Blog Archives

Here is a story about Meridian 180 that appeared today in the Cornell Chronicle:

http://www.news.cornell.edu/stories/March12/Meridian.html

Earlier today, I gave an interview to WHCU to discuss the anniversary of the earthquake and tsunami in Japan. You can listen to the interview here:

Here is a question that intrigues me about the current protests: How can, and should the targets of these protests (investment bankers, lawyers, regulators, journalists, politicians, etc.) respond?

Among the many legends surrounding Dean Guido Calabresi of the Yale Law School is the following story, which I am sure is only partially true: One day, law students organized a protest against the dean–what the reason for the protest was is long forgotten, but they chanted and held signs that read “Down with Dean Guido!”  Guido, hearing this protest, raced down from his office, smiling, with open arms, and grabbed one of the signs in one hand, while throwing himself at the most angry protester in a giant hug.  Soon they were all chanting and smiling together–Down with Dean Guido!–while hugging and laughing at the absurdity of it all.  The protest ended as a love-fest.

Now we could read Dean Guido’s actions as cynical or we could read them as signs of the immaturity of the students and their lack of clarity about what their protest was about in the first place. And there are certainly differences between whatever causes may have motivated the Yale Law students on that day and the very serious issues at stake in debates about the regulation of global markets.  But I would rather read Dean Guido’s actions as the political version of the old martial arts move of absorbing and deflecting your opponent’s power not simply as a means of defeating him but an instantiation of your commonality with him.  From this point of view, this incident offers a more complicated insight about the nature of protest, as political ritual which, like all ritual, is about many things at the same time and not simply about “demands,” which can turn in unexpected directions and offer opportunities for unexpected political outcomes if the parties can see beyond their own positions long enough to imagine unexpected ways of intervening, and which, above all, requires a response.

So how will “Wall Street” broadly conceived, respond? Are there opportunities for doing like Dean Guido, and embracing the protesters and the protests, thereby transforming this political moment?

Today is my last day as a visiting researcher at the Bank of Japan’s Institute for Monetary and Economic Studies, where I have been working on global financial governance issues, particularly as concerns the Financial Stability Board. It has been a fantastic experience to have a chance to exchange ideas with the people responsible for making monetary and financial regulatory policy at all levels in Japan. What emerges most clearly for me is how provincial is the world view reflected in current international financial governance. I have taken to calling this world view the NAPL model–the North Atlantic Post-Lehman Model–to suggest that it has been made largely by regulators in North American countries, very much with their own experience of the Lehman crisis in mind. As one bank manager in Tokyo put it, “they caused the last financial crisis, we didn’t–so why do they get to write all the rules on how to fix things?”
As the Financial Stability Board grows more diverse and more global, the emerging conflicts between developed economies and emerging markets about what exactly are the key problems that global financial governance should be addressing should be watched closely. If global financial governance is to be truly global, at a minimum it needs to address the key challenges faced by most economies, and not just some economies. This could begin with the FSB expanding its focus from the Lehman crisis to the experience with other financial crises, such as the Asian Financial Crisis, in which the causes and consequences were somewhat different. Japan is sometimes on one side of these debates, sometimes on the other, and sometimes has other concerns altogether. For example, its problem is not banks that take too much risk; its problem is that banks sit on stockpiles of cash and refuse to take risk at all, and this too can be highly damaging to an economy.
Yesterday I gave a seminar to researchers and policy makers inside the Bank of Japan. We had a lively discussion about whether the fancy new tools of financial governance deployed by the FSB to create global consensus and ensure global compliance such as “supervisory colleges,” peer review and the like help to broaden the global agenda in practice or not. I think we need serious empirical research to help us understand better when exactly these new tools work to promote greater mutual understanding across jurisdictions and when they do not. We also had a good discussion of my proposal that we look to develop other regulatory tools, in particular, private international law doctrines and protocals, to supplement the weaknesses of the FSB in the short to medium-term.

The Fukushima nuclear disaster is causing Americans to begin to ask important questions about the safety of our own nuclear reactors. Meanwhile, in Japan, many people are making comparing their government’s response to the US experience with Katrina or the BP oil spill.  Yet the lead-up and fall-out of Fukushima is eerily reminiscent of the conditions that led to the US financial crisis of 2007.  This suggests we might ask where the makings of the next crisis—financial, environmental, political, security-related—might be: where else do we find the same conflation of causes? 

Here are some similarities:

A collusive relationship between regulators  and industry, facilitated by mobility of staff between the two, facilitated a group-think consensus that downplayed risks and placed great faith in industry self-regulation. 

As in the case of financial firms at the center of the American financial crisis, a company—TEPCO—was implicitly understood to be Too Big To Fail. Hence the moral hazard problem was enormous.

Academics largely failed to serve as objective and independent sources of expertise: in both crises, elite academics generally sided with the industry and testified in court cases on behalf of the industry, thus creating a sense that criticisms or doomsday scenarios were the work of less elite non-experts who did not really understand the science.

Prior to the crisis, there was a lack of appreciation on the part of the general public of how ordinary actions fed the vicious cycle that in the end endangered us all.  Just as it easy to demonize Wall Street and forget the role of ordinary Americans in gaming the sub-prime system, it is easy to forget how our own vociferous appetite for energy fed this beast.

The ultimate cause of each crisis then, is the repeated lack of imagination and courage–on the part of -the executives who might have invested in safer technology, the middle level managers who might have made different recommendations to their higher ups, the bureaucrats who pushed the reports along rather than risk their reputations on challenging the group think that said the industry was totally safe and should be left alone, the professors who might have asked different questions, lawyers who fashioned logically defensible but ultimately counterproductive arguments on behalf of their corporate clients, the journalists who didn’t push too hard, the citizens who might have used the power of the purse more effectively.  

The consequences too have some similarities:

The costs to ordinary citizens’ property, physical and psychological well-being, and quality of life will be long-lasting and on-going—perhaps for generations.

A  government bail-out is eminent and it is likely that most of the large financial players—the executives, bond holders, and even shareholders—will end up getting off much better than they might have while victims will receive much less than they deserve.   

The costs of this bail-out to the national treasury, and its implications for the long term economic health of the country, will be enormous.

Although there is public outrage, the outrage still seems largely unproductive: unfocused, lacking in creative leadership about what reforms to demand in return for the significant public assets this disaster will cost, and tainted by a kind of nationalist rhetoric that deflects attention away from the ongoing institutional and political causes of the crisis.

One of my conclusions after watching with despair the hollowing out of the Dodd-Frank Act and now the Japanese failures at Fukushima is that ordinary citizens and market participants must stop waiting for the government to make things safe. The interests involved are such that politicians are probably the most unlikely sources of leadership. Instead, we should start thinking about our markets, our environment, and our security more generally as something akin to a public park—a commons that we value together and that we all need to pitch in to maintain from whatever vantage point  we participate in it—whether as consumers, traders, regulators, scholars, and so on.  As the old slogan goes, if the people lead, the leadership will follow. But for those of us—that is almost all of us—who have some measure of responsibility for these crises, daily pressures often get in the way—a fear of risk-taking, a lack of imagination, or just the pressures of time and the fact that it is quicker and easier to go along than to buck a trend.  But what if we began to see that the millions of small choices we all make in those moments in the aggregate are challenging our collective security?

In this respect, one of the only encouraging trends coming out of Japan’s nuclear disaster is the efforts ordinary citizens and corporations alike are making to conserve electricity (even in the almost unthinkably tone-deaf suggestion by TEPCO that it now will have to raise rates to make up for lost revenue).   Ordinary people are moving beyond retrospective blame and starting to do what they can—from the little corner of the problem they can influence,  to make change and collectively it is making a big difference. 

It will be interesting to see what the next step will be.  Will some TEPCO employees be inspired to wage a battle within the company to steer a more socially responsible course? Will judges, begin to think about their own accountability for public security when faced with a lawsuit by a citizens’ group? Will bureaucrats inside the relevant ministries begin to think about what creative work they can do, from where they stand inside the bureaucracy, even if they imagine that there is a risk that it might come at some personal cost to their careers? Will academics think more carefully about their public responsibilities in defining topics of research and evaluating the evidence? Will journalists begin to see more independent, and meaningful information about the causes, dangers, and alternatives to this disaster might anger some corporate interests but also will gain them the respect of readers? As with the financial crisis, there is an opportunity here, amidst the devastation.