this in context, companies that attempt to mount Thais have a lot to live up to. As Lawrence Gilman wrote in a review of a 1939 production, "[Thais] has never lived again with the kindling veracity that Miss [Mary] Garden gave her [in a 1907 production]. But what would you? There has been only one Mary, and there never will be another. On that November night in 1907 when she first appeared upon a New York stage, lithe, slender, dazzling, indescribably vital and magnetic, as she entered, with long and sweeping strides, the presence of the adoring crowd, flinging her roses among them and greeting rapturously her waiting lover, she transformed the papier-mâché figure of Massenet and his librettist into a creation that will always haunt the minds of those who were present to observe it. This was one of the great entrances in the history of the stage. And this was Thais, authentic in grace, fascination, and reality. Since then Thais has walked among us, but she has never wholly come to life."

In the Met performance, La Fleming did not disappoint. Her voice is magnificent, particularly in the middle range, and most of all when she is half-swallowing the notes. Her character's religious conversion brought tears to the eyes of this cynical old atheist.

I could have skipped the parts that most sopranos apparently can't sing. Fleming has a lovely voice, but the high notes are not as special as the middle ones. It is supposed to be very difficult for sopranos to emit the harsh laughter called for in the score, but the harsh laughter didn't sound good and it added little to the plot. Maybe it just seemed out of place in the diva showcase revue that this opera has become.

That was Diva1. In my opera adventures last weekend, Diva2 was so bad that I won't even say who she was or where I saw her. I'll tell you that it wasn't in Toronto. Diva2 was young, but seemed to have been trained in the 1930s: she had a warble that could vibrate tarnish off a spoon. I don't know that any amount of proper training could have made her voice appealing. I described it as a "whistle"; my companion thought a better word was "strained". Her volume was a problem. Plus, she didn't hit all the notes. She braved it out in the title role of Traviata, and I would have admired her chutzpah if I didn't suspect that she doesn't realize how truly, truly awful she is.

Unlike the Met performance, Diva2's production was on the cheap. It was billed as opera in concert but at the last minute they threw in surtitles, put a couch on the stage and tried to act it out, the result being the crappiest production in operatic history. I'm a big fan of opera in concert as it lets you concentrate differently; this production I saw last Sunday was truly the worst of all worlds. The orchestra was on the stage with a chorus standing behind, and the principal singers tried to act out the story in the couple of feet at the front of the stage. Apparently nobody had coordinated costumes: at one point Diva2 was dressed in a plain sweater and skirt while the singer playing her maid was all dolled up in a cocktail dress with high heels. When I'm at opera and something's off, I try to concentrate on something else. But there really was nothing redeeming about this performance: the fellow singing Giorgio had an upper-range caterwaul that was the worst noise ever emitted in a professional performance; there was an out-of-tune violin during the first half; one of the tenors in the chorus was singing to a different tempo; and so it went.

As often happens these days, when the pathetic horror finally came to end people immediately screamed "Brava" and gave it a standing ovation. The local paper, ever supportive of the arts, said that Diva2 had a "commanding vibrato" and called it an "impressive show." (On the other hand, they once reviewed Swiss Chalet and said it had excellent service and outstanding ambience.)

Both performances left me unsatisfied. The second was so bad that it gives a bad name to the art form. But the first wasn't quite right either. I'm all for great tour de force performances - I was enchanted with Renee Fleming in this year's Met opening gala, in which she sang excerpts from three operas that highlilghted her great talent. But when you mount an entire opera the production shouldn't be so much a star vehicle, no matter how great the star. For example, I don't like it when the audience continually interrupts an opera to applaud individual performances, and that's because to me an opera is a play with extra dimensions. Can you imagine applauding the actor playing Hamlet after each soliloquy? Treating it as a concert of songs is just wrong, and takes away much of the emotional punch. The same is true of making the entire production a frame for a star.


Monday, February 16, 2009

Ending the Wars

I was just reading a good post over at the newly-rebranded Disaffected Lib about Obama's dilemma of being stuck in two unaffordable, unwinnable wars. As MoS points out, Americans have a low tolerance for defeat. In fact, if not played right a winless exit could be political suicide.

But here's a thought: change the name. The US isn't involved in two wars; it's involved in two invasions. Nobody ever really wins a military invasion: they occupy the country for a while and then leave it.

It's not going to be possible, at least in this generation, for Americans to admit that what they did was morally reprehensible and illegal. They were too supportive of the invasion, too angry at anyone who didn't support it with them (and that went far beyond France; I am still smarting from the way ordinary Americans treated Canadians during that period).

Obama doesn't have to call it an illegal invasion; all he has to do is say they invaded for a reason, but now those reasons are past, and it's time to pull out.

After that... there have to be war reparations. As I have been arguing for some time, a Truth & Reconciliation commission might be able to sort out what went wrong and how to ensure that the world's biggest military doesn't get misused this way again. On top of that, the US needs to spend decades paying back the Iraqis and Afghans for the damage the American military and occupying bureaucrats have done.

Will an American pull-out result in civil war, increased power of terrorist organizations, even state failures? I don't know... of course we have to figure out how to lessen the post-pullout negatives. But the negatives of continuing the invasion are so great that there is no longer any question that the main priority is for the Americans and their allies to GET OUT.


Sunday, February 15, 2009

Risk Part 7: Some Basic Accounting Problems

Avinash Persaud, chair of Intelligence Capital, describes current financial regulations as like seat belts that stop working when you need them. He says, "If the purpose of regulation is to avoid market failures, we cannot use, as the instruments of financial regulation, risk-models that rely on market prices, or any other instrument derived from market prices such as mark-to-market accounting. Market prices cannot save us from market failures. Yet, this is the thrust of modern financial regulation, which calls for more transparency on prices, more price-sensitive risk models and more price-sensitive prudential controls. ...if we rely on market prices in our risk models and in value accounting, we must do so on the understanding that in rowdy times central banks will have to become buyers of last resort of distressed assets to avoid systemic collapse."

Persaud argues that financial markets follow a sort-of Heisenberg uncertainty principle: since everyone is seeing the same data, using the same statistical tools, and chasing the same investment opportunities, then "under the weight of the herd, favoured instruments cannot remain undervalued, uncorrelated and low risk. They are transformed into the precise opposite. ...Paradoxically, the observation of areas of safety in risk models creates risks, and the observation of risk creates safety." He wrote in 2000 about the problem of market crises being exacerbated by this phenomenon: "market-sensitive risk models, increasingly integrated into financial supervision in a prescriptive manner... send the herd off the cliff."

Another problem with our current measurement of risk is that it too frequently looks at risk in isolation. In The Case for Collective Risk Reporting, David Shimko, president of Asset Deployment and a trustee at the Global Association of Risk Professionals, provides several examples of times when looking at risk in isolation was inadequate. One horrifying example is that banks do not have collective risk reporting, so can only evaluate the risk of their relationship with a company without knowing how many other banks the company is borrowing from. Another example is trading with an entity when you don't know who else they're trading with, and how vulnerable they are to their other counterparties.

Shimko suggests "a neutral risk report aggregation and disaggregation service, overseen or managed by the Fed, that would report each bank’s risk information on a no-names basis to the peer banks and other stakeholders. In so doing, risk information could be shared while the identity of the bank providing the information could be kept secret."

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard


Risk Part 6: Moral Hazard

Moral hazard occurs when someone is in a position to take risks that can hurt other people, but that can only result in benefit to the risk-taker.

In our current financial environment, there are several causes of moral hazard:

* Bonuses to investment dealers - Traders invest other people's money, and they suffer no penalty for losing money. They are paid huge bonuses (sometimes as high as 20 to 50%) for showing short-term gains on their investments. This encourages them to invest recklessly - to look for high short-term returns, regardless of long-term problems.
* Layered leverage without transparency - There is a large group of players who benefit from the upside of investments but pass the downside on. These include the mortgage originator, underwriter, and mortgage pool sponsor; and the traders of credit default swaps, collateralized debt obligations and collateralized mortgage obligations.
* Government bailouts - Bailouts mean, essentially, that profit is privatized while risk is socialized.
* Sinecure - Senior management has become an elite group that looks out for itself, regardless of performance. Not only are management bonuses insufficiently tied to company performance, but CEOs who fail in one place are generally able to find similar work elsewhere.

The bad bonus system is not all the fault of the banks. When hedge funds started paying 20% bonuses they started attracting all the best traders, which pretty well forced the banks to increase bonuses.

There are lots of good suggestions for how to change trader incentive by reducing and restructuring bonuses. There's no question those need to be implemented.

But it doesn't help to incentivize the traders to think long-term if the bosses aren't thinking long-term. In fact, a lot of the current criticism smacks of scapegoating. After all, those bonuses got set up because it benefited the guys at the top, and it's at the top that the buck really stops. Currently, the organizational incentive is to push short-term profits at all costs - even at the cost of the company collapsing.

The problem goes beyond reckless investments; problems with over-leveraging and insufficient capital are just as bad, if not worse. By the time of the collapse last fall entire companies were precarious houses of cards that were doomed to collapse when the bubble burst. Worse, the only reason we didn't know it was going to happen was because of insufficient transparency. And all of this was in a heavily regulated, heavily scrutinized industry.

What we need to do is remove, or at least reduce, moral hazard throughout the financial industry. That means we need to go beyond capital requirements and leverage limits and address the root of the problem. People and organizations who have the priviledge of investing money should have to prove their ability to act responsibly. There should be serious jail time for people who take reckless risks. That would be a start.

See also:
See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems


Friday, February 13, 2009

Risk Part 5: Capitalism 2.0

If the only lesson we get out of the current financial crisis is that we need to tweak the regulatory system, then we are in BIG trouble. Tax-payers in the western world are paying trillions of dollars to profit-taking corporations. This bailout may be necessary, but it is deadly dangerous. Every time we bail them out they get a little more complacent about taking risks that leave them needing more bailouts.

Make no mistake: these people have a mandate and it is to make as much money as possible. Their commitment to maximizing profits is as zealous as commitment can be. Like the creature on the late show, they will not stop. Like the Mississippi River, when they hit an obstruction they will overflow banks and find new routes. Even in the face of enormous pressure to act responsibly, after taking billions in bailout money they paid themselves billions in bonuses. The bailout became just another strategy to accumulate wealth, and that is just the nature of our current economic system.

Capitalism 2.0 is a change in basic principles: from "working to create value for shareholders" to "working to sustainably create value for all stakeholders". There are two key differences here:

Term - Decision making considerations need to move from short-term to long-term. Currently, the entire system is set up so that players make short-term decisions that put money in their pockets, and once there, they own it: there's no giving it back. Meanwhile, the decisions they make have long-term effects on everyone else. In the last few years the principle of short-term advantage was pushed to the limit by investment traders. The system encouraged them to make decisions that yielded short-term bonanzas but ulitimately caused the entire system to collapse.

Scope - The beneficiaries of business decisions need to move beyond a narrow group of the power elite. We charitably call this group shareholders, but in Cap1 a company is disproportionately run for the benefit of a handful of senior executives. (To get an idea of some of the extra remuneration head honchos give themselves, go to, type a stock symbol or company name in the "Get quotes" box, and then scroll down the page and click on "Insider Transactions" in the left column.)

One example: we have to nationalize parts of our banks. Nassim Taleb has been arguing for this. There is a "utility" function to banks, clearing cheques and the like, that is fundamental to the running of our economy but that is threatened by the risk-taking parts of the bank. I have to agree that the utility functions of banks should be nationalized, and that everyone must understand that the risky investment part of banks will never again be bailed out.

The need for nationalization goes beyond the banks. Over and over in this crisis we hear people saying that there are companies that are too big to fail. And when the Bush administration ignored that warning and let Lehman Brothers fail, chaos descended. The lesson has to be that the market cannot be allowed to handle everything.

The idea of nationalization may seem shocking to some, but it's really not a huge change from the present. Paul Krugman wrote recently, "not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie." Most of the world's biggest oil companies are nationally owned. The move to privatize hydro operations is quite a recent phenomenon. Americans are horrified by the idea of "socialized medicine", but we in Canada are quite comfortable with a medical system that doesn't insert profit-takers throughout the process.

Another fundamental change required by Cap2 is the move from rule-based regulation to principle-based regulation. In Cap1, businesses can do anything that is not illegal. Business should be regulated in the way that driving is: you need to demonstrate fitness to participate. Part of this is rethinking what is legitimate business. For example, Robert Bonfiglio says, "Buying a Credit Default Swap that exceeds the actual amount of what you are protecting, or on something you don't own or have any money invested in, is gambling and should be subject to taxes and the laws of gambling in the state which the bet is placed."

The Cap1 concept of financial oversight is simply a joke. The watchdog for all the Wall Street hedge funds was a handful of inexperienced bureaucrats. And the models that are used in credit risk are a joke, analysing single transactions without looking at all the transactions of an organization. There needs to be so much more oversight that the concept of oversight reaches another dimension. We need a holistic approach to risk management. (See The Case for Collective Risk Reporting and the article "Integrated Risk Assessment", here.)

Capitalists have proved that they will act just as predicted by economic models, and that that means they can't be trusted. You may argue: what about corporate donations? But corporate donations are a way to create goodwill, which is just another line on the balance sheet. It reduces taxes, increases brand value, and makes shares worth more. It also gives personal advantages to senior executives who administer and fete the money they are giving away (which does not come out of their own pockets).

The ability of the Cap1 capitalist to find loopholes and routes around the rules are as powerful as the aforementioned creature on the late show and Mississippi River. Then once they get around the rules and make their money, our Cap1 value structure lauds them for being wealthy. A case in point is Conrad Black. Now in jail as a convicted felon, he was the cock of the walk for 25 years after being exposed as a con man in Peter Newman's best-selling "The Canadian Establishment". He was an important man because he was rich, even though we knew he was a crook.

For a long time we have known that the system is rotten, but have been told that while imperfect, it is the most efficient way to operate. The current collapse of the financial system has changed all that.

Part of our acceptance of Cap1 was a phony dichotomy between unfettered capitalism and state-centralized communism, as if those were the only options. Now that capitalism isn't working, it's clear that we need to find another option.

Capitalism has changed whether we accept it or not. We have entered a period of extreme business cycles. In the upswing there is enormous wealth-mongering that inevitably leads to a crash that requires bailout. Some call this corporate socialism but that is much too kind a word, as it is really a massive fraud perpetrated on the public by the power elite. The remuneration that senior executives at large corporations pay themselves has gone way beyond any fair amount required by competition to keep good talent - especially since top executives now get hundreds of millions of dollars a year even when the company loses money, and even (in the form of golden parachutes) when they are fired. It's not about attracting talent: it's about power rewarding itself. It has been going on for years, but recently has been on a sharp increase. There's only one word for it: egregious.

After all the scandals and all the trillions in bailouts, if we don't have the will to take real action now we'll never have it. And we need to strengthen our resolve to make some real structural change. Only when we accept the principle of Cap2 ("the purpose of business is to sustainably create value for all stakeholders") can we start to transform our political-economic system into something that works for the people.

The question is whether we can grab the monkey by the tail and get a harness on it. Every lobbyist in every national capital will be against this one, and the politicians are mostly part and parcel of the same community.

Update: Greenspan Backs Bank Nationalization

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems


Risk Part 4: Regulatory Revision

There is widespread consensus these days that the way we, as a society, are dealing with risk is unacceptable. In up business cycles wild profits are made based on risky behavior, and then in down cycles the public has to bail out corporations. The re-regulation process spearheaded by the Basel Committee aims to "align bank capital more closely with the risks taken." To make banks more resilient to market downturns, Basel II proposes the following:

* Set higher capital requirements for certain complex structured credit products.
* Strengthen global practices for liquidity risk management and supervision.
* Initiate efforts to strengthen banks’ risk management practices and supervision, relating in particular to stress-testing and off-balance sheet management.
* Enhance market discipline through better disclosure and valuation practices.

Lots of other suggestions are being made for regulatory revision, many from players in the hedge fund community and financial community. Here's a selection of what I've seen recently:

* Pay bonuses out of the least-desirable assets held by the company. For 2008 year-end bonuses, Credit Suisse gave employees its most illiquid loans and bonds.
* Tax transactions during booms to even out business cycles and to pay for bailouts during busts. Perhaps this should be aimed directly at problem instruments: Steven Allen of Rutter Associates and NYU suggests that "uncollateralized derivative transactions would be subject to a “systemic risk tax” which could be adjusted by regulators until desired risk reductions were achieved. In addition, to aid regulators in overseeing credit extension to hedge funds, a complete database of hedge fund positions would be created to facilitate the assessment of risk concentrations that may not be visible to individual prime brokers."
* Keep some of the risk of loans in each place the loan passes through. Part of the problem in the sub-prime crisis is that the bank that originated the loan was able to pass all the risk on to other organizations.
* Reduce moral hazard - Tie bonuses to long-term profitability, not short-term, so that employees don't have an incentive to maximize bonuses through wreckless investments.
* Mark-to-Market accounting - Modify this accounting standard, such as by changing what counts as a capital charge.
* Scrutinize new products - Have a vetting procedure, akin to health & safety vetting of new drugs, for new financial products.
* Stopper up the loop holes - Make regulations principles-based instead of rules-based.
* Stop using VaR for determining market risk capital requirements. Use stress tests and stop limits instead.
* Change the way we calculate credit risk.
* Raise credit capital requirements for risky products - Such as credit default swap contracts; and any product that is new, complex or opaque.
* Improve the work of rating agencies - the founder of a hedge fund says, "The market perceives the rating agencies to be doing much more than they actually do. The agencies themselves don’t directly misinform the market, but they don’t disabuse the market of misperceptions — often spread by the rated entities — that the agencies do more than they actually do. ...The rating agencies remind me of the department of motor vehicles: they are understaffed and don’t pay enough to attract the best and the brightest. The DMV is scary, but it is just for mundane things like driver’s licenses. Scary does not begin to describe the feeling of learning that there are only three or four hard-working people at a major rating agency judging the creditworthiness of all the investment banks; the agency, moreover, does not even have its own model for evaluating creditworthiness."
* Ensure corporations have better forensic accounting staff to prevent rogue traders.

(I apologise that I've lost some of the links to that material, a hazard of doing my reading on the streetcar.)

Reading what needs to be fixed was shocking to me. I think most of us had no idea how lax the regulations and oversight have been. There is plenty of bureaucracy, but holes in the rules big enough to drive the space shuttle through. Lots of regulatory revision is required, but it's not enough. Some structural changes are needed as well. More on that next.

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis


Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis

The collapse of Lehman Brothers on September 15, 2008 is the event that tipped the financial system into full-blown crisis. Allowing Lehman to fail is arguably one of the worst decisions of the Bush administration. Why did Lehman fail? Here's an analysis of the problems at Lehman. This is an excerpt from an article by David Einhorn in the Global Association for Risk Professionals' publication GARP Risk Review. Keep in mind that this article was written after the spring of 2008 (when the financial crisis started) but before the collapase of Lehman, and that when it was written few people suspected any problems at Lehman:
The first question to ask is, how did this [financial crisis] happen? The answer is that the investment banks outmaneuvered the watchdogs, as I will explain in detail in a moment. As a result, with no one watching, the management teams at the investment banks did exactly what they were incentivized to do: maximize employee compensation. Investment banks pay out 50% of revenues as compensation. So, more leverage means more revenues, which means more compensation.
The second question is, how do the investment banks justify such thin capitalization ratios? And the answer is, in part, by relying on flawed risk models, most notably value at risk (VaR). VaR is an interesting concept. The idea is to tell how much a portfolio stands to make or lose 95% of the days or 99% of the days or what have you. Of course, if you are a risk manager, you should not be particularly concerned how much is at risk 95% or 99% of the time. You don’t need to have a lot of advanced math to know that the answer will always be a manageable amount that will not jeopardize the bank.

A risk manager’s job is to worry about whether the bank is putting itself at risk in the unusual times — or, in statistical terms, in the tails of distribution. Yet, VaR ignores what happens in the tails. It specifically cuts them off. A 99% VaR calculation does not evaluate what happens in the last 1%. This, in my view, makes VaR relatively useless as a risk management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an airbag that works all the time, except when you have a car accident.

By ignoring the tails, VaR creates an incentive to take excessive but remote risks. Consider an investment in a coin-flip. If you bet $100 on tails at even money, your VaR to a 99% threshold is $100, as you will lose that amount 50% of the time, which obviously is within the threshold. In this case, the VaR will equal the maximum loss.

Compare that to a bet where you offer 127 to 1 odds on $100 that heads won’t come up seven times in a row. You will win more than 99.2% of the time, which exceeds the 99% threshold. As a result, your 99% VaR is zero, even though you are exposed to a possible $12,700 loss. In other words, an investment bank wouldn’t have to put up any capital to make this bet. The math whizzes will say it is more complicated than that, but this is the basic idea.

Now we understand why investment banks held enormous portfolios of “super-senior triple A-rated” whatever. These securities had very small returns. However, the risk models said they had trivial VaR, because the possibility of credit loss was calculated to be beyond the VaR threshold. This meant that holding them required only a trivial amount of capital, and a small return over a trivial amount of capital can generate an almost infinite revenue-to-equity ratio. VaR-driven risk management encouraged accepting a lot of bets that amounted to accepting the risk that heads wouldn’t come up seven times in a row.

In the current crisis, it has turned out that the unlucky outcome was far more likely than the backtested models predicted. What is worse, the various supposedly remote risks that required trivial capital are highly correlated; you don’t just lose on one bad bet in this environment, you lose on many of them for the same reason. This is why in recent periods the investment banks had quarterly write-downs that were many times the firmwide modelled VaR.
Lehman’s management is charismatic and has almost cult-like status. It gets tremendously favorable press for everything from handling the 1998 crisis to supposedly hedging in this crisis to not playing bridge while the franchise implodes.

From a balance sheet and business mix perspective, Lehman is not that materially different from Bear Stearns. Lehman entered the crisis with a huge reliance on US fixed income, particularly mortgage origination and securitization. It is different from Bear in that it has greater exposure to commercial real estate and its asset management franchise did not blow up. Incidentally, neither Bear nor Lehman had enormous on-balance-sheet exposure to CDOs. At the end of November 2007, Lehman had Level 3 assets and total assets of about 2.4 times and 40 times its tangible common equity, respectively. Even so, at the end of January 2008, Lehman increased its dividend and authorized the repurchase of 19% of its shares. In the quarter ended in February, Lehman spent over $750 million on share repurchases, while growing assets by another $90 billion. I estimate Lehman’s ratio of assets to tangible common equity to have reached 44 times.

There is good reason to question Lehman’s fair value calculations. It has been particularly aggressive in transferring mortgage assets into Level 3. Last year, Lehman reported its Level 3 assets actually had $400 million of realized and unrealized gains. Lehman has more than 20% of its tangible common equity tied up in the debt and equity of a single private equity transaction — Archstone-Smith, a real estate investment trust (REIT) purchased at a high price at the end of the cycle. Lehman does not provide disclosure about its valuation, though most of the comparable company trading prices have fallen 20-30% since the deal was announced. The high leverage in the privatized Archstone-Smith would suggest the need for a multibillion-dollar write-down.

Lehman has additional large exposures to Alt-A mortgages, CMBS and below-investment-grade corporate debt. Our analysis of market transactions and how debt indices performed in the February quarter would suggest Lehman could have taken many billions more in write-downs than it did. Lehman has large exposure to commercial real estate. Lehman has potential legal liability for selling auction-rate securities to risk-averse investors as near cash equivalents.

What’s more, Lehman does not provide enough transparency for us even to hazard a guess as to how they have accounted for these items. It responds to requests for improved transparency grudgingly, and I suspect that greater transparency on these valuations would not inspire market confidence. Instead of addressing questions about its accounting and valuations, Lehman wants to shift the debate to where it is on stronger ground. It wants the market to focus on its liquidity. However, in my opinion, the proper debate should be about Lehman’s asset values, future earning capabilities and capital sufficiency.

In early April, Lehman raised $4 billion of new capital from investors, thereby spreading the eventual problems over a larger capital pool. Given the crisis, the regulators seem willing to turn a blind eye toward efforts to raise capital before recognizing large losses; this holds for a number of other troubled financial institutions. The problem with 44 times leverage is that if your assets fall by only a percent, you lose almost half the equity. Suddenly, 44 times leverage becomes 80 times leverage and confidence is lost. It is more practical to raise the new equity before showing the loss. Hopefully, the new investors understand what they are buying into, even though there probably isn’t much discussion of this dynamic in the offering memos. Some of the sovereign wealth funds that made these types of investment last year have come to regret them.

Lehman wants to concentrate on long investors; in fact, it went to great lengths to tell the market that it sold all of its recent convert issue to long-only investors. Putting aside the fact that some of the clearing firms have told us that this wasn’t entirely true, companies that fight short sellers in this manner have poor records. The same goes for companies that publicly ask the SEC to investigate short selling, as Lehman has done. There is good academic research to support my view on this point. As I have studied Lehman for each of the last three quarters, I have seen the company take smaller write-downs than one might expect. Each time, Lehman reported a modest profit and slightly exceeded analyst estimates that each time had been reduced just before the public announcement of the results. That Lehman has not reported a loss smells of performance smoothing. Given that Lehman hasn’t reported a loss to date, there is little reason to expect that it will any time soon. Even so, I believe that the outlook for Lehman’s stock is dim. Any deferred losses will likely create an earnings headwind going forward. As a result, in any forthcoming recovery, Lehman might underearn compared to peers that have been more aggressive in recognizing losses.

Further, I do expect the authorities to require the brokerdealers to de-lever. In my judgment, a back-of-the-envelope calculation of prudent reform would require 50-100% capital for no ready market investments; 8-12% capital for what the investment banks call “net assets”; 2% capital for the other assets on the balance sheet; and an additional charge that I don’t know how to quantify for derivative exposures and contingent commitments. Only tangible equity, not subordinated debt, should count as capital. On that basis, assuming that Level 3 assets are a good proxy for no ready market investments — assigning no charge for the derivative exposure or contingent commitments and assuming its asset valuations are fairly stated — Lehman, based on its November balance sheet, would need $55-$89 billion of tangible equity, which would be a three- to-five-fold increase.

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems

Risk Part Two: The Mess

The financial crisis of the last ten months is so severe that banks around the world are collapsing, propped up only by unheard-of bailouts by their governments. Many banks have been fully nationalized, either completely or effectively. These include Icelandic banks; Northern Rock in Britain; the biggest Irish banks (Allied Irish Banks, Bank of Ireland and Anglo Irish Bank); and Fortis in Belgium. The British government now owns 70% of the Royal Bank of Scotland. I have lost track of the billions (trillions?) the US government has put in its financial sector. And that's just a partial list, and only as of today. We can foresee that many more banks are going to be in big trouble in the future, especially as the countries on the periphery of Europe implode and we await the next round of mortgage defaults in the US.

The crisis is so severe that currently governments are doing little more than buying time before there are more defaults and more bankruptcies. Despite the massive payments, the credit crunch is not easing. Consequently, the whole economic system is folding in on itself, and a vicious cycle is in full swing of layoffs, reduction in demand, and corporate collapse. Already it is estimated that 20% of the wealth of American citizens has been wiped out. Layoffs are announced daily. All of this will have tremendous negative impact down the road. Just one example: a massive reduction in municipal tax revenues.

To me, the scariest part of the whole mess is the complete inability of anyone to predict what's going to happen next or to agree on what to do about it. Just a few weeks ago our government and most Canadian economists were saying we might escape unscathed. Then the statistics came out (after a frustratingly long delay) and it was apparent that things are much worse than the worst prediction.

At President Obama's press conference about the financial crisis last week, the first question was about the language he used in describing the crisis: the reporter implied that he was fear-mongering and asked him to justify his extreme language when saying what could happen if we didn't enact effective stimulus immediately. It was a profoundly stupid question. In reality, we already have fallen into the abyss.


Thursday, February 12, 2009


I haven't lived in Toronto since 1995, and I've been sitting on the sidelines for a while listening to the national pasttime of trashing the Big Smoke. Albertans in particular seem to delight in schadenfreude at Toronto's expense: "Freeze in the dark eastern bastards" and so on. Even other residents of Ontario seem to enjoy heaping a little contempt on our biggest city.

The last few weeks I've been working in Toronto, subletting a loft in a converted toy factory in the new neighborhood of Liberty Village. A few minute walk from a streetcar stop, I'm also around the corner from the Academy of Spherical Arts (which is on Snooker Street), the new incarnation of Mildred Pierce restaurant, a Balzac's coffee shop, 24-hour grocery store, LCBO, and more. I don't even move my car except to come back to Waterloo.

Sure, there are some weird things. The traffic's crazy. It's congested and definitely dirtier than Waterloo. Toronto businessmen all seem to wear the same style of slip-on flat-toed shoe and the same shade pink shirt.

But great heavens, what a wonderful city! It's everything a city should be, with vibrant neighborhoods, a huge cultural scene, live-work mixed together, beauty, walkability. Added to all that, it's safe and it's friendly. I have been lucky to live and work in London, New York, Boston, Ottawa, Sofia and Dar-es-Salaam, and to spend time in a number of other great cities, but really, nothing beats Toronto.


Monday, February 09, 2009

Experiencing Opera

The simple part of learning to experience opera is learning to open your senses to a blast of complex inputs. It's not all that easy, at least for me.

First, you have to avoid getting distracted, because sometimes in a lengthy piece there's a tendency to daydream, get miffed at people coughing, or whatever. (I hear that some people, egad, even doze off.) It's important to be well rested, have no alcohol and only moderate carbohydrates before the show, not be hungry or thirsty, and be dressed in light comfortable clothing. It's also best not to plan any events for afterwards that might absorb your attention.

You also can't let yourself get distracted by the surtitles: it's important to read them in little bursts and sometimes just ignore them altogether. It helps me to sit in the balcony so I don't have to look up, away from the stage, at the surtitles. An ideal situation is to attend an opera you know well enough that you don't need the surtitles. I particularly like attending the encore performance of the Met HD program because the production is clear in mind from the first viewing.

Likewise, it's easy to focus too much on the singers and the visuals, and not pay adequate attention to the orchestra - occasionally I forget to listen to the orchestra, and I always get mad at myself when I do that. In some operas, like the Ring Cycle, I partciularly focus on the orchestra (it's not really possible to miss the singing or the action, in any event).

It's also important to me that I don't focus on the mistakes, but absorb it as a whole, uncritically. I can think critically later. This might separate me from people who are musically trained or more knowledgable about the music.

How much you know about the opera is a less definitive area. Opera can be enjoyed on many levels. For me, the decades-long process of understanding opera has been a gradual increase in awareness that deepens my understanding, and lately I've been speeding up that process, attending lectures and reading web sites and books. I'm getting more out of opera now, but I don't know that the emotional punch was any less when I was less knowledgable. I was lucky that my mother started me off on very accessible operas. My first was Maureen Forrester in Menotti's The Medium, which is not only very short but also really a play with words - and it was engrossing and spine-tingling. As I learned more my understanding deepened and my experience became richer. It took me until my 30s or 40s to like Wagner, although I was an early convert to Janacek.

For me, both the requirement and the reward is the high level of concentration required by opera, but there's more, and that's not overthinking the experience. The whole point of opera is the emotional impact, so you have to make yourself open to that. My dad once said that a game of golf is like living a lifetime, with emotional highs and lows - I think opera is for me what golf is for him. To a certain extent, you have to free yourself to ride the emotional rollercoaster, unhinge from the world and yourself. You have to be able to be caught up in the moment.

The difference between opera and a play or a book is that the emotional impact is not mostly the story. When I cry in an opera, it's almost always because of sublime music, not the plot. There are exceptions, such as the end of Gotterdammerung, when the final lietmotif heralding the era of man is almost overwhelmingly emotional on all levels. I've never been brought to tears by sublime music at the symphony - it's something about voice that is so powerful. And for me, the music has to be live... I'm not very enthusiastic about recordings, and can only watch videos in certain circumstances (Met HD productions I've seen before, and mostly, the Chereau-Boulez Ring Cycle).

All this is sort of dancing around my central interest in writing about opera: why does it affect me the way it does? That's a developing topic. I want to understand it in a way that will heighten the experience, rather than lessen it by externalizing a deeply felt experience.

I met someone recently who attends upwards of 100 operas a year, and it dawned on me that there is an addictive high to the experience, in much the way that joggers say they get addicted to an endorphin rush from extreme exercise. I guess I'm not an addictive personality... I'm happy with two or three dozen a year...


Saturday, February 07, 2009

Measuring Risk Part 1: Issues

Risk is all the rage right now. I made a timely decision last year when I decided to move into financial risk statistics as a new area of expertise. The financial meltdown caught everyone unawares, and the idea of being better prepared next time has caught on big. Businesses are getting interested in finding more sophisticated ways to measure volatility and exposure, and new government regulations are also requiring they do so.

In the banks, risk is effectively a corporate governance function, not a business function. One reason for this is that risk is seen as an impediment to short-term profits (and hence bonuses). But it's also the case that people don't trust risk statistics. A lot of money goes into producing risk statistics, but people don't actually make decisions based on them... and when they do, their accuracy is so poor that they're hardly better predictors of financial gain than flinging a dart at a newspaper stuck to the wall.

Most risk measurement is based on normal distributions that simply don't exist in the stock market. A normal distribution can be assumed when you have a lot of small movement without a lot of outliers (meaning that severe market events would occur only once every few hundred years). In reality, we have severe market events every five years or so. Real distributions are not normal; they're skewed in various ways.

In addition, most measures of risk are measures of volatility around the mean. This assumes that upside volatility is as bad as downside volatility - hardly true! Plus, they assume that volatility and the correlations between assets are not affected by extreme market conditions, even though it has been shown that after extreme market shocks the volatility and correlations go haywire for a while.

But even if you use stable (non-normal) distributions, measure downside risk, and account for volatility clustering, there are basic limitations to fundamental analysis: how far can you go basing risk on historical market data? For example, you're not measuring the exposure of an asset to exchange rates: you're measuring the way the asset responded to exchange rate fluctuations in a particular historical period. You don't know why it fluctuated, so you can't predict it will follow the same pattern in the future. It's the fundamental problem of econometrics: correlation does not imply causation.

Even if the statistics were at all accurate, there are problems with how to use them. We need a more sophisticated vocabulary and set of statistics based on the purpose of the measurement, and we need a better understanding of how to apply the statistics to the real world. Regulators, corporations, risk managers and individual investors all have different needs for assessing risk and should in many cases use different statistics.

More to come in subsequent posts.

Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems


Tuesday, February 03, 2009

Time to Step Up

Canadian conservatives are pro-free trade when it comes to opening up markets for their factories, but they aren't so pro-free trade when it comes time to meet the international obligations of globalization.

Our government, along with many Canadian economists, have had a recurring subtext in the last few months: Maybe Canada could get away with not shelling out for a fiscal stimulus since we'll rebound when the US economy does. This sentiment is what led to the infamous Harper/Flaherty Economic and Fiscal Statement of November 27, 2008. If the opposition had not made an effective threat to overthrow the government unless it enacted fiscal stimulus, this attitude would probably have led to Canada - alone in the developing world - not pitching in to help avert the global catastrophe.

IMF First Deputy Managing Director John Lipsky recently said, "Governments must not fall into the 'seductive trap' of focusing only on national priorities at the expense of international health." He's talking to Canada. Most of the rest of the world gets it.

Okay, to be fair, it's not just Canada. For a while Germans also also floated the idea of skimping on stimulus and riding the coat-tails of other countries. And it's not just Conservatives: others have suggested we might duck the cost of stimulus and wait for the US. But Canadian Conservatives are definitely the main proponents of this isolationist policy.

Most countries not only get it, but they have really stepped up to the plate. When the IMF asked developed countries to enact fiscal stimulus with a combined effect of 2% of global GDP, most countries announced stimulus packages immediately.

In early December, Japan announced out of the blue that it was loaning the IMF an additional $100M. Japanese Ambassador Takeshi Kondo said when he announced the loan: "International trade and Japanese business are based on the US dollar system and it is in the interests of the country and the GCC states to support that system."

Alistair Darling, UK chancellor of the exchequer, recently wrote: "Working alone, as individual countries, there can be no solution [to the economic crisis]. But together... we could get through this global credit crunch." He calls for "coherent and concerted policy action across the world" and says the UK "needs to lead the process of managing globalisation as a force for good."

The IMF recently asked developed countries to pitch in extra cash to the IMF crisis rescue fund. Doing so is in our own best interest. By helping the countries most in peril (like much of Eastern Europe), we help stop the spiral of defaults on loans and loss of trade that will bring us down too.

We also need to rehabilitate our image. So far in this crisis we have behaved very poorly, and there will be repercussions if we don't address that. This situation is the same as if we hadn't risen to the defence of Europe in 1939. It's like turning our backs on a country that has suffered a devastating national disaster. If we don't step up on this, we don't have a lot of moral authority when we argue against the US not wanting to spend any of their stimulus money in Canada. We don't have much claim to authority at all.


Sunday, February 01, 2009

Business as Usual

The most underreported aspect of the current economic crisis is the degree to which this is just business as usual. By making events seem extraordinary, we don't develop the public will to change.

Economic downturns, crisis in the banking industry, large-scale bailouts of corporations, fraud in the securities industry, millions of investors losing their shirts - all happen on a regular basis. The last US recession was just five years ago. This time the housing bubble burst; ten years ago the tech bubble burst. The US government bailed out the auto industry in the late 70s and the banks in the early 90s (and thousands of other companies from that period to now). This time inadequate regulation led to enormous losses due to sub-prime mortgages and the securitization of risk; in the 80s lack of regulation led to enormous losses due to junk bonds. In the 80s the banking sector was rocked by the Savings & Loans scandal, and in the early 90s it was rocked by the collapse of that decade's real estate bubble. This year investors lost billions to Bernie Madoff; just a few years ago investors lost billions in Enron. I was flipping through a 2005 copy of a financial industry magazine the other day, and it was full of articles about fraud and corporate collapse in the hedge fund industry. This recession is so far no worse than those we suffered in the early 80s and early 90s.

The essential problem seems to be an inability to understanding during booms that booms lead to busts. Alan Greenspan kept interest rates low long past the time that monetary policy was needed to spur to the economy, and so created the massive bubble that burst so spectacularly last year. During booms we feel that the good times will never end. I recall during the tech boom that the business press line was: If you don't invest in tech stocks you're throwing away money; tech stocks grow by 30% every year while every other investment pays a fraction of that; it's crazy not to invest in tech stocks! Then tech stocks went kaput.

During a downturn we all understand the concept of business cycles. During an upturn we forget about it completely. If citizens, investors, policy-makers and regulators all developed a clear long-term approach to business cycles, then we might start to get some coherent policy that would avoid our current situation of lemon socialism, in which the rich bleed dry a company and then seek government assistance.

If we saw the situation for what it is, we might institute taxes on financial transactions to create a bailout fund (first, we should create a fund to pay off previous bailouts; then start saving for future catastrophes). Or we might decide that if something is too big to fail then it's too big to be in private hands. We might think about regulating the bonus system in financial institutions that lets financial managers collect bonuses on investments that make huge gains in the short term but face catastrophic risk down the road, after the manager collects the bonus.

We might see that we need some reins on the ability of the elite to enrich themselves at the helms of large corporations. That there is something wrong when individuals in the hedge fund industry make over a billion dollars a year (and pay only a 15% tax rate). Or when CEOs of money-losing companies take home hundreds of millions in remuneration. Or even little things like senior management of public companies flying to the superbowl on company jets.

And we need to see that the good times aren't so good after all. We need to even out business cycles by putting a damper on booms. This can be done with monetary policy (raise interest rates to slow down a hyperactive economy), but also with fiscal policy, such as some form of excess-profits tax. Just as we have economic stabilizers for downturns, such as employment insurance payments, so we could institute economic stabilizers for booms, such as more top-end tax brackets.

Thirty years ago, at least we knew we were being shafted. Now we (the middle class) seem to have been blinded by our own increased affluence, even though it is mostly driven by demographics (more people in peak-income years), women joining the workforce and so creating two-income households, increased hours of work, and a decrease in the non-immediate remuneration of pensions. We also fail to see that the increasing lack of job security means that our income is lower than it would seem from a single pay cheque: increasing numbers of us face periods of no income.

Once we see that this economic crisis is not extraordinary but just business as usual, it becomes clear that this isn't bad luck: it's a corrupt system. We haven't moved beyond the trickle-down economics of the Reagan years. In fact, the gap between the compensation of senior management and the average compensation of everyone else in corporations continues to widen, while tax cuts have mostly benefited corporations and the wealthy; and when bad times hit, it is the taxes of the middle class that bail out the wealthy. It's time for real change, and it's not going to come without public awareness and will.