Tuesday, August 25, 2015

Mainstream media goes to repudiated conservative expert for analysis of China’s problems

By Marc Jampole

“Of all the gin joints in all the towns in all the world, she walks into mine,” is what Humphrey Bogart’s character says when his long-lost love, played by Ingrid Bergman, walks into a bar in “Casablanca.”

I have a variation for Andrew Ross Sorkin, who writes the “Dealbook” column for the New York Times. “Of all the economists in all the universities in the world with all the theories predicting China’s decline, Sorkin writes a full-length feature article on one whose theory has been discounted because he and his associates couldn’t count.”

I’m referring to Sorkin giving Professor Kenneth Rogoff of Harvard a platform for applying his repudiated theory of debt to China’s current problems in a Times article titled “A Warning on China Seems Prescient.”

It turns out that Rogoff has predicted that China’s economic difficulties would affect the world economy for a number of years now. His reason—too much debt.

Sorkin spends a lot of time building up Rogoff’s credentials, mentioning that he is a chess grandmaster and calling This Time It’s Different, the 2008 tome of economic history he wrote with Carmen Reinhart, a “seminal book.” A few years back, when government debt trumped all other macroeconomic concerns in the news media, This Time Is Different caught the attention of the news media because it concluded that countries with public debt greater than 90 percent of gross domestic product suffered measurably slower economic growth. Politicians and journalists throughout the world used this “new discovery” to bolster assertions that governments everywhere had to reduce debt instead of pumping money into the economy to create jobs. The problem was that Reinhart and Rogoff miscalculated in a number of places and even made counting errors. With their bad math corrected, no real correlation was found between levels of debt and economic growth.

In other words, within a few years of publishing their study, Rogoff and Reinhart’s theory was disproven.

Sorkin, who is supposed to be a specialist in these matters and therefore familiar with the literature, explicates Rogoff and Reinhart’s theory but makes no mention of its repudiation. I can’t imagine the learned and honored Sorkin not having read that their bad math led to a false conclusion.

We can only assume that Sorkin wanted to use Rogoff as his expert because he wanted to float the theory that too much debt is causing China’s economic problem.
Apart from the fact that use of a bad expert calls into questions Sorkin’s credibility, the idea that debt is to blame for the Chinese stock market crash and economic slowdown is absolutely ridiculous, for reasons of fact and common sense.

First the fact: because of the lack of transparency in the Chinese economy, no one really knows how much debt the Chinese government and its citizens really hold as a percentage of gross domestic product (GDP). You can’t say “too much” if you don’t know “how much.”

Now the common sense: For years, China’s economy has grown at an enormous rate that was bound to eventually falter. Its lowest annual growth rate since 1989 has been 3.4%, its highest 14.2%, with most years more than 7%. That’s a phenomenal growth rate. For example, since 1800, the growth rate in Great Britain has averaged less than two percent. As measured by GDP, the U.S. averaged growth of 3.24% between 1947 and 2015. Before about 1800, the average economic growth rate throughout the world was less than 1%. For a country to essentially sustain a 7% growth rate for more than 25 years is exceedingly rare.

China may or may not have too much debt. The Chinese leaders may or may not be mismanaging the short-term crisis, as some have said. There may or may not be a real estate bubble in China. Maybe all or some of these factors exacerbate what’s happening in China now. But one thing is certain: China could not sustain its rapid growth forever and whenever that growth slowed down, it was going to be a bumpy ride for China and any country that does business with it (meaning every country!).

With Rogoff’s help, Sorkin looks past the obvious and blames too much debt—the excuse that conservatives always like to give for economic problems. For those new to the “three-card monte” that the ruling elite and mainstream media constantly pull on the public, let me explain that “too much debt” always begins a conversation or thought process that ends with decisions not to pump government money into the economy, but instead to pay off debt without raising taxes; in other words, to starve the government.  If Sammy Kahn were an economist, instead of “Love and marriage go together like a horse and carriage,” he would have written, “Too much debt and austerity go together like a golf ball and a tee.” Politicians tee up “too much debt” theories and hit the austerity ball hundreds of feet.

Unfortunately, the austerity ball always ends up in the sand trap. As we have seen everywhere in the world since the 2008 economic crisis, countries that follow austerity programs run into greater problems, and countries whose governments spread money around recover quickly with less permanent damage to their economies. 

Monday, August 24, 2015

Those in looking-glass world of investments think making financial advisors responsible to client harms public

By Marc Jampole

There’s a scary series of ads on broadcast and cable television lately that warn us that the federal government is about to make it more expensive to get financial planning, make it impossible for people to use the trusted financial planner who has helped them reach their financial goals for years, and may even leave people with phone robots as their only source of investment advice.

The two ads I saw focus on two distinct demographic groups: One ad describes a conversation a couple have in the car ride home after dropping a child off at college. It seems as if the only thing threatening their financial future is a nebulous action the government is about to take. The other spot is a pained soliloquy of a minority small business owner—in the construction industry—who is worried what the impact of this unexplained government action will be on his ability to provide his employees with 401K plans. The call to action in each spot is to contact Congress and ask it to “fix this now.” Of course the ads never define what “this” is, instead focusing on what the speakers predict are the dire consequences of “this.”

The ads do a good job of raising anxiety and anger levels—anxiety about your financial future and anger at the government for making ominous if undescribed changes to the law.

Both spots drive viewers to Securefamily.org, which describes the “this”: “new retirement regulations from the Department of Labor.” Throughout the website, we learn about the consequences of the new retirement regulations, but we never learn what the regulations are or do.

That’s because, counter to what the Securefamily.org campaign may say, the new Labor Department retirement rules do not raise fees, mandate robo-advisors, nor of necessity make it harder to have a financial advisor or offer a retirement plan to employees.

What the new regulations, which have not yet been finalized, will do is make anyone providing financial advice for a retirement account to become a “fiduciary” of the client. Fiduciary is an odd- and corporate-sounding word about which thousands of books and article have been written. But the basic meaning of fiduciary is quite simple: A fiduciary must act in the best financial of the client.

That’s right. Under current law, registered financial advisors and others giving investment advice do not necessarily have to act in the best interest of their clients. They are free to recommend buying a stock to accommodate a larger client who wants to sell or to unload a large purchase their brokerage house just made. They are free to recommend mutual fund A over mutual fund B, if A gives the advisor a bigger commission and B is better for the client. They are free to sell fee-based accounts to clients who hardly trade and would save money if they switched to a commission-based account. As a fiduciary of the client, all these common actions would expose the investment advisor to a lawsuit.

The new rules would require advisors offering individualized recommendations to sign a contract detailing their fiduciary responsibilities. The advisor would also have to provide extensive information about fees and expenses and follow specific procedures to minimize conflicts of interest. Under the new regulations, individuals and businesses will have new rights to sue advisors for breach of fiduciary responsibility.

Who in the world could be opposed to making financial advisors fiduciaries, and therefore responsible for acting in the best interests of the client? How could acting in the clients’ best interests hurt the public? 

The twisted, almost pathological reasoning of those opposed to the new regulations is that the cost of financial advice will rise, pricing many Americans out of the market for financial planners.

Let’s consider the ways in which the new regulations might lead to higher prices: Investment companies might get sued more often for not putting the client’s interest first, which would raise insurance costs. Or many advisors—the less competent ones to be sure—may get out of the business, unable to make a good living anymore because they won’t be able to steer their clients into more expensive options for the same basic investment; with fewer advisors out there, the cost of advice could go up. On the other hand, service will improve as advisors become both more competent and less conflicted, which should lead to fewer lawsuits and better returns in the long run. I’m thinking a good analogy is seatbelts: the industry said they would make the cost of new cars prohibitive, but they added very little cost while making automobiles much, much safer. No one was priced out of the market.

Some opponents also say that disclosure and record-keeping under the new regulations might be so extensive that it would make it too expensive to give advice to investors who aren’t wealthy. LOL! It will only take a few months for the industry to develop software that automates disclosure, just as it has automated financial planning for virtually everyone not a millionaire.  That’s the “robo-advisors” the ads warn you about, except the ads don’t tell you that many current financial advisors do nothing more than follow the recommendations of the software already. I don’t think the new regulations will dissuade the investment industry from continuing the “live robo” strategy of having human financial planners present the results of a software analysis.

I’m sure few readers are wondering who is financing this war against making investment advisors responsible for acting in their client’s best interest. We all know it’s the insurance and investment industry. The SecureFamily.org website, TV commercials and other campaign elements are financed by Americans to Protect Family Security, which describes itself as “a partnership of America’s financial advisors, life insurance agents, and life insurance companies that is dedicated to educating policymakers about the role our products play in the financial lives of 75 million American families.”

The financial industry has every right to fight regulations that will make it harder to make money, even if their position hurts the very clients they are supposed to serve. We see organizations advocating selfish positions all the time—automobile manufacturers arguing against higher fuel standards; coal companies and heavy manufacturers arguing against environmental regulations; Republican politicians arguing in favor of laws that restrict the right to vote.

What’s particularly horrifying is when the organizations lie or mislead. Talking about the hypothetical impact of a new regulation without telling us what the regulation does is as misleading as quoting weather personalities who don’t believe in global warming or creating nonexistent problems such as voter fraud. For the investment industry, this duplicitous approach is likely to backfire. The organization is acting deviously to oppose a new regulation that makes it harder for the industry it represents to act deviously. It seems as if all the Americans to Protect Family Security campaign is doing is showing just how necessary the regulations it opposes are.

Wednesday, August 19, 2015

What do Netanyahu, Schumer, Menendez, other Iran deal critics want? War, a stronger Saudi Arabia, contracts for cronies?

By Marc Jampole

When Senator Robert Menendez says that the Obama Administration should have held out for a better deal with Iran, he forgets that every day of negotiation without a deal was one more day that Iran could work on gaining a nuclear weapons capability. He also forgets that the Iranians and Americans weren’t the only ones at the table. If the United States rejects the agreement, the other five nations could still go through with it, pretty much breaking the economic embargo and isolating the United States.

Like Senator Charles Schumer, Israeli Prime Minister Benjamin Netanyahu and other vocal critics, Senator Menendez never asks the question, What if there is no deal? 

The status quo is as unstable as Beryllium 6, an unstable isotope with a half-life of less than a nanosecond: The economic isolation of Iran will continue and Iran will continue to build nuclear weapons. And how long will that scenario last? Only until one of three things happens: 1) Our allies in negotiation walk away from us and forge a deal with Iran that breaks the economic sanctions; 2) Iran has a fully functional bomb; or 3) Someone—the United States or Israel—bombs Iran and starts a yet another war in the Middle East.

How can any of these likely scenarios be better than a deal with inspections that postpones development of an Iranian nuclear capability for 15 years, during which time the West and Iran will have time to settle their differences, much as the United States and Viet Nam have done.

The common sense of the deal is so compelling that I find myself cynically asking what’s in it for the opponents, or better what’s in it for the network of rich donors and supporters of the various politicians who are voting or lobbying against the agreement.

Let’s first take care of the ridiculous Israel card. How could Israel’s interests (as opposed to the interests of Netanyahu’s supporters) possibly be served by passing on an agreement that keeps nuclear arms out of the hands of a government that at one time called for the eradication of the Jewish state? If we accept the premise that Iran will always be Israel’s mortal enemy—and it’s a premise that I believe is deeply flawed—how could you possibly want to not see constraints and inspections?  Why would you prefer an isolated, angry and nuked-up Iran to one without a nuclear capability that is slowly reintegrating itself into the broader world economy? Why would you rather project the world view of the ultra-right Ayatollahs than that of Iran’s many secularists?

Remember that while Iranian leaders have polluted the world’s media with numerous anti-Israel statements, Iran has never taken one overtly aggressive act against Israel. It has supplied arms to Palestinians, much as the United States supplies arms to governments and insurgents worldwide. Selling arms is, however, a far cry from an invasion, bombing or sending in of drones. I understand the emotional impact of having someone scream in your face for 30 years, but that shouldn’t prevent supporters of Israel from thinking clearly.

My conclusion: anyone who is against the Iran treaty because they fear it will weaken Israel is either an outright liar or an unwitting victim to the worst kind of emotional manipulation.  Let’s give the American Jewish organizations against the agreement the benefit of the doubt and say that they are all being misled. The irony, of course, is that surveys show that a majority of American Jews favor the deal, regardless of what claptrap spews from the brainwashed, co-opted or corrupted leaders of the various Jewish organizations that follow Netanyahu’s apocalyptic script in knee-jerk fashion.

That leaves only cynical reasons to oppose the deal:
·         Help Saudi Arabia, which benefits the most from no deal and loses the most from the deal, because reintegrating Iran into the world economic order hurts the Saudis.
·         Blindly implement a foreign policy strategy that depends exclusively on the use of force, the same neo-con strategy that has proven to be so disastrous in Iraq and Afghanistan.
·         Gain more contracts for defense companies who contribute to your campaign.
·         Use the fear of Iran to gain power or remain in power, regardless of whether that harms your country.

I think for the Israeli and Republican Americans against the deal, all four reasons apply, whereas only the first three rationales apply to the benighted Senators Schumer and Menendez; they aren’t manipulating voters with bellicose rhetoric, only satisfying special interest groups.

But whatever the motivation, those who want to walk away from the nuclear arms deal with Iran certainly do not have the best interest of either the United States or Israel in mind and seem to prefer serving the tiny fragment of the population with large investments in defense contractors or strong ties to Saudi Arabia.