Professor Joseph E. Stiglitz should be ashamed of himself for arguing racial profiling was a major cause of the 2007/08 subprime mortgage crisis

Nobel Prize winner Joseph E. Stiglitz, in “When Shall We Overcome?” Project Syndicate, March 12, 2018 writes: “America’s financial sector targeted African-Americans for exploitation, especially in the years before the financial crisis, selling them volatile products with high fees that could, and did, explode.” Thousands lost their homes, and in the end, the disparity in wealth, already large, increased even more. One leading bank, Wells Fargo, paid huge fines for charging higher interest rates to African-American and Latino borrowers”

No! America’s financial sector did not target any special community”. It targeted extraordinary returns on equity made possible by the process of securitization teaming up with extremely lousy bank regulations.

1. A part of the financial sector targeted originating and packaging very lousy high interest rate mortgages into AAA rated securities, because that is how you make real big money in the process of securitizing. Packaging an AA rated mortgage into an AAA rated security is not even worth the effort. Packaging a $300.000, 30 year, 11% fixed rate mortgage, and getting an AAA rating on the resulting security, that would allow you to perhaps sell the mortgage as if 6% was a reasonable rate, something which would allow the team to pocket $210.000 in immediate profits.

2. In 2004, bank regulators approved that if those securities had an AAA rating, or if an AAA rated corporation (AIG) had sold a default guarantee on such securities even if it had worse credit ratings, then banks needed to hold only 1.6% in capital, meaning they could leverage 62.5 times with it. If banks thought they could only make 1% in net margin on those securities, then they could expect 62.5% yearly return on equity… and frankly who could resist such a temptation.

Put those two things together and you have 99% of the explanation you need without having to enter into any sort of racial profiling arguments.

Professor Stiglitz having served in 2009 as the chairman of the U.N. Commission on Reforms of the International Monetary and Financial System, where he oversaw suggested proposals and commissioned a report on reforming the international monetary and financial system, should know all that very well, and so he should be ashamed of himself for doing so.

The AAA-bomb

There are those who feel that the current crisis is a direct result of economic imbalances and they most certainly have very good arguments.

But then there are also some, like me, who believe that the financial sector and its regulatory system stopped the normal market mechanisms from working, among other by luring funds into the mortgage sector which financed the growth of further imbalances, so as to cause a crisis, of this magnitude.

Certainly nothing of this sort would have happened without the economic imbalances that provided the enriched uranium, but it was the financial sector that turned it al into an AAA-bomb.

In God We Trust to see that…

The dollars, for which value the US is responsible, are printed with the abbreviated prayer of “In God We Trust”.

A more complete version would be: “In God We Trust to see that the politicians and the bureaucrats do not print and circulate more dollars that what the economy could back or, otherwise, that the American taxpayer finds it in him the capacity and the willingness to pay taxes so as to make up any shortfalls.”

The keeping the big lean tax

No matter how optimistic we can be about that all the assets the US government acquires during the current financial crisis will be fairly priced, there is no doubt that the whole crisis is going to be extremely expensive for the public sector. The costs will have to be paid by taxes or, in its absence, by inflation.

In this respect society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. The following is a second proposal that follows up on “An income tax on profits from intellectual-property monopolies.”

The keeping the big lean tax: Tax progressiveness based on market share.

There is nothing wrong with a corporation striving to obtain a large market share. Indeed since it is the result of having a better motivated and better organized commitment to exploit comparative advantages in order to satisfy the market with better products or services at better prices, the fight for more market share benefits us all.

That said, while the market share grows, for all the good reasons, growing market powers might tempt the corporation to use competitive tools of dubious nature which could diminish the marginal returns for the society, to such an extent that they could perhaps even turning into costs that erode all previously obtained benefits.

I therefore propose we introduce tax progressiveness based on market shares. For instance if a corporation has below 10 percent of market share a 30% income tax rate applies but, if it has a 100 percent market share then it should be taxed at for instance a 50% rate, with a linear function for the in-betweens. Alternatively, if we want to avoid making the “after-tax” subsidies of inefficiencies higher it could be a progressive sales tax.

Of course the market share tax is not be applied to those corporations who have the financial returns on their activities otherwise regulated, such as the electricity distribution companies.

Of course in banking where the bigger-you-are-the-more- it-hurts-when-you-fall-on-us, a tax on size should be immediately applied, before we run out of the small local banks that do not need the credit rating agencies to know us.

PS. In the case of some behemoths, like Facebook, I prefer they help fund an unconditional Universal Basic Income with 40-50% of the ad revenues they obtain exploiting our own personal data.

The index of perceived Corruption

Transparency International (TI) has developed an index by means of which it ranks countries around the world according to their perceived levels of internal corruption. I have a Danish friend who recently came to me for the umpteenth time with this list clutched firmly in his fist, proudly crowing over the fact that Denmark once again tops the list as the least corrupt country while Venezuela once again comes in toward the bottom, beaten out for the basement spot by only seven countries among which we find Colombia and Nigeria.

As a Venezuelan, I immediately went into a defensive mode. I argued that since the index is based on the perception of corruption, it could be that the results merely indicate a serious problem of exactly that, the perception, not the reality. Additionally, should this actually be true (evidently not the case), I told him that although I did lament the fact that Venezuela was not mentioned in the top half of the list, I was at least satisfied that we were definitely not occupying any “not too human” first place.

My good friend, observing my discomfort, realizing that I have some Swedish blood in my veins, and in a sincere effort to console me, blurted out that in reality he also did not understand why Denmark had been ranked first while Sweden was ranked third. My immediate reply was “Chico, Denmark must simply have paid more for it.” 

Jest aside, the index is the result of a serious effort on the part of professionals of diverse backgrounds who, using the few tools available, have managed to develop a system of evaluation which is useful and of great support for every citizen wishing to combat this age-old plague. 

Its importance is of even greater significance when we hear that Transparency International suggests that we don’t attribute more accuracy than necessary to its index. Venezuela’s ranking on this list of 85 countries is such that it is evident, to say the least, that the country’s level of corruption is far greater than average. This is bad enough!

Any debate over whether Venezuela should be ranked higher could be perceived simply as a strategy aimed at discrediting the index. Only the beneficiaries of corruption could possibly have an interest in doing this. A true patriot would not waste one single second of his or her valuable time in debating why people speak poorly of our country. On the contrary, he would dedicate all his time and energy to correct the reality instead of objecting to the perception.

This debate on corruption is truly difficult and complicated. Even though we should be pleased that such an index exists, I am worried that the mere fact that we are trying to reduce corruption to terms of a measurable dimension may lead us to oversimplify the problem dangerously.

The index, in principle, only measures the perception of corruption in general terms. This is defined in ample terms as “the abuse of public office for private gain.” In this sense, and because of the nature of the problem, I am sure that when using the term “gain” we are referring mostly to a monetary benefit. This avoids measuring other aspects of corruption that could be just as important or more.

For instance, I believe that the appointment of someone to public office for reasons other than his or her capacity or professional integrity is a corruption that is even more pernicious and costly to the country than the sum of all monetary corruption put together.

An example of this is our recent banking-sector crisis. The costs caused by the poor administration of this crisis are far and above the costs attributable directly to the bankers involved. It’s not that the bankers are free of guilt. They did undoubtedly start the fire. But whose fault is it that the financial firemen were caught napping and did not hear the alarms, and that once they finally got to the scene of the disaster they tried to douse the flames with gasoline instead of water? 

I make these comments to remind all that the monster of corruption has a thousand heads. I would be sad if all the result of the efforts to slay this monster would simply be the elimination of the traditional offers of discounts for prompt payment, right then and there, and that we frequently receive when fined for a traffic violation.

Let me make one last comment on this quite tortuous subject. In Venezuela, perhaps more than in any other countries, there is more than sufficient evidence of the total administrative ineptitude of the state, and all of our governments have absolutely no results to show, considering all of their income. Nonetheless multilateral agencies, such as the International Monetary Fund, frequently come to the country and recommend an action (sales taxes) that could only mean allowing the state to squander even more resources. For whom then is the IMF working? For the politicians? Could we then be staring at another unknown dimension of this monster called Corruption?

As edited for Voice and Noise, 2006

Originally published The Daily Journal, Caracas, November 4 1998

PS. “Our recent banking sector crisis” I here refer to in 1998, was a Venezuelan one that happened in 1994. Reflect on how much of that comment also applies to the bank crisis suffered by developed nations in 2008. 

PS. The world needs more than a theme park of anti-corruption efforts

Traducción:

El Indice de Percepción de la Corrupción 

Hay un índice, desarrollado por Transparencia Internacional (TI), relativo a la percepción que existe sobre la corrupción en distintos países. Tengo un amigo danés que por enésima vez este año me ha suministrado la copia del ranking, donde Dinamarca aparece como el país menos corrupto y Venezuela, en corrupción, solo es superada por siete países entre los cuales esta Colombia y Nigeria.

Como venezolano, en obligada defensa, le expuse que por cuanto el índice lo que mide es la percepción que se tiene sobre la corrupción, puede que los resultados solo indiquen serias dificultades de apreciación. Además y para el caso (negado) de que fuese cierto, le comente que si bien lamentaba que Venezuela no estuviese en la parte superior de la tabla, por lo menos me satisfacía el que no ocupasen un "inhumano" primer lugar.

Mi amigo, a sabiendas que también soy de procedencia sueca y en un esfuerzo por consolarme, expreso, de forma generosa, de que en verdad no entendía sobre que bases se había determinado que Dinamarca ocupase el primer lugar y Suecia el tercero. Mi replica fue inmediata; "Chico, Dinamarca debe haber pagado mas!"

Apartemos la broma. El índice es el resultado del esfuerzo por parte de un grupo de profesionales diversos que, con base a las muy pocas herramientas disponibles, han logrado desarrollar un sistema de evaluación útil y de mucho apoyo para todo ciudadano deseoso de combatir esta plaga de vieja data.

Su importancia se hace aun más significativa cuando, siguiendo las propias sugerencias de TI, no le atribuimos mas exactitud que la necesaria. La posición de Venezuela en esta lista de 85 países es tal que sin lugar a duda podemos decir que en nuestro país tiene una corrupción mayor que el promedio. Lo anterior resulta suficientemente malo.

El debatir sobre si Venezuela debe estar en un puesto mejor, simplemente seria una estrategia para tratar de desacreditar el índice y en esto solo podrían tener interés los beneficiarios de la corrupción. El patriota no dedicaría ni un segundo al debatir el porqué se habla mal del país sino daría todo su empeño en corregir la situación.

Qué difícil resulta todo el debate relativo a la corrupción. Aun cuando reconozco que, en el papel de motivador, debemos agradecer la existencia del índice, me preocupa de que el solo hecho de tratar de medir la corrupción, al tener que reducirlo a una dimensión que permita su medición, puede conducirnos a una peligrosa simplificación del problema.

El índice, en principio, solo mide la percepción que se tiene como una corrupción general, definida esta de forma amplia como "el abuso de cargo publico en beneficio propio". En tal sentido y por la sola naturaleza del problema, estoy seguro que el termino de "beneficio propio" implica principalmente un beneficio monetario, obviando medir aspectos de corrupción que pudiesen ser tanto o mas importantes.

Creo que la corrupción presente cuando se nombra a quien habrá de ejercer un cargo público, por razones distintas a su capacidad e integridad profesional, es más perniciosa y costosa para el país que la suma de todas las corrupciones monetarias.

Como ejemplo de lo anterior, los costos derivados de la mala administración de la crisis bancaria supera, por largo rato, los costos que de forma directa son atribuibles a los banqueros. No es que los banqueros sean inocentes, sin duda prendieron el fuego, pero; ¿quién es el responsable de que el cuerpo de bomberos financieros, estuviesen dormidos sin oír la alarma y luego utilizaran gasolina para apagar las llamas?

Hago esta observaciones para recordar que el monstruo de la corrupción tiene mil caras. Seria lastimoso que el resultado de los esfuerzos que se haga para combatirla, solo culmine en que cuando se imponga una multa por violación de transito, no se ofrezca la tradicional alternativa, del descuento por pronto pago.

Por ultimo un comentario sobre este escabroso tema. En Venezuela mas que en cualquier otro país ha quedado evidenciado la total ineptitud administrativa del Estado. Todos los ingresos del mundo y nada de resultados. Cuando entonces un organismo, como el Fondo Monetario Internacional viene acá y nos receta, como única vía para salir de nuestros problemas, el que proveamos al Estado con mas ingresos aún, pagando mas impuestos, para el beneficio no individual sino colectivo de la secta política; ¿estaremos enfrentando una faceta desconocida de la corrupción?