Slouching Towards Wall Street… Notes for the Week Ending Friday, 24 June 2011
Coming generations will learn equality from poverty.
Poor people — the ultimate fungible commodity.
Humans are interchangeable in many instances. All that is required to work on a loading dock is the ability to lift. A slicing station in a meat processing plant or a bolt tightening step in an assembly line can be handled by anyone with normal grip strength and wrist flexibility. And the popularity of undifferentiated pornography is alluded to by Cambridge University philosopher Edward Craig, contrasting love with lust: “crude desire is satisfiable by fungible bodies.” Indeed, porn is the ultimate in unskilled labor.
The world needs its poor. Indeed, without the Poor, the Rich would be the same as everyone else. A recent study found no increase in happiness as people’s income goes over $75,000 a year. This was misinterpreted to mean that no one needs to make more than $75,000. In fact, the study finds Happiness does not increase as income exceeds $75,000, but Satisfaction does (NewScientist, 16 April, “The Pursuit Of Happiness”). Also, people measure their success against others, so a person who earns $76,000 experiences a $1000 boost in Satisfaction, but is doubly satisfied if he knows that everyone else earns only $75,000. The absolute increase in Satisfaction to earning more than one earned before is bolstered the higher one moves on the relative income scale. As one’s earnings continue higher, the comparison to others — let’s call it Power — takes over. Most of us will never be as “satisfied” as Carlos Slim or Bill Gates, but we derive both Satisfaction and Power from knowing that so many people will never join the 75K Club.
“Absolute poverty” is defined by the World Bank as subsisting on US$1.25 a day or less. About 1.7 billion people live in absolute poverty today, and one human in seven lives in constant hunger. That’s a heap of Satisfaction for 75K Clubbers.
World Bank president Robert Zoellick is trying to change things. The World Bank says global food production must expand by 70% to accommodate a world population estimated at 9 billion by the year 2050. Production of rice and cereals in developing countries, home to 80% of the world’s population, has decelerated from 3% annual growth in 1970, to only 1% growth today. Zoellick proposes an initiative, in partnership with JP Morgan, to provide $400 million in credit coverage for food producers in emerging nations to hedge against fluctuations in food prices. The credit facility will provide up to $4 billion in price protection. Recalling how well the Public/Private Partnership worked in the TARP program, we count on JP Morgan to be the broker for those hedge contracts and to control the World Bank’s allocation as well. They are no doubt happy that they will get credit for paying themselves their $200 million share — at ten to one margin.
We have a more radical proposal. Free Market evangelists at the World Bank should encourage the poor to become capitalists. It was not obvious that throwing Keynes-semolians at the market was the right policy move, but if the government was determined to spend a trillion dollars of our money, then clearly we should have bailed out homeowners and small business owners. This would bolster real estate values and the banks’ balance sheets, kept people in their homes and maintained employment.
Now the World Bank will spend $200 million dollars for JP Morgan to trade with Cargill in Bangladesh. And conspiracy theorists will note Congress’ recent pressure on the SEC and CFTC to exempt commodities “end users” from capital requirements for commodities. Draw your own conclusion.
India’s farmers obtained cell phones in the last decade and made stunning progress in production and marketing by receiving real-time weather and market reports via text. They know the minute there is a rice shortage in their local village market, or a wheat glut, and deliver or withhold product accordingly. These small farmers are the true End Users, and most exquisitely tuned to their local markets. No one should be more entitled to the largesse of the World Bank. In partnership with local finance operations — Grameen Bank is an obvious choice — small farmers can lock in price protection and local merchants can guarantee supplies. Grameen could offer hedging contracts through its vast network, creating jobs and additional profit opportunities for its local members and providing a road to financial independence and food sustainability — critical to political stability.
Could a billion people rise out of poverty and become self-reliant? Alas, the World Bank would never let a million Dalits compete with Cargill. Adepts of the Church of 75K will recall the Biblical promise: The poor you have with you always.
This week the International Labor Organization brought fifty years of global negotiations to a close with the passage of the Convention on Decent Work for Domestic Workers. The ILO conference of representatives of governments, worker groups, and employers passed the convention overwhelmingly to adopt the document. Abstainers include Malaysia, Singapore and Britain, and delegates report the EU countries pushed for weaker protections in general. The sole government to vote against the Convention was Swaziland.
The ILO, the UN arm representing labor, called the Convention a major victory for world labor and human rights advocates. Human Rights Watch singled out the leadership of Australia, Brazil, South Africa and the US for their advocacy of the measure. The treaty will only be binding on countries that ratify it, but countries with large émigré populations, the source of large numbers of domestic workers for wealthy nations, will guide their citizens to countries that have strong measures in place. The Wall Street Journal reports (23 June, World Watch) that Indonesia will halt the flow of workers to Saudi Arabia after the Saudis beheaded an Indonesian maid convicted of murdering her employer. Indonesia will seek ties with countries with strong worker protections.
Governments that ratify the convention must fully integrate domestic workers into their formal sector, including standards for working hours, minimum wage and overtime pay, guaranteed time off, social security, maternity leave, and other routine benefits.
The convention effectively does away with child domestic labor and requires governments to ensure underage domestic workers receive an education. It requires signatory states to regulate employment agencies and prohibits agencies or employers from deducting from a domestic’s wages to cover recruiting fees. Among other rights stipulated in the convention are the right to association and collective bargaining, prohibition against forced or dangerous work, and a ban on all forms of discrimination in hiring. Migrant domestic workers’ contracts must be fully enforceable in the country of employment.
New York State enacted rights and protections for domestic workers last year, and California is broadening its labor laws to cover domestic employees. Both the New York and California legislation were viewed as models for the ILO convention.
Brazil, which employs 15% of the world’s domestics, will likely be among the first to ratify the convention. It will have to amend its constitution to reflect increased worker rights and protections. There are approximately 7.2 million domestic employees in Brazil, and fewer than 10% have legal work papers. Brazil’s labor ministry says undocumented domestics work an average of 58 hours a week on an average salary of less than US$ 250 a month, well below the legal minimum.
The ILO says they know of more than 52 million women in the global domestic work force, but the number could easily be twice that. With countries like Brazil and the US taking the lead, this could create a global two-tiered system, where the fortunate emigrate to signatory nations, while desperate women increasingly take dangerous jobs in countries that refuse to offer such protections. Either way, big change is afoot.
Notable in last year’s Brazilian elections was the landslide victory of Francisco Everardo Oliveira Silva, better known as Tiririca the Clown. Tiririca (pronounced “Chee-ree-REE-ca,” meaning “Grumpy”), now a Deputy — a Congressman — is one of Brazil’s best loved performers. He won the second largest popular vote of any Brazilian candidate in history, spouting campaign slogans such as “I promise to help Brazil’s families — especially my own!”
Tiririca has been diligent in attending congressional sessions. Now, four months after taking office, he has proposed his first legislative initiatives. The first is “Bolsa Alfabetizacao” — modeled on the Bolsa Familia cash transfer program, and intended to pay R$ 545 (Brazil’s official monthly minimum salary) to each adult who completes a government-run literacy program. A major recent news series reported that 25% of Brazil’s adults are functionally illiterate. This may include Tiririca himself, whose candidacy was challenged when news stories appeared claiming he is illiterate — an automatic disqualification of candidacy if true. His lawyers said he suffers from a rare nerve condition called dysgraphia, which explains why his wife has to guide his hand when he signs his name. In the first major test of the Rousseff presidency — the vote on the new minimum salary level — Tiririca, who promised to vote in favor of Rousseff’s proposal, pushed the “No” button. He sheepishly apologized, saying he had a hard time telling them apart. The entire opposition voted in favor, ensuring a solid victory. Indeed, Titirica was one of the few deputies to vote against it.
Tiririca has also proposed legislation to guarantee education for circus performers — clearly a neglected interest group. Let’s face it, do you ever hear about winning the clown vote?
Tiririca can’t tell Yes from No. Needs help putting his own name on something. Not really sure what his job is or what the government is supposed to do, even though he shows up for every session. Bernanke will need a replacement sooner or later…
Who is wealthy? He who is content with his lot.
The catechistic statement of the onanistic church of self-gratificatory capitalism comes from Adam Smith’s Wealth of Nations. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love…” Smith’s famous use of the expression “invisible hand,” which appears three times in his writings, is interpreted to fit the prejudice of whichever scholar is speaking at the moment.
Smith first used this expression in his work on astronomy, written before his Theory of Moral Sentiments (1759), which was itself published well before the Wealth of Nations (1776). There, he mocks those who apply religious principles to natural phenomena. “Fire burns, and water refreshes; heavenly bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters.”
Smith’s use of the “invisible hand” in the Moral Sentiments fits with today’s religious use: in the grand scheme of the cosmos, even the wealthiest can only consumer slightly more than the very poorest. Thus even the rich, “in spite of their selfishness and rapacity… are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants… When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.” Now comes the scary bit. “These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them.”
Today’s religion of manum indespectum holds as an irrefutable tenet that, the richer the rich grow, the better the lot of the poor. Thus the poor who do not appreciate the success of the wealthy are not merely ungrateful, but ungodly.
Investment bankers and their acolytes ignore the scholarly consensus that, over the course of the next decade and a half, Smith rejected this notion of a heavenly trickling-down. By the time he composed his Wealth of Nations, Smith had gone negative on incidental spillover wealth creation, viewing it as unproductive and a distraction from the optimization of societal progress through macro-economic growth.
Speaking of epiphanies from the ancient world, many noted the odd timing of the reassignment of Greece’s finance minister to the environment ministry. Greece tried launching eco-friendly projects in 2008, but the nation’s excess of bureaucracy was a stumbling block to meaningful change. In the first quarter of last year, Greece announced a 5.5 billion euro green development plan to grow the economy out of the financial crisis. The environmental projects stalled. Greece signed the Kyoto Protocol, but has not met its carbon emission targets. In 2008 a rash of fires destroyed vast swathes of the nation’s forests, and acid rain and poor municipal waste management have been ongoing issues. Then of course there is the budget itself. Like the State of New Jersey and Bernie Madoff, no one had the slightest inkling how much money really was — or really wasn’t — in Greece’s coffers. What you don’t see is what, ultimately, you don’t get.
Observers feared a Greek default will trigger global panic (NY Times, 12 June, “In Greece, Some See A New Lehman”). Within the halls of Hedgeye, our Financials sector head, Josh Steiner, observed that Lehman collapsed a mere three months after the firm fired its own CFO. Like Greece’s latest move, Lehman’s CFO was not summarily dismissed but dialed down to “senior investment banker.” She was replaced by Ian Lowitt, a former Rhodes Scholar, McKinsey executive, and chief administrative officer of Lehman’s European operation. The bankruptcy examiner’s report of the collapse of Lehman said there was a “colorable claim” (legalese for “apparently valid”) that Lowitt knew about the problems surrounding the notorious Repo 105 financing, and that he may have been “at least grossly negligent in causing the company to file materially misleading financial statements.”
Our purpose in dredging these murky waters is not to attack Mr. Lowitt, nor do we take any Schadenfreude over recounting the demise of Lehman. But we think we see a trend of throwing highly visible folks under the chariot when it is clearly too late to make a difference, and we think Adam Smith may have addressed this with his tongue thrust firmly in his Scottish cheek.
As food prices spiraled out of control Egypt saw food riots in 2008 and again this year, contributing to the downfall of the Mubarak government. Egypt, the world’s largest importer of wheat, can ill afford to have its citizens’ stomachs empty. In ancient Egypt, the Pharaoh would appoint a court official whose job was to keep the nation fed. More than a mere administrator, this official was the public face of the nation’s food supply. When there was famine, and ensuing bread riots, the Keeper of the Granaries would be dragged from his quarters and executed in front of the angry crowd. This enabled Pharaoh to announce his profound disappointment with his vizier and to promise that he would appoint another, better man in his stead. Obama cynics should note the ancient — and apparently honorable — practice of a head of state standing before the nation and droning “I take full responsibility…” Honorable, that is, insofar as Honor is an accessory to Power.
It is the prerogative of power to allocate suffering among one’s subjects. Or, if one is a modern statesman, one’s citizens. Or if an investment banker, one’s clients. Or if one is a desperate CEO, to fire one’s senior executives one after the other while refusing to contemplate the inevitable destruction of the firm.
A hierarchy of pain has long been reflected in Wall Street’s Great Chain of Being. The world prayed at the altar of finance, and everyone accepted that the bankers made the most, their top clients made the second most, their second tier clients usually made something, and everyone else could damned well fend for themselves. Everyone — even the losers — acknowledged this was the natural order. That it was as it should be. That Greed is Good. Clearly the London Times misread Lloyd Blankfein. They thought “doing God’s work” was a saucy quip, a feeble joke. We do not believe Blankfein jokes about Goldman’s business any more than God plays dice with the universe. And no one knows better than Goldman’s CEO the ways in which, to quote Adam Smith, “… Providence divided the earth among a few lordly masters.” Blankfein, like Treasury Secretary Paulson and Senator Corzine before him, officiates at the altar of the trickler-downers and would surely maintain that the poorest also enjoy their share — as enjoy it they must, or be seen as ungrateful. Worse, as infidels.
The occupations listed in Smith’s famous passage struck a nerve with us. “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner.” Coming from a Scots Protestant family, Smith surely knew his Bible. Invoking the Butcher, Baker and Brewer calls to mind the story of the most famous Keeper of the Grain of all, told in the Book of Genesis.
Joseph, abandoned by his brothers at the bottom of a pit, is brought down to Egypt and sold as a slave to Pharaoh’s Chief Butcher, a man named Potiphar. Accused falsely by Potiphar’s wife, Joseph ends up in the royal prison under Potiphar’s authority. There he shares a cell with two unfortunate members of Pharaoh’s court who have fallen out of favor: the royal baker, and the royal cup-bearer. For an ordinary man, the story would end there. But this is the foundational narrative of Western Civilization, so it is no surprise when Joseph is brought out of the dungeon and asked to interpret Pharaoh’s dreams. He succeeds, to Pharaoh’s pleasure, and is rewarded by being put in charge of Egypt’s food supply — roughly the equivalent of Pharaoh’s central banker. Wait a minute, you ask — isn’t that the most dangerous job in the nation? And in fact the last guy who held that position — the Royal Baker — has his head chopped off. Well, shrugs Pharaoh, we can always throw you back in the dungeon for the rest of your nasty, brutish, short life.
Joseph takes up his task with a will, and in a few years has all Egypt in utter thrall to Pharaoh. His success may be a testament to divine favor. It certainly speaks to Joseph’s entrepreneurial animal spirit and to the acumen of Pharaoh in his choice of Grand Vizier. Modern politicians, alas, have to do better than merely reassigning government ministers to less sexy portfolios. Evangelos Venizelos, the new finance minister, was formerly minister of defense. Perhaps Papandreu thinks controlling the government printing press is good, but controlling the army is better. This Venizelos is not related to “the Maker of Modern Greece,” Eleftherios Venizelos (d. 1936), whose likeness today graces a coffee can. Reliance on Divine assistance? Greece is no more likely to benefit from it than Lehman Bros did. To paraphrase an oft-paraphrased political diss: I knew Pharaoh, I was enslaved under Pharaoh, and neither Dick Fuld nor Papandreou is Pharaoh.
The Greek confidence vote was a foregone conclusion: no one was seriously going to allow Papandreou to be voted out — it would have forced the opposition to step in and take responsibility. As Socrates might have said: “Duhhh!” As to the Biblical theme, we know folks who believe there is a policy case for beheading central bankers who fail at their job. And in case you are wondering what happened to the original Butcher and Brewer — when the Baker was executed, the Cup Bearer was released from prison and got his old job back. Potiphar, according to rabbinic legend, went mad with hidden sexual desire for Joseph. When Pharaoh appropriated the lad, Potiphar castrated himself in despair.
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