The Firestorm is Starting

Financial Reform, Industry Puschback and Political Sausage-making
By Dave Livingston. Dave is a management consultant with almost 30 years of experience with analyzing complex business problems and developing solutions and new businesses. He blogs on public affairs at his blog Parts, Systems, Structures and Outcomes ( ) where he attempts to apply that toolkit to current affairs and public policy.

The problems with the Finance Industry are fairly well known, in some form or another, because we’ve all suffered the consequences. As a result one of the major issues slowly working itself thru the legislative maze are major reformulations of the regulatory framework. The proposed changes, in whatever final form they take, represent as large a structural change as any we’ve seen since the 1930’s and the reactions to the Great Depression. Because the Industry is systemically important, touching as it does, the lives and well being of every person, these reforms are innately, inherently important. One could even say critical. Representing as they do a major change in the rules by which the game is played it’s no surprise that all the major players are doing their best to influence the outcome. The question is in whose best interests? One can’t expect any industry to act purely for the public good but the level and nature of the pushback represents an attempt to maintain business as usual. And continue the culture that’s brought us three decades of slow growth, poor job creation, a mountain of debt and stagnant wages and benefit growth. Three decades where we’ve increasingly seen the results of what economic growth there has been go to those earning the highest incomes. We’d suggest that the two are not uncorrelated. The Industry’s pushback is based on the argument that the efficient and effective allocation of capital is essential for the health of the economy and the prosperity of society. It so happens that, in the long run, that’s true. As Neil Ferguson discusses and demonstrates in his most recent book, “The Ascent of Money”. But the case against reform is based on the notion that capital allocation is in fact efficient, effective and, in a word, sound. Ah, there’s the rub, indeed. Below we dive deeply into the “business case” for/against reform. We also take a pretty deep look at the political sausage-making of reform and the current state of play and the outlook Our findings are that the case for deep and wide-ranging reform are very clear cut. The Industry has pretty well established that self-supervision is not workable and that adult referees are required to ensure that the game is played well and according to the rules. There are bigger issues at stake here as well. Not just the most systemically Industry and it’s influence on the economy and society. Also at stake is the question of how effectively we can reduce the impact of narrow interests struggling to influence legislation and regulation for their own narrow benefit. In some ways, and not to be to dramatic, we are in fact debating the nature of Capitalism and what our collective futures will look like. Can we find, develop and implement an effective governance mechanism that works to everyone’s benefit, or not? We even argue, and we think demonstrate, that it’s in the interests of the Industry to re-engineer the regulatory framework. Sadly though they don’t see it that way and want to continue the Bonus Culture, which has proven dangerous and ineffective. This is one among many great debates of the time and will tell us a lot about what the future will look like.

Table of Contents
Essays The Chinese Goldsmith, Finance and the Next Big Fight Banks Hate Banks, Voters Hate Banks: Hear the People Singing! The Beginnings of a Great Debate: People Singing, Politicians Making Sausage Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin Pictures for a Prosecution: Wall St. Bonuses vs. the Public Good Bonus Fantasies vs Political Realities: the Reform Firestorm This Time Firestorm Flaring up: Finance Reform, Compensation Wars & Sausages Readings Financial Industry Performance and Reform Background References on Institutions and Economic Development 22 22 3 6 8 11 14 16 18

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October 22, 2009

The Chinese Goldsmith, Finance and the Next Big Fight The last several months have seen partisan fight after partisan fight in Washington, often leaving us average citizens as innocent bystanders or even collateral damage, or so it seems to many people. Now we' been focused on the ve Healthcare Reform fight and the debate on Afghanistan. On the first there was some amazingly good news, the last committee passed a proposal out of the Baucus Committee to the rest of the Senate, though the day before the Insurance Industry published a report attacking the proposals that was so bad even the consultants who wrote it have disavowed it. On Afghanistan we by stand what we' been saying - it' a ve s mess but if we walk away again it' be worse. ll The big fight you may be missing is the one over Finance Industry Reform. It was back-burnered because of the urgency and importance of immediate business, e.g. saving the country from economic collapse, but is moving center stage. Like many of the stakeholders in HC Reform those in Finance have been fighting to water down the bill but in this case with less justification, if possible, more smoldering anger among the public and, with this week' announcements. The Industry argues that the last two s quarters of monumental bonuses are right, proper, the way they do business, indicate a return to health and good for the economy and country. The country' mood is probably captured by the cartoon collage but just in case s s were wondering how angry people are check out this video clip from Dylan Rattigan' Morning Meeting. The question is who' right? ( ) s

Post De-regulation: Finance Industry, Debt and the Economy
There' no question that a properly functioning Finance Industry is necessary s for a growing economy and contributes to long-run growth and prosperity. Neil Ferguson covers millenia of history in addressing that in his PBS Special "The Ascent of Money". We' rest the strategic case there and focus instead on the ll narrower one of is our finance industry functioning properly? In particular has it contributed to our wealth and prosperity at an acceptable cost to society, that is are we getting a return for our money? :)! The graphic starts to speak directly to that with the top part showing recent changes in debt among several sectors (NB: all this worry about excess government borrowing is mis-placed, btw; right now it' simply absorbing all s the excess sloshing around as everybody else de-leverages and is likely to do so for years). The bottom part of the chart is the really interesting part. On the left you can see ordinary businesses continuing a gradual growth of their borrowing while the Finance Industry, ex-post mid-80s de-regulation, securitzation and financial engineering wizardry, shooting for the money...oops, we mean moon. Similarly consumers got completely carried away as well, again beginning with the widespread availability of cheap consumer and credit card debt.

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Judging from these charts the net impact of the last three decades of de-regulation was to load down everybody in the economy with loads and loads of debt. Which sustained the explosion in consumer demand that fueled worldwide economic growth. As the US consumer pulls back, de-leverages and re-builds their balance sheets we' facing a fundamental change in the underlying economic structure we' been dealing with. re ve

Finance Industry, Debt and Bonuses
So what did the Industry do with all that debt? Well judging by this chart, again from the WSJ, it looks like what it did was pay itself bonuses from the profits from loading up the rest of us with debt. Just to draw the points home Wall St. compensation before WW2 was significantly higher than compensation in the rest of the economy and then went thru a huge equalizing drop. Then, after de-regulation, it sky-rocketed back to the mooney until it exceeded the relative levels seen during the 20s and 30s! So much for the argument that high bonuses are innate in the Industry or contribute to the overall health and well-being of the economy. We won'go thru the charts or arguments but will mention that t prior to de-regulation and bonuses excesses the US enjoyed both its highest rates of saving and its highest rates of economic growth. We' also add that the last couple of ll years have seen an enormous destruction of wealth for the average citizen. In the readings you' find very ll extensive links and excerpts to a huge inventory of readings that examine the business performance of the Industry, economic policy and the state of the economy. Let' summarize the findings so far, inclusive of those readings: s 1. The Industry argues that bonuses are a natural part of the way it does business but not only is that not true but ALL the profits in the last two quarters were the result of proprietary trading, i.e. speculating on their own account. That' be o.k. if it were their own money at risk but actually, between bailouts, Fed guarantees and bond d purchrases, etc. it' our money and our risk but their profits and bonuses. s 2. While efficient and effective finance is important we think we' also shown that an industry built on leverage, ve securitization and financial engineering has created a situation that has over-loaded the economy with debt and hampered growth. So much for the "social value" argument. 3. The "encumberances" on the rest of us are part of the problem but then again the Industry almost destoyed itself; in other words by blindly and apparantly mindlessly pursuing excess risks they didn'understand they t destroyed the last decade' worth of what turned out to be paper profits inside the industry. In other words as s businesses they performed abysmally. 4. Finally, and obviously of course, they almost brought down the entire economy and destroyed Western Civilization. Just in case you hadn'noticed! :). t

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Helmet Laws, Adult Supervision and Re-regulation
Peter Drucker tells us a business has three main purposes - it should: 1) create value for society, 2) create an effective work environment that makes people effective and 3) it should contribute to the health of society. He further breaks down the last point into three major points about organizational social responsibility by arguing that any organization should also a) do no harm, b) act to correct harms innate in its activities and c) support the correction of society's problems because no organization can be successful in an unhealthy society. How would you judge the Finance Industry on those criteria? Based on the points we' summarized above and ve document extensively in the readings? People argued that seat belt or helmet laws are an unwarranted interference in private decision-making. We confess to having similar notions ourselves but then we thought about it. When some idiot goes ripping down the road without a helmet and crashes society is put to the problem of cleaning up the mess, treating the idiot and taking care of the innocent victims. This kind of external damage is why we end up with helmet laws. The President and his administration have been inviting the Industry since taking office to act responsibly and this last weekend many senior members of the Administration made appearances on the Sunday news shows to repeat and reiterate the appeal. Not to mention the President' speech to s Wall St. several weeks ago. We' suggest that when you' d ve got the President and many senior members of Congress mad at you you' making a major mistake. When it turns out re your case for arguing with them is beyond wrong you' in a re world of hurt. Yet the Industry continues to appear tone-deaf where these issue are concerned. If you don'think he' serious we suggest you listen to the CSpan vidclip t s ( )....not just the words but the tone and body language. For Mr. Cool we' suggest he' more than a little irate. d s

The Chinese Goldsmith vs the Special Interests
Mancur Olson in his book The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities about how special interest groups eventually seize control of the levers of power and begin acting in their own narrow interest and sacrificing the good of society tells an interesting story from the end of the last Chinese Imperial Dynasty. In seems an innovative goldsmith tried to introduce modern wire-drawing equipment from the West that would have enormously improved the productivity of his apprentices, let him make a lot more jewelry and sell it at much

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cheaper prices. The end result? His fellow goldsmiths found this change all together too threatening to their iron ricebowls and put him to death using the "Death of a Thousand Cuts"! Now in this case who' the innovator and who' protecting their iron rice bowls? An exercise for the reader with, s s we hope, an obvious answer. We' leave you with a final hint...again channeling Herr Drucker. When an Industry refuses to correct a major ll problem it leaves society no choice but to step in and fix it, even when the fix is not ideal. He further adds that its a fundamental management responsibility to anticipate these problems and fix them before society is forced to. To otherwise is deeply irresponsible. And your judgment? October 28, 2009

Banks Hate Banks, Voters Hate Banks: Hear the People Singing! We' going to stick with Financial Reform for a while because re so much has happened in the last week, and even more importantly, because it' such an important, even critical, issue. s In some ways, though not all, Financial Reform is the single most important domestic policy challenge after stimulating the economy. Healthcare Reform as well as Education, Energy and Innovation are probably more important in the long-run but to get there we need to have a healthy, reliable and effective Finance Industry. Setting aside the natural anger that almost all of us feel about the last two years, which should be counter-balanced by the fact that we all rode the gravy train for the last three decades, we' concluded that the policy and business cases for ve not reforming Finance do NOT hold up, and in fact are completely contradicted by the facts and the economic history. But, like almost every other major policy initiative, we' now having to pay the Piper for that three decades party, re before he comes to collect with claymore in hand. Take a few minutes to listen to this BNN clip ( )from the founder of a Canadian securities firm who sounds about like the rest of us on the banks, but starts with discussing his recent trip to Afghanistan and the level of public dedication displayed as well as the level of progress. Then close the loop....what a compare and contrast between the Financiers and those troops. You might also want to check out Andrew Sorkin on Charlie Rose (go to the site, go to the archives and scroll down) and this recent PBS Special on Brooksley Born and futures regulation. Among other things Sorkin uses a key phrase - "tone deaf". What' happening to the Industry is something that they s refused to see coming because they figured it was business as usual. On that topic Ms. Born' history should give s you a bit of the history involved.

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The Vicious Cycle of Malfeasant Financial Engineering
The last post went into some length on why the business models are broken and why the case(s) for leaving the Industry unregulated don'hold up as well as pointing t to support from an interesting range of commentators, from Greenspan to Volcker to Mervyn King of the Bank of England. In the accompany graphic we' tried to ve summarize those arguments and put them into the context of the bigger economic picture. The top box summarizes the key economic policy goals that we must succeed at, no ifs, ands or buts, if we' going to stabilized re the economy, get it growing again and recreate a healthy long-term outlook for us all. A healthy and product Financial sector is vital to all of them, but is key to #6 and IS #7! The righthand box summarizes several of the critical arguments we concluded the last post with on what a contributory organization has to do to be a constructive member of society. We are after all a large and complex society that would be unable to function without our large organizations. In other words effective organizations that make a positive contribution, are well-run and, at minimum, do no harm to society, are inescapable to our meeting those goals. How would you grade the Finance Industry on those topics (please feel free to review the last post again)? We' offer up our grades but there' nothing below an F and somehow that seems inadequate d s for an Industry that almost collapsed Western Civilization. It also seems in adequate for an Industry that' taking advantage of public funds and support programs to create s giant trading profits to pay bonuses when there' no demonstrable positive contribution. In fact we could even s argue that paying those bonuses when, at minimum, they should be used to shore up the capital of the banks is essential. The lefthand box summarizes our findings from the last post, and all the readings excerpted there, on where the Industry has failed us. The bottomline is that an argument for bonuses because it' essential to an s efficient and effective industry doesn'hold up very well. t

The Economic Outlook
Martin Feldstein was recently interviewed on BNN, the Canadian Financial News network, about his take on the industry and regulation in two parts. Wrapped around his comments in part two are his comments on the state of the economy and the outlook, and he' not very sanguine. In s fact he sees a weak recovery with serious downside risks for another downturn without government support. Now as it happens he' NOT as strong on controlling bonuses and s risk-taking as we are but we' argue that he hasn'looked at d t those issues as carefully as we have, or in much depth. In fact it' be interesting to have him or his team at the NBER d take a look at the issues. You can see Part 1 of his interview by clicking on the highlights. ( )

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In fact while you' at it here are some other BNN interviews that are directly and specifically relevant on the state re of the economy, the challenges we' still got ahead of us and the Industry reaction to regulatory reform. Rather ve than leave you entirely in suspense it struck as fascinating and encouraging that the industry business experts also supported reform. The sooner the better, too!
Dallas Fed President Richard Fisher

The president of the U.S. Federal Reserve Bank of Dallas says he sees the beginnings of an "inventory correction" in the U.S. economy. But, Richard Fisher also says a recovery is going to be "tough slog". He spoke with BNN' Howard Green in this exclusive interview. Part 1 and Part 2 s
Reaction to Fed Statement on Compensation

The Obama administration' pay czar released a report calling for big cuts in executive pay at s companies that have yet to repay TARP loans. Paul Bagnell reports and BNN speaks to Scott Talbot, senior VP, government relations, The Financial Services Roundtable.
The Optics of Executive Pay

BNN investigates executive pay with Christopher Chen, regulatory lead, executive compensation, Hay Group. We trust from the opening clip to the Rose and PBS programs to our own arguments plus the BNN interviews and reporting we' made a sufficiently strong case for why this is critically important? Feel free to write your ve Congressman. In fact, please do! Just in case we haven' you' find a rather extensive reading except collection after the jump that is at least worth t ll skimming IOHO, starting with an excellent Jim Jubak column on how badly broken the banks are in their traditional lines of business and where they' making their profits. Plus some stories that back up the re "Malfeasant" part of the title, readings on compensation and some more on the need for structural reform. The final section on the readings is on Capitalism and its future - we particularly recommend them here. It turns out we' fighting another Cold War here. re Several years ago a Marine Archeology team explored Kublai Khan' "Divine Wind" fleet that invaded Japan in s the 13thC. What they found is that many, if not most, of the ships were built to hugely sub-par standards. Partly because they were rushed but mostly because the Mandarins in charge grafted off the public funds for their own purses. Who says History doesn'repeat itself! t
November 19, 2009

The Beginnings of a Great Debate: People Singing, Politicians Making Sausage _great_deba.html Let' go back and pick our theme of Financial res regulation. On the surface that may appear to be a real swerve from our discussions of, stress and selfmanagement. Or even the first bookend on "change is hard". It' actually not. Now this is critically important in s and of and for its own sake. But it' also a case in point. s It actually points to the problems when self-delusions

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and hubris create gigantic problems. It also a perfect example of the problems with sausage-making in the policy and political factories. It should be fairly clear at this point that reform is necessary and justified. But as reform has wound its twisty path thru the factory the Industry has been fighting it tooth and nail. Normally all that, like all the other momentous changes we' collectively tackling has been more visible than usual so we get an inside view of re the slaughtering and processing that would normally be well hidden. The question, tying both threads together, is what kind of sausage do you want? In other words this about change on the personal and social level.
The Warning: How We Got In This Mess

An interesting question is it not? Overall it turns out we all drank the koolaid, some much more than others and therefore more directly responsible. But a central cause was a widely shared belief that markets would govern themselves. An argument that ignores the vital role of law, a court system and police to enforce it. As well as rules and regulations that make markets possible. There is no market that has ever existed that didn'have some mechanism for defining t the nature and quality of goods, how they can be exchanged or what the price-setting mechniams are. And ways of adjudicating and resolving disputes. Whether it' buying groceries, getting a new car or s house, something arcane like a wheat (or pig) futures contract. Or punishing the guilty and malfeasant - just ask Bernie Madoff or think back to Enron and Ken Lay or Worldcom and Bernie Ebbers. Not only did we all drink the koolaid and surf a wave of funny money to buy all those things we believed. Nonetheless when there are rules there are those who will focus on manipulating them to their own advantage rather than playing the game. And from time-to-time there are key players who try and make sure the game stays honest, fair and just. When the players spend more time on manipulation than trying to win economists call that a rent-seeking society - in other words rule manipulations trying to create rents just like the old German River Barons put up their castles at bends in the river to force merchants and bargemen to pay tolls, or rent. In the late ' when the players were really starting to play rules one person, Brooksley Born, took a shot at reforming the 90s game and was shut down by the koolaid drinkers. With the widespread applause of the Industry and society ringing in their ears. PBS did a marvelous special on her and The Warning which you click on the picture to watch. The web page is here.
No More Koolaid? Industry Reactions

Now everybody' sworn off Koolaid - well almost everybody. A s few weeks back there was an Industry conference in NYC (SIFMA) where Charlie Rose interviewed Jaime Dimon. Mr. Dimon is one of the good guys inside the Industry in all this and he has a lot of wise and insightful things to say. BtW Rose has changed the structure of his web site so the clicking on the clip takes you to it rather than the specific interview. You have to scroll the archives - in this case the online only specials. But it' really well worth your trouble, at least IOHO. s ( ) Perhaps the most interesting thing is Dimon acknowledges the problems and failures, recognizes the need for a massive regulatory overhaul, has some well thought out suggestions and comments and so forth. But at the end of the day there are some things he still finds too hard to swallow about some of the proposals on the table. And this is the best of the best - literally. If he' pushing back how' the lobbyists in the backroom doing? Especially now that s re they are really doing God' Work, at least according to Lloyd Blankfein of Goldman Sachs. You know them - the s

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secret government who' profited the most from public money and support and is in the process of paying the s biggest bonuses in a decade? A decade of widespread over-consumption of the Koolaid where bonuses were outrageous? And now they' paying bigger ones? re
Inside the Factory: Reform Requirements and Outlook

At the same conference Rose also interviewed Tim Geithner who talked about all the things that need to be done as we re-think what' a safe industry and how we get there. There' s s probably no better sketch of what needs to be done and, from a strictly policy perspective, how we might get there. Larry Summers and the President have made similar speeches. We even commented before on the President' s. The question of how the sausage is going to get made is a, shall we say, tad problematic. In the readings you' find a ll collection of excerpts and links to some key readings that survey the situation, review the history and talk about the politics involved. Worth skimming at least. Now at the heart of the Industry' pushback is the argument s that what they do is essential to the efficient and effective functioning of our economy, and therefore the health, well-being and prosperity of our society. In the longrun they' right - throughout history sound capital markets are essential (cf. Ferguson' "Ascent of Money" on PBS). re s The glitch is in that word sound.
Beginning the Great Debate

In previous posts plus some other investigations the business case, as it were, practices as usual and limited reform fail on five counts: 1) Financial Industry malfeasance almost destroyed the economy, brought on Great Depression 2.0 and might have collapsed Western Civilization. 2) The collective and cumulatively losses of the last couple of years wiped out most of the last decade’s profits, even though they were all funny money in the first place. In other words the Industry almost destroyed itself. It' in their own s best interests since obviously they can'be allowed to play t without adult referees. •
NB: the bonuses that the Industry started paying itself grew exponentially starting in the ' 80s, accelerated in the ' 90s and turned into a bubble in the ' 00s. And put compensation completely out of line. There is no evidence that those bonuses contributed positively to the health of society. In fact all the evidence is the other way.

3) Post de-regulation in the ' we began almost three decades of wild indulgence in debt and over-consumption 80s that loaded up the Industry, the consumer and business with leverage that we couldn'sustain. t 4) That debt caused savings to drop to nothing and severely retarded investment and economic growth. 5) The lack of economic growth led to a relatively stagnant economy with poor job creation and flat to declining wages and benefits. And that, in turn, has led to an increasingly stratified society where the top 1% of earners, strangely enough somewhat concentrated in the Finance Industry, to garner all of the gains of the last three decades.

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When a society, historically, spends more effort on rent-seeking and power elites focus their careers on rule manipulation then it eventually succumbs to sclerosis and dies. Just ask the farmers and peasants who harvested all the wood on Easter Island and destroyed the ecology just to keep making giant statues for the Chiefs. We are not just debating Financial Reform but the kind of society we want, whether we can find it within ourselves to change and, indeed and not to get too dramatic, the future of Capitalism. Can we find the governance mechanisms that make it work and renew the most productive system mankind has ever come up with? Or we will choose to continue the descent into Collapse (cf. Jared Diamond)? A great debate indeed. September 19, 2009

Ask Not For Whom the Siren Shrieks: Let the Finance Wars Begin The title is a play on words of course, taken from John Donne' Meditation VII, which starts, "No s man is an island entire of itself; every man is a piece of the continent, a part of the main" and end with "And therefore never send to know for whom the bell tolls; it tolls for thee.". The message being in a society we are all mutually interdependent. Sadly, this is a message which not only seems to have been lost on the Finance Industry but they would appear, judging from last quarter' s earnings and their source in proprietary trading profits, to turned on its head. Ask not for whom the bell rings for it rings for me, but never thee. Having been monitoring and analyzing the business performance of the Industry for two years now we were, and are, nonetheless very surprised. Because the other side of that coin is that society requires that it' major organizations and institutions s provide a service that creates value. And, especially, does no harm to society. When the opposite is true, and when it looks likely that the behaviors will continue, society has no choice but to act. Well this week is the anniversary of Lehman' fall and it behooves us to ask what lessons have we learned, what have we done to fix s the systemic and systematic problems and what will we do. Washington has been focused on saving us from our own and the industry' follies but the President marked the occasion with a speech to Wall St. putting them on s notice that the reckless behaviors of the past will no longer be tolerated; and inviting them to constructively contribute to creating new regulatory regimes. An invitation they' had for months and been fighting in every ve possible way. The week ended with the Fed' announcement that they will start setting compensation policy. s Meanwhile Barney Frank on MSNBC provided pretty clear indications of where he sees things going and Pecora II is about to kick off. Now it' a siren rushing to the crime scene and the results could be very ugly. s

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Perverse Incentives, Bad Consequences
Let' review some stuff we' gone over before s ve separately and put a new picture together, plus add in some stuff, from this week. Here we look at the overall performance of the Economy vs sector Profits, the Economy vs Markets and Wall St. vs Society. The UL chart we' talked about a lot so moving on the UR ve chart is updated and shows real SP500 vs real GDP cumulative growth from 1950 to now. The bottom triptych puts charts showing the growth of Debt with Wall St. relative compensation and Bonuses. Taken all together it almost seems to us that a complete story is being told, eh what? But what we have is de-regulation that led to a wave of financial engineering innovation that started by creating value but soon focused almost entirely on internal products, e.g. proprietary trading, that created a tsunami of debt leading to completely out-of-balance compensation for the Industry. Not least amusing is that this didn'metastasize until this decade. In other words despite all the tooth-gnashing about t systemic problems and accumulated history it wasn'really until the last five years that we all got ebolasized! t Anyway that' how we read. s

Give 'em More Rope
One of the interesting things, whatever else you might think, the political sausage-making the Administration went thru on Healthcare was carefully managed and got buyin from all the major stakeholders. The Administration took the same careful steps, signaling its intent in advance, contacting the players. trial-ballooning multiple aspects of its agendii and so forth. Unlike the Healthcare stakeholders the Finance Industry has been fighting tooth and toenail. Now that the rest of the agenda, like saving the economy, has made some progress they apparantly feel it' time to dig s into finance. We dissected the major lines of business, which made money and which didn'and t how, in a prior post (BaU vs. NN I: Finance Fumes, Realities and Pecora II). The bottom line is that the Industry think that not that they' been saved it' time to return to business as ve s usual. In point of fact all the bad capital is still on the books, it could take a decade to repair, the business models in each line of business are broke, it' been s

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government support and guarantees for Housing loans (80% of mortgages are FHA), "bank" funds and various Fed instruments (TALF, etc.) that have let things return to a semblance of reality, when we were all trembling on the edge of the cliff. Yet the Industry and investors are treating things as if it never happened. We use the Finance ETFs to gauge that where IYG is the Industry, IAI is Broker-Dealers, IAK is Insurance, and IAT is Regional Banks. Now either we' completely nuts, the euphorialistic relief rally that the world didn'end is generating enormous re t momentum or we' right and none of this is grounded in any of the realities we' just listed out. We know where re ve we about you? We think the Industry is going to go thru a decade of poor performance that reverses at least the last decade of perversities, or more, and returns it to its roots and that' irrespective of what regulatory s changes occur.

Get Ready for Adult Supervision
Any organization must provide, as we' said, a ve value to society. It doesn'exist for it' own sake t s but on sufferance. When you take that down organizations must: 1) create value-add (a profit for businesses), 2) creative a productive workplace environment and 3) contribute to the existence of a healty society. The grades for the Industry are so bad here, unparalleled since the last time they screwed up this bad, that we won'bother to give them. That' t ll be your pleasure. Over and above those when you talk specifically about not creating social damages there are three further goals: 1) do no harm, 2) act proactively to develop solutions to external problems created by the industry that no one firm can handle alone and 3) contribute materially to addressing broader social problems where feasible; after all no enterprise can be healthy in an unhealthy society. It is a preeminent leadership responsibility for management to deal with these rather than ignore them; or worse try and actively oppose them while continuing to create problems. In the early part of the 20thC Theodore Vail, the first CEO of ATT, acted to create a productive and constructive relationship with Federal and State regulatory authorities that kept ATT a profitable private company. The only such company in the developed or developing world. The rest of the world' telecom is run by their PTT Ministries. s It should be done, it can done and it certainly shouldn'be done in reverse. Vail proved himself and ATT capable t of adult self-supervision. Not only did the Finance Industry do just the opposite but it literally thumbed its nose at society in the last two quarters. The Piper is beginning to ask for his pay.

NO Plan? Don't Worry One Will Be Provided!
We' ask, "where' the plan Wall St." but it' d s s becoming clearer that one will have to be provided for them. Or so says much of the public, Washington and the rest of the Industry who was badly damaged by the malfeasant behavior of a too well rewarded few. And in the meantime here' some background s reading that collects the last two years of our aggregate analysis plus our set on governance and social responsibility. We suggest you might want to

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peruse it to review and refresh yourselves on some of these points. October 13, 2009

Pictures for a Prosecution: Wall St. Bonuses vs. the Public Good If you' been here before you may have noticed we like ve to tell our story with pictures and so shall it be this time as well, with the slight difference that they' be more ll stories and less the complex graphics we' prone to. By re this time you' no doubt heard that Wall St. is fixing to ve pay another set of stunning multi-$B bonuses while the rest of us are still crawling across the floor of the chasm, broken and bleeding on the rocks. How does that make you feel? It' likely our point of view is implicitly clear and if it' not s s then several of the last posts will make it clearer. One of the bloggers we both admire and have learned a lot from, Barry Ritholz of BigPicture, has defended the bonuses as the way the Street works and if we want it to recover and do its job that' the price. Aside from the moral reactions or the questions of good public relations we s thought we' speak directly to the implied assessment of the contributions of the Street and whether or not they d are justified and earned. We have three major problems leading to a major challenge. ( )

And We Paid Bonuses Because???
1) Currently the Street' profits are entirely dependent on public policy ranging from reduction in competition to s implicit guarantees of the TBTF banks to low interest rates to various quantitative easing programs, e.g. the Fed' s purchase of mortgage-backed securities and the FHA' being the source of 80% of the mortgage market flow. The s point being their profits are being made off our capital, not their own. 2) There is no evidence that the perverse incentives where all the gains went to the high-earners thru trading gains (read speculation) while all the losses went to us are being corrected. Add to which the perverse structure led to the failure or near-failure (including GS which had a near-death experience and was only saved by government action) of the firms themselves as well as almost collapsing Western Civilization. 3) The really deep argument is that banks and financial institutions are the intermediaries that efficiently and effectively allocate capital to their highest and best use. Well the prior two points tend all on their own to destroy that argument entirely but, since we' been reviewing the record, let' review it. We won'repeat ourselves but ve s t will simply cite several graphics we' previously put up and let you pop them yourselves because, taken all ve together they reach a clear conclusion. • • • • •
Wall Street profits and compensation Historical Growth of Debt o WSJ Debt Growth Savings, Investment and Growth Finance Industry Case Theory Finance Industry Drucker Criteria Performance

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What those charts tell you is a sequential story - a logical syllogism if you will - that makes perfect sense to us and, IOHO, completely destroys the argument that paying bonuses is innate in the industry, necessary for performance, part of the culture and ensures that the Industry contributes to the greater good. What they tell us is that, beginning with de-regulation in the mid-80s, that Wall St. compensation completely pulled away from the rest of the economy because the industry made exorbitant profits, that we "indulged" in astounding growth in indebtedness beginning then, which created the profits that paid the bonuses while destroying savings and investment, that the periods of highest savings were also the periods of highest economic growth (this one is particularly important), and that the Industry has failed in its duties to itself to perform as businesses and failed to deliver value to society. We really do urge you to review the charts and see if you agree with the syllogism. And if not then why not and what alternative data do you have to propose. The opening vidclip is Sully Sullenberger appearing on Morning Joe and we put it up as an example of what good leadership is all about, in the small. We were particularly taken with and moved by Sully' comment that one should s "take responsibility for the people". The next vidclip is also from MJ and is ofered as a compare and contrast for where we' at with regard to the Industry. We' just list out some re ll other MJ/MSNBC vidclips that add fuel to the fire. We' ll particularly point you to the interview with Michael Moore, not because we don'think he' over the top, but because t s he' representative of the firestorm that' smoldering away s s waiting to be fanned into flame by more irresponsible behavior. ( 25187 ) • • • •
Is a second Great Depression possible? : Financial Times' Chrystia Freeland and Donny Deutsch join Morning Joe to consider whether the U.S. economy is really recovering. Rep. Waters ' glad' Obama going to New Orleans: Rep. Maxine Waters, D-Calif., joins the Morning Joe gang to discuss the state of the U.S. economy and the president' quick trip to the Gulf Coast. s The end of easy money: New York Times' Peter Goodman discusses his new book, "Past Due," a look at how Wall St. made reckless bets and how average taxpayers took the hit Michael Moore talks ' Capitalism'Filmmaker Michael Moore joins Morning Meeting' Dylan Ratigan to shed some light : s on his new film, "Capitalism: A Love Story."

This is, in a way, another exercise in syllogism. Only this time it' sort of emotional syllogism but it also tells you s how many people are thinking the same things. After all, when a still avowedly conservative talk show host is repeatedly castigating the Street and getting people like Dylan Rattigan or Maria Bartiromo agreeing with him we think the case for smoldering embers just waiting to bust into conflagration is pretty well made. But just in case it' s not, and while it' still up, we' point you to the most recent episode of NUMB3RS, which explores the s ll consequences of the catastrophe and the loss of faith: Playing Russian Roulette - Seven Men Out.

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Real Leadership: Her Majesty as Exemplar
At the heart of this whole discussion is the central question, or questions: what does a business owe society and what does a truly responsible leader owe his firm and society as a whole? Not surprisingly Peter Drucker considered those questions years ago and came up with some deep and profound answers, which we' ve discussed multiple times. With regard to society he saw it as the deepest management obligation to do three things: do no harm, act to reduce negative external impacts and contribute to the overall health of society. We converted his writings into several simplifying charts over time and we' point you at two, for the same sort of popd up treatment: a Manager' Responsiblities and Drucker' Fundamental Principles of Executive Leadership. s s We think the case has been made pretty strongly that the Finance Industry has failed to satisfy either it' private s managerial responsibilities or the fundamental principles, and in fact, by being narrowly self-interested and shortsighted, has actually failed itself. It would be in each firm' own enlightened self-interest to adopt and implement s those Principles if for no other reason than that society can no longer afford to tolerate their continued violation. So what does publicly responsible leadership look like? We think Her Majesty, Queen Elizabeth II, is as much an exemplar of the discharge of duty with the highest standards of personal integrity and honor as any public leader around. We' also suggest that the movie "The Queen" captures those ll perfectly. If you haven'seen it we highly recommend it. But t why? ( ) The movie traces out a week that began with the death of Princess Diana and goes inside the palaces and the Queen' s behavior to watch her change 50 years of behavior in response to her subjects need for public grief. All in response to the irresponsible behavior of a spoiled girl who charmed the public but in fact failed miserably to live up to her own voluntarily assumed responsibilities and duties. West Point' motto is "Duty, Honor, Country". It' what the Queen s s displays, ultimately it' what' asked of public leaders responsible for large institutions and it' what their own selfs s s worth requires. Now that trailer only gives you a small flavor, you really ought to watch and study the movie, but these other clips will also help: Queen Reflecting on Her Life, Queen' Christmas Message and the Queen & the s Prime Minister. I don'know about you but she sets a standard that' hard for me to live up to! t s

Now, are we going to get it or not?
In the meantime there are a few brief readings excerpts after the break, some immediate prior posts and the pointers to our major collections of previous discussions on the Finance Industry and on Social Responsibility going back almost three years now. We' trust you' believe that our brief discussion here is grounded in some ll ll careful thought and some background digging. October 16, 2009

Bonus Fantasies vs Political Realities: the Reform Firestorm This Time If you' a fan of political theatre this is the season for you. After the stimulus and budget battles we' had a longre ve running, multi-scene Healthcare Reform debate that' almost Shakespearean! But the other one heating up in the s wings is Financial Reform, which is going to be as much a sturm und drang drama as any other, and is moving rapidly from the cloakrooms on Capitol Hill to the front pages of the MSM and the talk shows.

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This post should really be an addendum to the immediately prior post (Pictures for a Prosecution: Wall St. Bonuses vs the Public Good (Add)) but there was so much that bubbled up that came to our attention today that we decided to make it a seperate post. In particular we lost weigh too much time watching Dylan Rattigan' show s this morning and then collecting various URL addresses so you could to. Now Dylan' always been a little loud s and he' gotten more so with his new show. So one could take these various clips with a grain of salt or more. If s we were the Finance Industry we wouldn'however. For technical reasons we aren'able to create a placeholder t t of a recent Bloomberg interview with Niall Ferguson on the state of the Industry but will try and create a little attention space. It doesn'take too long so we recommend you watch it for the level set...on the whole he gets it t mostly right (our basic prejudice for selecting recommendations though Niall has a track record of not having as deep a knowledge of finance and economics as one would hope). Ferguson Says Bank of America Shows Crisis Not Over &A=

Industry Pushback and Administration Counter-attack
We' been on this topic for some time (years in fact) but ve particularly emphasizing it for the last several months and our take is that the Industry by pursuing business as usual and selfinterested, narrow and short-sighted lobbying as traditional is building up a backlash that could swamp them. And underestimating the commitment of the Administration, the magnitude of committed opponents on the Hill and the deep-anger of the American people. Now the Administration held out a hand to the interest groups in Healthcare literally days after taking office, and has slowly been pursuing its goals while continuing to offer them the opportunity to be constructive in helping shape the new legislation. Most of them were smart enough to take it and the Administration is in the process of winning this fight and getting a pretty good bill to boot (A Taught/Taut/Taunt Moment: Healthcare Speech, Policy, Politics & Realities, aths Toward Healthcare: Compromise, Consensus or Conflicts?).
Continued ....

The Finance Industry was offered the same opportunity but has deliberately chosen to bite the hand that fed it. Much more so than any of the HC interest groups. The President' speech in early September was a declaration s of war but recent administration speeches are a clear outline of intentions (Saddam Hussein are you listening?). The video clip above is a recent short speech by the President on a Consumer Protection Agency and financial reform in general. We urge you, again, to listen to it but not just for the content per se but for the tone and attitude. The President sounded as angry as we' ever heard him, and while much less strident than the folks on ve Rattigan' show, the language and tone were pretty similar. When you get the President that disturbed with you s you are NOT in a good place. After the break you' find some news story excerpts on the state of things, the Administration' intentions, some ll s industry news which illustrate how badly they are handling things and the whole slew of URL' for the video clips s we mentioned. You don'need to listen to them all but we suggest at least a couple. t Peter Drucker in his magnum opus "Management: Tasks, Responsibilities and Practices" has a whole section devoted to social responsibility that is the most insightful and brilliant thing we' ever read on the subject. He ve points out that no business can be healthy when society is hurting. But he makes a fundamental point that business executives have a primary responsibility to fix problems they create before society is forced to fix them for itself. Let' turn that around - it is a primary executive responsibility to constructively engage with society and s

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help shape fixes to problems. To act otherwise is profoundly irresponsible. It is also counter-productive because, sooner or later, those problems will be addressed and the results will not be to industry' liking. s If we were considering investing in Finance we' have three major problems: d 1) there are lots of problems still exponentiating (bad loans, CRE losses, terrible balance sheets, toxic assets, the need to raise capital and the lurking problem of mortgage writedowns. Taken all together they mean the industry is facing years of operational challenges that make them poor candidates. But, 2) the business models of all the major lines of business are broken which makes them even worse. Finally, 3) the industry's obtuseness and bad tactics are going to create a major strategic problem for them on current course and speed! We suggest you evaluate them with these factors in mind.
November 19, 2009

Firestorm Flaring up: Finance Reform, Compensation Wars & Sausages Not to rush you along too fast but we thought we' re-visit our previous posts d on regulatory reform of the Finance Industry. Understanding the state of play AND the business performance of the Industry per se are important for their own sake. In fact this post should be considered as another deep dive into the state of the industry and as a case study. It' also important for several s other reasons. One of course is the question of how viable investing in the Financials is. But because the industry is the ecology of the Markets it is systemically important and influences how the entire economy does. It also controls how well you own investment does. This is particularly important, as we' been covering in multiple posts, ve because the old ideologies of Efficient Markets and Asset Allocation are being fundamentally re-visited. The long and short of it is that discussing reform touches Business Performance, Markets and Investments and the Economy! We will observe however that this famous painting, "The Scream", originally done to express the anxieties of the early 20thC, pretty well captures most folks feelings about the Industry. Which means, of course, that the pressures for reform are mounting. Which we' discuss but pay ll attention!

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Market Performance as Indicator

Let' start with a benchmark by looking at the stock s performance of the Industry and its sectors YTD. We use the XLF ETF as a proxy for the industry as a whole while SPDR ETF' for various sectors including Banks, s Regional Banks, Capital Markets, Insurance and Mortgage Finance are also shown. As you can they all moved pretty much together into, through and after the March Madness when everybody thought the world was collapsing and the Financial Sector was going to end. Thank goodness for the Stress Test it' called Animal Spirits, as in the world' not ending. The s s recovery continued for everybody thru mid-May on the back of earnings surprises (told you we' close the loops) d that turned out on examination to be a lot poorer quality than you' hope. d Then things changed. The Regionals and Mortgage guys took some big hits as the size and scope of the CRE problems became more apparent. And as the up and downs of Housing optimism waxed and waned as well, though they both climbed back in the ballpark to keep playing with tre other teams. Since then the Regionals have re-deteriorated a bit as reality starts to set in. The other important differentials ae with the Big Banks, the Investment Houses and Insurers. Strangely enough the Banks did relatively well but the real differential performer has been the Insurance Sector. Oddly enough the Investment folks haves slightly under-performed - it looks like performance actually matters a bit and some horses run faster than others. Of course which ones are important questions.
Financial Reform and Reactions

For a while there with the news that bonuses were going to be paid but would be extremely large there were multiple stories per day in the business press. Given that some of those bonuses were as large or larger than those paid during the decade of the leveraged financial boom that' pretty s surprising. One might even use the word outrageous - lots of folks have. Now we' covered the elements of reform several times in ve multiple posts as taking repeated deep dives on the financial business as a business over the last couple of years. So many times that we' collected all the prior posts into essay ve collections which, taken as a whole, are a pretty complete portrait, assessment and diagnosis of the industry. Pointers to the URL addresses for those collections are in the readings. If you' in the Industry, an investor or just concerned as we all re should be we strong suggest getting them and reading them.

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The net net is that the old business models are broke and not coming back. But the business doesn'believe that, t thinks business as usual is coming back and is pushing as hard as possible against reform. AND the culture is still locked into the last three decades view of bonuses and excess compensation. It' be interesting to see what ll happens. As it happens both the House and Senate, with strong support and encouragement from the Administration, are moving huge bills forward as we speak. One of the best surveys of the consensus views of what needs to be done is one Geithner gave at a recent SIFM conference, during an interview by Charlie Rose. Rose also interviewed Dimon who was, overall, very supportive of those arguments but pushed back where his ox was being gored. Rose has changed his web site so you just go to and scroll the exclusive archives to find them.
The Case For Reform

We think the case for reform is overwhelming on several counts. But if you cast your minds back to the late ' 90s there was an interesting situation where Brooksley Born, of the CFTC, tried to change te rules of the game to level the playing field. She was squashed by some major players, including folks who are again in the arena, because they were all drinking they Koolaid. URL: They have since recanted, as has almost everybody. Except Lloyd Blankfein who thinks they are still doing "God' Work" of course. We' see how this ends up but s ll we' going to get something, it' going to be big and a bigger change, comprehensively, than anything we' re s ve seen since the 1930' And let' not forget the Pecora II commission that' busy beavering away in some back s. s s rooms. It' well worth listening to the entire PBS Special on The Warning, or so we think. You can find the web page for s the whole effort ( e=proglist ). If you want to take a deeper dive on the political sausage-making and the state of play, as well as the big picture implications and debates may we point you to: The Beginnings of a Great Debate: People Singing, Politicians Making Sausage.
Here the People Singing

In the essay collections plus previous posts digging into the Industry, its performance as a business and its influence and impact on the overall health of the economy we go into some detail about the business case for business as usual. So let' just summarize our s findings: 1) Financial Industry malfeasance almost destroyed the economy, brought on Great Depression 2.0 and might have collapsed Western Civilization. 2) The collective and cumulatively losses of the last couple of years wiped out most of the last decades' s profits, even though they were all funny money in the first place. In other words the Industry almost destroyed itself. It' in their own best interests since obviously they can'be allowed to play without adult referees. s t

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NB: the bonuses that the Industry started paying itself grew exponentially starting in the ' 80s, accelerated in the ' 90s and turned into a bubble in the ' 00s. And put compensation completely out of line. There is no evidence that those bonuses contributed positively to the health of society. In fact all the evidence is the other way.

3) Post de-regulation in the ' we began almost three decades of wild indulgence in debt and over-consumption 80s that loaded up the Industry, the consumer and business with leverage that we couldn'sustain. t 4) That debt caused savings to drop to nothing and severely retarded investment and economic growth. 5) The lack of economic growth led to a relatively stagnant economy with poor job creation and flat to declining wages and benefits. And that, in turn, has led to an increasingly stratified society where the top 1% of earners, strangely enough somewhat concentrated in the Finance Industry, to garner all of the gains of the last three decades. When a society, historically, spends more effort on rent-seeking and power elites focus their careers on rule manipulation then it eventually succumbs to sclerosis and dies. Just ask the farmers and peasants who harvested all the wood on Easter Island and destroyed the ecology just to keep making giant statues for the Chiefs.Sadly though the mood of things is pretty well captured by the song "Hear the People Singing" from Les Miserables.( ) The real problem is that the Industry had an opportunity to both fix itself AND to collaborate on re-shaping the regulatory framework in a constructive fashion. But has refused to do so. The evidence for helmet laws and adult referees to make sure the game is played according to the rules seems to be overwhelming.

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Readings and References
The Broken Finance Industry: Credit, Crisis, Collapse and Broken Business Models The credit crisis of 2007-2008 that metastasized into a collapse and nearly caused Great Depression 2.0 was largely created by broken business models based on bad practices, malfeasance, excess leverage and synthetic, structured investment products. We' all learned the hard way that the Finance Industry is more than just another industry ve but impacts us all. By looking back, perhaps in anger and certainly in dismay and puzzlement, we can understand more about how this all came to pass. And, as a result, more about what to expect because all of these problems remain with us. If you' like to get a better understanding of how broke the Industry is and what the consequences d are this is a place to start. The Broken Finance Industry II: Crisis, Adaptation, Innovation and Value? The Finance Industry brought itself and us to the brink of disaster thru bad practices and poor management. But effective capital markets are vital to the health of the economy. Now we need to consider what' broke, how to fix and how govern the Industry s for its own benefit and the health of society. Facing the Firestorm: Finance Industry, Popular Anger and Re-regulation The Finance Industry appears to have returned to profitability on the back of public funds and government support programs. Its refusal to acknowledge that debt is leading to a tidal wave of initiatives for regulatory and legislative reform which will be made worse by a refusal to constructively cooperate. Society needs a productive Finance Industry and will get it either voluntarily or otherwise. The Industry' refusal to see these pressures will make things more difficult than s necessary, but are unavoidable without leadership and a sense of social responsibility. The Corporation vs Society: Performance, Social Responsibility and the Win-Win The unfettered free market was supposed to bring enduring prosperity but recent history shows that markets and participants are not self-regulating. In fact markets require an institutional framework to work, publicly responsible behavior by participants and appropriate regulatory frameworks to balance private gain with public welfare. The results are better performing markets that are sustainable.

Background Readings
Wealth of Man by Peter Jay. Quixotic it may appear to proffer a one-volume history of the world economy that holds interest, but Jay succeeds. Exhibiting the flair of a journalist and the worldly wisdom of a finance official, both of which professions occupied him in Britain, Jay jaunts from the dawn of agriculture to the globalized present. His story adheres to a highly serviceable metaphor for humanity' work for wealth: the waltz. First, an s advance increases wealth; the increase attracts political attention; and the threat to wealth from politics eventuates in rules to regulate or protect wealth from capricious avarice. Commanding a capacious fund of information, Jay advances illustrations of his waltz motif from the first recorded wars in the Fertile Crescent to wealth' modern three-step in China. Yet Jay' erudition is not designed for impressing readers, but for informing s s them about the buildup of the material platform of contemporary civilization--about which most are unreflecting. Far from an apology for laissez-faire, Jay' accessible, non-technical history outlines wealth' accumulations and s s dissipations as a way of cautioning against sanguine expectations of unending prosperity. •
A Concise Economic History of the World: From Paleolithic Times to the Present by Rondo Cameron and Larry Neal

Structure and Change in Economic History by Douglass C. North. This book aims to explain the structure and evolution of institutions. The author, Nobel laureate Douglass North, concludes that the tension between gains from specialization and attendant costs is "the basic source of structure and change in economic history." Institutions arise to exploit the gains from division of labor or to reduce transaction costs. This theory appears to offer considerable economy and power of explanation. North asserts that, in the prehistoric era, human population increase would lead to declining labor productivity as resources were exhausted. New technologies could

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increase productivity but, if property rights were nonexclusive, as they must have been in a nomadic huntergatherer society, new technologies would simply accelerate resource depletion. Only if a tribe or band could exclude rivals from exploiting the resource, as they could in a settled agricultural society, would the productivity gains from new technology be sustained. The advantage that agriculture offered, then, was the opportunity to establish exclusive communal property rights. This produced what North calls the first economic revolution. The first economic revolution, occasioned by the rise of agriculture, produced the state, "the most fundamental achievement of the ancient world." The state specialized in providing security, keeping order within societies and protecting them from outside threats, while the complex demands of an agricultural economy (compared to those of a hunter-gatherer economy) required increased specialization throughout the rest of society as well. Over time, new military technologies led to larger states and more representative forms of government as rulers were forced to make concessions to their constituents to compete militarily with other rulers. • • •
The Rise of the Western World: A New Economic History by Douglass C. North and Robert Paul Thomas The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes One Economics, Many Recipes: Globalization, Institutions, and Economic Growth by Dani Rodrik

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson. Olson does a stellar job "proving" his theory using accepted scientific standards. His main thesis is that stable societies, over time, will be stifled by a steady growth of groups each committed to obtaining a disproportionate amount of society' goods. This theory, composed of only nine implications, is parsimonious with wide explanatory power. It s helps to explain the post-war growth of countries such as Japan and Germany, while providing a reason why the growth rates of the United States, and especially Great Britain, have been stagnated. I was amazed at how many phenomena, such as slavery and the Indian caste system, can be at least partially explained by Olson' theory. s Anyone seriously interested in knowing the way the world works will want to give this theory substantial consideration. ....Most people recognize that there is something wrong about special interest groups. While most people think of special interest groups in terms of fairness, Olson examines efficiency issues. Special interest groups, or distributional coalitions, hinder economic growth in industrialized nations. Special interest groups slow the pace of change in industry. We will reorganize production and adopt new technologies more slowly as more coalitions form for the purpose of transferring wealth. • •
Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships by Mancur Olson Economic Origins of Dictatorship and Democracy by Daron Acemoglu and James A. Robinson

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