Deficiencies in the E.U. Capital Markets: A Silver Lining

With the IMF reducing its forecast of E.U.[1] economic growth for 2015 by 0.2% to 1.2 percent, E.C.B. officials still intent to go ahead with the much-anticipated “quantitative easing” program (i.e., buying state bonds), and, the euro having recently fallen 12% against the U.S. dollar since peaking, and crude oil prices below $60 a barrel in January, the limited scale of the E.U.’s capital markets relative to their American counterparts exacerbated the E.U.’s blight. Most directly, the lack of diversification on the types of capital markets meant that the focus on the bonds issued by state governments would continue.[2] With an upcoming election in the state of Greece making stock markets jittery due to the risk that the state might default on its bonds, the precarious condition of a relatively undiversified capital market added, albeit subtly, to the sense of risk in the air. Having had years to develop alternative markets since the financial crisis, E.U. policy makers had no one to blame but themselves—it would seem. However, a bright spot in European culture or society may be responsible for the lack of development.

The size of the corporate bond market was at the time just 34% of the American counterpart as a proportion of GDP, according to New Financial, a think tank in London.[3] The E.U.’s leveraged loan and securitization markets were 19% and 17% the size of their U.S. counterparts, and the venture capital market was just 15 percent, again all in terms relative to GDP.[4] Because the respective U.S. counterparts dwarf the E.U. markets by such an amazing extent in terms of GDP, part of the explanation may involve different business cultures with respect to debt.

With the U.S. federal debt at nearly $18 trillion and the previous year still showing a deficit of over $400 billion, and almost a third of student loans in default, it is easy to view Europeans as relatively debt-averse even if the post-financial-crisis years of debt-weary states (i.e, the “PIGS”) present an image to the contrary. I suspect that the relative skepticism on debt is in turn a manifestation of European society being less infatuated with business and thus less reflective of its culture. Put another way, the positive connotation that leverage (i.e., using borrowing in productive investment to hopefully capture more of the returns than is possible in the case of stock-issuance capital financing) has in the business world has been more salient in American society than in its European counterpart. Considering the misuse of debt-financing in the American and European housing markets that led to the financial crisis in 2008, the relative size of the European capital markets as of 2015 has a silver lining.

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[1] Specifically, for the part of the E.U. that uses the euro currency.

[2] Simon Nixon, “A Continent in Need of Greater Capital Markets,” The Wall Street Journal, January 20, 2015.

[3] Ibid.

[4] Ibid.

Oil Supply: Problem or Panacea?

Between June 2014 and January 14, 2015, crude oil prices fell by 57 percent. Between November 1985 and March 1986, the prices had fallen by 67 percent.[1] That time, it took nearly two decades for oil prices to rebound. Would it take that long again? The answer has implications for how efficient the market mechanism itself is, and in turn for public policy on energy and global warming.

According to The Wall Street Journal, the discovery of oil in shale rock makes all the difference. The difficult question involves what that difference might be. With less time entailed from discovery to extraction, and less cost relative to the more traditional sources such as off-shore oil, the supply of oil on the market should be able to adjust downward much quicker, resulting in higher crude prices, other things equal. For example, wildcatters in Texas discovered the Eagle Ford Shale in 2008; within only five years, a million barrels a day were going to market.[2] “Faster-reacting shale production could help cut supply more quickly than in the past, restoring market balance without a decadeslong wait.”[3] This assumes the efficient market hypothesis—that suppliers quickly reduce their respective contributions to the market as a result of lower prices.

So it is surprising that the Journal cautions that the faster-reacting shale production does not necessarily “mean prices will rebound soon, or return to the triple-digit levels . . . Price pressure may need to remain on the U.S. oil industry and its lenders for months to rein in supply.”[4] Andrew Hall, who runs a $3 billion energy derivatives hedge fund, wrote to investors that it is unclear how long it would take for American suppliers to cut back due to the lower prices and even what the new price-equilibrium would be.[5]

For one thing, oil producers sunk into contracts would rather get as much revenue as they can, even if they will still lose money. Although shale producers have a shorter timeframe, the short life of a given well means that the producers are under pressure to start new wells in order to cover as much of the initial investment as possible. Put another way, keeping production up is the better of two bad options.

With the tap expected to remain open, the supply of oil from shale was predicted to peak in 2020, after which the annual decrease in oil from liquid sources would be less and less made up by oil from shale. By 2030, the production from liquid sources could be only half of its level in 2014, with no oil left from shale. In short, the lack of a drastic downturn in supply during the last half of 2014 suggests that the American economy might suffer shocks in the 2020s as oil prices skyrocket from dramatically reduced supplies. With alternative energy representing only about 3% of the total in 2014, even increased investment in wind and solar facilities would not counter the anticipated drop in oil supplies.

Had the oil market in 2014 been more in keeping with the efficient market hypothesis—with supplies dropping drastically as the prices of crude drop likewise until the reduced supply pushes the prices back, up at least partially—the anticipated “cliff” in the early 2020s could be either flatter or delayed. Policy makers would have more time to get the economic “up to steam” on alternative sources of energy. Already in 2014, when I was driving across the Midwest, I was stunned by the number (and size) of “wind fields.” Even so, considering that carbon emissions were at the time going in the wrong direction—up instead of down—the continued supply of oil in spite of the lower prices must have been relieving pressure on policy makers to reduce the reliance on fossil fuels. Meanwhile, the lower gas prices gave American consumers the misperception that oil supplies are just fine and a lack of incentive to obviate global warming above the 2C degree threshold.

In short, the lack of an efficient market was forestalling vital public policies concerning both the American economy and climate change. It is not that an efficient market would obviate government action. In fact, just the opposite.

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[1] Russell Gold, “Back to the Future? Oil Replays 1980s,” The Wall Street Journal, January 14, 2015.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

Divestment as a Carbon-Reduction Strategy

As gas prices were dropping during the fall of 2014 throughout the U.S., sales of SUVs were picking up. That such drivers might find themselves with gas-guzzlers and high prices was apparently out of sight, out of mind. Moreover, that the increased carbon emissions might push the planet further from the habitable zone for humans was a point entirely missing from the mainstream media as well as office-holders. To the extent that some “socially responsible” investors selling off their holdings in or related to fossil-fuel companies was generally deemed to be a suitable approach to global warming, the overriding question may be how a species could treat its own survival as if it were an after-thought rather than a priority.

According to The New York Times at the time, “180 institutions — including philanthropies, religious organizations, pension funds and local governments — as well as hundreds of wealthy individual investors . . . pledged to sell assets tied to fossil fuel companies from their portfolios and to invest in cleaner alternatives. In all, the groups . . . pledged to divest assets worth more than $50 billion from portfolios, and the individuals more than $1 billion, according to Arabella Advisors.”[1] Although these figures are by no means “chicken feed,” the overall imprint of such divestments pales in comparison to the assets in the American financial system, not to mention the global system of capital. The prioritizing of investors can perhaps be inferred here, with global warming coming up short—given its potential harm.

The divesting investors themselves were not convinced that their efforts would pay off climatically. According to the Times, “(t)he people who are selling shares of energy stocks are well aware that their actions are unlikely to have an immediate impact on the companies, given their enormous market capitalizations and cash flow.  At the Rockefeller Brothers Fund, there [was] no equivocation but there [was] caution, [according to] Stephen Heintz, its president. The fund [had] already eliminated investments involved in coal and tar sands entirely while increasing its investment in alternate energy sources. Unwinding other investments in a complex portfolio from the broader realm of fossil fuels [would] take longer. ‘We’re moving soberly, but with real commitment,’ he said.”[2]

To the extent that other investors would simply swap up the holdings for sale, the “bad” companies would be “harmed” only marginally—certainly not enough to make a dent in their role in the carbon-emitting process. Moreover, “moving soberly” at a time when climatologists were warning that the global temperature would rise more than the 2 degree C threshold (beyond which human habitation would be uncomfortable at best) points to a major disconnect between even the diverters’ priority and the true significance of the problem.

Pointing to the complexity involved in unwinding a portfolio is itself an indication of misplaced priorities akin to a passenger in an airport risking his flight merely because he wants to finish the meal he has purchased. That such a passenger would likely be completely unaware of the foolishness of his decision may suggest that we as a species may be utterly unconscious of our individual and collective lack of perspective as concerning our own medium- and long-term comfort and the survival of our descendants. Indeed, by 2014, the survival of even the future children of teenagers could be hanging in the balance. Touting divestment as a viable strategy, or even part of one, leaves me with the impression that the human brain may be ill-equipped to grapple with its own propensity to put the species itself at risk.

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1. John Schwartz, “Rockefellers, Heirs to an Oil Fortune, Will Divest Charity of Fossil Fuels,” The New York Times, September 21, 2014.

2. Ibid.

Amtrak: Running on Empty

Letting Amtrak expire in the U.S. in favor of encouraging other companies to pick up new high-speed routes is, I submit, in America’s interest. I make the claim not because Amtrak trains are slow and cumbersome—which they are—or because the food is over-priced—which it is; rather, the company culture is the true culprit, being sordid in a way that I suspect few employees or passengers suspect.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

Wall Street Banks in Commodities Businesses: An Inherently Unethical Conflict of Interest

Writing to the bank’s board of directors, an executive at Goldman Sachs wrote that the bank’s commodities division would achieve higher value “if the business was able to grow physical activities, unconstrained by regulation and integrated with the financial activities.”[1] According to Sen. Carl Levin, Goldman’s goal here is “to profit in its financial activities using the information it gains in the physical commodities business.”[2] The integration could be achieved in part by using the bank’s access to nonpublic information from the banking or trading operations to manipulate the price of a commodity by artificially restricting or adding to supplies through ownership at the production or storage stages. This structure contains a conflict of interest. Because resisting the temptation to exploit the conflict would put the Goldman bankers at odds with the bank’s financial interest, I contend that reliance by the public on intra-bank firewalls (i.e., policies) separating the commodity businesses from the bank’s trading operations is too weak to protect the public, including buyers of the commodity.






The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

In addition, a subtler underlying contributor—more paradigmatic—renders sustainable shelter insecure and even elusive for many people who go from paycheck to paycheck. What I have in mind here is the assumption that housing is and should be a commodity. That is to say, we use the market mechanism to allocate houses, condos, and apartments. To be sure, matching supply to demand is in itself helpful to low-income people, the assumption that the prices they pay—for example, more money due to speculators—must vary accordingly is problematic, as well as unnecessary. The Section Eight housing program, for example, separates the amounts that low-income people pay for rent from the rents that property-owners accept.

We can go even further and question whether the rents (and housing prices) determined by the market should be acceptable to society. For example, speculators bought up foreclosed properties in the U.S. during the housing slump that began in 2007. The cost of houses (and thus rents) in such markets was higher than would otherwise have been the case. Low-income families that might otherwise have had shelter may have gone homeless as a result. In the tradeoff here between speculators and homelessness, societal values can be seen. Put another way, tolerating homelessness so economic liberty can encompass residential housing reflects a value judgment.

In summary, the relatively large number of homeless children reflects a tacit societal judgment of priorities premised on the assumption that housing should be a commodity fully subject to the market mechanism. That speculators can take advantage of it to profit at the expense of people going homeless suggests that the American collective judgment may be too extreme—meaning that it accepts a high marginal pain at one pole (i.e., homelessness) in order to be able to hug the other pole. This can explain why shelter as a basic human right is virtually absent from the public discourse in the United States.

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[1] David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

Religion and Business Clash at a Church’s Food Pantry

The sacred and the profane are like oil and water—oil for anointing and water for cleaning. The viability or value of the sacred does not depend on denigrating that which is exogenous to it. In other words, praising the sacred does not require trashing the world. Being in the world but not of it does not imply that the world is necessarily bad. From this perspective, the sacred and profane can both be viewed as viable in their own rights, respectively. The inevitable distance that distinguishes them so starkly is breached only with great difficulty, even if pressed out of sheer practicality. For example, a theological interpretation undergirding a religious organization’s food pantry can clash with a business calculus such as would be held by an auditor pouring over the numbers and procedures. As theology and business enjoy their own, sui generis (i.e., of its own genus or type) bases of justifications or rationales, unraveling a clash can be notoriously difficult for want of a common denominator.

One pantry, which I will call here “Food Pantry of the Church of the Ossifier,” faced a challenge when the local food bank, which distributes meat to the local pantries, informed the pantry’s director, Sue, that the amount allotted would decrease on account of supplier issues. Specifically, as the price of meat increased, grocers had more of a financial incentive to more efficiently manage their respective inventories—with less left over nearing expiration dates. Translated into the Ossified Pantry’s terms, only 80 out of 430 families would get meat on the first and third Wednesdays of each month. In Sue’s words, “Meat is in short supply as donations to the food bank.  Walmart, . . . etc are not putting as much meat out in hopes to not have as much given away.  It cuts into their profit margins and everyone is being for frugile.”

The gap can be narrowed on both the demand and supply sides of the equation. On the supply side, one of the pantry’s volunteers, a former certified public accountant (CPA), contacted Sam’s Club for funding. The company had been instrumental in setting up an infrastructure locally for getting food from grocery stores to the food bank for further distribution to the pantries. Furthermore, each Sam’s Club store gave out gift cards to local charities, which could apply for the limited funds every other month. Charities could also apply to the corporation for grants ranging from $250 to $2,500 annually. The volunteer provided Sue with the information and she applied for both programs in the hope of being able to buy meat to supplement that which the food bank could supply. In addition, she asked the store manager about a possible discounted price. She could offer incentives such as free advertising in the church bulletin and at the pantry itself, as well as inclusion among the list of donors featured on a wall in the church lobby. From this side of the equation, business and religion look like country cousins—not marriage material but close enough to help each other out on a regular basis.

The intractable distance becomes apparent on the demand side. Sue allowed food recipients to pick up for other families too, under the assumption that some families cannot get to the pantry. Some recipients picked up for four or five families. From a CPA’s standpoint, the 430 families served figure—which the food bank uses as a basis for determining the pantry’s allocation (government funders would also use the figure)—would be a highlighted item for sampling and procedure-assessment. That is to say, the potential for cheating under such an arrangement was such that an auditor would want to test its validity rigorously. In fact, such a policy might have to go for the figure of families served to be said to be accurate enough for third-party reliance. Even with a record of the families in absentia, those families may not actually have received any of the food said to be picked up for them.

Sue’s theological basis for the policy is eons away from an auditor’s foundation. Compounding the difficulty in reconciling Sue’s perspective with that of an auditor, Sue held some non-theological assumptions regarding business that are vulnerable to criticism from a business standpoint. Even so, because her theological assumptions are beyond a business critique may have given her a misplaced confidence that her business assumptions too are beyond such a basis of critique. Her theological and business assumptions in her own words come in five points.

1.  People will scam us - that is a given and something that I can't control - if they really want to cheat they will.  Thieves are so smart and creative.

2 If they cheat they will have to explain it to God, I won't.  I hope that God is merciful.

3.  I do have a paper trail.  There have been a few times when I find out someone is cheating and when I confront them about it, I tell them they are not welcome to come back.  

4.  Occasionally I will make a phone call and spot check on the ones who pick up multiple families.  Most of them have asked me for permission to do so and I believe a lot of them do it to save on gas.  I have to trust that it is true or else God will take care of it.  God often tells me not to worry as He will take care of things and so I do just that.  

5.  Lastly this is God's work not mine.  It is never about the volume but about the one who needs us most.

Regarding Sue’s first point, just because theft cannot be completely eradicated does not mean that managers cannot do anything to reduce it. Sue’s assumption that a thief’s desire to steal necessarily means the thefts will occur is fallacious. Even if thieves are smart and creative, managers can be too. The passivity in Sue’s assumption likely comes from her theological tenets.

The theology surges in on the second point. Sue is saying that she is not obliged to provide a defense for the cheaters when God judges them.[1] Her assumption itself takes it as a given that the stealing will take place. Furthermore, her passivity or noninvolvement in the divine judgment may be a reflection (or projection) of her assumed passivity in her first point. Put another way, her assumption that the lying will take place may be based on her more foundational assumption that she has no involvement in God’s judging the cheaters.

A business practice may thus stem from a theological interpretation. Problematically, that the latter is beyond critique from a business standpoint may be used to assert that the resulting business practice is also beyond critique (and thus control) from a business basis. In cases in which the person has substantial power in the business, the business practice may go uncontrolled even though business principles have jurisdiction. Should the person’s boss have the wherewithal to stop the offending practice, the theological auspices could legitimately stand in the way if the business is part of or sponsored by a religious organization.

In her third point, Sue defends her practice of multiple-family pick-ups on the basis of business principles. She points to a paper trail, yet having the names and contact information of the families receiving the food at home is not sufficient to prevent fraud. A recipient could simply collude with a friend willing to act as a front. Asking for permission and using gas as a rationale, which Sue cites in her fourth point, can be part of the ruse even if the proactive gestures reduce the likelihood that cheating is going on in such cases.  

Sue assumes that because she has uncovered only a few cases of fraud by making a few spot calls, a small number of stealth instances remain among the 430 families being served. Of course, a colluding friend of an in-person recipient would naturally lie, though speaking with kids could uncover problems. Even so, a CPA would advise more than a few spot calls. Considering Sue’s passivity toward the matter of cheaters in general, the assumption that she has actively caught most if not all of the outstanding cases is vulnerable. In fact, the opposite assumption has more support. That her passivity is informed by her assumption of God’s agency makes her assumption of infrequent fraud particularly shaky.

In her fourth point, Sue bases her assumptions that a paper trail and a few spot calls are sufficient and that only a few cases are actually fraudulent anyway on her more fundamental (to her) theological assumption that God would take care of any problematic cases unknown to her. From a theological standpoint, this assumption is problematic, for if God would eradicate any cheating then wouldn’t God stop evil from happening? If not, then God is not omnipotent (i.e., all powerful). That injustices do in fact happen in the world is typically explained theological as an unavoidable consequence of God giving us free will.

Sue’s claim that God tells her not to worry (i.e., to passively accept that God will stop the cheating) opens the proverbial can of worms. In her fifth point, she concludes that taking care of any cheating is God’s work, presumably because God has told her this. From a religious standpoint, verifying Sue’s claim that God as “spoken” to her is fraught with intractable difficulties. However, that Sue does not question the “fact” that God has spoken to her may itself undermine her claim. Put another way, her unwillingness to question what she perceives to be the case flies in the face of the human experience, which is based in human nature itself. 

Given the conditionality inherent in Creation, Sue overplays the certainty card. Abraham struggles with God’s command that he sacrifice his only son even as God promises that his seed will populate the world. In Kierkegaard’s terminology, Abraham embraces the absurd in the realm of the finite.[2] Sue’s certainty belies her broader claim of being a person of faith. It is possible, even likely, that she had unconsciously chosen her theological assumptions to mollify her managerial challenges in formulating and implementing a system of accountability. 

Her compromised system can indeed be subjected to a business critique and correction, even if such oversight is hampered by the religious auspices of the pantry—being that it is part of a religious institution. To be sure, the business oversight can make use of the problematic elements in Sue’s theological basis, yet this presumes that managerial oversight is vigorous among religious functionaries.

Therefore, even though the gap in supply and demand occasioned by decreased supply at the local food bank could be narrowed by corporate giving and greatly reducing the instances of multiple-family pick-ups—such as by reducing the number of families a recipient can cover to one and asking volunteers to make the deliveries on their way home to cover as many cases as possible (especially the hitherto multiple-family pick-ups!)—the role of Sue’s theology on the demand side of the equation could keep the gap unnecessarily large. 

Moreover, both the pantry and the church’s administration could develop a reputation locally for ineptness in being disorganized. A boat with many leaks does not inspire much confidence. The rigidity alone with respect to plugging the leaks is easily offensive and naturally frustrating. Even though theology and business are worlds apart in their respective rationales, the flash-points need not be so intense and harmful. 

To the extent that some recipients get more meat than others, the shortfall hurts the people in need while enabling the gluttony of others; this is not exactly about the ones who need the pantry most. Hence Sue’s theological approach to caritas seu benevolentia universalis (i.e., higher-aimed human love, that is, universal benevolence) is vulnerable to her own criterion. Regarding the nexus of business and religion more generally, using the criteria of each on its own domain can work wonders in reducing otherwise inexorable difficulties from the interaction of the two domains.

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[1] Notice that Sue assumes that God will judge them. This assumption has historically given confidence to people that unjust people leading a happy life would nonetheless “get theirs” eventually. Nietzsche interprets this desire of after-life retribution as being sourced on the urge of some of the weak to dominate even the strong out of resentment and for the pleasure that can be extracted even from such wan power.

[2] See Soren Kierkegaard, Fear and Trembling (London: Penguin, 1985), pp. 65, 75.