by Stephan Foley / 18 November 2011

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic. This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.

It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank’s alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund’s European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons. Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as “the Vampire Squid”, and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman’s interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren’t “bought and paid for” by corporations, as in the US, he says. “Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions.”

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Mr Monti is one of Italy’s most eminent economists, and he spent most of his career in academia and thinktankery, but it was when Mr Berlusconi appointed him to the European Commission in 1995 that Goldman Sachs started to get interested in him. First as commissioner for the internal market, and then especially as commissioner for competition, he has made decisions that could make or break the takeover and merger deals that Goldman’s bankers were working on or providing the funding for. Mr Monti also later chaired the Italian Treasury’s committee on the banking and financial system, which set the country’s financial policies. With these connections, it was natural for Goldman to invite him to join its board of international advisers. The bank’s two dozen-strong international advisers act as informal lobbyists for its interests with the politicians that regulate its work. Other advisers include Otmar Issing who, as a board member of the German Bundesbank and then the European Central Bank, was one of the architects of the euro. Perhaps the most prominent ex-politician inside the bank is Peter Sutherland, Attorney General of Ireland in the 1980s and another former EU Competition Commissioner. He is now non-executive chairman of Goldman’s UK-based broker-dealer arm, Goldman Sachs International, and until its collapse and nationalisation he was also a non-executive director of Royal Bank of Scotland. He has been a prominent voice within Ireland on its bailout by the EU, arguing that the terms of emergency loans should be eased, so as not to exacerbate the country’s financial woes. The EU agreed to cut Ireland’s interest rate this summer.

Picking up well-connected policymakers on their way out of government is only one half of the Project, sending Goldman alumni into government is the other half. Like Mr Monti, Mario Draghi, who took over as President of the ECB on 1 November, has been in and out of government and in and out of Goldman. He was a member of the World Bank and managing director of the Italian Treasury before spending three years as managing director of Goldman Sachs International between 2002 and 2005 – only to return to government as president of the Italian central bank. Mr Draghi has been dogged by controversy over the accounting tricks conducted by Italy and other nations on the eurozone periphery as they tried to squeeze into the single currency a decade ago. By using complex derivatives, Italy and Greece were able to slim down the apparent size of their government debt, which euro rules mandated shouldn’t be above 60 per cent of the size of the economy. And the brains behind several of those derivatives were the men and women of Goldman Sachs.

The bank’s traders created a number of financial deals that allowed Greece to raise money to cut its budget deficit immediately, in return for repayments over time. In one deal, Goldman channelled $1bn of funding to the Greek government in 2002 in a transaction called a cross-currency swap. On the other side of the deal, working in the National Bank of Greece, was Petros Christodoulou, who had begun his career at Goldman, and who has been promoted now to head the office managing government Greek debt. Lucas Papademos, now installed as Prime Minister in Greece’s unity government, was a technocrat running the Central Bank of Greece at the time. Goldman says that the debt reduction achieved by the swaps was negligible in relation to euro rules, but it expressed some regrets over the deals. Gerald Corrigan, a Goldman partner who came to the bank after running the New York branch of the US Federal Reserve, told a UK parliamentary hearing last year: “It is clear with hindsight that the standards of transparency could have been and probably should have been higher.” When the issue was raised at confirmation hearings in the European Parliament for his job at the ECB, Mr Draghi says he wasn’t involved in the swaps deals either at the Treasury or at Goldman.

It has proved impossible to hold the line on Greece, which under the latest EU proposals is effectively going to default on its debt by asking creditors to take a “voluntary” haircut of 50 per cent on its bonds, but the current consensus in the eurozone is that the creditors of bigger nations like Italy and Spain must be paid in full. These creditors, of course, are the continent’s big banks, and it is their health that is the primary concern of policymakers. The combination of austerity measures imposed by the new technocratic governments in Athens and Rome and the leaders of other eurozone countries, such as Ireland, and rescue funds from the IMF and the largely German-backed European Financial Stability Facility, can all be traced to this consensus. “My former colleagues at the IMF are running around trying to justify bailouts of €1.5trn-€4trn, but what does that mean?” says Simon Johnson. “It means bailing out the creditors 100 per cent. It is another bank bailout, like in 2008: The mechanism is different, in that this is happening at the sovereign level not the bank level, but the rationale is the same.” So certain is the financial elite that the banks will be bailed out, that some are placing bet-the-company wagers on just such an outcome. Jon Corzine, a former chief executive of Goldman Sachs, returned to Wall Street last year after almost a decade in politics and took control of a historic firm called MF Global. He placed a $6bn bet with the firm’s money that Italian government bonds will not default. When the bet was revealed last month, clients and trading partners decided it was too risky to do business with MF Global and the firm collapsed within days. It was one of the ten biggest bankruptcies in US history.

The grave danger is that, if Italy stops paying its debts, creditor banks could be made insolvent. Goldman Sachs, which has written over $2trn of insurance, including an undisclosed amount on eurozone countries’ debt, would not escape unharmed, especially if some of the $2trn of insurance it has purchased on that insurance turns out to be with a bank that has gone under. No bank – and especially not the Vampire Squid – can easily untangle its tentacles from the tentacles of its peers. This is the rationale for the bailouts and the austerity, the reason we are getting more Goldman, not less. The alternative is a second financial crisis, a second economic collapse. Shared illusions, perhaps? Who would dare test it?

Mario Monti, Lucas Papademos and Mario Draghi have something in common: they have all worked for the American investment bank. This is not a coincidence, but evidence of a strategy to exert influence that has perhaps already reached its limits.

Our friends from Goldman Sachs…
by Marc Roche / 16 November 2011 / Le Monde

Serious and competent, they weigh up the pros and cons and study all of the documents before giving an opinion. They have a fondness for economics, but these luminaries who enter into the temple only after a long and meticulous recruitment process prefer to remain discreet. Collectively they form an entity that is part pressure group, part fraternal association for the collection of information, and part mutual aid network. They are the craftsmen, masters and grandmasters whose mission is “to spread the truth acquired in the lodge to the rest of the world.” According to its detractors, the European network of influence woven by American bank Goldman Sachs (GS) functions like a freemasonry. To diverse degrees, the new European Central Bank President, Mario Draghi, the newly designated Prime Minister of Italy, Mario Monti, and the freshly appointed Greek Prime Minister Lucas Papademos are totemic figures in this carefully constructed web.

Heavyweight members figure large in the euro crisis
Draghi was Goldman Sachs International’s vice-chairman for Europe between 2002 and 2005, a position that put him in charge of the the “companies and sovereign” department, which shortly before his arrival, helped Greece to disguise the real nature of its books with a swap on its sovereign debt. Monti was an international adviser to Goldman Sachs from 2005 until his nomination to lead the Italian government. According to the bank, his mission was to provide advice “on European business and major public policy initiatives worldwide”. As such, he was a “door opener” with a brief to defend Goldman’s interest in the corridors of power in Europe. The third man, Lucas Papademos, was the governor of the Greek central bank from 1994 to 2002. In this capacity, he played a role that has yet to be elucidated in the operation to mask debt on his country’s books, perpetrated with assistance from Goldman Sachs. And perhaps more importantly, the current chairman of Greece’s Public Debt Management Agency, Petros Christodoulos, also worked as a trader for the bank in London. Two other heavyweight members of Goldman’s European network have also figured large in the euro crisis: Otmar Issing, a former member of the Bundesbank board of directors and a one-time chief economist of the European Central Bank, and Ireland’s Peter Sutherland, an administrator for Goldman Sachs International, who played a behind the scenes role in the Irish bailout.

Relay exclusive information to the bank’s trading rooms
How was this loyal network of intermediaries created? The US version of this magic circle is composed of former highly placed executives of the bank who effortlessly enter the highest level of the civil service. In Europe, on the other hand, Goldman Sachs has worked to accumulate a capital of relationships. But unlike its competitors, the bank has no interest in retired diplomats, highly placed national and international civil servants, or even former prime ministers and ministers of finance. Goldman’s priority has been to target central bankers and former European commissioners. Its main goal is to legally collect information on initiatives in the near future and on the interest rates set by central banks. At the same time, Goldman likes its agents to remain discreet. That is why its loyal subjects prefer not to mention their filiation in interviews or in the course of official missions. These well-connected former employees simply have to talk about this and that secure in the knowledge that their prestige will inevitably be rewarded with outspoken frankness on the part of those in powerful positions. Put simply they are there to see “which way the wind is blowing,” and thereafter to relay exclusive information to the bank’s trading rooms.

Bid for global dominance
Now that it has a former director at the head of the ECB, a former intermediary leading the Italian government, and another in charge in Greece, the bank’s antagonists are eager to highlight the extraordinary power of its network in in Frankfurt, Rome and Athens, which could prove extremely useful in these turbulent times. But looking beyond these details, the power of Goldman’s European government before and during the financial ordeal of 2008 may well prove to be an obstacle. The relationships maintained by experienced former central bankers are less likely to be useful now that politicians are aware of the unpopularity of finance professionals who are seen to be responsible for the present crisis. Where Goldman Sachs used to be able to exercise its talents, it now has to contend with opposition from public authorities raising questions about a series of scandals. A well stocked address book is no longer sufficient in a complex and highly technical financial world, where a new generation of industry leaders are less likely to be imbued with an unquestioning respect for the establishment. In their bid for global dominance, they no longer need to rely on high finance crusaders in the Goldman mould, while the quest to protect shareholder’s rights, demands for more transparency and active opposition from the media, NGOs, and institutional investors continue to erode the potency of “the network effect.”

{Translated from the French by Mark McGovern}

The giant American investment bank which is accused of helping the Greek state to conceal the real nature of its financial situation while speculating on its debts can count on a remarkable network of advisers with very close links to European leaders, reports Le Monde.

Goldman Sachs, the international web
by Marc Roche / 3 March 2010 / Le Monde

Petros Christodoulou affects not to care about compliments or their source. Ever since he was a teenager, this top-of-the-class student has grown used to hearing his praises sung. Appointed on 19 February to the head of the organization for the management of Greek public debt, he has arrived at the top of the tree. However, the trouble is that the former manager of global markets at the National Bank of Greece (NBG) is at the centre of an inquiry, announced on 25 February by the United States Federal Reserve, on contracts relating to Greek national debt, which link Goldman Sachs and other companies to the government in Athens. The New York based investment bank was paid as a banking advisor to the Greek government while speculating on the Hellenic nation’s sovereign debt. In particular, the American regulator is interested in the role played by Petros Christodoulou, who, in collaboration with Goldman, supervised the creation of the London company Titlos to transfer debt from Greece’s national accounts to the NBG. Before joining the NBG in 1998, Mr Christodoulou had worked as a banker for – you guessed it – Goldman Sachs.

“Government Sachs”
The affair has highlighted the powerful network of influence that Goldman Sachs has maintained in Europe since 1985 – a tightly woven group of underground and high-profile go-betweens and loyal supporters, whose address books open the doors of ministries of finance. These carefully recruited and extraordinarily well-paid advisors understand all the subtleties of the corridors of power within the European Union, and have a direct line to decision makers that they can call during moments of crisis. But who are the members of the European arm of the institution which is so powerful in Washington that it is referred to as “government Sachs”? The key figure is Peter Sutherland, chairman of Goldman Sachs International, the bank’s London-based European subsidiary. The former European commissioner for competition and ex-chairman of BP, is an essential link between the investment bank and the 27 EU member states and Russia. In France, Goldman Sachs benefits from the support of Charles de Croisset, a former chairman of Crédit Commercial de France (CCF), who took over from Jacques Mayoux, a government inspector of finances and former chairman of Société Générale. In the United Kingdom, it can count on Lord Griffiths, who advised former prime minister Margaret Thatcher, and in Germany, on Otmar Issing, a one-time board member of the Bundesbank and ex-chief economist of the European Central Bank (ECB).

Discreetly advances its interests
And that is not to mention the many Goldman alumni who go onto hold positions of power, which the bank can count on to advance its position. The best known of these is Mario Draghi, Goldman’s vice-president for Europe between 2001 and 2006, who is the current governor of the Bank of Italy and Chairman of international regulator, the Financial Stability Board. But do not expect to come across former diplomats in the austere corridors of Goldman Sachs International. As an institution with real world interests, the bank prefers to recruit financiers, economists, central bankers, and former highly placed civil servants from international economic organizations, but considers retired ambassadors to be jovial status symbols without any real high-level contacts or business sense. For Goldman Sachs, this network has the advantage of enabling it to discreetly advance its interests. In the Financial Times of 15 February, Otmar Issing published an article voicing his hostility to any attempt by the European Union to rescue Greece. However, he omitted to mention the fact that he has been an international advisor to Goldman Sachs since 2006. Nor did he say that the bank’s traders, who have been speculating against the single European currency, might well lose their shirts if the EU does intervene.

Max Keiser & Catherine Austin Fitts on Goldman Sachs (2009)

The government and the big banks deceived the public about their $7 trillion secret loan program. They should be punished
by Eliot Spitzer  /   Nov. 30, 2011

Imagine you walked into a bank, applied for a personal line of credit, and filled out all the paperwork claiming to have no debts and an income of $200,000 per year. The bank, based on these representations, extended you the line of credit. Then, three years later, after fighting disclosure all the way, you were forced by a court to tell the truth: At the time you made the statements to the bank, you actually were unemployed, you had a $1 million mortgage on your house on which you had failed to make payments for six months, and you hadn’t paid even the minimum on your credit-card bills for three months. Do you think the bank would just say: Never mind, don’t worry about it? Of course not. Whether or not you had paid back the personal line of credit, three FBI agents would be at your door within hours. Yet this is exactly what the major American banks have done to the public. During the deepest, darkest period of the financial cataclysm, the CEOs of major banks maintained in statements to the public, to the market at large, and to their own shareholders that the banks were in good financial shape, didn’t want to take TARP funds, and that the regulatory framework governing our banking system should not be altered. Trust us, they said. Yet, unknown to the public and the Congress, these same banks had been borrowing massive amounts from the government to remain afloat. The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told. This was not TARP: This was secret Fed lending. And although it has since been repaid, it is clear why the banks didn’t want us to know about it: They didn’t want to admit the magnitude of their financial distress.

The banks’ claims of financial stability and solvency appear at a minimum to have been misleading—and may have been worse. Misleading statements and deception of this sort would ordinarily put a small-market player or borrower on the wrong end of a criminal investigation. So where are the inquiries into the false statements made by the bank CEOs? And where are the inquiries about the Fed and Treasury officials who stood by silently as bank representatives made claims that were false, misleading, or worse? Only now, because of superb analysis done by Bloomberg reporters—who litigated against the Fed and the banks for years to get the information—are we getting a full picture of the Fed and Treasury lending. The reporters also calculated that recipient banks and other borrowers benefited by approximately $13 billion simply by taking advantage of the “spread” between their cost of capital in these almost interest-free loans and their ability to lend the capital.

In addition to the secrecy, what is appalling is that these loans were made with no strings attached, no conditions, and no negotiation to achieve any broader public purpose. Even if one accepts the notion that the stability of the financial system could not be sacrificed, those who dispensed trillions of dollars to private parties made no apparent effort to impose even minimal obligations to condition the loans on the structural reforms needed to prevent another crisis, made no effort to require that those responsible for creating the crisis be relieved of their jobs, took zero steps towards the genuine mortgage-reform that is so necessary to begin a process of economic renewal. The dollars lent were simply a free bridge loan so the banks could push onto others the responsibility for the banks’ own risk-taking. If ever there was an event to justify the darkest, most conspiratorial view held by many that the alliance of big money on Wall Street and big government produces nothing but secret deals that profit insiders—this is it.

So what to do? The revelations of the secret loan program may provide the opportunity for Occupy Wall Street to suggest a few concrete steps that would be difficult to oppose.

First: Demand a hearing where the bank executives have to answer questions—under oath—about the actual negotiations, or lack thereof, that led to these loans; about the actual condition of each of the borrowing banks and whether that condition differed from the public statements made by the banks at the time.

Second: Require the recipient banks to use this previously undisclosed gift—the profit they made by investing this almost interest-free money—to write down the value of mortgages of those who are underwater. The loans to the banks were meant to solve a short-term liquidity problem, not be a source of profits to fund bonuses. Take back the profits and put them to apublic use.

Third: Require the government officials responsible for authorizing these loans to explain why there was no effort made to condition these loans on changes in policy that would protect the public going forward.

Fourth: Ask congress to examine every filing and statement made to Congress by the banks about their financial condition and their indebtedness to see if any misrepresentations were made in an effort to hide these trillions of dollars of loans. Misleading Congress can be a felony, and willful deception of the Congress to hide the magnitude of the public bailouts should not go unprosecuted.

Finally: Demand that politicians return all contributions made by the institutions that got hidden loans. Pressure the politicians who continue to feed from the trough of Wall Street, even as they know all too well how the banks and others have gamed the system and the public.

The Fed’s European “Rescue”: Another back-door US Bank / Goldman bailout?
by Nomi Prins /  November 30, 2011

In the wake of chopping its Central Bank swap rates today, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right. The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball.  Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks). Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks. Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert – a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street’s staunchest ally, and Tim Geithner’s old stomping ground, the New York Fed.

The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want – like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.) Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29th, 2011, these lines were extended through August 1, 2012.  AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.

Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed’s own words, provide “foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds. These were originally used with 4 foreign banks on April, 2009  and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank. They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.) That’s a lot  of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.

There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland  – or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come. Perhaps at that point, Goldman thought they had it all under control, but Germany’s bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play.  Nothing from the Fed, except a small increase in funding to the IMF. Rating agency Moody’s  announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.

Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to  $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )

Breaking that down:  JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase’s ratio is 44 to 1. Bank of America’s ratio is 36 to 1. Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital  it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed’s timing have something to do with its star bank? We don’t really know for sure.

Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly. But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity’ or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.

As the World Crumbles: the ECB spins, FED smirks, and US Banks Pillage
by Nomi Prins / November 21, 2011

Often, when I troll around websites of entities like the ECB and IMF, I uncover little of startling note. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies. That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens. What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then… see where I’m going with this.

We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’.) The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff. Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Greek banks bought US-minted AAA assets and leveraged them. Norway did too (through the course of working on a Norwegian documentary, I discovered that 8 tiny towns in Norway bought $200 million of junk assets from Citigroup, borrowed money from local banks to pay for them, and pledged 10 years of power receipts from hydroelectric plants in return. The AAA assets are now worth zero, the power has been curtailed for residents, and the Norwegian banks want their money back–blood from a stone.) The same kind of thing happend in Italy, Spain, Portugal, Ireland, Holland, France, and even Germany – in different degrees and with specific national issues mixed in.  Problem is – when you’ve already used worthless collateral to borrow tons of money you won’t ever be able to repay, and international capital slams you in other ways, and your funding costs rise, and your internal development and lending seize up, you’re screwed – or rather the people in your country are screwed.

In the IMF paper, the authors convincingly make the case that it wasn’t just the US subprime asset meltdown itself that initiated Europe’s implosion, but the fact that our Federal Reserve and Treasury Department adopted a reckless don’t-let-em-fail doctrine. Even though Bear Stearns and Lehman Brothers failed, their investors, the huge ones anyway, were protected. The Fed subsidized, and still subsidizes, $29 billion of risk for JPM Chase’s acquisition of Bear. The philosophy of saving banks and their practices poisoned Europe, as those same financial firms played euro-roulette in the global derivatives markets, once the subprime betting train slowed down.

The first fatal stop of the US bailout mentaility was the ECB’s 2010 bailout of Anglo Irish bank, which got the lion’s share of the ECB’s Irish-bailout: $51 billion euro of ELA (Emergency Loan Assistance) and $100 billion euro of regular lending at the time. After the international financial community saw the pace and volume of Irish bank bailouts, the game of euro-roulette went turbo, country by country.  More ‘fiscally conservative’ governments are replacing any semblance of population-supportive ones. The practice of  extracting ‘fiscal prudency’ from people and providing bank subsidies for bets gone wrong has infected all of Europe. It will continue to do so, because anything less will threathen the entire Euro experiement, plus otherwise, the US banks might be on the hook again for losses, and the Fed and Treasury won’t let that happen. They’ve already demonstrated that. It’d be just sooo catastrophic.

In the wings, the smugness of Treasury Secretary Tim Geithner and Fed Chairman, Ben Bernanke is palpable – ‘hey, we acted heroically and “decisively” to provide a multi-trillion dollar smorgasbord  of subsidies for our biggest banks and look how great we  (er, they) are doing now? Seriously, Europe – get your act together already, don’t do the trickle-bailout game – just dump a boatload of money into the same banks – and a few of your own before they go under  – do it for the sake of global economic stability. It’ll really work. Trust us.’ Most of the media goes along with the notion that US banks exposed to the ‘euro-contagion’ will hurt our (nonexistent) recovery. US Banks assure us, they don’t have much exposure – it’s all hedged. (Like it was all AAA.) The press doesn’t tend to question the global harm caused by never having smacked US banks into place, cutting off their money supply, splitting them into commercial and speculative parts ala Glass-Steagall and letting the speculative parts that should have died, die, rather than enjoy public subsidization and the ability to go globe-hopping for more destructive opportunity, alongside some of the mega-global bank partners.

Today, the stock prices of the largest US banks are about as low as they were in the early part of 2009, not because of euro-contagion or Super-committee super-incompetence (a useless distraction anyway) but because of the ongoing transparency void surrouding the biggest banks amidst their central-bank-covered risks, and the political hot potato of how many emergency loans are required to keep them afloat at any given moment.  Because investors don’t know their true exposures, any more than in early 2009. Because US banks catalyzed the global crisis that is currently manifesting itself in Europe. Because there never was a separate US housing crisis and European debt crisis. Instead, there is a worldwide, systemic, unregulated, uncontained,  rapacious need for the most powerful banks and financial institutions to leverage whatever could be leveraged in whatever forms it could be leveraged in. So, now we’re just barely in the second quarter of the game of thrones, where the big banks are the kings, the ECB, IMF and the Fed are the money supply, and the populations are the powerless serfs. Yeah, let’s play the ECB inflation game, while the world crumbles.

Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress
by Bob Ivry, Bradley Keoun and Phil Kuntz   /  Nov 27, 2011

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing. The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue. Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse. A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

‘Change Their Votes’
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.” The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open. The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.

$7.77 Trillion
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year. “TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.” Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.

‘Motivate Others’
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation. Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment. The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.

‘Core Function’
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.” The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland. The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view. The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.

Big Six
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment. The six — JPMorgan, Bank of America, Citigroup Inc. (C)Wells Fargo & Co. (WFC)Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.

Bank Supervision
While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says. Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.” On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.

‘Need Transparency’
Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup. “I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee. Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark. “We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs. “We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”

Disclose Lending
Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank. “The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.” The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.

Protecting TARP
TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says. “Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says. Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.

No Clue
Lawmakers knew none of this. They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible. Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs. Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Moral Hazard
Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers. If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks. Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking. “Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.

Getting Bigger
Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble. Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data. For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.” Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.

‘Wanted to Pretend’
“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.” Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.

Prevent Collapse
Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase. “These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo. JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.

‘Regulatory Discretion’
“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.” The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms. “When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.” Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.

‘Can We Survive?’
“The amount of pain that people, through no fault of their own, had to endure — and the prospect of putting them through it again — is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?” Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up — a gain of 33 percent, according to, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, reported. Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF. The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.

‘Serious Burden’
In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks.  “The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.” Dearie says his group didn’t mean to imply that Williamson endorsed big banks. Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.

Geithner, Kaufman
On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission. At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman. Anthony Coley, a spokesman for Geithner, declined to comment.

‘Punishing Success’
Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says. The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble. Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner. “Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”

Below Market
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.” The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg. The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest. Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.

Added Income
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show. The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion. “The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia. While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out. Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.

Standing Access
Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed. “Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?” In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise — to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).

Occupy Wall Street
The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California. The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor. “The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”

In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries. They take full effect in 2019. Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
“An amount of wealth that enables an individual to reject traditional social behavior and niceties of conduct without fear of consequences.”


Paying Zero for Public Services
BY Fumiko Nagano / 12.29.2009

Imagine that you are an old lady from a poor household in a town in the outskirts of Chennai city, India. All you have wanted desperately for the last year and a half is to get a title in your name for the land you own, called patta. You need this land title to serve as a collateral for a bank loan you have been hoping to borrow to finance your granddaughter’s college education. But there has been a problem: the Revenue Department official responsible for giving out the patta has been asking you to pay a little fee for this service. That’s right, a bribe. But you are poor (you are officially assessed to be below the poverty line) and you do not have the money he wants. And the most absurd part about the scenario you find yourself in is that this is a public service that should be rendered to you free of charge in the first place. What would you do? You might conclude, as you have done for the last 1-1/2 years, that there isn’t much you can do…but wait, you just heard about a local NGO by the name of 5th Pillar and it just happened to give you a powerful ally: a zero rupee note.

In Doha last month, CommGAP learned about the work of 5th Pillar, which has a unique initiative to mobilize citizens to fight corruption. In India, petty corruption is pervasive – people often face situations where they are asked to pay bribes for public services that should be provided free. 5th Pillar distributes zero rupee notes in the hopes that ordinary Indians can use these notes as a means to protest demands for bribes by public officials. I recently spoke with Vijay Anand, 5th Pillar’s president, to learn more about this fascinating initiative.

According to Anand, the idea was first conceived by an Indian physics professor at the University of Maryland, who, in his travels around India, realized how widespread bribery was and wanted to do something about it. He came up with the idea of printing zero-denomination notes and handing them out to officials whenever he was asked for kickbacks as a way to show his resistance. Anand took this idea further: to print them en masse, widely publicize them, and give them out to the Indian people. He thought these notes would be a way to get people to show their disapproval of public service delivery dependent on bribes. The notes did just that. The first batch of 25,000 notes were met with such demand that 5th Pillar has ended up distributing one million zero-rupee notes to date since it began this initiative. Along the way, the organization has collected many stories from people using them to successfully resist engaging in bribery.

One such story was our earlier case about the old lady and her troubles with the Revenue Department official over a land title. Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.

Anand explained that a number of factors contribute to the success of the zero rupee notes in fighting corruption in India. First, bribery is a crime in India punishable with jail time. Corrupt officials seldom encounter resistance by ordinary people that they become scared when people have the courage to show their zero rupee notes, effectively making a strong statement condemning bribery. In addition, officials want to keep their jobs and are fearful about setting off disciplinary proceedings, not to mention risking going to jail. More importantly, Anand believes that the success of the notes lies in the willingness of the people to use them. People are willing to stand up against the practice that has become so commonplace because they are no longer afraid: first, they have nothing to lose, and secondly, they know that this initiative is being backed up by an organization—that is, they are not alone in this fight.

This last point—people knowing that they are not alone in the fight—seems to be the biggest hurdle when it comes to transforming norms vis-à-vis corruption. For people to speak up against corruption that has become institutionalized within society, they must know that there are others who are just as fed up and frustrated with the system. Once they realize that they are not alone, they also realize that this battle is not unbeatable. Then, a path opens up—a path that can pave the way for relatively simple ideas like the zero rupee notes to turn into a powerful social statement against petty corruption.

Can this note stamp out corruption in a land where it’s the norm?
BY Ashling O’Connor / April 9, 2007

In the secret language of corruption in India, an official expecting a bribe will ask for Mahatma Gandhi to “smile” at him. The revered leader of the independence movement is on all denominations of rupee notes. With rampant dishonesty ingrained in the bureaucratic culture, an anticorruption group has decided to interpret the euphemism literally by issuing a zero-rupee note.

A direct copy of the 50-rupee note, including Gandhi’s portrait, it is designed to be handed out to officials who demand backhanders. In the place of the usual promise of redemption by the central bank governor, the new pledge is: “I promise to neither accept nor give bribe.”

5th Pillar, the organisation behind the initiative, says that the note will allow ordinary Indians to make a statement against corruption without provoking a confrontation with people in authority. It has printed 25,000 notes and is distributing them in the southern city of Chennai as part of a wider mission to stamp out corruption “at all levels of society”.

Vijay Anand, the president of 5th Pillar, said: “People have already started using them and it is working. One autorick-shaw driver was pulled over by a policeman in the middle of the night who said he could go if he was ‘taken care of’. The driver gave him the note instead. The policeman was shocked but smiled and let him go. The purpose of this is to instil confidence in people to say no to bribery. It is just a representation.”

The group says that it has checked its legal position carefully and is not deemed to be printing counterfeit money because the official design is on only one side. The other side carries its mission statement. G. Ramakrishnan, information commissioner of Tamil Nadu, described the note as “a symbol to express refusal to grease the palms of officials”.

Corruption is part of the daily routine in India. Whether an individual needs to get a phone line, renew a passport or dodge a speeding ticket, the process normally involves a bribe. Most officials get away with it because of a general lack of awareness about citizens’ rights. In 2005 the Right to Information Act was passed as a way of holding government departments, agencies and officials accountable. Citing the law, anyone can access government records within 30 days of their request. Yet the majority of the population have no idea how to use it in their everyday lives nor do they have access to the legal resources.

Last month 5th Pillar, which has 1,200 members and 6,000 online subscribers worldwide, opened drop-in centres staffed by volunteers able to help people to leverage the Act by drafting petitions and delivering them to the relevant government department. “We want to empower people to fight for their rights,” Mr Anand said. “One lady had been waiting a year for her land title and was told she would only receive it if she paid a 7,500-rupee ‘fee’. She went back to the office with one of our volunteers and got the document in 30 minutes without paying anything.”

Hard graft
— India regularly joins China and Russia at the top of the global bribery index
— Ordinary people pay bribes worth £2.5 billion a year for public services
— Bihar is the most corrupt state, Kerala the least
— Civil servants are poorly paid and open to temptation. Police are the most corrupt, followed by lower courts and land administration
— Traffic police pay to be posted at junctions that are fertile ground for kickbacks
— Every bag of cement that goes into Indian roads has involved a bribe

Vijay Anand
email : vijay [at] 5thpillar [dot] org / ENDcorruption [at] 5thpillar [dot] org

Corruption (n.): the misuse of entrusted power for private gain

“Corruption in the form of bribery is prevalent throughout the world. On average in a country where corruption is a known occurrence around
$5 billion exchange hands every year. Corruption results in many problems for a country’s political, economic and social structures. If every one of us stops giving and taking bribes we can put an end to corruption in our country.

The zero currency note in your country’s currency is a tool to help you achive the goal of zero corruption. The note is a way for any human being to say NO to corruption without the fear of facing an encounter with persons in authority. Next time someone asks you for a bribe, just take your country’s zero currency note and hand it to them. This will let the other person know that you refuse to give or take any money in order to perform services required by law or to give or take money to do something illegal.”



Lawrence Lessig
email : lessig_from_web [at] pobox [dot] com

Citizens United upholds institutional corruption
BY Aminu Gamawa / The Harvard Law Record / January 28, 2010

What started as a 90-minute political campaign documentary against then- presidential candidate Hilary Clinton ended in the Supreme Court with a decision that was described by some critics as one of the worst since Dred Scot. “Hillary: The Movie,” was produced by Citizens United, a conservative nonprofit, as part of its campaign against the former democratic presidential aspirant, and was released during the Democratic presidential primaries in 2008.

The judgment, which relaxes the restriction on power of the corporations to directly spend on advertising during federal elections, was described by Harvard law Professor Lawrence Lessig as “proverbial fuel on the fire”. He notes that the issue is not whether corporations are silenced or their First Amendment right to free speech upheld. More importantly, the outcome is an assault on democracy, capable of promoting a system that will further erode the public trust in their elected officers. Lessig cautioned that decision would undermine the participation of the citizens in the democratic process and that it gives unfair advantage to corporations, whose financial prowess will give them a stronger voice than the electorate.

Lessig heads Harvard’s Safra Center for Ethics, which studies the intersection between politics, interest groups and corruption in the U.S. politics. As part of the reading for a course convened by the program, I came across a very interesting article by an expert on political corruption, Zephyr Rain Teachout (found in the Cornell Law Review, Vol. 94, No. 341, 2009, for those who are interested), which I found very relevant to the Court’s decision in Citizens United.

Teachout writes that the Framers of the Constitution were obsessed with corruption and saw it as one of the greatest threats to democracy. They designed the system in such a way that corrupt leaders will not only loose their positions, but also their reputation. The Founding Fathers built mechanisms into the Constitution to safeguard democracy by ensuring transparency, accountability and citizens’ participation in the political process. The independence of the political office holders from other special interests was of paramount importance to the Framers.

Teachout writes that “corruption was discussed more often in the constitutional convention than factions, violence, or instability. It was a topic of concern on almost a quarter of the days that the members convened. Madison recorded the specific term corruption fifty-four times, and the vast majority of the corruption discussions were spearheaded by influential delegates Madison, Moris, Mason, and Wilson. The attendees were concerned about the corrupting influence of wealth, greed, and ambition.” It is not an overstatement to say that the Framers actually saw the Constitution as an instrument to fight corruption.

The Framers defined political corruption to include “self-serving use of public power for private ends, including, without limitation, bribery, public decisions to serve private wealth made because of dependent relationships, public decisions to serve executive power made because of dependent relationships, and use by public officials of their positions of power to become wealthy”.

Their efforts to curb corruption in the political process is visible in issues including the regulation of elections, term limits, limits on holding multiple offices, limitations on accepting foreign gifts, the veto power, the impeachment clause, and provisions for the separation of powers, among other measures, with a view to ensure that leaders represent the interest of their constituency and not personal interests. In the words of Teachout, “taking seriously the architecture [of the Constitution] requires more than passing knowledge of what motivated the choice of architecture. Political corruption is context without which other specific words don’t make sense; it is embodied in the text itself through other words that can’t be understood without understanding corruption”.

History has shown that when leaders put their self-interest above those who elected them, it undermines the trust of the people in the process and inevitably leads to collapse of the democratic system. The Roman and Greek empires are classic examples. The danger of democracies leaving political corruption unchecked is succinctly captured by Teachout: “voters will stop voting, people will stop running for office, and citizens will stop making serious efforts to read news and understand the public issues of their day, because they will believe that such efforts are futile,” she writes.

In McConnell v. FEC, 540 U.S. 93, which the Court overturned in Citizens United, the Court had made the following powerful comments: “Just as troubling to a functioning democracy as classic quid pro quo corruption is the danger that officeholders will decide issues not on the merits or the desires of their constituencies, but according to the wishes of those who have made large financial contributions valued by the office holder. Even if it occurs only occasionally, the potential for such undue influence is manifest. And unlike straight cash-for-votes transactions, such corruption is neither easily detected nor practical to criminalize. The best means to prevention is to identify and remove the temptation.”

Ignoring the threat of corruption to democracy is, therefore, a serious problem that cannot be taken lightly. I agree with Teachout when she writes that “internal decay of our political life due to power-and-wealth seeking by representatives and elites is a major and constant threat to our democracy. History provides some powerful tools to allow us incorporate the anti-corruption principle into the constitutional law of democracy. We should pay attention to it”. The recent decision of the Supreme Court ignores this history, undermining the Constitution’s efforts to curb corruption at the highest level.

The 5-4 conservative majority decision was delivered by Justice Anthony Kennedy ’61, and concurred in by Justice Samuel Alito, Chief Justice John Roberts ’79, Justice Clarence Thomas and Justice Antonin Scalia ’60. Justice Sonia Sotomayor began her Supreme Court career with a dissent. She joined four other liberal justices in disagreeing with the majority decision. The dissenting judgment delivered by Justice Stevens severely criticized the majority court for ignoring the dangerous consequence of the decision on democracy:

“At bottom, the Court’s opinion is thus a rejection of the common sense of the American people, who have recognized a need to prevent corporations from undermining self government since the founding, and who have fought against the distinctive corrupting potential of corporate electioneering since the days of Theodore Roosevelt. It is a strange time to repudiate that common sense. While American democracy is imperfect, few outside the majority of this Court would have thought its flaws included a dearth of corporate money in politics,” Justice Stevens wrote.

The decision overruled a decade of precedent laid down in McConnell, a 2003 decision that upheld the part of the Bipartisan Campaign Reform Act of 2002, which restricted campaign spending by corporations and unions, as well as Austin v. Michigan Chamber of Commerce, 494 U.S. 652, a 1990 decision that upheld restrictions on corporate spending to support or oppose political candidates.

In his weekly address on Saturday, President Barack Obama ’91 criticized the decision as “a huge victory to the special interests and their lobbyists”. The President expressed his disappointment with the ruling, saying that he could not “think of anything more devastating to the public interest. The last thing we need to do is hand more influence to the lobbyists in Washington, or more power to the special interests to tip the outcome of elections”. He noted that even foreign corporations would now have say in U.S. politics; candidates that disagreed with corporations would come under serious attack from the corporations during election.

Obama went on to observe that “all of us, regardless of party, should be worried that it will be that much harder to get fair, common-sense financial reforms, or close unwarranted tax loopholes that reward corporations from sheltering their income or shipping American jobs offshore”. He also cautioned that the decision makes it “more difficult to pass common-sense laws” to promote energy independence or expand health care.

The danger is clear!
The competition will now be intense among the corporations to producing the highest number of Senators and Representatives. Doesn’t this undermine the role of the public in the American democracy? Can individuals’ contribution to candidates now count in the campaign process? Will this be the last Congress that is truly elected by the people? How much would this decision contributing in promoting institutional corruption? I am sure most politicians will be more concerned about pleasing the corporations than their constituencies. It will be dangerous for any of them to fall out with the corporations.

American democracy has been a model to many countries across the globe. But the recent decision by the Supreme Court legalizing direct corporate participation which over turn a time revered restriction on the corporation is a worrisome development that deserve concern of anyone that is interested in American democracy’s future. Citizens United has introduced a new era in the U.S. politics.

The Constitution’s “We the People” has gradually become “We the Corporations”. Equating corporations with human beings undoubtedly undermines the participation of individual citizens in the political process. Election into political office under the new regime will largely depend on having the highest donation from the corporations. Corporations and their interests, which sometimes include interest of foreign nationals, will now have the strongest voice in the U.S. politics.

It will not be surprising to see Blackwater, Wal-Mart, Exxon and other corporations being better represented in Congress than citizens, whose interest and participation the Constitution seeks to preserve. This is an unwelcome development that anyone concerned about preserving the U.S.’ long-cherished democracy must oppose.

The matter of democratic integrity, transparency and accountability transcends the usual liberal/conservative or Democrat/Republican divide. It is an assault on democracy and negation of the text and original understanding of the Constitution as understood by the Founding Fathers, who strived to craft a document that would preserve democracy by protecting the interest of the electorate over and above other interests.

One might ask if there is anything Congress can do. Even before the decision was announced, an advocacy group called Change Congress was working to pursue the passage of a bipartisan bill called the Fair Elections Now Act. The bill is sponsored by congress men Sens. Dick Durbin (D-IL) and Arlen Specter (R-PA), and Reps. John Larson (D-CT) and Walter Jones (R-NC).

“Under this legislation, congressional candidates who raise a threshold number of small-dollar donations would qualify for a chunk of funding—several hundred thousand dollars for House, millions for many Senate races. If they accept this funding, they can’t raise big-dollar donations. But they can raise contributions up to $100, which would be matched four to one by a central fund. A reduced fee for TV airtime is also an element of this bill. This would create an incentive for politicians to opt into this system and run people-powered campaigns.”

President Obama said that he has instructed his advisers to work with Congress on a forceful, bipartisan response. In a New York Times op-ed, David D. Kirkpatrick wrote that because of the enormous threat of this decision to democracy, some members of Congress are working hard to introduce new laws that will, cure the defect by either
• Imposing a ban political advertising by corporations that hire lobbyists, receive government money, or collect most of their revenue abroad;
• Tightening rules against coordination between campaigns and outside groups so that, for example, they could not hire the same advertising firms or consultants; or
• Requiring shareholder approval of political expenditures, or even forcing chief executives to appear as sponsors of commercials their companies pay for.

What is really necessary need, as Professor Lessig puts it, is an alternative, “Not the alternative that tries to silence any speaker but an alternative that allows us to believe once again that our government is guided by reason or judgment or even just the politics of the people in a district and not by the need to raise money.”


“When confronted with threatening stimuli and predators, the crayfish responds with an innate escape machanism called the startle reflex. Also known as tailflipping, this stereotyped behaviour involves rapid flexions of the abdominal muscles which produce powerful swimming strokes that thrust the small crustacean through the water and away from danger. In the struggle for existence, the speed of this response can mean the difference between life and death, and the crayfish has evolved an incredibly fast escape mechanism which can be initiated within well under one-hundredth of a second. This mechanism depends on a process called coincidence detection, whereby the electrical impulses inputs from sensory organs on different parts of the body arrive simultaneously at a specific location in the central nervous system. Although this reflex has been studied intensively, the mechanism by which nervous impulses arrive in synchrony at the central nervous system was poorly understood.”


Fear the Roller Coaster? Embrace It
by Dennis K. Berman  /   September 11, 2007

In these markets, everyone’s afraid. It’s your response to the fear that matters most. Are you going to crack up like Howard Dean in 2004? Or detach yourself, analyze and respond like Neil Armstrong in 1969? Astronauts, firefighters and soldiers train to respond to moments of duress. The rest of us are left on our own. And in most cases, the results aren’t good. We generally underestimate the true dangers arrayed against us, overplaying the dramatically violent outcomes over the more insidious ones. And in times when we lack information, we’re prone to imagine the worst, scientists say. We are only as effective as our emotions allow us.

Which is precisely why this current market is so daunting. Consider the unknowns still in play: The choked market for short-term corporate funding. The impossible-to-value mounds of LBO debt and equity. The daisy-chain effect between liquidating hedge funds and the broader market. It’s a far different situation than the market drop of 2001, when the downturn was spurred by the relatively simple concept that technology stocks were broadly overvalued. What’s the best way to handle all of this lingering fear? Some inspiration comes from a group of researchers who have been applying new techniques to get an answer. The researchers have begun studying professional traders as if they were chimps, even using MRI machines to divine how fear affects the brain. “We are responding from a different part of the brain when we are in the midst of calm, clear thought,” says Brett Steenbarger, a psychiatry professor at the State University of New York’s Upstate Medical University, who also trains traders and hedge-fund managers.

That area is the prefrontal cortex, what he calls the “executive” node of the brain that plans and reasons. When we are fearful, blood flows away from the area toward the motor areas of the brain – the ones that produce a flight-or-fight sensation. This is great if you’re confronting a saber-toothed tiger, but not so great if you’re mulling your daughter’s college fund. “You end up making decisions rashly without engaging in research and planning that you might otherwise do,” he explains. Dr. Steenbarger has found that the most important step is to get back to basics: to methodically check whether the hypothesis that got you into an investment still applies or not. The next step of controlling market fear may be to eliminate as much borrowing as possible, he adds. Leverage, he says, magnifies financial results and therefore emotional swings. During times of high volatility, this can become an especially dangerous trap for bad decision making.

Andrew Lo, a professor at Massachusetts Institute of Technology, has observed professional traders in their natural habitats. He’s found that there is some truth to the idea of the Cool Hand Luke. Palms of veteran traders get less sweaty than novice ones. After especially stressful moments, these traders return to a standard physiological baseline. The novices “are all over the map,” Dr. Lo says. He recommends two other means of coping with financial fear. The first sounds simple but is essential – training yourself to recognize fear in the first place. For example, your habit may be to avoid the markets altogether by shunning the newspaper or online stock quotes. The second approach is to prepare for a busted or volatile market,
much like an astronaut rehearsing emergency procedures. This helps neutralize the fear in your decision making, especially in those moments when it seems so easy to succumb.

That’s why it might make sense to decide ahead of time your range of responses if your portfolio loses, say, 10 percent to 20 percent of its value. Research has shown that, unsurprisingly, retail investors are usually the worst at this, adds Dr. Lo. Neil Armstrong’s cool is on vivid display in the wonderful new movie, “In the Shadow of the
Moon,” about the Apollo lunar missions. In one fraught moment, Mr. Armstrong is running low on fuel as he pilots the spacecraft to the moon’s surface. The cameras pan to the smoking, sweating wonks in Mission Control. Piped in by radio, Mr. Armstrong’s voice sounds unshaken, almost blase. His best human trait – his intellect – has subdued his most animal one – his fear. That’s been the experience of 67-year-old Lewis van Amerongen, formerly of private-equity firm Gibbons, Green, Goodwin & van Amerongen. Having pioneered the buyout business, the firm got bogged down in the now-infamous “Burning Bed” purchase of Ohio Mattress Co. in the late 1980s. When the junk-bond market collapsed soon afterward, bank First Boston couldn’t refinance
a $457 million bridge loan and ended up owning most of the company. “Each generation has to go through it and has to emotionally experience it,” Mr. van Amerongen said in an interview. “Without that, it’s just an academic exercise.” In other words, there is no substitute for having survived other fearful experiences. The best
antidote for fear just may be fear itself.


Brett Steenbarger
email : steenbab [at] aol [dot] com

Andrew Lo
email : ssalem [at] mit [dot] edu

Darwinian Investing – Dr. Andrew Lo’s market theory borrows from
neuroscience, evolution, and econometrics
by Christopher Farrell  /  February 20, 2006
“Can brain science unlock the secrets of success on Wall Street? And if so, will it transform the field of personal finance? These matters fascinate Andrew W. Lo, a finance professor at Massachusetts Institute of Technology’s Sloan School of Management and director of its Laboratory for Financial Engineering. Lo, 45, and a small band of economists are tapping into neuroscience and cognitive psychology to
better understand how investors make financial decisions. In one early experiment, he and a colleague wired up 10 traders in Boston and monitored their breathing, body temperature, perspiration, pulse rates, and muscle activity as they risked real money in the markets. While the most seasoned traders in the group remained relatively calm,
nearly everyone had sweaty palms and quickened pulses when the markets grew more volatile. “Even the best traders have significant emotional responses when they trade,” says Lo. This fights the stereotype of traders as rational, coolly analytical Vulcans of commerce. Lo’s results, along with further studies using more sophisticated magnetic-
resonance imaging on traders, also undercut a dominant theory known as the efficient market hypothesis (EMH), which holds that markets aggregate information efficiently and investors form their financial expectations rationally. The reality may be much messier. Lo, who also serves as chief scientific officer at the hedge fund Alphasimplex, breaks with both EMH and behavioral economics in seeing emotions as
central to survival in the market. But this is just one element in a theory Lo is developing called the Adaptive Market Hypothesis. It shows how investors use trial and error to establish rules of thumb when placing financial bets and then hone their skills amid disruptive changes. Think of the market as an ecosystem made up of hedge funds, mutual funds, retail investors, and other “species,” all competing for
profit opportunities. It’s a Darwinian world where market shifts render some strategies obsolete, resulting in chances missed and money lost, says Lo. “The only way to maintain an edge is to continually innovate.”

Lo is not the first to incorporate the insights of Charles Darwin in his models. Luminaries from Joseph Schumpeter to Gary Becker explored this territory in the past. But Lo’s mingling of neuroscience, evolution, and financial econometrics is highly original. He predicts that the insights of evolutionary psychology will change individual
wealth- and risk-management techniques, right down to how people handle 401(k) portfolios or deal with declining home prices. Prepped with appropriate data from Lo’s research, a simple computer program might one day provide invaluable financial advice. You would punch in basic information, such as family status, life goals, the standard of living you would find acceptable in retirement, and the types of risks
you can or can’t tolerate. An algorithm would then tailor a portfolio for you and help you hedge against unwanted risks, such as a lost job or a wage cut. “Now, it sounds like science fiction,” says Lo. “Not in 10 years.” Sci-fi was an important influence on Lo, whose family moved from Taiwan to Queens, N.Y., when he was 5. Raised by his mother, he became an academic star. He skipped eighth grade, sped through Bronx
High School of Science and Yale University, and nabbed a PhD in economics from Harvard University at age 24. But it was Isaac Asimov’s Foundation trilogy that steered him toward finance economics. Asimov sketched out a branch of mathematics called psychohistory, whose practitioners sample the proclivities of large numbers of people, then accurately predict the future based on what they learn. Sound familiar?”

Visualizing Market Fear
by Richard L. Peterson  /  September 26, 2007

“How can you cope with market fear? Many investors consider this a crucial question. Yet it often isn’t until periods of fear and sharp market downturns that investors think, “now I know I shouldn’t sell everything, but it really hurts!” It’s at these times that the
excellent investors and traders stand out. They can muster the courage to buy in such markets, even as the financial news and media pundits are screaming, “The sky is falling!” The MarketPsych Fear Index was displayed on the Wall Street Journal’s C1 Money and Investing page a couple weeks ago. The MarketPsych Fear Index helps investors visualize the fear they are feeling that is affecting their judgment. Studies
show that we’re all affected by market fear, and it takes a lot of courage and experience to step back and see the fear and identify the opportunities that it creates. The first step is understanding that fear is contagious. The second step is identifying where it is and how strong it is. That’s what our Index allows.”

On Wall Street, Eyes Turn to the Fear Index
by Michael M. Grynbaum  /  October 20, 2008

Fear is running high on Wall Street. Just look at the Fear Index. With all those stomach-churning free falls and sharp reversals in the stock market recently, traders are keeping a nervous eye on an obscure index known as the VIX. The VIX (officially the Chicago Board Options Exchange Volatility Index) measures volatility, the technical term for those wrenching market swings. A rising VIX is usually regarded as a sign that fear, rather than greed, is ruling the market. The higher the VIX goes, the more unhinged the market looks. So how scared are investors? On Friday, the VIX rose to 70.33, its highest close since its introduction in 1993. To some experts, that suggests that the wild ride is far from over. “Right now, it’s an extremely important part of the puzzle,” Steve Sachs, a trader at Rydex Investments, said of the VIX. “It’s showing a huge amount of fear in the marketplace.”

The VIX is hardly a household name like the Dow. But lately, it has become a fixture on CNBC and other financial news outlets, with commentators often invoking an index that most of the general public was blissfully unaware of only a few weeks ago. Some traders think all the publicity has only added to the anxieties that the VIX is intended
to reflect. “The VIX is a self-fulfilling prophecy,” said Ryan Larson, head equity trader at Voyageur Asset Management. “It’s almost adding to the problems.” Speaking on Thursday, when the VIX hit an intraday high of 81.17 before closing lower, he said: “You see the VIX trade north of 80, and of course the media starts to pick it up.” Mr. Larson continued, “It’s blasted on the TV, and for the average investor sitting at home, they think, oh, my gosh, the VIX just broke 80 — I’ve got to go sell my stocks.”

Put simply, the VIX measures the degree to which investors think stocks will swing violently in the next 30 days. It is calculated in real time throughout the trading day, fluctuating minute to minute. The higher the VIX, the bigger the expected swings — and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-
Term Capital Management, collapsed, and after the 9/11 terrorist attacks. Mr. Sachs, with some incredulity, said that the swings in the stock market have reflected the volatility implied by the VIX. “We had a 17 percent peak-to-trough trading range this week,” he said. “It should take two years under normal circumstances for the S.& P. 500 to have that type of trading range.”

The VIX had its origin in 1993, when the Chicago Board Options Exchange approached Robert E. Whaley, then a professor at Duke, with a dual proposal. “The first purpose was the one that is being served right now — find a barometer of market anxiety or investor fear,” Professor Whaley, who now teaches at the Owen Graduate School of
Management at Vanderbilt University, recalled in an interview. But, he said, the board also wanted to create an index that investors could bet on using futures and options, providing a new revenue stream for the exchange. Professor Whaley spent a sabbatical in France toying with formulas. He returned to the United States with the VIX, which gauges anxiety by calculating the premiums paid in a specific options market run by the Chicago Board Options Exchange.

An option is a contract that permits an investor to buy or sell a security at a certain date at a certain price. These contracts often amount to insurance policies in case big moves in the market cause trouble in a portfolio. A contract, like insurance, costs money — specifically, a premium, whose price can fluctuate. The VIX, in its current form, measures premiums paid by investors who buy options tied to the price of the Standard & Poor’s 500-stock index. In times of confusion or anxiety on Wall Street, investors are more eager to buy this insurance, and thus agree to pay higher premiums to get them. This pushes up the level of the VIX. “It’s analogous to buying fire insurance,” Professor Whaley said. “If there’s some reason to believe there’s an arsonist in your neighborhood, you’re going to be willing to pay more for insurance.”

The index is not an arbitrary number: it offers guidance for the expected percentage change of the S.& P. 500. Based on a formula, Friday’s close of around 70 suggests that investors think the S. & P. 500 could move up or down about 20 percent in the next 30 days — an almost unheard-of swing. So the higher the number, the bigger the
swing investors think the market will take. Put another way, the higher the VIX, the less investors know about where the stock market is headed. The current level shows that “investors are still very uncertain about where things will go,” said Meg Browne of Brown Brothers Harriman, a currency strategist who was keeping a close eye on the VIX as the stock market soared last Monday.

Since 2004, investors have been able to buy futures contracts on the VIX itself, providing a way to hedge against volatility in the market. Options on the VIX have been available since 2006. “You have seen more and more investors using it as an avenue toward hedging their portfolios,” said Chris Jacobson, chief options strategist at the Susquehanna Financial Group. In times of crisis, “while you’re losing your portfolio, you could make some money on the increase in volatility,” he said. Some investors are skeptical about the utility of the index. “If you’re trading the markets, you pretty much know the fear, you know the volatility. I don’t need an index to tell me there’s volatility out there,” Mr. Larson said.

Robert E. Whaley
email : whaley [at] vanderbilt [dot] edu



What caused the meltdown on Wall Street? Greed. Lax regulation. Panic. And maybe the very biological makeup of investors’ brains. Eight years ago a handful of brain scientists began using MRI scanners, psychological tests and an emerging understanding of brain anatomy to try and overturn traditional economic theories that assume people always act rationally when it comes to financial decisions. To understand the market, these researchers said, you needed to get inside peoples’ heads. They called their new field neuroeconomics.

If proof was needed that markets can be unpredictable, irrational and cruel, the past few weeks provided it. Bear Stearns and Merrill Lynch have been swallowed up by emergency mergers. The government has bailed out Fannie Mae, Freddie Mac and AIG. Lehman Brothers is bankrupt.  So, can these neuroeconomists shed any light on what went wrong? Surprisingly, yes. “Fear plus herding equals panic,” says Gregory
Berns, a neuroeconomist at Emory University. “You bet it’s biologically based.”

At the core of the market mess are securities that were backed by extremely risky mortgages. The theory was that slicing and dicing mortgages diluted the risk away. But the ratings agencies were being compensated by issuers of the mortgage-backed securities, and neuroeconomics says that created big problems. “You don’t get mistakes this big based on stupidity alone,” says George Loewenstein of Carnegie Mellon University. “It’s when you combine stupidity and people’s incentives that you get errors of this magnitude.”

Consider this forthcoming research by Loewenstein, Roberto Weber and John Hamman, all of Carnegie Mellon. They organized volunteers into partners. One partner is given $10 and told to split it however he sees fit. On average, the deciding partner keeps $8 and gives away $2. Then researchers repeat the game. This time, the decider pays an “analyst” to decide how to split the money fairly. The game continues
for multiple rounds and the decider can fire the analyst. With this change, the decider gets everything. Paying somebody else to ensure assets are divided fairly actually makes things less fair.

Colin Camerer, an economist at Caltech, blames “diffusion of responsibility” for the problems. His own research identifies another problem: Neither investors nor bankers were likely to be considering worst-case scenarios. Camerer conducted experiments in which two people engage in a negotiating game on how to split $5. But each time
they fail to come to an agreement, the value of the pot drops. The negotiators can check the total value of the money by clicking colored boxes on a computer screen. But only 10% look to see what will happen in the worst case.

To make matters worse, hedge funds were bragging about uncanny returns, making the impossible seem possible. But some studies show that these results may have been inflated by a lack of disclosure, Camerer says. Brain imaging studies show that investors as a whole get more and more used to big returns, and thus take bigger and bigger risks in a bull market–and then the bubble pops and stockholders start selling like mad.

One reason: Investors fear losing more than they look forward to winning. According to a 2007 paper, researchers used MRI scans to watch the brains of people as they decided whether or not to take gambles with a 50/50 risk. Gains caused brains to light up in areas that released dopamine (the chemical boosted by Zoloft and Prozac); losses caused those same areas to decrease. Researchers could predict that people would do based on the size of the increases.

Dread, the anticipation of a loss that is expected to happen, is another powerful force. Emory’s Berns has shown that people differ in how they respond to expected pain. He gave electric shocks to people in an MRI machine, and then gave them the option of either getting an intense shock immediately or a less intense shock later. People whose brains started lighting up in areas associated with pain beforehand were more likely to decide to get the pain over with. They also would have sold stock.

So what’s a regulator to do? One argument against big bailouts is moral hazard–the idea that if you bail the banks out now, future bankers will take even bigger risks. Caltech’s Camerer points out that people are naturally shortsighted. People with health insurance do spend more on care, he says, but people who rent cars don’t get in
more accidents, because there are more immediate risks, like bodily harm. But so far the government’s attempts to quell the risk have just reinforced the idea that something is very wrong. If you tell somebody not to think about white elephants, Loewenstein notes, they will do exactly that.

On the other hand, putting a floor in the market for these mortgage-backed securities, as the government’s plan tried to do, could ease investor panic, says Richard Peterson of MarketPsy Capital, who is trying to put neuroeconomic research to work in a $50 million hedge fund. “Things are unknowable,” Peterson says. “That is the X factor
that is causing the risk aversion to accelerate.”

George Loewenstein
email : gL20 [at] andrew.cmu [dot] edu

Colin Camerer
email : camerer [at] hss.caltech [dot] edu


The Chemical Basis of Trust
Trust is essential to healthy social interactions, but how do we decide whether we can trust strangers? An article based on research supported by the Templeton Foundation and published in the June issue of Scientific American argues that the hormone ocytocin enhances our ability to trust strangers who exhibit non-threatening signals.

The article, “The Neurobiology of Trust,” by Paul J. Zak, is based on original research with an experimental situation that the author calls the “trust game.” It is a modification of a similar game developed in the mid-1990s by the experimental economists Joyce Berg, John Dickhaut, and Kevin McCabe. The game allows test subjects to transfer their money to a stranger if they trust the stranger to reciprocate by transferring more back.

When we are trusted, Zak found, our brains release oxytocin, which makes us more trustworthy; the subjects with the highest levels of oxytocin returned the most money to their partners. Moreover, the rise in oxytocin levels, and not the absolute level, made the difference. Zak also found that subjects who inhaled an oxytocin nasal spray were more likely to trust others. Those given oxytocin transferred 17 percent more money than control subjects who inhaled a placebo. Twice as many subjects who received oxytocin gave all their cash to their partners.

Ocytocin is best known as the hormone that induces labor in pregnant women. But Zak maintains that its role in the development of trust has implications for a range of important issues, from the growth of wealth in developing countries to the nature of diseases such as autism to the physiological basis of virtuous behaviors. A professor
of economics and founding director of the Center for Neuroeconomics Studies at Claremont Graduate University, Zak also serves as clinical professor of neurology at Loma Linda University Medical Center. His new book, Moral Markets: The Critical Role of Values in the Economy, was also supported by JTF, and was published by Princeton University Press this year.


Paul J. Zak
email : paul [at] pauljzak [dot] com

‘Might have been’ key in evaluating behavior
by Ruth SoRelle  /  August 2007

“What might have been,” or fictive learning, affects the brain and plays an important role in the choices individuals make – and may play a role in addiction, said Baylor College of Medicine researchers and others in a report that appeared in the Proceedings of the National Academy of Sciences. These “fictive learning” experiences, governed by what might have happened under different circumstances, “often dominate the evaluation of the choices we make now and will make in
the future,” said P. Read Montague Jr., Ph.D., professor of neuroscience at BCM and director of the BCM Human Neuroimaging Laboratory and the newly formed Computational Psychiatry Unit. “These fictive signals are essential in a person’s ability to assess the quality of his or her actions above and beyond simple experiences that
have occurred in the immediately proximal time.”

Blood flow reflects brain’s response to risk and reward
Using techniques honed in previous experiments that studied trust, Montague and his colleagues used an investment game to test the effects of these “what if” thoughts on decisions in 54 subjects. Using functional magnetic resonance imaging (fMRI) to measure blood flow changes in specific areas of the brain, they precisely measured
responses to economic instincts. These blood flow changes in the brain reflect alterations in the activity of nerve cells in the vicinity. In this case, they measured the brain’s response to “what could have been acquired” and “what was acquired.” This newly discovered “fictive learning” signal was measured, localized and precisely parsed from the brain’s standard reward signal that reflects actual experience. Each
subject took part in a sequential gambling task. The player makes a new investment allocation (a bet) and then receives a “snippet” of information about the market – either the market went up and the investment was a good one or the market goes down and the play had a loss. Each subject received $100 and played 10 markets, making 20 decisions about each.

Regret affects future decisions
Montague and his associates found that fictive learning – the “what might have happened” – affected the brains of the subjects and played an important role in their decisions about the game. This effect manifested as a distinct selective activation signal in a part of the brain called the ventral caudate nucleus. The emotion of regret for a path chosen or not taken can be strongly influential on future decision-making. The fictive learning signal discovered by Montague and the team of researchers does not necessarily manifest as such a conscious “feeling” but contributes to the brain’s computation and planning operations in a robust way that is now available to rigorous
experimental analysis in health and in diseases of the brain/mind. “We used real world market data – the crash of 1929, the bubble of the late 1990s and so on – to probe each subject’s brain response to fictive signals (what could have been) as they navigated their choices. This means we now have a kind of neural catalogue of how
famous stock market episodes affect signals in the average human brain,” said Montague. He plans to use the findings from this study to explore the balance of choices between actual and fictive outcomes.

New tool for studying addiction
“These results provide a new tool for exploring issues related to addiction,” Montague said. “For example, why does a person choose using a drug even though he or she can imagine the bad consequences that can result? We now have a way to measure quantitatively the balance between reward-seeking (like seeking a drug) and the thoughts that could intervene.”

“The brain has a well-defined system for pursuing actual rewards based on actual outcomes,” said Terry Lohrenz, Ph.D., instructor in the neuroimaging laboratory and the report’s first author. “The system is complex, but recent research has begun to dissect them in great detail. The importance of that work is that the reward guidance
signals are exactly those hijacked by drugs of abuse. “Identifying real neural signals to fictive outcomes now positions us to understand how our more abstract thoughts – the way we contextualize or frame our experience – guide our behavior,” Lohrenz added.

P. Read Montague
email : readm [at] bcm.tmc [dot] edu

Terry Lohrenz
email : tlohrenz [at] hnl.bcm.tmc [dot] edu

Has evolution essentially bootstrapped our penchant for intellectual concepts to the same kinds of laws that govern systems such as financial markets?
by Jonah Lehrer  /  August 8, 2008

Read Montague is getting frustrated. He’s trying to show me his newest brain scanner, a gleaming white fMRI machine that looks like a gargantuan tanning bed. The door, however, can be unlocked only by a fingerprint scan, which isn’t recognizing Montague’s fingers. Again and again, he inserts his palm under the infrared light, only to get the same beep of rejection. Montague is clearly growing frustrated — “I can’t get into my own scanning room!” he yells, at no one in particular — but he also appreciates the irony. A pioneer of brain imaging, he oversees one of the premier fMRI setups in the world, and yet he can’t even scan his own hand. “I can image the mind,” he says. “But apparently my thumb is beyond the limits of science.”

Montague is director of the Human Neuroimaging Lab at Baylor College of Medicine in downtown Houston. His lab recently moved into a sprawling, purpose-built space, complete with plush carpets, fancy ergonomic chairs, matte earth-toned paint and rows of oversize computer monitors. (There are still some technical kinks being worked
out, hence the issue with the hand scanner.) If it weren’t for the framed sagittal brain images, the place could pass for a well-funded Silicon Valley startup. The centerpiece of the lab, however, isn’t visible. Montague has access to five state-of-the-art fMRI machines, which occupy the perimeter of the room. Each of the scanners is hidden
behind a thick concrete wall, but when the scanners are in use — and they almost always are — the entire lab seems to quiver with a high-pitched buzz. Montague, though, doesn’t seem to mind. “It’s not the prettiest sound,” he admits. “But it’s the sound of data.”

Montague, who is uncommonly handsome, with a strong jaw and a Hollywood grin, first got interested in the brain while working in the neuroscience lab of Nobel Laureate Gerald Edelman as a post-doc. “I was never your standard neuroscientist,” he says. “I spent a lot of time thinking about how the brain should work, if I had designed it.” For Montague the cortex was a perfect system to model, since its incomprehensible complexity meant that it depended on some deep, underlying order. “You can’t have all these cells interacting with each other unless there’s some logic to the interaction,” he says. “It just looked like noise, though — no one could crack the code.” That’s
what Montague wanted to do. The human brain, however, is an incredibly well-encrypted machine. For starters it’s hard to even know what the code is: Our cells express themselves in so many different ways. There’s the language of chemistry, with brain activity measured in squirts of neurotransmitter and kinase enzymes. And then there’s the electrical conversation of the cortex, so that each neuron acts like a
biological transistor, emitting a binary code of action potentials. Even a silent cell is conveying some sort of information — the absence of activity is itself a form of activity.

Montague realized that if he was going to solve the ciphers of the mind, he would need a cryptographic key, a “cheat sheet” that showed him a small part of the overall solution. Only then would he be able to connect the chemistry to the electricity, or understand how the signals of neurons represented the world, or how some spasm of cells caused human nature. “There are so many different ways to describe
what the brain does,” Montague says. “You can talk about what particular cell is doing, or look at brain regions with fMRI, or observe behavior. But how do these things connect? Because you know they are connected; you just don’t know how.” That’s when Montague discovered the powers of dopamine, a neurotransmitter in the brain.
His research on the singular chemical has drawn tantalizing connections between the peculiar habits of our neurons and the peculiar habits of real people, so that the various levels of psychological description — the macro and the micro, the behavioral
and the cellular — no longer seem so distinct. What began as an investigation into a single neurotransmitter has morphed into an exploration of the social brain: Montague has pioneered research that allows him to link the obscure details of the cortex to all sorts of important phenomena, from stock market bubbles to cigarette addiction
to the development of trust. “We are profoundly social animals,” he says. “You can’t really understand the brain until you understand how these social behaviors happen, or what happens when they go haywire.”

And yet even as Montague attempts to answer these incredibly complex questions, his work remains rooted in the molecular details of dopamine. No matter what he’s talking about — and he likes to opine on everything from romantic love to the neural correlates of the Coca-Cola logo — his sentences are sprinkled with the jargon of a neural cryptographer. The brain remains a black box, an encrypted mystery, but the transactions of dopamine are proving to be the Rosetta Stone, the missing link that just might allow the code to be broken. The importance of dopamine was discovered by accident. In 1954 James Olds and Peter Milner, two neuroscientists at McGill University, decided to implant an electrode deep into the center of a rat’s brain. The
precise placement of the electrode was largely happenstance: At the time the geography of the mind remained a mystery. But Olds and Milner got lucky. They inserted the needle right next to the nucleus accumbens (NAcc), a part of the brain dense with dopamine neurons and involved with the processing of pleasurable rewards, like food and sex.

Olds and Milner quickly discovered that too much pleasure can be fatal. After they ran a small current into the wire, so that the NAcc was continually excited, the scientists noticed that the rodents lost interest in everything else. They stopped eating and drinking. All courtship behavior ceased. The rats would just cower in the corner of
their cage, transfixed by their bliss. Within days all of the animals had perished. They had died of thirst. It took several decades of painstaking research, but neuroscientists eventually discovered that the rats were suffering from an excess of dopamine. The stimulation of the brain triggered a massive release of the neurotransmitter, which
overwhelmed the rodents with ecstasy. In humans addictive drugs work the same way: A crack addict who has just gotten a fix is no different from a rat in electrical rapture. This, then, became the dopaminergic cliché — it was the chemical explanation for sex, drugs, and rock ‘n’ roll. But that view of the neurotransmitter was vastly oversimplified. What wasn’t yet clear was that dopamine is also a profoundly important
source of information. It doesn’t merely let us take pleasure in the world; it allows us to understand the world.

The first experimental insight into this aspect of the dopamine system came from the pioneering research of Wolfram Schultz, a neuroscientist at Cambridge University. He was originally interested in the neurotransmitter because of its role in triggering Parkinson’s disease, which occurs when dopamine neurons begin to die in a part of
the brain that controls bodily movements. Schultz recorded from cells in the monkey brain, hoping to find those cells involved in the production of movement. He couldn’t find anything. “It was a classic case of experimental failure,” he says. But after years of searching in vain, Schultz started to notice something odd about these dopamine
neurons: They began to fire just before the monkeys got a reward. (Originally, the reward was a way of getting the monkeys to move.) “At first I thought it was unlikely that an individual cell could represent anything so complicated,” Schultz says. “It just seemed like too much information for one neuron.” After hundreds of experimental
trials, Schultz began to believe his own data: He realized that he had found, by accident, the reward mechanism at work in the primate brain. “Only in retrospect can I appreciate just how lucky we were,” he says. After publishing a series of landmark papers in the mid-1980s, Schultz set out to decipher this reward circuitry in exquisite detail. How, exactly, did these single cells manage to represent a reward? His experiments observed a simple protocol: He played a loud tone, waited for a few seconds, and then squirted a few drops of apple juice into the mouth of a monkey. While the experiment was unfolding, Schultz was probing the dopamine-rich areas of the monkey brain with a needle that monitored the electrical activity inside individual cells. At first the dopamine neurons didn’t fire until the juice was delivered; they
were responding to the actual reward. However, once the animal learned that the tone preceded the arrival of juice — this requires only a few trials — the same neurons began firing at the sound of the tone instead of the sweet reward. And then eventually, if the tone kept on predicting the juice, the cells went silent. They stopped firing altogether.

When Schultz began publishing his data, nobody quite knew what to make of these strange neurons. “It was very, very tough to figure out what these cells were encoding,” Schultz says. He knew that the cells were learning something about the juice and the tone, but he couldn’t figure out how they were learning it. The code remained impenetrable. At the time Montague was a young scientist at the Salk Institute, working in the neurobiology lab of Terry Sejnowski. His approach to
the brain was rooted in the abstract theories of computer science, which he hoped would shed light on the software used by the brain. Peter Dayan, a colleague of Montague’s at Salk, had introduced him to a model called temporal difference reinforcement learning (TDRL). Computer scientists Rich Sutton and Andrew Barto, who both worked on models of artificial intelligence, had pioneered the model. Sutton and Barto wanted to develop a “neuronlike” program that could learn simple rules and behaviors in order to achieve a goal. The basic premise is straightforward: The software makes predictions about what will happen — about how a checkers game will unfold for example — and then compares these predictions with what actually happens. If the prediction is right, that series of predictions gets reinforced. However, if the prediction is wrong, the software reevaluates its representation of the game.

Montague was entranced by these software prototypes. “It was just so clearly the most efficient way to learn,” he says. The problem was that TDRL remained purely theoretical, a system both elegant and imaginary. Even though computer scientists had begun to adapt the programming strategy for various practical purposes, such as running a bank of elevators or determining flight schedules, no one had found a
neurological system that worked like this. But one spring day in 1991, Dayan burst into Montague’s small office. “He was very excited and shoved these figures from some new paper in my face,” Montague remembers. “He kept on saying to me, ‘What does this look like? What does this look like?'” The figures were from Schultz’s experiments
with dopamine neurons, and they showed how these cells reacted to the tone and the juice. “I thought he had faked the data,” Montague says. “Dayan was a big prankster, and I assumed he’d photocopied some of our own figures [on TDRL] just to tease me. It looked too good to be true.” Montague immediately realized that he and Dayan could make sense of Schultz’s mysterious neurons. They knew what these dopamine cells were doing; they had seen this code before. “The only reason we could see it so clearly,” Montague says, “is because we came at it from this theoretical angle. If you were an experimentalist seeing this data, it would have been extremely confusing. What the hell are these cells doing? Why aren’t they just responding to the juice?” That
same day Montague and Dayan began writing a technical paper that laid out their insight, explaining how these neurons were making precise predictions about future rewards. But the paper — an awkward mix of Schultz’s dopamine recordings and equations borrowed from computer science — went nowhere. “We wrote that paper 11 times,” Montague says. “It got bounced from every journal. I came this close to leaving the field. I realized that neuroscience just wasn’t ready for theory, even
if the theory made sense.”

Nevertheless, Montague and Dayan didn’t give up. They published their ideas in obscure journals, like Advances in Neural Information Processing Systems. When the big journals rejected their interpretation of monkey neurons, they instead looked at the nervous systems of honeybees, which relied on a version of TDRL when foraging
for nectar. (That paper got published in Nature in 1995.) “We had to drag the experimentalists kicking and screaming,” Montague says. “They just didn’t understand how these funny-looking equations could explain their data. They told us, ‘We need more data.’ But what’s the point of data if you can’t figure it out?” The crucial feature of these dopamine neurons, say Montague and Dayan, is that they are more concerned with predicting rewards than with the rewards themselves. Once the cells memorize the simple pattern — a loud tone predicts the arrival of juice — they become exquisitely sensitive to variations on the pattern. If the cellular predictions proved correct and the primates experienced a surge of dopamine, the prediction was reinforced. However, if the pattern was violated — if the tone sounded but the juice never arrived — then the monkey’s dopamine neurons abruptly decreased their firing rate. This is known as the “prediction error signal.” The monkey got upset because its predictions of juice were wrong. What’s interesting about this system is that it’s all
about expectation. Dopamine neurons constantly generate patterns based upon experience: If this, then that. The cacophony of reality is distilled into models of correlation. And if these predictions ever prove incorrect, then the neurons immediately readjust their expectations. The discrepancy is internalized; the anomaly is remembered. “The accuracy comes from the mismatch,” Montague says. “You learn how the world works by focusing on the prediction errors, on the events that you didn’t expect.” Our knowledge, in other words, emerges from our cellular mistakes. The brain learns how to be right by focusing on what it got wrong.

Despite his frustration  with the field, Montague continued to work on dopamine. In 1997 he published a Science paper with Dayan and Schultz whose short title was audaciously grand: “A Neural Substrate of Prediction and Reward.” The paper has since been cited more than 1,200 times, and it remains the definitive explanation of how the brain parses reality into a set of accurate expectations, which are measured
out in short bursts of dopamine. A crucial part of the cellular code had been cracked. But Montague was getting restless. “I wanted to start asking bigger questions,” he says. “Here’s this elegant learning system, but how does it fit with the rest of the brain? And can we take this beyond apple juice?” At first glance the dopamine system
might seem largely irrelevant to the study of human behavior. Haven’t we evolved beyond the brutish state of “reward harvesting,” where all we care about is food and sex? Dopamine might explain the simple psychology of a lizard, or even a monkey sipping juice, but it seems a stretch for it to explain the Promethean mind of a human. “One of the distinguishing traits of human beings is that we chase ideas, not just
primary rewards,” Montague says. “What other animal goes on hunger strike? Or abstains from sex? Or blows itself up in a cafe in the name of God?” These unique aspects of human cognition seem impossible to explain with neurons that track and predict rewards. After all, these behaviors involve the rejection of rewards: We are shrugging off tempting treats because of some abstract belief or goal.

Montague’s insight, however, was that ideas are just like apple juice. From the perspective of the brain, an abstraction can be just as rewarding as the tone that predicts the reward. Evolution essentially bootstrapped our penchant for intellectual concepts to the same reward circuits that govern our animal appetites. “The guy who’s on hunger strike for some political cause is still relying on his midbrain dopamine neurons, just like a monkey getting a treat,” Montague says. “His brain simply values the cause more than it values dinner.” According to Montague, the reason abstract thoughts can be so rewarding, is that the brain relies on a common neural currency for
evaluating alternatives. “It’s clear that you need some way to compare your options, even if your options come from very different categories,” he says. By representing everything in terms of neuron firing rates, the human brain is able to choose the abstract thought over the visceral reward, as long as the abstraction excites our cells
more than apple juice. That’s what makes ideas so powerful: No matter how esoteric or ethereal they get, they are ultimately fed back into the same system that makes us want sex and sugar. As Montague notes, “You don’t have to dig very far before it all comes back to your loins.”

In recent years Montague has shown how this basic computational mechanism is a fundamental feature of the human mind. Consider a paper on the neural foundations of trust, recently published in Science. The experiment was born out of Montague’s frustration with the limitations  of conventional fMRI. “The most unrealistic element [of fMRI experiments] is that we could only study the brain by itself,” Montague says. “But when are brains ever by themselves?” And so Montague pioneered a technique known as hyper-scanning, allowing subjects in different fMRI machines to interact in real time. His experiment revolved around a simple economic game in which getting the maximum reward required the strangers to trust one another. However, if one of the players grew especially selfish, he or she could always steal from the pot and erase the tenuous bond of trust. By monitoring the players’ brains, Montague was able to predict whether or not someone would steal money several seconds before the theft actually occurred. The secret was a cortical area known as the caudate nucleus,
which closely tracked the payouts from the other player. Montague noticed that whenever the caudate exhibited reduced activity, trust tended to break down.

But what exactly is the caudate computing? How do we decide whom to trust with our money? And why do we sometimes decide to stop trusting those people? It turned out that the caudate worked just like the reward cells in the monkey brain. At first the caudate didn’t get excited until the subjects actually trusted one another and garnered
their separate rewards. But over time this brain area started to expect trust, so that it fired long before the reward actually arrived. Of course, if the bond was broken — if someone cheated and stole money — then the neurons stopped firing; social assumptions were proven wrong. (Montague is currently repeating this experiment with a collaborating lab in China so that he can detect the influence of culture on social interactions.) The point, he says, is that people were using this TDRL strategy — a strategy that evolved to help animals find caloric rewards — to model another mind. Instead of predicting the arrival of juice, the neurons were predicting the behavior of someone else’s brain.

A few years ago, Montague was reviewing some old papers on TDRL theory when he realized that the system, while effective and efficient, was missing something important. Although dopamine neurons excelled at measuring the mismatch between their predictions of rewards and those that actually arrived — these errors provided the input for learning — they’d learn much quicker if they could also incorporate the
prediction errors of others. Montague called this a “fictive error learning signal,” since the brain would be benefiting from hypothetical scenarios: “You’d be updating your expectations based not just on what happened, but on what might have happened if you’d done something differently.” As Montague saw it, this would be a very valuable addition to our cognitive software. “I just assumed that evolution would use this approach, because it’s too good an idea not to use,” he says.

The question, of course, is how to find this “what if” signal in the brain. Montague’s clever solution was to use the stock market. After all, Wall Street investors are constantly comparing their actual returns against the returns that might have been, if only they’d sold their shares before the crash or bought Google stock when the company first went public. The experiment went like this: Each subject was
given $100 and some basic information about the “current” state of the stock market. After choosing how much money to invest, the players watched nervously as their investments either rose or fell in value. The game continued for 20 rounds, and the subjects got to keep their earnings. One interesting twist was that instead of using random simulations of the stock market, Montague relied on distillations of data from famous historical markets. Montague had people “play” the Dow of 1929, the Nasdaq of 1998, and the S&P 500 of 1987, so the neural responses of investors reflected real-life bubbles and crashes.

The scientists immediately discovered a strong neural signal that drove many of the investment decisions. The signal was fictive learning. Take, for example, this situation. A player has decided to wager 10 percent of her total portfolio in the market, which is a rather small bet. Then she watches as the market rises dramatically in
value. At this point, the regret signal in the brain — a swell of activity in the ventral caudate, a reward area rich in dopamine neurons — lights up. While people enjoy their earnings, their brain is fixated on the profits they missed, figuring out the difference
between the actual return and the best return “that could have been.” The more we regret a decision, the more likely we are to do something different the next time around. As a result investors in the experiment naturally adapted their investments to the ebb and flow of the market. When markets were booming, as in the Nasdaq bubble of the late 1990s, people perpetually increased their investments.

But fictive learning isn’t always adaptive. Montague argues that these
computational signals are also a main cause of financial bubbles. When
the market keeps going up, people are naturally inclined to make
larger and larger investments in the boom. And then, just when
investors are most convinced that the bubble isn’t a bubble — many of
Montague’s subjects eventually put all of their money into the booming
market — the bubble bursts. The Dow sinks, the Nasdaq collapses. At
this point investors race to dump any assets that are declining in
value, as their brain realizes that it made some very expensive
prediction errors. That’s when you get a financial panic.

Such fictive-error learning signals aren’t relevant only for stock
market investors. Look, for instance, at addiction. Dopamine has long
been associated with addictive drugs, such as cocaine, that overexcite
these brain cells. The end result is that addicts make increasingly
reckless decisions, forgoing longterm goals for the sake of an
intensely pleasurable short-term fix. “When you’re addicted to a drug,
your brain is basically convinced that this expensive white powder is
worth more than your marriage or life,” Montague says. In other words
addiction is a disease of valuation: Dopamine cells have lost track of
what’s really important.

Montague wanted to know which part of the dopamine system was
distorted in the addicted brain. He began to wonder if addiction was,
at least in part, a disease of fictive learning. Addicted smokers will
continue to smoke even when they know it’s bad for them. Why can’t
they instead revise their models of reward? Last year Montague decided
to replicate his stock market study with a large group of chronic
smokers. It turned out that smokers were perfectly able to compute a
“what if” learning signal, which allowed them to experience regret.
Like nonsmokers they realized that they should have invested
differently in the stock market. Unfortunately, this signal had no
impact on their decision making, which led them to make significantly
less money during the investing game. According to Montague, this data
helps explain why smokers continue to smoke even when they regret it.
Although their dopamine neurons correctly compute the rewards of an
extended life versus a hit of nicotine — they are, in essence, asking
themselves, “What if I don’t smoke this cigarette?” — their brain
doesn’t process the result. That feeling of regret is conveniently
ignored. They just keep on lighting up.

Montague exudes the confidence of a scientist used to confirming his
hypotheses. He buzzes with ideas for new experiments — ” I get bored
rather easily,” he says — and his lab is constantly shifting
direction, transitioning from dopamine to neuroeconomics to social
neuroscience. Montague is currently consumed with questions about how
people interact when they’re part of a group. “A mob or a market is
not just a collection of discrete individuals,” he says. “It’s
something else entirely. You would do things in a group that you would
never do by yourself. But what’s happening in your brain? We’ve got
all these sociological studies but no hard data.” Montague’s been
warned that the project is too complicated, that social interactions
are too subtle and complex to pick up in a scanner, but he’s convinced
otherwise. “If I’d listened to the naysayers,” he says, “I’d still be
studying honeybees.”

Montague’s experiments take advantage of his unique fMRI setup. He has
four people negotiate with one another as they decide how much to
offer someone else during an investing game. While the group is
bickering, Montague is monitoring the brain activity of everyone
involved. He’s also infiltrated the group with a computer player that
has been programmed to act just like a person with borderline
personality disorder. The purpose of this particular experiment is to
see how “one bad apple” can lead perfect strangers to also act badly.
While Montague isn’t ready to share the results — he’s still gathering
data — what he’s found so far is, he says, “stunning, shocking
even…. For me the lesson has been that people act very badly in
groups. And now we can see why.”

Such exuberance is well earned. In the space of a few short years,
Montague has taken his theoretical model of learning — a model he
borrowed from some old computer science textbooks — and shown that
it’s an essential part of the human brain. He’s linked the
transactions of a single neurotransmitter to a dizzying array of
behaviors, so that it’s now possible to draw a straight line between
monkeys craving juice and stock market bubbles. A neurotransmitter
that wasn’t supposed to matter is now our most important clue into the
secret messages of the mind and the breakdown of social graces. The
code hasn’t been broken. But for the first time, it’s getting cracked.

Jonah Lehrer
email : jonah.lehrer [at] gmail [dot] com



“In a fiduciary relation one person justifiably reposes confidence,
good faith, reliance and trust in another whose aid, advice or
protection is sought in some matter. In such a relation good
conscience requires one to act at all times for the sole benefit and
interests of another, with loyalty to those interests. A fiduciary
duty [1] is the highest standard of care at either equity or law. In
English common law the fiduciary relation is arguably the most
important concept within the portion of the legal system known as
equity. In the United Kingdom, the Judicature Acts merged the courts
of Equity (historically based in England’s Court of Chancery) with the
courts of common law, and as a result the concept of fiduciary duty
also became usable in common law courts. When a fiduciary duty is
imposed, equity requires a stricter standard of behavior than the
comparable tortious duty of care at common law. It is said the
fiduciary has a duty not to be in a situation where personal interests
and fiduciary duty conflict, a duty not to be in a situation where his
fiduciary duty conflicts with another fiduciary duty, and a duty not
to profit from his fiduciary position without express knowledge and
consent. A fiduciary cannot have a conflict of interest. It has been
said that fiduciaries must conduct themselves “at a level higher than
that trodden by the crowd”[2] and that “[t]he distinguishing or
overriding duty of a fiduciary is the obligation of undivided

“Self-dealing trustee, an attorney, a corporate officer, or other
fiduciary that consists of taking advantage of his position in a
transaction and acting for his own interests rather than for the
interests of the beneficiaries of the trust, corporate shareholders,
or his clients. Self-dealing may involve misappropriation or
usurpation of corporate assets or opportunities. Michael McDonald,
Ph.D, Chair of Applied Ethics at The University of British Columbia
provides examples based from this book: “using your government
position to get a summer job for your daughter”.”

“In contrast to enlightened self-interest is simple greed or the
concept of “unenlightened self-interest”, in which it is argued that
when most or all persons act according to their own myopic
selfishness, that the group suffers loss as a result of conflict,
decreased efficiency because of lack of cooperation, and the increased
expense each individual pays for the protection of their own
interests. If a typical individual in such a group is selected at
random, it is not likely that this person will profit from such a
group ethic. Some individuals might profit, in a material sense, from
a philosophy of greed, but it is believed by proponents of enlightened
self-interest that these individuals constitute a small minority and
that the large majority of persons can expect to experience a net
personal loss from a philosophy of simple unenlightened selfishness.
Unenlightened self-interest can result in the tragedy of the commons.”

by Garrett Hardin  /  December 1968

Pathogenic Effects of Conscience
The long-term disadvantage of an appeal to conscience should be enough
to condemn it; but has serious short-term disadvantages as well. If we
ask a man who is exploiting a commons to desist “in the name of
conscience,” what are we saying to him? What does he hear? –not only
at the moment but also in the wee small hours of the night when, half
asleep, he remembers not merely the words we used but also the
nonverbal communication cues we gave him unawares? Sooner or later,
consciously or subconsciously, he senses that he has received two
communications, and that they are contradictory: (i) (intended
communication) “If you don’t do as we ask, we will openly condemn you
for not acting like a responsible citizen”; (ii) (the unintended
communication) “If you do behave as we ask, we will secretly condemn
you for a simpleton who can be shamed into standing aside while the
rest of us exploit the commons.”

Everyman then is caught in what Bateson has called a “double bind.”
Bateson and his co-workers have made a plausible case for viewing the
double bind as an important causative factor in the genesis of
schizophrenia (17). The double bind may not always be so damaging, but
it always endangers the mental health of anyone to whom it is applied.
“A bad conscience,” said Nietzsche, “is a kind of illness.” To conjure
up a conscience in others is tempting to anyone who wishes to extend
his control beyond the legal limits. Leaders at the highest level
succumb to this temptation. Has any President during the past
generation failed to call on labor unions to moderate voluntarily
their demands for higher wages, or to steel companies to honor
voluntary guidelines on prices? I can recall none. The rhetoric used
on such occasions is designed to produce feelings of guilt in

For centuries it was assumed without proof that guilt was a valuable,
perhaps even an indispensable, ingredient of the civilized life. Now,
in this post-Freudian world, we doubt it. Paul Goodman speaks from the
modern point of view when he says: “No good has ever come from feeling
guilty, neither intelligence, policy, nor compassion. The guilty do
not pay attention to the object but only to themselves, and not even
to their own interests, which might make sense, but to their
anxieties” (18). One does not have to be a professional psychiatrist
to see the consequences of anxiety. We in the Western world are just
emerging from a dreadful two-centuries-long Dark Ages of Eros that was
sustained partly by prohibition laws, but perhaps more effectively by
the anxiety-generating mechanism of education. Alex Comfort has told
the story well in The Anxiety Makers (19); it is not a pretty one.

Since proof is difficult, we may even concede that the results of
anxiety may sometimes, from certain points of view, be desirable. The
larger question we should ask is whether, as a matter of policy, we
should ever encourage the use of a technique the tendency (if not the
intention) of which is psychologically pathogenic. We hear much talk
these days of responsible parenthood; the coupled words are
incorporated into the titles of some organizations devoted to birth
control. Some people have proposed massive propaganda campaigns to
instill responsibility into the nation’s (or the world’s) breeders.
But what is the meaning of the word responsibility in this context? Is
it not merely a synonym for the word conscience? When we use the word
responsibility in the absence of substantial sanctions are we not
trying to browbeat a free man in a commons into acting against his own
interest? Responsibility is a verbal counterfeit for a substantial
quid pro quo. It is an attempt to get something for nothing. If the
word responsibility is to be used at all, I suggest that it be in the
sense Charles Frankel uses it (20). “Responsibility,” says this
philosopher, “is the product of definite social arrangements.” Notice
that Frankel calls for social arrangements–not propaganda.

Mutual Coercion Mutually Agreed upon
The social arrangements that produce responsibility are arrangements
that create coercion, of some sort. Consider bank-robbing. The man who
takes money from a bank acts as if the bank were a commons. How do we
prevent such action? Certainly not by trying to control his behavior
solely by a verbal appeal to his sense of responsibility. Rather than
rely on propaganda we follow Frankel’s lead and insist that a bank is
not a commons; we seek the definite social arrangements that will keep
it from becoming a commons. That we thereby infringe on the freedom of
would-be robbers we neither deny nor regret.

The morality of bank-robbing is particularly easy to understand
because we accept complete prohibition of this activity. We are
willing to say “Thou shalt not rob banks,” without providing for
exceptions. But temperance also can be created by coercion. Taxing is
a good coercive device. To keep downtown shoppers temperate in their
use of parking space we introduce parking meters for short periods,
and traffic fines for longer ones. We need not actually forbid a
citizen to park as long as he wants to; we need merely make it
increasingly expensive for him to do so. Not prohibition, but
carefully biased options are what we offer him. A Madison Avenue man
might call this persuasion; I prefer the greater candor of the word

Coercion is a dirty word to most liberals now, but it need not forever
be so. As with the four-letter words, its dirtiness can be cleansed
away by exposure to the light, by saying it over and over without
apology or embarrassment. To many, the word coercion implies arbitrary
decisions of distant and irresponsible bureaucrats; but this is not a
necessary part of its meaning. The only kind of coercion I recommend
is mutual coercion, mutually agreed upon by the majority of the people
affected. To say that we mutually agree to coercion is not to say that
we are required to enjoy it, or even to pretend we enjoy it. Who
enjoys taxes? We all grumble about them. But we accept compulsory
taxes because we recognize that voluntary taxes would favor the
conscienceless. We institute and (grumblingly) support taxes and other
coercive devices to escape the horror of the commons.

An alternative to the commons need not be perfectly just to be
preferable. With real estate and other material goods, the alternative
we have chosen is the institution of private property coupled with
legal inheritance. Is this system perfectly just? As a genetically
trained biologist I deny that it is. It seems to me that, if there are
to be differences in individual inheritance, legal possession should
be perfectly correlated with biological inheritance–that those who
are biologically more fit to be the custodians of property and power
should legally inherit more. But genetic recombination continually
makes a mockery of the doctrine of “like father, like son” implicit in
our laws of legal inheritance. An idiot can inherit millions, and a
trust fund can keep his estate intact. We must admit that our legal
system of private property plus inheritance is unjust–but we put up
with it because we are not convinced, at the moment, that anyone has
invented a better system. The alternative of the commons is too
horrifying to contemplate. Injustice is preferable to total ruin.

It is one of the peculiarities of the warfare between reform and the
status quo that it is thoughtlessly governed by a double standard.
Whenever a reform measure is proposed it is often defeated when its
opponents triumphantly discover a flaw in it. As Kingsley Davis has
pointed out (21), worshippers of the status quo sometimes imply that
no reform is possible without unanimous agreement, an implication
contrary to historical fact. As nearly as I can make out, automatic
rejection of proposed reforms is based on one of two unconscious
assumptions: (i) that the status quo is perfect; or (ii) that the
choice we face is between reform and no action; if the proposed reform
is imperfect, we presumably should take no action at all, while we
wait for a perfect proposal.

But we can never do nothing. That which we have done for thousands of
years is also action. It also produces evils. Once we are aware that
the status quo is action, we can then compare its discoverable
advantages and disadvantages with the predicted advantages and
disadvantages of the proposed reform, discounting as best we can for
our lack of experience. On the basis of such a comparison, we can make
a rational decision which will not involve the unworkable assumption
that only perfect systems are tolerable.

American Dream a Biological Impossibility, Neuroscientist Says
by Brandon Keim  /  October 21, 2008

What if people are biologically unsuited for the American dream? The
man posing that troubling question isn’t just another lefty activist.
It’s Peter Whybrow, head of the Semel Institute for Neuroscience and
Behavior at UCLA. “We’ve been taught, especially in America, that
happiness will be at the end of some sort of material road, where we
have lots and lots of things that we want,” said Whybrow, a 2008
PopTech Fellow and author of American Mania: When More Is Not Enough.
“We’ve set up all sorts of tricks to delude ourselves into thinking
that it’s fine to get what you want immediately.”

He paints a disturbing picture of 21st century American life, where
behavioral tendencies produced by millions of years of scarcity-driven
evolution don’t fit the social and economic world we’ve constructed.
Our built-in dopamine-reward system makes instant gratification highly
desirable, and the future difficult to balance with the present. This
worked fine on the savanna, said Whybrow, but not the suburbs: We
gorge on fatty foods and use credit cards to buy luxuries we can’t
actually afford. And then, overworked, underslept and overdrawn, we
find ourselves anxious and depressed.

That individual weakness is reflected at the social level, in markets
that have outgrown their agrarian roots and no longer constrain our
excesses — resulting in the current economic crisis, in which
America’s unpaid bills came due with shocking speed. But with this
crisis, said Whybrow, comes the opportunity to rethink how Americans
live, as individuals and as a nation, and build a country that works.
“We’re primed for doing things immediately. We’re poor at planning for
the future, unless we get into circumstances like these, where we’re
forced to think cleverly about what to do next,” he said. “In a way,
this financial meltdown is a healthy thing for us. We’ll think
intuitively again.”

Foremost among Whybrow’s targets is the modern culture of spending on
credit. “The instinctive brain is well ahead of the intellectual
brain. Credit cards promise us that you can have what you want now,
and postpone payment until later,” he said. Buying just feels good, in
a biological sense — and that instant reward outweighs the threat of
future bills. Of course, many people use credit cards to pay bills and
put food on the table, rather than buy flat-screen televisions and new
computers. “That unfortunate reality,” said Whybrow, “is produced by
an out-of-control economic system” geared toward perpetual growth.
That is no more natural a state for markets than a mall food court is
natural for individuals whose metabolic heredity treats fats and
sugars as rarities. “Once upon a time, this economic system worked.
But for the invisible hand of the free market to function, it needed
to be balanced. And that balance is gone,” he said.

Markets were once agrarian institutions, said Whybrow, which balanced
the gratification of individuals with the constraints of small
communities, where people looked their trade partners in the eye, and
transactions were bounded by time and geography. With those
constraints removed, markets have engaged in the buy-now, pay-later
habits of college kids who don’t read the fine print on their credit
card bills. “You can think about markets in the same way as
individuals who mortgaged their future — except markets did it with
other people’s money,” he said. “You end up with a Ponzi scheme
predicated on the idea that we can get something now, rather than
having to wait. And it all comes back to the same instinctual drive.”
And now that the fundamental excesses of our economy have been so
painfully exposed, with trillions of dollars vanishing from the
American economy in just a few days, we have to think about changing
both the economy and ourselves.

The answers aren’t easy, Whybrow cautioned — but they do exist. People
can think creatively about jumping from the treadmills of bad jobs and
unmeetable needs; and even if this isn’t always possible, they can
teach their children to live modestly and within their means. Urban
engineers can design cities that allow people to live and work and
shop in the same place. Governments can, at the insistence of their
citizens, provide the social safety nets on which social mobility,
stagnant for the last 50 years, is based. And we can — however much it
hurts — look to Europe for advice. “America has always believed that
it was the perfect society. When you have that mythology driving your
culture, it’s hard to look around and say, ‘Is someone else doing it
better than us?'” said Whybrow. “But you can trace the situation we’re
in to our evolutionary origins. Now that we find ourselves in the
middle of this pseudo-abundance, we’re in trouble. And the fantasy
that we can restart the American dream just isn’t true.”

Peter Whybrow
email : pwhybrow [at] mednet.ucla [dot] edu

Humankind evolved to seek rewards and avoid risks but not to invest
by Jason Zweig  /  August 23 2007

For most purposes in daily life, your brain is a superbly functioning
machine, steering you away from danger while guiding you toward basic
rewards like food, shelter and love. But that brilliant machine can
lead you astray when it comes to investing. You buy high only to sell
low. You try to time the market. You follow the crowd. You make the
same mistakes again. And again. How come?

We’re beginning to get answers. Scientists in the emerging field of
“neuroeconomics” – a hybrid of neuroscience, economics and psychology
– are making stunning discoveries about how the brain evaluates
rewards, sizes up risks and calculates probabilities. With the wonders
of imaging technology we can observe the precise neural circuitry that
switches on and off in your brain when you invest. Those pictures make
it clear that your investing brain often drives you to do things that
make no logical sense – but make perfect emotional sense. Your brain
developed to improve our species’ odds of survival. You, like every
other human, are wired to crave what looks rewarding and shun what
seems risky.

To counteract these impulses, your brain has only a thin veneer of
modern, analytical circuits that are often no match for the power of
the ancient parts of your mind. And when you win, lose or risk money,
you stir up some profound emotions, including hope, surprise, regret
and the two we’ll examine here: greed and fear. Understanding how
those feelings – as a matter of biology – affect your decision-making
will enable you to see as never before what makes you tick, and how
you can improve, as an investor.

Greed: The thrill of the chase
Why is it so hard for most of us to learn that the old saying “Money
doesn’t buy happiness” is true? After all, we feel as if it should.
The answer lies in a cruel irony that has enormous implications for
financial behavior: Our brains come equipped with a biological
mechanism that is more aroused when we anticipate a profit than when
we get one. I lived through the rush of greed in an experiment run by
Brian Knutson, a neuroscientist at Stanford University. Knutson put me
into a functional magnetic resonance imaging (fMRI) scanner to trace
my brain activity while I played a kind of investing video game that
he had designed. By combining an enormous magnet and a radio signal,
the fMRI scanner pinpoints momentary changes in the level of oxygen as
blood ebbs and flows within the brain, enabling researchers to map the
neural regions engaged by a particular task.

In Knutson’s experiment, a display inside the fMRI machine showed me a
sequence of shapes that each signaled a different amount of money:
zero ($0), medium ($1) or large ($5). If the symbol was a circle, I
could win the dollar amount displayed; if it was a square, I could
lose the amount shown. After each shape came up, between 2 and 2½
seconds would pass – that’s the anticipation phase, when I was on
tenterhooks waiting for my chance to win or lose – and then a white
square would appear for a split second.

To win or avoid losing the amount I had been shown, I had to click a
button with my finger when the square appeared. At the highest of the
three levels of difficulty, I had less than one-fifth of a second to
hit the button. After each try the screen showed how much I’d just won
or lost and updated my cumulative score. When a shape signaling a
small reward or penalty appeared, I clicked placidly and either won or
lost. But if a circle marked with the symbols of a big, easy payout
came up, I could feel a wave of expectation sweep through me. At that
moment, the fMRI scan showed, the neurons in a reflexive, or
emotional, part of my brain called the nucleus accumbens fired like
wild. When Knutson measured the activity tracked by the scan, he found
that the possibility of winning $5 set off twice as strong a signal in
my brain as the chance at gaining $1 did.

On the other hand, learning the outcome of my actions was no big deal.
Whenever I captured the reward, Knutson’s scanner found that the
neurons in my nucleus accumbens fired much less intensely than they
had when I was hoping to get it. Based on the dozens of people Knutson
has studied, it’s highly unlikely that your brain would respond much
differently. Why does the reflexive part of the brain make a bigger
deal of what we might get than of what we do get? That function is
part of what Brian Knutson’s mentor, Jaak Panksepp of Bowling Green
State University in Ohio, calls “the seeking system.”

Over millions of years of evolution, it was the thrill of anticipation
that put our senses in a state of high awareness, bracing us to
capture uncertain rewards. Our anticipation circuitry, says Paul
Slovic, a psychologist at the University of Oregon, acts as a “beacon
of incentive” that enables us to pursue rewards that can be earned
only with patience and commitment. If we derived no pleasure from
imagining riches down the road, we would grab only at those gains that
loom immediately in front of us. Thus our seeking system functions
partly as a blessing and partly as a curse. We pay close attention to
the possibility of coming rewards, but we also expect that the future
will feel better than it does once it turns into the present.

A vivid example of this is the stock of Celera Genomics Group. In
September 1999, Celera began sequencing the human genome. By
identifying each of the 3 billion molecular pairings that make up
human DNA, the company could make one of the biggest leaps in the
history of biotechnology. Investors went wild with anticipation,
driving the stock to a peak of $244 in early 2000. Then, on June 26,
Celera announced that it had completed cracking the code. How did the
stock react? By tanking. It dropped 10.2% that day and another 12.7%
the next day. Nothing had occurred to change the company’s fortunes
for the worse. Quite the contrary: Celera had achieved a scientific
miracle. So what happened? The likeliest explanation is simply that
the anticipation of Celera’s success was so intense that reality was a
letdown. Getting exactly what they wished for left investors with
nothing to look forward to, so they got out and the stock crashed.

Greed: The stuff of memories
Researchers in Germany tested whether anticipating a financial gain
can improve memory. A team of neurologists scanned people’s brains
with an fMRI machine while showing them pictures of objects like a
hammer or a car. Some images were paired with the chance to win half a
euro, while others led to no reward. The participants soon learned
which pictures were reliably associated with the prospect of making
money, and the scan showed that their anticipation circuits fired
furiously when those images appeared. Immediately afterward, the
researchers showed the participants a larger set of pictures,
including some that had not been displayed inside the scanner. People
were highly accurate at distinguishing the pictures they had seen
during the experiment and equally adept at recognizing which of those
pictures had predicted a gain.

Three weeks later the participants came back to the lab, where they
were shown the pictures again. This time people could even more
readily distinguish the pictures that had signaled a financial gain
from those that had not – although they hadn’t laid eyes on them in 21
days! Astounded, the researchers went back and re-examined the fMRI
scans from three weeks earlier. It turned out that the potentially
rewarding pictures had set off more intense activation not only in the
anticipation circuits but also in the hippocampus, a part of the brain
where long-term memories live.

The fire of expectation, it seems, somehow sears the memory of
potential rewards more deeply into the brain. “The anticipation of
reward,” says neurologist Emrah Düzel, “is more important for memory
formation than is the receipt of reward.” Anticipation has another
unusual neural wrinkle. Brian Knutson has found that while your
reflexive brain is highly responsive to variations in the amount of
reward at stake, it is much less sensitive to changes in the
probability of receiving a reward.

If a lottery jackpot was $100 million and the posted odds of winning
fell from one in 10 million to one in 100 million, would you be 10
times less likely to buy a ticket? If you’re like most people, you
probably would shrug, say “A long shot’s a long shot” and be just as
happy buying a ticket as before. That’s because, as economist George
Loewenstein of Carnegie Mellon University explains, the “mental image”
of $100 million sets off a burst of anticipation in the reflexive
regions of your brain. Only later will the analytical, or reflective,
areas calculate that you’re less likely to win than Ozzy Osbourne is
to be elected Pope. When possibility is in the room, probability goes
out the window. It’s no different when you buy a stock or a mutual
fund: Your expectation of scoring a big gain elbows aside your ability
to evaluate how likely you are to earn it. That means your brain will
tend to get you into trouble whenever you’re confronted with an
opportunity to buy an investment with a hot – but probably
unsustainable – return.

Fear: What are you afraid of?
Here are two questions that might, at first, seem silly.
1 Which is riskier: a nuclear reactor or sunlight?
2 Which animal is responsible for the greatest number of human deaths
in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark

Now let’s look at the answers. The worst nuclear accident in history
occurred when the reactor at Chernobyl, Ukraine melted down in 1986.
Early estimates were that tens of thousands of people might be killed
by radiation poisoning. By 2006, however, fewer than 100 had died.
Meanwhile, nearly 8,000 Americans are killed every year by skin
cancer, commonly caused by overexposure to the sun.

In the typical year, deer are responsible for roughly 130 human
fatalities – seven times more than alligators, bears, sharks and
snakes combined. Deer, of course, don’t attack. Instead, they step in
front of cars, causing deadly collisions. None of this means that
nuclear radiation is good for you or that rattlesnakes are harmless.
What it does mean is that we are often most afraid of the least likely
dangers and frequently not worried enough about the risks that have
the greatest chances of coming home to roost.

We’re no different when it comes to money. Every investor’s worst
nightmare is a stock market collapse like the crash of 1929. According
to a recent survey of 1,000 investors, there’s a 51% chance that “in
any given year, the U.S. stock market might drop by one-third.” In
fact, the odds that U.S. stocks will lose a third of their value in a
given year are around 2%. The real risk isn’t that the market will
melt down but that inflation will erode your savings. Yet only 31% of
the people surveyed were worried that they might run out of money
during their first 10 years of retirement.

If we were logical we would judge the odds of a risk by asking how
often something bad has actually happened under similar circumstances.
Instead, explains psychologist Daniel Kahneman, “we tend to judge the
probability of an event by the ease with which we can call it to
mind.” The more recently it occurred or the more vivid our memory of
something like it in the past, the more “available” an event will be
in our minds – and the more probable its recurrence will seem.

Fear: The hot button of the brain
Deep in the center of your brain, level with the top of your ears,
lies a small, almond-shaped knob of tissue called the amygdala (ah-mig-
dah-lah). When you confront a potential risk, this part of your
reflexive brain acts as an alarm system – shooting signals up to the
reflective brain like warning flares. (There are two amygdalas, one on
each side of your brain.) The result is that a moment of panic can
wreak havoc on your investing strategy. Because the amygdala is so
attuned to big changes, a sudden drop in the market tends to be more
upsetting than a longer, slower decline, even if it’s greater in

On Oct. 19, 1987, the U.S. stock market plunged 23% – a deeper one-day
drop than the crash of ’29. Big, sudden and inexplicable, the ’87
crash was exactly the kind of event that sparks the amygdala. The
memory was hard to shake: In 1988, U.S. investors sold $15 billion
more worth of shares in stock mutual funds than they bought, and their
net purchases of stock funds didn’t recover to pre-crash levels until
1991. One bad Monday disrupted the behavior of millions of people for
years. There was something more at work here than merely investors’
individual fears. Anyone who has ever been a teenager knows that peer
pressure can make you do things as part of a group that you might
never do on your own.

But do you make a conscious choice to conform or does the herd exert
an automatic, almost magnetic, force? People were recently asked to
judge whether three-dimensional objects were the same or different.
Sometimes the folks being tested made these choices in isolation.
Other times they first saw the responses of four “peers” (who were, in
fact, colluding with the researcher).

When people made their own choices, they were right 84% of the time.
When the peer group all made the wrong choice, however, the
individuals being tested chose correctly just 59% of the time. Brain
scans showed that when the subjects followed the peer group,
activation in parts of their frontal cortex decreased, as if social
pressure was somehow overpowering the reflective, or analytical,
brain. When people did buck the consensus, brain scans found intense
firing in the amygdala.

Neuroscientist Gregory Berns, who led the study, calls this flare-up a
sign of “the emotional load associated with standing up for one’s
belief.” Social isolation activates some of the same areas in the
brain that are triggered by physical pain. In short, you go along with
the herd not because you want to but because it hurts not to. Being
part of a large group of investors can make you feel safer when
everything is going great. But once risk rears its ugly head, there’s
no safety in numbers.

Fear: Fright makes right
I learned how my own amygdala reacts to risk when I participated in an
experiment at the University of Iowa. First I was wired up with
electrodes and other monitoring devices to track my breathing,
heartbeat, perspiration and muscle activity. Then I played a computer
game designed by neurologists Antoine Bechara and Antonio Damasio.
Starting with $2,000 in play money, I clicked a mouse to select a card
from one of four decks displayed on the monitor in front of me. Each
“draw” of a card made me either “richer” or “poorer.”

I soon learned that the two left decks were more likely to produce big
gains but even bigger losses, while the two right decks blended more
frequent but smaller gains with a lower chance of big losses.
Gradually I began picking most of my cards from the decks on the
right; by the end of the experiment I had drawn 24 cards in a row from
those safer decks. Afterward I looked over the printout that traced my
spiking heartbeat and panting breath as the red alert of risk swept
through my body, even though I didn’t recall ever feeling nervous.

Early on, when I drew a card that lost me $1,140, my pulse rate shot
from 75 to 145. After a few more bad losses from the risky decks, my
body would start reacting even before I selected a card from one of
them. Merely moving the cursor over the risky decks was enough to make
my physiological functions go haywire. My decisions, it turns out, had
been driven by fear even though the “thinking” part of my mind had no
idea I was afraid. Ironically – and thankfully – this highly emotional
part of our brain can actually help us act more rationally.

When Bechara and Damasio run their card-picking game with people whose
amygdalas have been injured, the subjects never learn to avoid
choosing from the riskier decks. If told that they have just lost
money, their body doesn’t react; they can no longer feel a financial
loss. Without the saving grace of fear, the analytical parts of the
brain will keep trying to beat the odds, with disastrous results. “The
process of deciding advantageously,” concludes Damasio, “is not just
logical but also emotional.”

Jason Zweig
email : info [at] jasonzweig [dot] com / jason.zweig [at] wsj [dot] com /
intelligentinvestor [at] wsj [dot] com

Synopsis : Predictably Irrational by Dan Ariely
by George Gibson  /  September 18, 2008

[This detailed, chapter-by-chapter précis of Dan Ariely’s Predictably
Irrational: The Hidden Forces That Shape Our Decisions is a guest post
by George Gibson, a colleague of mine at Xerox. George originally
posted it on our internal blogs as a series, and I found it so much
fun to read, I asked if I could repost it on ribbonfarm. So here you

Chapter 1: The Truth About Relativity
This was clearly the most interesting of the books from my summer
reading list. Let me be clear that though I don’t buy all of the
points Dan tries to make, I find them all interesting and worthy of
thought. With any luck we can begin a real discussion of his ideas and
observations in the commentary. That means I’ll attempt (not always
successfully) to keep my opinion out of the body of this piece, and
reserve that for any commentary that might develop. The real point
here is to get you interested enough to read the book yourself.

“Most people don’t know what they want until they see it in context.”
Control the context and you can change their decisions. This chapter
is about how our decision making as skewed from what we might think of
as rational by the use of comparisons, anchor points and some about
the magic of “FREE!”. The Economist offered three subscription
* Electronic alone: $59
* Print alone: $125
* Electronic and print: $125

So what would you guess people would choose? Would anyone choose the
Print alone option forgoing a “FREE!” electronic subscription? Not
likely. So, why is it even offered? Testing with 100 Sloan School
students, 16 chose Electronic alone and 84 chose the combined
Electronic and print option. Nobody chose the Print alone option (boy
those Sloan folks are smart aren’t they?). However when the irrelevant
option, the one nobody chose, was eliminated, another, equally bright,
hundred Sloan students divided 68 for Electronic alone and only 32
chose Electronic and print. So…what happened here?

Ariely makes the unpleasant but often correct assertion, “Thinking is
difficult and sometimes unpleasant.” Cues that allow us to establish
the relative value of various offerings, then, reduce the required
thought effort. What the Economist offered was a no-brainer; while we
might not be certain if the print subscription was worth more than
twice the electronic version, the combination of the two was clearly
worth more that the print version alone.

The chapter contains many examples of this effect including movie
script jokes, bread makers, houses, vacations, salaries and even
potential dates. Two general frameworks are noted as particularly
common. First is the inclusion of a slightly degraded offering near
the offering you want the customer to accept increases the likelihood
that he or she will make your desired choice (read the choice of
potential dating partners section of the book for this one). Next is
the pick the middle one strategy in which three offerings are
presented with the middle of them as the sellers preferred choice. So
often the butt of jokes, car companies even provide an interesting
example. What portion of the firm’s profits on most platforms come
from the middle of the line offering?

There are take-aways here for both the seller and buyer. Politely
said, you as a seller can help guide your customer through the
bewildering array of choices by providing helpful contextual
information (I’ll let each of you put your cynical hat on and restate
that one for fun!) As a consumer it is helpful to understand the
framing a seller is likely to present you with and do some of that
nasty thinking work up front deciding whether or not the seller’s
preferred context and yours are the same.

Chapter 2: The Fallacy of Supply and Demand
This chapter is at the heart of Ariely’s argument. Classical economics
says that our decisions about resource allocation reflect our relative
valuation of the various investment alternatives. If I buy more wine
than cheese it’s because I derive greater utility (more than just
usefulness by the way) from the juice of the grape. There are clear
limits of course, I am unlikely to allow myself to starve and will
occasionally buy cheese, or buy cheese when the price is low enough.
But the general point remains, I am willing to pay more for those
things from which I derive greater utility.

Not so says our man Dan. How much a person is willing to pay for
something is determined or at least significantly affected by a
variety of factors which have nothing to do with any benefit that he
or she derives from that purchase. Do you remember what Tom Sawyer did
with his chore, whitewashing a fence? Review that first and you’ll be
more open to these arguments.

He starts with the story of black pearls. There were essentially none
on the market so there was no objective way of establishing price.
What happened was they were shown in advertising and in Harry
Winston’s toney store along rubies and diamonds at a very high price.
This initial association served to effectively anchor the price and
therefore, going forward, future prices were high since the initial
frame in which people were introduced to the product was among high
priced goods.

He likens this anchor price phenomenon to that of imprinting. We are
all goslings, fixed on that first object. He’s done a lot of really
neat experiments to support his point. None of them are completely
convincing but they certainly are thought provoking.

Consider, for example some really interesting experiments suggesting
that thinking about a number – any number – before considering what
you are willing to pay for an item whose market price you do not know
– actually effects what you would be willing to pay for that item. In
one of the experiments described a group of students were asked to
write down the last two digits of their social security number before
they indicated how much they were willing to pay for a bottle of wine,
a cordless keyboard, some imported chocolates. Guess what! The amounts
they were willing to pay actually correlated with those social
security number fragments they had previously written down. I spend
time much time on this particular experiment precisely because the
results are so bizarre.

He cites a number of other experiments and observations that support
not only that an anchoring affect, unrelated to market value or
derived utility. One of the ones he cites that I have experienced
personally is the persistence of old concepts of housing value when
you move from one market to another. When Ginny and I moved here from
Dayton, Ohio fifteen years ago, we went a long time looking for a
house that cost about as much as the one we were leaving. Although
Rochester can hardly be described as a high cost area, real estate was
roughly twice as expensive per square foot here than in Dayton. It
took us literally months to stop looking to replace our Dayton house
with one of similar price here and adjust to the new price scale we

I won’t spoil your fun and go through all the examples and neat
concepts, “coherent arbitrariness” being among my favorites, but I
will reiterate one of his most powerful points. Knowing that it is
entirely possible that some factors not related to the real value a
product or service crate for you may be affecting how much of that
good you consume and how much you are paying for it, be mindful.
Carefully examine your purchasing behavior and make sure you actually
believe that the money you allocate to consumption of various
offerings really advances your overall well being more than the next
best use of those funds. So when you’re paying for your $4 cup of
coffee at Starbucks (as you know I do), revisit the fundamental
decision – should I be buying cheaper coffee at McDonalds or even
bringing in coffee from home or should I be drinking water, of the
free sort.

But if first anchors are so significant and long lived, how come you
ever bought that first cup at $4 let alone the third? That first day
you walked into Starbucks wasn’t your first experience with buying
coffee. You had plenty of time and experience to establish an anchor
backed my years of repeated experience to reinforce it. Howard Shultz
had to work hard to make Starbucks fundamentally different than the
other places you might by coffee – not just quantitatively but
qualitatively. It just had to be unlike the other places you might
stop when you wanted coffee – you had to get something more. Their
success is the proof of their success there and the most recent
stumbling in earnings can be attributed to some extent as the success
of McDonalds and Duncan Donuts in making it just about the coffee.

Chapter 3. The Cost of Zero Cost
Why We Often Pay Too Much When We Pay Nothing
“Zero is not just another price….zero is an emotional hot button – a
source of irrational excitement.”

The allure of free stuff drives us to make all sorts of irrational
purchasing decisions. “Buy 2 get 1 FREE!!,” motivates a fair share of
people to buy two of something they wouldn’t have bought one of except
to get that free thing. As you’ve picked up by now, Ariely’s MO is to
do experiments to probe economic rationality or the lack thereof. In
this matter the first experiment involved selling chocolate on the MIT
campus albeit in a strange way. Limiting chocolate purchases to one
per customer they offered a choice between Lindt truffle and a Hershey
Kiss. A huge difference in quality reflected in a substantial
difference in price. The truffle sold for $0.15, half off the bulk
retail price, and the Kiss sold for $0.01. Students split on their
purchases with 73% choosing the truffle and 27% choosing the kiss.
Next they lowered the price of each by $0.01; the truffle at $0.14 and
the Kiss was FREE!! Now 69% of students choose the Kiss; same price
difference, same expected benefit or enjoyment from eating the
chocolate but apparently there is an additional benefit of FREE!!

Again my purpose here is to serve as a teaser here not to reiterate
the book, I want you to read the book. Let’s just say that he did this
experiment a variety of ways and each time the proposition that FREE!!
distorts decision making was supported. He has some especially
interesting Halloween experiments and some real Amazon experience
supporting his assertion.

Chapter 4. The Cost of Social Norms:
Why We Are Happy to Do Things, but Not When We Are Paid to Do Them

I’m against wholesale quotations in reviews. So remember that this
isn’t a review, it’s meant to be a précis and teaser. This chapter
leads off with a story so compelling that I just have to present it

You are at your mother-in-law’s house for Thanksgiving dinner, and
what a sumptuous spread she has put on the table for you. The turkey
is roasted to a golden brown; the stuffing is homemade and exactly the
way you like it. Your kids are delighted: the sweet potatoes are
crowned with marshmallows. And your wife is flattered: her favorite
recipe for pumpkin pie has been chosen for desert.

The festivities continue into the late afternoon. You loosen your belt
and sip a glass of wine. Gazing fondly across the table at your mother-
in-law, you rise to your feet, pull out your wallet. “Mom, for all the
love you’ve put into this, how much do I owe you?” you say sincerely.
As silence descends on the gathering, you wave a handful of bills. “Do
you think three hundred dollars will do it? No, wait, I should give
you four hundred.” Please fill in the blank with what you think will
happen next.

The rest of the chapter is devoted to some experiments (of course) and
some anecdotes that describe two separate frames in which we operate:
those of social norms and those of market norms. He compiles evidence
that social norms are more effective at motivating superior
performance than are market norms. The armed forces are an interesting
example. You didn’t really think that those soldiers in Iraq and
Afghanistan were there for the pay and to save money for college did
you? Those are nice perks (well the pay for low rank enlisted soldiers
sometimes leaves their families in poverty) but exactly how much money
would it take for you to risk your life like that? The actions we
barely hear on the news in the car as we travel back and forth to work
or have on as background during dinner, the acts of courage and
heroism are not motivated by the paycheck but by the social norms of
the service. One soldier I know said that you may join for your
country but, in a fire fight, you’re fighting for your buddies. Boy,
now there’s a powerful force. Powerful but, it turns out fragile.
After the dinner above, how long do you think it would be before the
narrator’s mother-in-law went out of her way for him?

In this chapter Dan provided the results of a number of experiments
showing that there is a particularly interesting difference between
the types and performance levels of tasks that can be produced when
the reward system is governed by “social norms.” In one set of
experiments he had people perform a simple computer task. Three groups
were paid varying amounts and one group was asked to do the task as as
a favor to the experimenter. Among those paid, those paid more
generally produced more in keeping with our idea of market behavior.
Those doing the experimenter a favor however, outperformed the highest
paid group. You can imagine all sorts of implications. One more
interesting twist however was that introducing market norms into the
conversation (talking about how much some folks had been paid) before
the volunteers worked destroyed the effect.

The most interesting set of things he explored based on these tenets
was the implications of personal in firm-level behavior: what should
you, and should a firm, leave in the arena of social norms and what in
the realm of market norms. Will extra productivity for a firm be most
effectively produced by market or social reinforcements? How about
employee loyalty in all its manifestations? What effect will a company
making clear that its relationship with its employees is purely
financial have on the performance of that company’s employees and
hence on the company itself. Is this an argument for a return to
paternalism? It seems unlikely. Is it at the heart of the oft vaunted
ability of small firms to “outperform” larger ones in some aspects of
innovation: perhaps.

Chapter 5. The Influence of Arousal
Why Hot is Hotter Than We Realize

One of the things I’ve learned about blogging, although it might not
be apparent, is that it’s a good idea to be brief. As you know I
seldom say in two words what I can say in five, this is an ongoing
challenge for me. This chapter however is one that encourages brevity.
The central hypothesis is that arousal, of all sorts, produces a
significant distortion of decision making. Decisions made in the heat
of the moment are notoriously badly made. Think road rage, think
victory celebration, think extreme thirst or hunger (I’ve always
wondered, just how hungry the first person was that saw a lobster and
thought, “hmmmm, that looks good”). There are all sorts of states of
arousal and given that this is a book by an experimentalist at a
university you can imagine that he describes experiments using
several. ‘Nuff said. You’re simply going to have to read the book to
get the details of what junior was doing in the name of behavioral
economics to supplement the pittance his parents were forcing him to
live on.

The major assertion of this chapter is that when we’re calm and
detached, we repeatably and significantly underestimate the effect of
altered mental states on our decision making. Of course we all know
that when we’re angry or in love or afraid or hot on the trail of a
particularly desirable objective like in a auction bidding war or when
we’ve had one too any drinks our decision making can suffer. Look at
the bad decisions made by the folks at Enron, Arthur Anderson or any
of a host of other companies. We know altered states of many kinds can
cause us to make bad decisions and so, forewarned we are forearmed
right? Not so much it turns out. The experimental subjects in this
chapter recognized that when they were excited they would make
decisions that were significantly different than those they would make
in a in the so called, cold light of day. They were asked to predict
behaviors or alternatives that they expect would change in the grips
of some emotionally charged state. However, when actually provoked and
queried again Dan’s experiments found that they consistently and
significantly underestimated the magnitude of the effect. His
prescription is a prevent defense. If you know that a certain
situations can cause you to make bad decisions, don’t put yourself in
those situations. This is another example of one of the jokes that, as
you know I believe, run the universe. It goes like this.
Patient: Doctor, doctor, it hurts when I go like this.
Doctor: Don’t go like that.

I’ll let you read the details but let’s all ask ourselves this;
knowing that we are highly likely to underestimate how much our
decision making will be changed in states of emotional turmoil of
varying sorts, how will we protect ourselves from being either patsies
of our emotions or manipulated by those willing to exploit this lever
for their gain?

Chapter 6: The Problem if Procrastination and Self-Control
Why We Can’t Make Ourselves Do What We Want to Do

Procrastination is probably the most common source of self-inflicted
wounds you or I are likely to suffer during our lives. Not necessarily
the source of the most significant ones but surely the greatest
number. From the petty (the “people” door on my garage has decayed to
the point that I will have to replace it) to the profound (I kept
meaning to start saving for retirement or dieting and exercising)
procrastination can leave nasty tracks in our lives.

Dan’s experiments here are perhaps the most limited of those he
describes in the book. Given the detail he presents it’d be hard to
judge their import if he turned up something new. Let me describe the
experiment. He compared three groups of students in a graduate
consumer behavior course. Each class was required to turn in three
papers over the course of the semester. One class was given strict and
equally spaced deadlines with a penalty for failing to meet the
deadline, A second class was told that they could turn the papers in
anytime before the end of the semester and that there was no reward
for being early. The third class was allowed to sign up for deadlines
spaced however they liked but, having committed to those deadlines,
there was a penalty for failing to meet them. Guess which group got
the best grades?

The group given the hard deadlines took first. The group with no
deadlines took last. The interesting point is that the other group,
those with self-selected deadlines did nearly as well as the first
group. Apparently, this tool, letting them pre-commit to a performance
standard was nearly as powerful as the externally imposed deadline.
Now since the experimenter graded the papers there is, of course, some
question about bias. There is also a significant degree of randomness
in this sort of grading process. In fact a great discussion of this is
in the other book from my reading list that I strongly recommend to
you, “The Drunkards Walk.” If Dan’s finding was revolutionary then we
might have some significant reservations. Pre-commitment is, however,
a well established technique. Really want to get something done? Write
a $500 check to some campaign or social cause based organization whose
ends you strongly oppose. Then give it to a friend and say, “If I
don’t accomplish X by Y send this check to these folks.” You’d be
amazed at what you can accomplish. This whole tack is a well
established result from game theory. Now let’s talk about some of the
ways Dan pictures using it.

Huge components of our health care costs are the results of
preventable diseases. What if your insurance company withdrew $200
dollars from your paycheck to cover the expense of a regular and
complete physical with the understanding that you would get that money
back IFF you kept your appointment for all of the required testing?
Maybe out on the lunatic fringe of health care thinking but
interesting. In this and other similar situations Dan suggests both
these voluntary pre-commitment models and the alternative of a
One of the most amusing suggestions he makes regards spending control,
especially credit card use. You may have heard the ice method. Some
people, to counter their impulsive use of consumer credit, put their
card(s) in a glass of water in the freezer. Thawing it (them) out to
use takes time allowing that arousal that we talked about last chapter
to fade. Of course there are simpler ways. Dan actually took one of
these suggestions to the executives of a major NY bank. Why, he said,
can’t a credit card record and automatically react in accordance with
pre-committed spending patterns. When you exceed your chosen limit
(which might be spending category specific) for instance, it would
decline more charges, or generate an email reporting your errant ways
to your spouse. He reports that the executives listened and thought it
was a good idea but never called him back. I would pay cash for a
recording of the conversation they had after he left.

There are lots of other approaches to controlling procrastination of
course. We’ll talk more about these later in the year. I confess that
this is a trait I personally fight. Let me just make two
recommendations other than pre-commitment. One is the time management
tool suite called “Getting Things Done” popularized by David Allen, or
alternately an approach which you can find described in a book called
“Making Work Work.” Julie Morgenstern.

Chapter 7: The High Price of Ownership
Why We Overvalue What We Have

Do you know of anyone whose house stays on the market not just for
months but for years? How about somebody who’s been driving around
with a “For Sale” sign in their car window long enough for you to
think it might actually be an accessory? What these folks have in
common is a valuation of what they are offering that does not match
the value in among the people to whom they are making the offer. These
are two quick examples but it turns out there are lots of other ways
in which we tend to overestimate the market value of the things we
own. It’s been called the investment effect. It might be because we
price in the positive feelings we have derived from owning the object
(we took such great family outings in that car) in ways that are
irrelevant to potential buyers. It may be that we experience the
parting with the object as a loss that prices in those good feelings
and it is well demonstrated that we have a tendency to avoid loss that
exceeds our desire for gains even at constant expected value. I’m not
sure Dan adds a lot new on this topic, although it is certainly a way
in which we evidence irrational consumer behavior, except an
experiment based on a rather peculiar basketball ticketing process at
Duke. None the less, this is useful stuff to be reminded of from time
to time.

I must admit that although one of my nephews is on faculty there, I
had not heard of Duke’s peculiar way of rationing basketball tickets
for important games. I won’t go through the whole thing hear – it’s a
pleasure left for the reader – but suffice it to say that it’s a multi-
day process that involves camping out and jumping through the odd hoop
and that process just gets you into a lottery for a ticket. Dan, who
did his Ph.D. there, and a colleague from INSEAD, contacted folks who
had gotten tickets and those who hadn’t and tried to arrange sales.
All had demonstrated the fervent desire to go to the game by
participating in the ritual described but, while those that had gotten
tickets said they would sell them for (on average) $2400, those who
hadn’t gotten them would only agree to pay (on average) $175.

This effect of ownership, even if it’s temporary (”FREE!! 10 day home
trial”, “return it without charge if you’re not satisfied”) or virtual
(how dare that idiot outbid me for my watch) is quite general.
Merchandisers use it to their advantage all the time. As with many of
these chapters, Dan’s point is, knowing that this effect is real,
examine your behavior when you get in these situations. So doing you
can avoid much frustration and avoid being manipulated into making
decisions that are not really in your best interest.

Chapter 8. Keeping Doors Open
Why Options Distract Us from Our Main Objective

I’m a big options fan. I like real options thinking and have seen it
used to generate real value in R&T environments. I was, therefore, not
wild when I read this title. Was there something fundamentally wrong
with my attachment to options? Well, let’s take a couple of famous
examples. The oldest comes from Sun Tsu in the world’s oldest job
application, “The Art of War,” written in the 6th century BC. I know
I’ve talked about this book before and I assure you I will talk about
it again. If you haven’t read it yet make it next on your list. Master
Tsu advises generals: “do not attack an enemy that has his back to a

and further
“do not thwart an enemy retreating home. If you surround the enemy,
leave an outlet; do not press an enemy that is cornered.

Such cornered foes are too formidable. Exploiting this same dynamic he
advises: Throw your soldiers into positions whence there is no escape,
and they will prefer death to flight. If they will face death, there
is nothing they may not achieve. Officers and men alike will put forth
their uttermost strength. Soldiers when in desperate straits lose the
sense of fear. If there is no place of refuge, they will stand firm.
If they are in hostile country, they will show a stubborn front. If
there is no help for it, they will fight hard.”

Indeed, Xiang Yu, in 210 BC, exploited this in Cortez and, doubtless,
many more. Having crossed the Yangtze, he burned his boats and had all
the cooking pots destroyed. Win or die; a clear message for the troops
and one that cleared their minds and free up assets from having to
protect those assets.

As always, Dan and some colleagues run some experiments on students.
They design several computer games in which players had 100 “clicks”
which they could use to choose one of three rooms and once in a room
click to get cash. Different rooms give different pay-offs and
generally people figured out pretty quickly which room paid the most
per click and then spent their time in that room. However, when the
game was changed such that rooms that hadn’t been visited in some
prescribed number of clicks disappeared, players would go back and
click on those rooms to keep them available even though it cost (on
average) 15% of their earnings.

This chapter makes the point that options can serve as distraction as
well as valuable alternatives. Olympic athletes are seldom concert
violinists. Mastery and focus often turn in better results than trying
to be all things to all people. My undergraduate honors advisor was,
and likely is still, a complete success as a chemist. When, as a
graduate student, I took his advanced organic synthesis course, I felt
like I was taken to the top of a tall mountain and shown the vast
landscape of chemical synthesis. He achieved that mastery as the
result of considerable focus. “George,” he said to me at one point,
“you should be spending 80% of your waking hours at the bench.”

This sort of behavior is contrary to much of what our culture offers
us today. Our environment bombards us with variety. You can know more
and more about more with just a few clicks of a mouse. Failure to be
well-rounded is viewed as a significant deficit. On the other hand,
the person who tries to do too many things can end up never doing any
one of them well enough to have impact. Like most things, of course,
there are two ways to get this wrong. Being monomaniacal may have its
benefits but it comes at a price. Having strong family relationships,
for example, can buffer you from the occasional bad days you may
experience at work.

There is another interesting aspect of the sometimes bewildering array
of choices that confronts us; a retreat to systems in which less
choice is allowed. The power and even ascendancy of authoritarian
regimes and rigid philosophical systems are sometimes viewed as
reactions to the world’s increasing complexity. Hardly a new idea,
“Escape from Freedom,” by the philosopher Eric Fromm is probably the
best treatment on the topic. However Dan has an interesting slant,
pointing out that increasing the complexity of a decision makes it
more likely that decision makers will rely on external (hence
manipulable) cues.

While it would be a mistake for us to fail to exploit options thinking
and the development of options for our business and personal lives,
trying to do too many things at once is a clear route to failure.

Chapter 9: The Effect of Expectations
Why The Mind Gets What It Expects

We all know that our expectations affect our experiences. Generally
however, since we are aware of this tendency we “smart people” think
we set that aside for the most part. In this chapter Dan describes a
number of experiments that he performed as well as a number of
experiments by others that point out just how subtle and persuasive
our expectations are.

Setting up shop in the “Muddy Charles,” the pub in MIT’s Walker
Memorial Building, he and collaborators started handing out free
samples of beer. Students were given samples of two types and then
asked to choose which of these they’d like a larger glass. The beers
started with the same brew but a few drops of balsamic vinegar were
added to one. (They actually started with Budweiser but some folks
“objected to calling Budweiser beer” so they switched to Sam Adams.)
They measured how many people ordered each of the samples and then
asked people to describe what they thought about the new beer. Some of
these folks were not told what the difference between the two beers
was, some were told about the vinegar before they tried it and some
were told after. Guess what happened. When they got the information
actually changed their rating of the experimental suds. Knowing it
contained vinegar beforehand changed their described experience when
doing the taste test.

There’s actually a lot more to this experiment and Dan presents a
number of other experiments including some employing functional MRI.
Here in a version of the classic Coke-v-Pepsi challenge it can be
demonstrated that at a brain activity level the experience of drinking
one as opposed to the other id modified by knowledge of which they
were drinking

By far the most interesting examples – and I really can’t bring myself
to spoil the fun you’ll have reading them – have to do with
stereotypes. Especially interesting are those dealing with groups to
whom several “conflicting” stereotypes can be applied. In these case
preconditioning the subjects with certain words chosen to “remind”
them of one or the other of these produced behavior that reflected the
provoked stereotype. You’ve just got to read this stuff trust me.

Chapter 10. The Power of Price
Why a 50 Cent Aspirin Can Do What a Penny Aspirin Can’t

We all know about the placebo effect; that wild and wonderful way in
which our mind affects our perception of, and in some cases our real
experience of the healing effects of one medication or the other. It’s
sort of an extension of the last chapter’s theme; the mind gets what
it expects. You’ll remember that Dan spent a long time in a hospital
burn unit recovering from a serious accident he’d had while training
for the IDF, well you won’t be surprised that he had a lot of time to
think about the placebo effect.

As part of his investigations into the perception of pain, as a newly
minted asst prof, he bought a vice and would crush people’s fingers in
it and ask them things like:

“How much did that hurt?”
“How much would I have to pay you to let me do that to you again?”

(You just can’t make this stuff up!) In this chapter he explores some
aspects of the economic side of the placebo effect. He has
experimenters pose as representatives from a drug company. They gave
people a series of electrical shocks of varying magnitude, asked them
about the pain they experienced. Next they were given a pain reliever,
well vitamin C actually, but they were told either that it was a new
and expensive one or a cheap one. When the shocks were repeated guess
what? Those who thought they were getting the high-priced stuff
reported that it worked pretty well, and much better than the folks
who got the cheap stuff. (Now let’s review what this means for the
spiraling costs of US health care.) By the way, the more recently the
folks had had experience with significant pain the better it worked.
As usual he did a number of experiments like this and I won’t spoil
you fun.

There are two sorts of implications he explores that are worth our
thought. First, how general is this phenomenon? It certainly applies
to food and drink, to cars to a whole lot of things. Does that mean
that we are manipulated into paying higher prices for goods that are
essentially equivalent to lower price alternatives? Would we be better
off if we brought this into our conscious mind as we decide whether
the most recent genes are worth it?

The next thing he brings up is really an ethical question. He cites
several examples where surgical procedures were found to produce no
better results than sham operations. A patient who thinks he or she
received one of these surgical procedure reports just as much benefit
as someone who actually had the procedure. While the medical community
wasn’t actually intending the procedures benefits to derive from the
placebo effect it turns out that’s exactly what happened. There is
also the less dramatic exploitation of the effect that many doctors
practice when they prescribe antibiotics for colds and sore throats,
the vast majority of which are viral. They prescribe, patients get
better and the offending microbe was not at all affected by the active
ingredient. It, of course, turns out, that in some instances at least,
people treated with placebos actually do get better faster than those
untreated. There will be some Nobels given out for figuring out
exactly how that works. So, the interesting ethical questions Dan
brings up are, knowing the placebo effect is real, should doctors use
in intentionally and if so how and when? Also if we want to protect
people from unnecessary surgery do we have an obligation to test
surgical procedures against sham surgery in humans?

Like I have said all along, this book is worth the time, even more for
the questions than for the answers.

Chapter 11: The Context of Our Character, Part 1
Why We Are Dishonest, and What We Can Do About It

Dan starts this chapter with some interesting observations. I haven’t
independently confirmed them but I’m willing to give him the benefit
of the doubt and assume they’re right.

Total loss due to robbery                                   $525M
Average loss per robbery                                $1,300
Total loss to robbery, burglary,
larceny-theft and auto theft                                 $16B
Workplace loss to theft and fraud                   $600B
Loss from fraudulent insurance claims            $24B
Underpayment of income tax (per IRS)         $350B
Fraudulent clothing returns to retail outlets    $16B

Do we think about the people who perpetrate these crimes differently?
In our most fundamentalist moments we’d say no. A theft is a theft.
But do we actually act that way as a society? Let’s change tacks. Does
the self concept of the guy or gal walking out of work with a package
of Post-It™ notes differ fundamentally from the folks speeding away
from the convenience store they’ve just knocked over? How about the
person who keeps the extra cash when they’ve been given too much
change? If we judge by how much attention and cash we pay to catch the
perpetrators and the answer seems clear. Does the amount of loss due
to the actions of people we do not generally think of as criminals
mean that many “honest” people cheat? Bring on the experiments!

Dan and a number of collaborators do a number of varieties of one
experimental theme using his favorite subjects, college students from
around the country. The basic outline of the experiment is as follows.
A control group is established by giving a group of students some
timed test (50 general information questions, 15 math problems,…) and,
allowing them no way to cheat, grade their papers paying them $0.10
per correct answer. The next group has to transfer their answers from
their work sheet to a grid on which the correct answers are
highlighted and they are to write at the top of the grid sheet how
many answers they got correct. The worksheet and the grid are handed
to the experimenter who them pays the student $0.10 for every correct
answer he or she claimed. Another group was treated the same as the
previous but then told to shred their worksheet and grid and then
simply tell the experimenter how many answers they had gotten right at
which point the experimenter paid them as before. A final group tested
as before, was told to shred their worksheet and grid and simply take
the correct amount of money from a jar containing about $100. Guess
what happened and write down your guess.

No really don’t look, guess first. The second experimental group,
which had handed in their work sheet and grid sheet, cheated by about
10%. How about the other groups? Have you got your guess recorded?

They cheated by about the same amount. Even when they could have
simply taken all the money the students cheated just a little. And it
wasn’t the case that there were a few bad apples that drove the
results. The means for the group shifted but the distribution remained
the same. Apparently we are pretty good at rationalizing small amounts
of dishonesty.

Now, same experiment (including the shredding of the work sheet and
the grid) but now the experimental groups are asked to do a little
memory test or given a verbal reminder before the test. One group was
asked to write down a list of 10 books they had read in high school,
another was asked to write down as many of the 10 commandments as they
could remember, a group at Princeton was told that this test was
governed by Princeton’s storied honor code, yet another was told that
the tests were governed by MIT’s honor code (there is, by the way, no
such thing). Have you guessed what happened?

In all of the groups asked to remember something that reminded them of
an ethical benchmark no one cheated. Now these are successful college
students at some of the best schools in the country so you’d hope
they’d had some underpinning in ethics, and of course there was little
at stake so we could expect different results in different groups and
among these groups in different contexts, nonetheless this experiment
is striking. Simply being recently reminded that there is a difference
between ethical and unethical conduct changed their behavior. Dan
draws the comparison with the codes of conduct to which professions of
varying sorts used to ascribe. He asserts that as the professional
societies and identities have become weaker forces in the practice of
their respective crafts, we have passed that boundary he talked about
earlier from the arena of social norms to that of market norms with a
concomitant cost to society.

Unsurprisingly there’s a lot more to this chapter and, as always, I do
not want to spoil the fun you’ll have when you read the book yourself.
But I think that there’s enough here to provoke discussion. If most
“good, honest” people cheat a little what does that say about society
as a whole and how might we actually promote a turn to more ethical
behavior, or has that die been cast?

Chapter 12: The Context of Our Character, Part 2
Why Dealing With Cash Makes Us More Honest

The fundamental finding Dan reports here is encapsulated in the title.
He finds that, in his experiments, people are less likely to steal
cash than they are to run off with non-monetary instruments. Again, he
cites a number of experiments, but the sense of the lot can be summed
up in just one. When he put 6 packs of Coke in MIT dorms they all
disappeared in 72 hours. When instead, he put 6 one dollar bills in
the same refrigerators they all survived. In his usual fashion he
explored just how close to case you had to be to see this effect. If
they were given tokens that you nearly instantly exchanged for cash
would it increase cheating (yes it turns out)?

This is one of his most broadly provocative points. If tokens increase
cheating, how about even more abstract instruments?
* How about credit cards – lots of cheating there
* How about the anonymity granted by the net – lots of cheating
* How about stock options – lots of back dating there
* How about cooking the books – lots of cheating there

It seems really likely that Jeff Skilling and Ken Lay would likely
never simply have mugged folks and taken their cash, but somehow
cooking the books was OK. There is clearly, at least for some folks, a
mechanism which allows the incremental dishonesty to creep in without
triggering our “If I do this I’ll be a bad person,” alarm.

On the whole I find this chapter a little depressing. It certainly
points out some things that, if they are truly extensible, should make
us have significant reservations about the increasing abstraction of
vessels of monetary exchange, a trend likely to continue. So I am left
at the end of this chapter with a dilemma I seldom faced in this book,
disquiet with no obvious remedy. I can more carefully examine my own
behavior and I can become more protective in my use of non-cash
instruments but the entire chapter begs for broader experimentation.
I’ll leave you with a quotation from HL Mencken. If you don’t know his
work, dabble some in it. It’s an excellent source for uncomfortable

“The difference between a moral man and a man of honor is that the
latter regrets a discreditable act, even when it has worked and he has
not been caught. “
– H. L. Mencken, ‘Prejudices: Fourth Series,’ 1924

Chapter 13: Beer and free lunches
What Is Behavioral Economics, And Where Are The Free Lunches?

There’s an old joke in economics – two economists are walking down the
street and they see a $20 bill on the ground. One begins to bend over
to reach for it, the other stops him saying, “If that were a real $20
bill someone would have already picked it up.”

OK – so there’s a lot of the standard model in a nutshell. It’s sort
of like that classic statement of the second law of thermodynamics,
“you can never win, you can, at best, break even.” There are several
more sets of experiments described in this chapter of course. These
focus on restaurants, people’s behavior in ordering food and beer (a
recurring theme) and their satisfaction with the outcomes. It turns
out that people order different things if they are the first or last
in a group to order. The orders previously given by group members
influence what the remaining members order. You can easily imagine at
least two ways that might happen, a drive toward conformity or a drive
toward displaying uniqueness, I’m not going to spoil your fun by
describing the experiments and the details of the results. Generally,
however, it turns out that you are likely to enjoy your selection more
if you make up your own mind and stick to it. This is, then, a source
of a free lunch. Having information about largely subliminal process
that influence your decision making can allow you to escape the traps
such processes help us fall into. So, order what you like and enjoy it
more. The extra enjoyment is free.

Indeed the real point of the majority of this fun book is just that:
don’t blindly believe that economic rationality prevails at all times.
Study real behavior, make the invisible processes visible to you and
stop being the tool of others – this is the real free lunch. Felix qui
potuit rerum cognoscere causas!

Dan Ariely
email : dan [at] predictablyirrational [dot] com / ariely [at] mit [dot] edu /
dandan [at] duke [dot] edu



RYSSDAL: Given our motives for revenge, is there a way that Congress
can shape a bill that’s going to make it acceptable to people whose
constituents really want to punish Wall Street?

ARIELY: Yes. So I think we need to include revenge in the bill. There
was discussion about capping CEO salaries, which I think went a small
way into revenge. But I think there are two ways to include revenge in
the bill. One way is to say every time we are going to nationalize
something, we are going to take the stock option of these people in
these banks, right? We will make them pay for nationalizing it. That’s
one approach. The second approach is to build into the system future
revenge. So another thing we can do is we can decide that the bill
will actually force us to create a new code of punishment for people
on Wall Street. And we have an opportunity here, with a meltdown
that’s so dramatic, that we feel that there is a need to go back and
try and reshape the whole system. And that might actually be very,
very useful in the long term.


by Daniel Kahneman

Many people think of economics as the discipline that deals with such
things as housing prices, recessions, trade and unemployment. This
view of economics is far too narrow. Economists and others who apply
the ideas of economics deal with most aspects of life. There are
economic approaches to sex and to crime, to political action and to
mass entertainment, to law, health care and education, and to the
acquisition and use of power. Economists bring to these topics a
unique set of intellectual tools, a clear conception of the forces
that drive human action, and a rigorous way of working out the social
implications of individual choices. Economists are also the
gatekeepers who control the flow of facts and ideas from the worlds of
social science and technology to the world of policy. The findings of
educators, epidemiologists and sociologists as well as the inventions
of scientists and engineers are almost always filtered through an
economic analysis before they are allowed to influence the decisions
of policy makers.

In performing their function as gatekeepers, economists do not only
apply the results of scientific investigation. They also bring to bear
their beliefs about human nature. In the past, these beliefs could be
summarized rather simply: people are self-interested and rational, and
markets work. The beliefs of many economists have become much more
nuanced in recent decades, and the approach that goes under the label
of “behavioral economics” is based on a rather different view of both
individuals and institutions. Behavioral economics is fortunate to
have a witty guru—Richard Thaler of the University of Chicago Business
School. (I stress this detail of his affiliation because the Economics
Department of the University of Chicago is the temple of the “rational-
agent model” that behavioral economists question.) Expanding on the
idea of bounded rationality that the polymath Herbert Simon formulated
long ago, Dick Thaler offered four tenets as the foundations of
behavioral economics:

Bounded rationality
Bounded selfishness
Bounded self-control
Bounded arbitrage

The first three bounds are reasonably self-evident and obviously based
on a plausible view of the psychology of the human agent. The fourth
tenet is an observation about the limited ability of the market to
exploit human folly and thereby to protect individual fools from their
mistakes. The combination of ideas is applicable to the whole range of
topics to which standard economic analysis has been applied—and at
least some of us believe that the improved realism of the assumption
yields better analysis and more useful policy recommendations.

Behavioral economics was influenced by psychology from its inception—
or perhaps more accurately, behavioral economists made friends with
psychologists, taught them some economics and learned some psychology
from them. The little economics I know I learned from Dick Thaler when
we worked together 25 years ago. It is somewhat embarrassing for a
psychologist to admit that there is an asymmetry between the two
disciplines: I cannot imagine a psychologist who could be counted as a
good economist without formal training in that discipline, but it
seems to be easier for economists to be good psychologists. This is
certainly the case for both Dick and Sendhil Mullainathan—they know a
great deal of what is going on in modern psychology, but more
importantly they have superb psychological intuition and are willing
to trust it.

Some of Dick Thaler’s most important ideas of recent years—especially
his elaboration of the role of default options and status quo bias—
have relied more on his flawless psychological sense than on actual
psychological research. I was slightly worried by that development,
fearing that behavioral economics might not need much input from
psychology anymore. But the recent work of Sendhil Mullainathan has
reassured me on this score as well as on many others. Sendhil belongs
to a new generation. He was Dick Thaler’s favorite student as an
undergraduate at Cornell, and his wonderful research on poverty is a
collaboration with a psychologist, Eldar Shafir, who is roughly my
son’s age. The psychology on which they draw is different from the
ideas that influenced Dick. In the mind of behavioral economists,
young and less young, the fusion of ideas from the two disciplines
yields a rich and exciting picture of decision making, in which a
basic premise—that the immediate context of decision making matters
more than you think—is put to work in novel ways.

I happened to be involved in an encounter that had quite a bit to do
with the birth of behavioral economics. More than twenty-five years
ago, Eric Wanner was about to become the President of the Russell Sage
Foundation—a post he has held with grace and distinction ever since.
Amos Tversky and I met Eric at a conference on Cognitive Science in
Rochester, where he invited us to have a beer and discuss his idea of
bringing together psychology and economics. He asked how a foundation
could help. We both remember my answer. I told him that this was not a
project on which it was possible to spend a lot of money honestly.
More importantly, I told him that it was futile to support
psychologists who wanted to influence economics. The people who needed
support were economists who were willing to be influenced. Indeed, the
first grant that the Russell Sage Foundation made in that area allowed
Dick Thaler to spend a year with me in Vancouver. This was 1983-1984,
which was a very good year for behavioral economics. As the Edge
Sonoma session amply demonstrated, we have come a long way since that
day in a Rochester bar.



Daniel Kahneman
email : kahneman [at] princeton [dot] edu

Sendhil Mullainathan
email : mullain [at] fas.harvard [dot] edu

Richard H. Thaler
email : richard.thaler [at] chicagogsb [dot] edu

Cass R. Sunstein
email : csunstei [at] law.harvard [dot] edu


“Libertarian Paternalism: Not an oxymoron. Libertarian paternalism is
a relatively weak, soft, and non-intrusive type of paternalism where
choices are not blocked, fenced off, or significantly burdened. A
philosophic approach to governance, public or private, to help homo
sapiens who want to make choices that improve their lives, without
infringing on the liberty of others. Addendum to skeptics: It is not
pledge for bigger government, just for better governance.”

Richard Thaler has led a revolution in the study of economics by
understanding the strange ways people behave with their money.
by Roger Lowenstein  /  11 February 2001

It is possible that Richard Thaler changed his mind about economic
theory and went on to challenge what had become a hopelessly dry and
out-of-touch discipline because, one day, when a few of his supposedly
rational colleagues were over at his house, he noticed that they were
unable to stop themselves from gorging on some cashew nuts he’d put
out. Then again, it could have been because a friend admitted to
Thaler that, although he mowed his own lawn to save $10, he would
never agree to cut the lawn next door in return for the same $10 or
even more. But the moment that sticks in Thaler’s mind occurred back
in the 1970’s, when he and another friend, a computer maven named Jeff
Lasky, decided to skip a basketball game in Rochester because of a
swirling snowstorm. “But if we had bought the tickets already, we’d
go,” Lasky noted. “True — and interesting,” Thaler replied.

Thaler began to make note of these episodes — anomalies, he called
them — and to chalk them up on his blackboard at the University of
Rochester, where he was a young, unheralded and untenured assistant
professor. Each of these stories was at odds with neoclassical
economics as it was taught in graduate schools; indeed, each was a
tiny subversion of the prevailing orthodoxy. According to accepted
economic theory, for instance, a person is always better off with more
rather than fewer choices. So why had Thaler’s colleagues roundly
thanked him for removing the tempting cashews from his living room?
The lawn example was even more troubling. Perhaps you dimly remember
from Economics 101 that unlovely term, “opportunity cost.” The idea,
as your pointy-headed prof vainly tried to persuade you, is that
forgoing a gain of $10 to mow a neighbor’s lawn “costs” just as much
as paying somebody else to mow your own. According to theory, you
either prefer the extra time or the extra money — it can’t be both.
And the basketball tickets refer to “sunk costs.” No sense going to
the health club just because we have paid our dues, right? After all,
the money is already paid — sunk. And yet, Thaler observed, we do.
People, in short, do not behave like the pointy heads say they should.

In the ordered world of economics, this rated as a heresy on the scale
of Galileo. According to the standard or neoclassical school
(essentially a 20th-century updating of Adam Smith), people, in their
economic lives, are everywhere and always rational decision makers;
those who aren’t either learn quickly or are punished by markets and
go broke. Among the implications of this view are that market prices
are always right and that people choose the right stocks, the right
career, the right level of savings — indeed, that they coolly adjust
their rates of spending with each fluctuation in their portfolios, as
though every consumer were a mathematician, too. Since the 1970’s,
this orthodoxy has totally dominated the top universities, not to
mention the Nobel Prize committee.

Thaler spearheaded a simple but devastating dissent. Rejecting the
narrow, mechanical homo economicus that serves as a basis for
neoclassical theory, Thaler proposed that most people actually behave
like . . . people! They are prone to error, irrationality and emotion,
and they act in ways not always consistent with maximizing their own
financial well being. So serious was Thaler’s challenge that Merton
Miller, the late Nobelist and neoclassical deity, refused to talk to
him; Thaler’s own thesis adviser lamented that he had wasted a
promising career on trivialities like cashews. Most economists simply
ignored him.

But the anomalous behaviors documented by Thaler and a band of fellow
dissenters, including Yale’s Robert Shiller and Harvard’s Lawrence
Summers, Clinton’s last treasury secretary, have grown too numerous to
ignore. And the renegades, though still a minority, have embarked on a
second stage: an attempt to show that anomalies fall into recognizable
and predictable patterns. The hope is that by illuminating these
patterns, behavioral economics, as it has come to be called, will
yield a new understanding of the economy and markets. Behaviorism,
says Daniel McFadden, the recent Nobel laureate, “is a fundamental re-
examination of the field. It’s where gravity is pulling economic

Thaler, after years of being shunned, is now a popular, highly paid
professor at the University of Chicago Graduate School of Business,
the traditional nerve center of neoclassicism. His increasing
following is owed in no small part to the fact that behaviorism,
unlike so much of economics, is fun. Although prewar economists like
John Maynard Keynes were literary artists, most writing in the field
since the 70’s has been obtuse and highly mathematical, all but
inaccessible to the lay person. By contrast, Thaler’s papers are rich
with intuitive gems drawn from sports, business and everyday life. In
one paper, he pointed out that people go across town to save $10 on a
clock radio but not to save $10 on a large-screen TV. It’s a seemingly
obvious point — and also a direct contradiction of rationalist

Thaler loves pointing out that not even economics professors are as
rational as the guys in their models. For instance, a bottle of wine
that sells for $50 might seem far too expensive to buy for a casual
dinner at home. But if you already owned that bottle of wine, having
purchased it earlier for far less, you’d be more likely to uncork it
for the same meal. To an economist (a sober one, anyway) this makes no
sense. But Thaler culled the anecdote from Richard Rosett, a prominent

A thickset man of 55, Thaler has a sharp wit and a voluble ego. Many
assume that his years in the academic wilderness have made him
defensive; Thaler denies it. “The last thing I want to do is to sound
embittered about having to struggle,” he told me, easing his Audi
around Lake Michigan toward the Gothic stone campus. But Thaler
doesn’t so much debate opponents; he skewers them. The British
economist Ken Binmore once proclaimed at a seminar that people evolve
toward rationality by learning from mistakes. Thaler retorted that
people may learn how to shop for groceries sensibly because they do it
every week, but the big decisions — marriage, career, retirement —
don’t come up that often. So Binmore’s highbrow theories, he
concluded, were good for “buying milk.”

I met Thaler two days after the election, and he was already
predicting that the country would be willing to accept Bush as the
winner, because “people have a bias toward the status quo.” I asked
how “status-quo bias” affects economics, and Thaler observed that
workers save more when they are automatically enrolled in savings
programs than when they have to choose to participate by, say,
returning a form. Standard theory holds that workers would make the
most rational decision regardless.

Savings is an area where Thaler thinks he can have a big impact. Along
with Shlomo Benartzi, a collaborator at U.C.L.A., Thaler cooked up a
plan called Save More Tomorrow. The idea is to persuade employees to
commit a big share of future salary increases to their retirement
accounts. People find it less painful to make future concessions
because pain deferred is, to an extent, pain denied. Therein lies the
logic for New Year’s resolutions. Save More Tomorrow was tried with a
Chicago company, and workers tripled their savings within a year and a
half — an astounding result. “This is big stuff,” Thaler says. He is
shopping the plan around to other employers and predicts that
eventually it could help raise the country’s low savings rate.

Though Thaler, who comes across as a middling, Robert Rubin-style
Democrat, plays down the connection, such results could provide
ammunition to liberals who think government bashing has gone too far.
Since the Reagan era, a mantra for office seekers is that people know
what is best for themselves. Generally, yes; but what if not always,
and what if they err in predictable ways? For instance, Thaler has
found that the number of options on a 401(k) menu can affect the
employees’ selections. Those with a choice of a stock fund and bond
fund tend to invest half in each. Those with a choice of three stock
funds and one bond fund are likely to sprinkle an equal amount of
their savings in each, and thus put 75 percent of the total in stocks.
Such behavior illustrates “framing” — decisions being affected by how
choices are positioned. Political pollsters and advertisers have known
this for years, though economists are just coming around.

Framing has big implications for the debate on privatizing Social
Security. Neoclassicists say that people should manage their own
retirement accounts, and that the more choices they have the better.
Thalerites are not so sure. “If Thaler is right, it makes the current
dogmatic antipaternalism really doubtful,” says Cass Sunstein, a
prominent legal scholar at the University of Chicago.

Thaler, who grew up in Chatham, N.J., the son of an actuary, wrote his

doctoral thesis at the University of Rochester on the economic “worth”
of a human life (public planners tackle this morbid theme frequently,
for instance, in determining speed limits). Thaler conceived a clever
method of calculation: measuring the difference in pay between life-
threatening jobs like logging and safer lines of work. He came up with
a figure of $200 a year (in 1967 dollars) for each 1-in-1,000 chance
of dying.

Sherwin Rosen, his thesis adviser, loved it. Thaler did not. He had
been asking friends about it, and most insisted that they would not
accept a 1-in-1,000 mortality risk for anything less than a million
dollars. Paradoxically, the same friends said they would not be
willing to forgo any income to eliminate the risks that their jobs
already entailed. Thaler decided that rather than rationally pricing
mortality, people had a cognitive disconnect; they put a premium on
new risks and casually discounted familiar ones.

For a while, Thaler regarded such anomalies as mere cocktail-party
fodder. But in 1976 he happened upon the work of two psychologists,
Daniel Kahneman and the now-deceased Amos Tversky, who had been
studying many of the same behaviors as Thaler. The two had noticed a
key pattern: people are more concerned with changes in wealth than
with their absolute level — a violation of standard theory that
explained many of Thaler’s anomalies. Moreover, most people are “loss
averse,” meaning they experience more pain from losses than pleasure
from gains. This explains why investors hate to sell losers. For
Thaler, their work was an epiphany. He wrote to Tversky, who plainly
encouraged him. “He took me seriously,” Thaler recalled, “and because
of that, I started taking it seriously.”

Thaler began designing experiments to test his ideas. In one, Thaler
told lab subjects to imagine they are stranded on a beach on a
sweltering day and that someone offers to go for their favorite brand
of beer. How much would they be willing to pay? Invariably, Thaler
found, subjects agree to pay more if they are told that the beer is
being purchased from an exclusive hotel rather than from a rundown
grocery. It strikes them as unfair to pay the same. This violates the
bedrock principle that one Budweiser is worth the same as another, and
it suggests that people care as much about being treated fairly as
they do about the actual value of what they’re paying for. Although
“fairness” is generally ignored by neoclassicists, it’s probably a
reason why companies do not lower salaries when they encounter tough
times — perversely, laying off workers is considered more fair.

Thaler’s first paper on anomalies was rejected by the leading economic
journals. But in 1980, a new publication, The Journal of Economic
Behavior and Organization, was desperate for copy, and Thaler’s
“Toward a Positive Theory of Consumer Choice” saw the light of day. “I
didn’t have any data,” he admits. “It was stuff that was just true.”

The response from fellow economists was zero. But the article
eventually caught the eye of Eric Wanner, a psychologist at the Alfred
P. Sloan Foundation in New York. Wanner was itching to get economists
and psychologists talking to one another, and Thaler took the bait.
“He was the first economist who thought hard about the implications
for economics,” Wanner says. “The reaction of mainstream economists
was defensive and hostile. They considered it an attack — an
apostasy.” Wanner, who became president of the Russell Sage
Foundation, started financing behavioral economics, and Thaler became
the informal leader, organizing seminars and summer workshops. In
effect, he turned an idea into a movement. “Dick was like a taxonomist
who goes out and collects embarrassing specimens,” Wanner says. “He
learned that to get anyone to pay attention to him he had to develop a
portfolio of facts that he could be entertaining about and that
economists couldn’t sweep under the rug.”

Thaler’s most original contribution was “mental accounting” — an
extension of Kahneman and Tversky’s “framing” principle. “Framing”
says the positioning of choices prejudices the outcome. “Mental
accounting” says people draw their own frames, and that where they
place the boundaries subtly affects their decisions. For instance, a
poker player who accounts for each day separately may become bolder at
the end of a winning night because he feels he is playing with “house
money.” If he accounted for each hand separately, he would play the
first and last hands the same.

Most people sort their money into accounts like “current income” and
“savings” and justify different expenditures from each. They’ll gladly
blow their winnings from the office football pool, a “frivolous”
account, even while scrupulously salting away every penny of their

Thaler and a trio of colleagues went on to document that cabdrivers
stop working for the day when they reach a target level of income.
(Each day’s “account” is separate.) This means that — quite
nonsensically — they work shorter hours on more lucrative days, like
when it’s raining, and longer hours on days when fares are scarce! In
a sense, investors who pay attention to short-term fluctuations are
like those cabbies; if they toted up their stocks less frequently,
they would be better investors. Thaler went so far as to suggest to an
audience at Stanford that investors should be barred from seeing their
portfolios more than once every five years.

Such irreverence reinforced the view among economists that Thaler
could be safely ignored. His anecdotes were fuzzy science, they said,
and examples like the cabbies were easy pickings. Since there is no
way for a third party to profit from a cabbie’s mistake, it’s not
surprising that he would make one. Thaler knew the criticism had
merit, and that to be taken seriously, he had to demonstrate
irrationalities in financial markets, which are the purest embodiment
of neoclassicism. In the markets, one person’s bad decision can be
offset by someone else’s smart one. Across the markets, rationality
should reign.

Thaler set out to prove that it did not. His first effort, a 1985
paper with Werner De Bondt, his doctoral student, showed that stocks
tend to revert to the mean — that is, stocks that have outperformed
for a sustained period are likely to lag in the future and vice versa.
This was a finding that Chicago School types couldn’t ignore —
according to their theory, no pattern can be sustained, since if it
did, canny traders would try to profit from it, correcting prices
until the pattern disappeared.

Then, in 1987, Thaler was hired to write a regular Anomalies column
for a new economics journal, giving him a widespread audience among
his peers. That same year, the stock market crashed 23 percent on a
single day. Thaler could hardly have imagined better proof that the
market was not, well, perfectly rational. More economists began to
mine the data, and by the 90’s there was a rich literature of market
anomalies, documenting, for example, that people can consistently make
money on stocks that trade at low multiples of earnings, or on
companies that signal changes by doing things like hiking dividends.
Documenting anomalies became a popular pastime from Berkeley to

Thaler still has plenty of critics. The harshest one is right upstairs
from his office at Chicago, the curmudgeonly Eugene Fama, a longtime
advocate of the efficient-market school. “What Thaler does is
basically a curiosity item,” Fama snipes. “Would you be surprised that
every shopper doesn’t shop at the lowest prices? Not really. Does that
mean that prices aren’t competitive?”

Thaler periodically invites Fama in to his class to present the other
side, but Fama has not returned the gesture and, indeed, sounds bitter
that behavioral finance is getting so much attention. “One question
that occurs to me,” Fama says, “is, ‘How did some of this stuff ever
get published?”‘ The objection raised most often, from Fama and
others, is that if Thaler is right and the market is so screwy, why
wouldn’t more fund managers be able to beat it? A variation of this
theme is that if behavioral economics, for all its intuitive appeal,
can’t help people make money, what good is it?

Thaler, actually, is a director in a California money management firm,
Fuller & Thaler Asset Management, which, according to figures it
provided, has been beating the market handily since 1992. The firm
tries to exploit various behavioral patterns, like “categorization”:
when Lucent Technologies was riding high, people categorized it as a
“good stock” and mentally coded news about it in a favorable way.
Lately, Lucent has become a “bad stock.” But Thaler, who does not get
involved in picking stocks, stops short of suggesting that investors
versed in his research can beat the market. Mispricings that spring
from anomalies are hard to spot, he says, particularly when the people
looking for them are prone to their own behavioral quirks.

If this sounds muted, it may be because Thaler is ready to declare
victory and join the establishment. The neoclassical model, he admits,
is a fine starting point; it’s misleading only when regarded as a
perfect or all-encompassing description. People aren’t crazy, he adds,
but their rationality is “bounded” by the tendencies that Kahneman,
Tversky, himself and others have studied. What he hopes is that a
future generation will resolve the schism by building behavioral
tendencies into a new, more flexible model.

For now, Thaler is still looking for new miniature applications
wherever he can find them, like on the basketball court recently.
Thaler studied games in which a team trails by 2 points, with time
left for just one shot. What to go for, 2 points or 3? A 2-point shot
succeeds about half the time, a 3-pointer about 33 percent of the
time. But since a 2-point basket would only tie the game (and force an
overtime, in which the team has a 50-50 chance of winning), going for
a 3-pointer is a superior strategy. Still, most coaches go for 2. Why?
Because it lowers the risk of sudden loss. Coaches, like the rest of
us, do more to avoid losing than they do to win. You won’t find an
explanation for that in the mechanical homo economicus of theory. But
it has everything to do with folks Thaler thinks are much more
relevant to the economy — Homo sapiens.

From the archive, originally posted by: [ spectre ]



lèse-majesté, lese majesty:
is a French phrase (literally meaning “injured majesty”) that is
pronounced either lez MAZH-es-TAI or lez MAJ-es-tee and is spelled
usually with the grave and acute accents. Today it means “an offense
against a sovereign” or, more generally, any slight or insult that
wounds someone’s dignity. [See FOREIGN PHRASES.]

Kleptocracy (sometimes Cleptocracy) (root: Klepto+cracy = rule by
thieves) is a pejorative, informal term for a government so corrupt
that no pretense of honesty remains. In a kleptocracy the mechanisms
of government are devoted to taxing the public at large, or using
their control of government processes in order to amass substantial
personal fortunes for the rulers and their cronies (collectively,
kleptocrats), or to keep said rulers in power through redistribution


a synopsis of Chapter 14: From Egalitarianism to Kleptocracy
by Jared Diamond, speaking on levels of societal organization

“The band has 5 to 80 people, are usually related by blood, typically
nomadic, have 1 language and ethnicity, have egalitarian government
with informal leadership, no bureaucracy, no formal structures for
conflict resolution, no economic specialization (e.g., Bushmen,

The tribe has hundreds of people, often fixed settlements, consist of
kin-based clans, still 1 ethnicity and language, have egalitarian or
“big-man” government, informal and often difficult conflict resolution
problems (e.g., much of New Guinea, Amazonia).

Chiefdoms have thousands of people, have 1 or more villages possibly
with a paramount village, have class and residence relationships,
still 1 ethnicity, have centralized often hereditary rule, include
monopoly and centralized conflict resolution, justify kleptocracy and
a redistributive economy (requiring tribute), have intensive food
production, early division of labor, luxury goods, etc…. (e.g.,
Polynesia, sub-Saharan Africa, etc.)

States have over 50,000 people, have many villages and a capital, have
class and residence based relationships, 1 or more languages and
ethnicities, centralized government, many levels of bureaucracy,
monopolies of force and information, have formalized laws and judges,
may justify kleptocracy, have intensive food production, division of
labor, pay taxes, public architecture, etc.

Kleptocrats maintain power by disarming the populace and arming the
elite, making the masses happy by redistributing the tribute, keeping
order and curbing violence (compared to bands and tribes), promoting
religion and ideology that justifies kleptocracy (and that promotes
self-sacrifice on behalf of others), building public works, etc.

States are especially good at developing weapons of war, providing
troops, promoting religion (fanaticism) and patriotic fervor that
makes troops willing to fight suicidally.  States arise not just from
the natural tendency of man (as Aristotle suggested), but by social
contract, in response to needs for irrigation (“hydraulic theory”),
and regional population size.  The large populations require intensive
food production, which contributes (1) seasonal workers for other
purposes, (2) stored food surpluses which feed specialists and other
elite, (3) sedentary living.  Increased opportunities in states for
conflicts forces the development of laws.  The processes by which
states form virtually never include voluntary merger, but rather (1)
merger under threat of force (e.g., the Cherokee Indian federation),
or (2) merger by conquest (e.g., the Zulus)–when population density
is high, the defeated men are often killed and the women taken in

Jared Diamond
email : jdiamond [at] geog [dot] ucla [dot] edu


‘I am re-reading Guns, Germs, and Steel by Jared Diamond and just
finished his chapters on kleptocracy, which is, broadly, “A government
characterized by rampant greed and corruption” [from the Greek
kleptein, to steal].

Specifically, Diamond is describing the ruling class of a nation state
that transfers tribute from producers to an elite (p. 276-277, Norton
trade paperback, 2003). I was struck by Diamond’s “four solutions,”
the ones that rulers have used to gain popular support while still
maintaining power (and riches)…and how much his model could be applied
to the world’s current crop of humongously compensated CEOs.

I’m as capitalistic as any businessman. I work hard for my earnings
and don’t – mainly – begrudge others’ higher salaries. But there’s a
parallel between what Diamond’s ruling kleptocrats have done
historically and what a number of C-level executives do with their

So very briefly, I’m putting down Diamond’s four solutions, and a
corporate interpretation of each.

Disarm the populace and arm the elite. – Well, think about what the
corporations do to “disarm” their employees, like fostering dependence
on healthcare benefits; and their stockholders, like forbidding them
to ask pointed questions during shareholders’ meetings. Corporations
arm their elites with similar (but smaller) executive compensation
packages and privileges.

Make the masses happy by redistributing much of the tribute received.
– How about slightly better returns on share price, or bonuses for
workers, or giving substantially to charity? Hmmm? Aren’t these ways
of “sharing the wealth,” but not very much of it?

Use the monopoly of force to promote happiness. – In other words, the
company will fire your keister if you question its behavior. Isn’t
that what happened to several of the Enron whistle-blowers? Or, the
company will move offshore, depriving the community of much-needed
jobs (which keep employees and their families happy).

Construct an ideology or religion justifying kleptocracy. – This one’s
pretty easy if you presume that capitalism is the reason and the
justification. But since I am a capitalist myself – without the hefty
salary – I would rather offer the “ideology of corporate entitlement,”
which has been heavily displayed by Enron, HealthSouth, and a few
other companies: we’re the best, so we deserve to be able to treat you
like peasants.” This kind of attitude runs throughout a given
organization…every employee feels the same way, no matter how little
he or she is involved in corporate management.

None of this is new. Wasn’t it Al Capp who coined the phrase more than
50 years ago, “What’s good for General Motors is good for the USA?” Or
was this from the musical version?’

‘After defining kleptocracy, author Jared Diamond says that the issue
with a kleptocracy is always how to maintain it. After all, this
system of government involves a small but powerful elite exploiting a
large population. (Sadly, I am growing convinced that America
abandoned democracy for corporate kleptocracy some time ago.) Diamond
says there are four solutions to the problem of how a kleptocracy can
maintain itself. Of likely interest to you, here is #4:

“The remaining way for kleptocrats to gain public support is to
construct an ideology or religion justifying kleptocracy” (p. 277).

Religious impulses almost certainly predate civilization. However, it
appears that most kleptocracies, starting with small chiefdoms and
extending through modern national governments, have recognized the
utility of religion. Superstitious beliefs may have originated as
methods for explaining confusing natural phenomena, but it seems that
they may persist today largely because of their role in justifying
kleptocracy. Without state sponsorship through the ages, the type of
organized religion we have today would not have been possible.

Diamond does not explicitly apply this to modern politics (at least
not in what I have read so far), but I can’t resist doing so. When I
examine contemporary American politics, I see the Republican party
talking the loudest about their religiosity. Why? Because their
policies are the most kleptocratic (i.e., they favor the wealthy at
the expense of the poor). In fact, they have few qualms about
exploiting the poor and even blame them for being poor! The need to
publicly announce their religion has been less necessary for Democrats
because their policies provide a more significant benefit to the
masses. Remember I said that Diamond gives four solutions to the
problem of maintaining a kleptocracy? #2 involves the redistribution
of wealth through popular public programs, and this describes the

The points I’m making here are not new. They have been made repeatedly
throughout historical and political literature. And yet, they are not
brought up often enough in modern political discourse. While we
continue to criticize Republican efforts to merge church and state,
let us also expose why they need religion so much.’

‘Diamond sees social structure, a kleptocracy, as ultimately a factor
intrinsic to growing, settled, agricultural populations. He sees it as
inevitable. The best the oppressed can do, in Diamond’s opinion, is to
oust one group of kleptocrats for hopefully a more benevolent group of
kleptocrats; and the big questions of history were determined largely
by environmental, geographic and techological factors, not even
individual human agency. For Diamond, if you develop a settled,
agricultural society… you are inevitably headed towards an
exploitive state.

Obviously, this is a problematic view for anarchists.

I actually studied Marx’s ethnographic notebooks, and Engels. I read
Morgan. I focused in on the Iroquois, the primary example Marx, Engels
and Morgan use for a stateless communist society of
“barbarians” (though Morgan over emphasizes “the hunt” and thus makes
“savages” out of the Iroquois at the point in their history of their
lowest population in the 1800s).’

‘The obvious corollary of this theory is that most successful modern
societies are, in fact, kleptocracies. The key is to use the four
methods to gain popular support in order to redistribute as much
wealth to the ruling class as the populace will support. If the ruling
class takes too much, it will be overthrown by a new ruling class
(which’ll do ditto).

So, is the US a kleptocracy? Of course, it is! Is that bad? Well, it
depends on who you are in society, and whether the kleptocracy is
efficient and fair over the long term.’

Our President’s Statement on Kleptocracy

“For too long, the culture of corruption has undercut development and
good governance and bred criminality and mistrust around the world.
High-level corruption by senior government officials, or kleptocracy,
is a grave and corrosive abuse of power and represents the most
invidious type of public corruption. It threatens our national
interest and violates our values. It impedes our efforts to promote
freedom and democracy, end poverty, and combat international crime and
terrorism. Kleptocracy is an obstacle to democratic progress,
undermines faith in government institutions, and steals prosperity
from the people. Promoting transparent, accountable governance is a
critical component of our freedom agenda.

At this year’s G-8 meeting in St Petersburg, my colleagues joined me
in calling for strengthened international efforts to deny kleptocrats
access to our financial systems and safe haven in our countries;
stronger efforts to combat fraud, corruption, and misuse of public
resources; and increased capacity internationally to prevent
opportunities for high-level public corruption. Today, I am announcing
a new element in my Administration’s plan to fight kleptocracy, The
National Strategy to Internationalize Efforts against Kleptocracy,
which sets forth a framework to deter, prevent, and address high-
level, public corruption. It identifies critical tools to detect and
prosecute corrupt officials around the world, so that the promise of
economic assistance and growth reaches the people.

Our objective is to defeat high-level public corruption in all its
forms and to deny corrupt officials access to the international
financial system as a means of defrauding their people and hiding
their ill-gotten gains. Given the nature of our open, accessible
international financial system, our success in fighting kleptocracy
will depend upon the participation and accountability of our partner
nations, the international financial community, and regional and
multilateral development institutions. Together, we can confront
kleptocracy and help create the conditions necessary for people
everywhere to enjoy the full benefits of honest, just, and accountable

2007/09/05  /  The United States, World’s First Corporate Kleptocracy

“When Ronald Reagan said, “…government is not the solution to our
problem; government is the problem,” many people thought it would
usher in a new era of fiscal responsibility, but to the contrary,
taxes decreased, government spending increased, and the national debt
went through the roof. In fact, it took 6 of 8 years of the Clinton
administration to turn those deficits into surpluses, and then only by
virtue of the fact that the economy boomed in the 90s. But now, with
the Bush oligarchy coming to an end, we see what really became of the
Reagan’s legacy. The GOP has turned our nation into the world’s first
fully functional ‘Corporate Kleptocracy’, a government/corporate
partnership whose goal is acquire as much of the nation’s wealth as

In a traditional kleptocracy, the government directly extends the
power and wealth of the ruling class through taxes and the looting of
wealth in natural resources. The United States is no longer rich in
resources but is rich in the productivity of its workers. Our country
is also rich in geo-political influence and military might. And so we
find the Bush Administration, at almost every turn, advancing policies
that indirectly transfer wealth to the powerful by:

1) Removing regulations on, curtailing oversight of, or blocking
corrective action against predatory industries. Example: Enron and the
gaming of California’s electrical markets with FERC blocking
corrective action after the fact.

2) Creating geo-political instability designed to enhance the profits
of particular industries. Example: The Iraq War with it’s direct and
indirect benefits for the defense and petroleum industries.

3) Actively supporting inefficient, but highly profitable, corporate
service delivery systems instead of more efficient government systems.
Examples: Private insurer health care and mandatory non-governmental
retirement financing

4) Supporting predatory laws that amount to non-tax “taxes” that favor
corporations over individuals. Examples: Bankruptcy reform, medical
savings accounts, privatized social-security

5) Massive politicization of the regulatory (EPA, OSHA), investigative
(DoJ, FBI, BATF, Customs), military, and judicial functions of
government, thereby ensuring compliance that supports the other four

Sort of makes you feel like Neo in The Matrix, doesn’t it? Not a
battery…a wealth creation machine for corporations. The proof in the
stats. Real income for the majority of Americans has not increased in
7 years while corporate profits have ballooned and are, for certain
industries, at historic highs. Productivity continues to climb while
wages fall, even during a period of low inflation.

One wonders how long such a system can last since most kleptocracies
fail, bloodily, when there is no more wealth to loot. The powerful
leave, and poor fight each other for what’s left.”






Kleptocracy and Divide-and-Rule: A Model of Personal Rule
‘Many developing countries have suffered under the personal rule of
‘kleptocrats’, who implement highly inefficient economic policies,
expropriate the wealth of their citizens, and use the proceeds for
their own glorification or consumption. The incidence of kleptocracy
is a serious impediment to development. Yet how do kleptocrats
survive? How can they apparently exploit the entire citizenship of
countries and not foment successful opposition? In this research we
argue that the success of kleptocrats rests on their ability to use a
particular type of political strategy, which we refer to as ‘divide-
and-rule’. Members of society need to cooperate in order to depose a
kleptocrat. A kleptocrat, however, may defuse such cooperation by
imposing punitive rates of taxation on any citizen who proposes such a
move, and redistributing the benefits to those who need to agree to
it. Thus kleptocrats can intensify the collective action problem by
threats that remain off the equilibrium path. In equilibrium, all are
exploited and no one challenges the kleptocrat because of the threat
of divide-and-rule. The divide-and-rule strategy is made possible by
the weakness of the institutions in these societies, and highlights
the different nature of politics between strongly- and weakly-
institutionalized polities. We show that foreign aid and rents from
natural resources typically help kleptocratic rulers by providing them
with greater resources to buy off opponents. Kleptocratic policies are
also more likely to arise when opposition groups are shortsighted and
when the average productivity in the economy is low. We also find that
greater inequality between producer groups may constrain kleptocratic
policies because more productive groups are more difficult to buy

Daron Acemoglu
email : daron [at] mit [dot] edu


“The answer is a kind of corruption of the political process. Or
better, a “corruption” of the political process. I don’t mean
corruption in the simple sense of bribery. I mean “corruption” in the
sense that the system is so queered by the influence of money that it
can’t even get an issue as simple and clear as term extension right.
Politicians are starved for the resources concentrated interests can
provide. In the US, listening to money is the only way to secure
reelection. And so an economy of influence bends public policy away
from sense, always to dollars.

The point of course is not new. Indeed, the fear of factions is as old
as the Republic. There are thousands who are doing amazing work to
make clear just how corrupt this system has become. There have been
scores of solutions proposed. This is not a field lacking in good
work, or in people who can do this work well.

But a third person — this time anonymous — made me realize that I
wanted to be one of these many trying to find a solution to this
“corruption.” This man, a Republican of prominence in Washington,
wrote me a reply to an email I had written to him about net
neutrality. As he wrote, “And don’t shill for the big guys protecting
market share through neutrality REGULATION either.”

“Shill.”  If you’ve been reading these pages recently, you’ll know my
allergy to that word. But this friend’s use of the term not to condemn
me, but rather as play, made me recognize just how general this
corruption is. Of course he would expect I was in the pay of those
whose interests I advanced. Why else would I advance them? Both he and
I were in a business in which such shilling was the norm. It was
totally reasonable to thus expect that money explained my desire to
argue with him about public policy.

I don’t want to be a part of that business. And more importantly, I
don’t want this kind of business to be a part of public policy making.
We’ve all been whining about the “corruption” of government forever.
We all should be whining about the corruption of professions too. But
rather than whining, I want to work on this problem that I’ve come to
believe is the most important problem in making government work.

And so as I said at the top (in my “bottom line”), I have decided to
shift my academic work, and soon, my activism, away from the issues
that have consumed me for the last 10 years, towards a new set of
issues: Namely, these. “Corruption” as I’ve defined it elsewhere will
be the focus of my work. For at least the next 10 years, it is the
problem I will try to help solve.

I do this with no illusions. I am 99.9% confident that the problem I
turn to will continue exist when this 10 year term is over. But the
certainty of failure is sometimes a reason to try. That’s true in this

Nor do I believe I have any magic bullet. Indeed, I am beginner. A
significant chunk of the next ten years will be spent reading and
studying the work of others. My hope is to build upon their work; I
don’t pretend to come with a revolution pre-baked.

Instead, what I come with is a desire to devote as much energy to
these issues of “corruption” as I’ve devoted to the issues of network
and IP sanity. This is a shift not to an easier project, but a
different project. It is a decision to give up my work in a place some
consider me an expert to begin work in a place where I am nothing more
than a beginner.”

Lawrence Lessig
email : lessig [at] lessig08 [dot] org / lessig [at] pobox [dot] com


“Following the good practice of others, and following suggestions of
inconsistency by others, I offer the following disclosure statement.

How I make money
I am a law professor. I am paid to teach and write in fields that
interest me. Never is my academic research directed by anyone other
than I. I am not required to teach any particular course; I am never
required or even asked by anyone with authority over me to write about
a particular subject or question. I am in this important sense a free

Business Attachments
I have no regular clients. I am on board of a number of non-
profits, including EFF, FSF, PLOS, Software Freedom Law Center,
FreePress, PublicKnowledge, MusicBrainz, and Creative Commons.

I serve on no commercial boards. I don’t take stock-options to
serve on boards or advisory boards.

The Non-Corruption (NC) Principle
It is a special privilege that I have a job that permits me to say
just what I believe, and not what I’m paid to say. That freedom used
to be the norm among professionals. It is less and less the norm
today. Lawyers at one time had a professional ethic that permitted
them to say what they believe. Now the concept of “business conflicts”
— meaning, a conflict with the commercial interests of actual or
potential clients — silences many from saying what they believe.
Doctors too are hired into jobs where they are not allowed to discuss
certain medical procedures (See, e.g., Rust v. Sullivan). Researchers
at “think tanks” learn who the funders are as a first step to deciding
what questions will be pursued. And finally, and most obviously, the
same is true of politicians: The constant need to raise money just to
keep their job drives them to develop a sixth sense about what sorts
of statements (whether true or not) will cost them fundraising

With perhaps one exception (politicians), no one forces
professionals into this compromise. (The exception is because I don’t
see how you survive in politics, as the system is, without this
compromise, unless you are insanely rich.) We choose the values we
live by ourselves. And as the freedom I have to say what I believe is
the most important part of my job to me, I have chosen a set of
principles that limit any link between money and the views I express.

I call these principles “non-corruption” principles because I
believe that behavior inconsistent with these principles, at least
among professionals, is a kind of corruption. Obviously, I don’t mean
“corruption” in the crudest sense. Everyone would agree that it is
wrong for a global warming scientist to say to Exxon, “if you pay me
$50,000, I’ll write an article criticizing global warming.” That is
not the sort of “corruption” I am talking about.

I mean instead “corruption” in a more subtle sense. We all
understand that subtle sense when we look at politicians. We don’t
recognize it enough when we think about lawyers, doctors, scientists,
and professors.

I want to increase this recognition, even at the risk of
indirectly calling some of my friends “corrupt.” Norms are uncertain
here. I hope they change. But until they change, we should not condemn
those with differing views. We should engage them. I intend this to be
the beginning of that engagement.

So, the NC principle:
The simple version is just this: I don’t shill for anyone.

The more precise version is this: I never promote as policy a
position that I have been paid to advise about, consult upon, or write
about. If payment is made to an institution that might reasonably be
said to benefit me indirectly, then I will either follow the same
rule, or disclose the payment.

The precise version need to be precisely specified, but much can
be understood from its motivation: “Corruption” in my view is the
subtle pressure to take views or positions because of the financial
reward they will bring you. “Subtle” in the sense that one’s often not
even aware of the influence. (This is true, I think, of most
politicians.) The rule is thus designed to avoid even that subtle

But isn’t disclosure always enough?
Some would say this principle is too strict. That a simpler rule
— indeed the rule that governs in most of these contexts — simply
requires disclosure.

I don’t agree with the disclosure principle. In my view, it is too
weak. The best evidence that it is too weak is the United States
Congress. All know, or can know, who gives what to whom. That hasn’t
chilled in the least the kind of corruption that I am targeting here.
More generally: if everyone plays this kind of corruption game, then
disclosure has no effect in stopping the corruption I am targeting.
Thus, in my view, it is not enough to say that “Exxon funded this
research.” In my view, Exxon should not be directly funding an
academic to do research benefiting Exxon in a policy dispute.

What the NC principle is not
The NC principle is about money. It is not about any other
influence. Thus, if you’re nice to me, no doubt, I’ll be nice to you.
If you’re respectful, I’ll be respectful back. If you flatter me, I
doubt I could resist flattering you in return. If you push causes I
believe in, I will likely push your work as well. These forms of
influence are not within the scope of the NC principle — not because
they are not sometimes troubling, but because none of them involve
money. I mean the NC principle only to be about removing the influence
of money from the work of a professional. I don’t think there’s any
need to adopt a rule to remove these other influences.”

‘Recent thoughts:
* kleptocracy – associated with state and the necessary
redistribution that comes with high specialization, population and
population density. Teaches one to devalue things that have value
(e.g. time, health, relationships etc.) and to value things that have
little real value (e.g. name brands, popularity, etc.) Derives power
from the fears and insecurities of the citizens. Stands in opposition
to more egalitarian societies of the past (recent and distant), in its
class divisions and allowance of slavery
* megaklept – a tool of the kleptocracy that takes your money/time
and gives you nothing in return (e.g. insurance companies,
* gigaklept – a tool of the kleptocracy that leaves you in worse
condition than before you interacted with it (e.g. the tobacco
* kleptocrat – an agent of the kleptocracy
* major kleptocrat – an agent of the kleptocracy that imposes
kleptocratism on others, often against their will (e.g. my uncle who,
without anyone’s permission, gave me a perm when I was three years
* minor kleptocrat – an unwitting agent of the kleptocracy. (e.g.
parents who let their children watch way too much TV)
* kleptovision – the TV. A very powerful tool of the kleptocracy.
* kleptonet – the internet, when used as a tool of the

Hypothesis – those that are slaves to the kleptocracy are often
unhappy and their joi de vivre would return if they began to emerge
from and limit their interaction with the kleptocracy.

Goal – to eliminate all interaction with gigaklepts and minimize
interaction with megaklepts in an effort free oneself from the global
kleptocracy and decrease its wide-ranging power.

Challenge – to find ways to minimize the power of the kleptocracy in
one’s life.

Root out the kleptocrats at

Definitions (and some words) by Althea Grant and Karama Neal. Inspired
by Guns, Germs and Steel by Jared Diamond.’
email : karama [at] alum [dot] emory [dot] edu





Secret Report: Corruption is “Norm” Within Iraqi Government
BY David Corn  /  08/30/2007

As Congress prepares to receive reports on Iraq from General David
Petraeus and U.S. Ambassador Ryan Crocker and readies for a debate on
George W. Bush’s latest funding request of $50 billion for the Iraq
war, the performance of the government of Prime Minister Nouri al-
Maliki has become a central and contentious issue. But according to
the working draft of a secret document prepared by the U.S. embassy in
Baghdad, the Maliki government has failed in one significant area:
corruption. Maliki’s government is “not capable of even rudimentary
enforcement of anticorruption laws,” the report says, and, perhaps
worse, the report notes that Maliki’s office has impeded
investigations of fraud and crime within the government.

The draft–over 70 pages long–was obtained by The Nation, and it
reviews the work (or attempted work) of the Commission on Public
Integrity (CPI), an independent Iraqi institution, and other
anticorruption agencies within the Iraqi government. Labeled
“SENSITIVE BUT UNCLASSIFIED/Not for distribution to personnel outside
of the US Embassy in Baghdad,” the study details a situation in which
there is little, if any, prosecution of government theft and sleaze.
Moreover, it concludes that corruption is “the norm in many

The report depicts the Iraqi government as riddled with corruption and
criminals–and beyond the reach of anticorruption investigators. It
also maintains that the extensive corruption within the Iraqi
government has strategic consequences by decreasing public support for
the U.S.-backed government and by providing a source of funding for
Iraqi insurgents and militias.

The report, which was drafted by a team of U.S. embassy officials,
surveys the various Iraqi ministries. “The Ministry of Interior is
seen by Iraqis as untouchable by the anticorruption enforcement
infrastructure of Iraq,” it says. “Corruption investigations in
Ministry of Defense are judged to be ineffectual.” The study reports
that the Ministry of Trade is “widely recognized as a troubled
ministry” and that of 196 corruption complaints involving this
ministry merely eight have made it to court, with only one person

The Ministry of Health, according to the report, “is a sore point;
corruption is actually affecting its ability to deliver services and
threatens the support of the government.” Investigations involving the
Ministry of Oil have been manipulated, the study says, and the “CPI
and the [Inspector General of the ministry] are completely ill-
equipped to handle oil theft cases.” There is no accurate accounting
of oil production and transportation within the ministry, the report
explains, because organized crime groups are stealing oil “for the
benefit of militias/insurgents, corrupt public officials and foreign

The list goes on: “Anticorruption cases concerning the Ministry of
Education have been particularly ineffective….[T]he Ministry of Water
Resources…is effectively out of the anticorruption fight with little
to no apparent effort in trying to combat fraud….[T]he Ministry of
Labor & Social Affairs is hostile to the prosecution of corruption
cases. Militia support from [Shia leader Moqtada al-Sadr] has
effectively made corruption in the Ministry of Transportation
wholesale according to investigators and immune from prosecution.”
Several ministries, according to the study, are “so controlled by
criminal gangs or militias” that it is impossible for corruption
investigators “to operate within [them] absent a tactical [security]
force protecting the investigator.”

The Ministry of the Interior, which has been a stronghold of Shia
militias, stands out in the report. The study’s authors say that
“groups within MOI function similarly to a Racketeer Influenced and
Corrupt Organization (RICO) in the classic sense. MOI is a ‘legal
enterprise’ which has been co-opted by organized criminals who act
through the ‘legal enterprise’ to commit crimes such as kidnapping,
extortion, bribery, etc.” This is like saying the mob is running the
police department. The report notes, “currently 426 investigations are
hung up awaiting responses for documents belonging to MOI which
routinely are ignored.” It cites an episode during which a CPI officer
discovered two eyewitnesses to the October 2006 murder of Amer al-
Hashima, the brother of the vice president, but the CPI investigator
would not identify the eyewitnesses to the Minister of the Interior
out of fear he and they would be assassinated. (It seemed that the
killers were linked to the Interior Ministry.) The report adds, “CPI
investigators assigned to MOI investigations have unanimously
expressed their fear of being assassinated should they aggressively
pursue their duties at MOI. Thus when the head of MOI intelligence
recently personally visited the Commissioner of CPI…to end
investigations of [an] MOI contract, there was a clear sense of
concern within the agency.”

Over at the Defense Ministry, the report notes, there has been a
“shocking lack of concern” about the apparent theft of $850 million
from the Iraqi military’s procurement budget. “In some cases,” the
report says, “American advisors working for US [Department of Defense]
have interceded to remove [Iraqi] suspects from investigations or
custody.” Of 455 corruption investigations at the Defense Ministry,
only 15 have reached the trial stage. A mere four investigators are
assigned to investigating corruption in the department. And at the
Ministry of Trade, “criminal gangs” divide the spoils, with one
handling grain theft, another stealing transportation assets.

Part of the problem, according to the report, is Maliki’s office: “The
Prime Minister’s Office has demonstrated an open hostility” to
independent corruption investigations. His government has withheld
resources from the CPI, the report says, and “there have been a number
of identified cases where government and political pressure has been
applied to change the outcome of investigations and prosecutions in
favor of members of the Shia Alliance”–which includes Maliki’s Dawa

The report’s authors note that the man Maliki appointed as his
anticorruption adviser–Adel Muhsien Abdulla al-Quza’alee–has said
that independent agencies, like the CPI, should be under the control
of Maliki. According to the report, “Adel has in the presence of
American advisors pressed the Commissioner of CPI to withdraw cases
referred to court.” These cases involved defendants who were members
of the Shia Alliance. (Adel has also, according to the report,
“steadfastly refused to submit his financial disclosure form.”) And
Maliki’s office, the report says, has tried to “force out the entire
leadership of CPI to replace them with political appointees”–which
would be tantamount to a death sentence for the CPI officials. They
now live in the Green Zone. Were they to lose their CPI jobs, they
would have to move out of the protected zone and would be at the mercy
of the insurgents, militias, and crime gangs “who are [the] subjects
of their investigations.”

Maliki has also protected corrupt officials by reinstating a law that
prevents the prosecution of a government official without the
permission of the minister of the relevant agency. According to a memo
drafted in March by the U.S. embassy’s anticorruption working group–a
memo first disclosed by The Washington Post–between September 2006
and February 2007, ministers used this law to block the prosecutions
of 48 corruption cases involving a total of $35 million. Many other
cases at this time were in the process of being stalled in the same
manner. The stonewalled probes included one case in which Oil Ministry
employees rigged bids for $2.5 million in equipment and another in
which ministry personnel stole 33 trucks of petroleum.

And in another memo obtained by The Nation–marked “Secret and
Confidential”–Maliki’s office earlier this year ordered the
Commission on Public Integrity not to forward any case to the courts
involving the president of Iraq, the prime minister of Iraq, or any
current or past ministers without first obtaining Maliki’s consent.
According to the U.S. embassy report on the anticorruption efforts,
the government’s hostility to the CPI has gone so far that for a time
the CPI link on the official Iraqi government web site directed
visitors to a pornographic site.

In assessing the Commission on Public Integrity, the embassy report
notes that the CPI lacks sufficient staff and funding to be effective.
The watchdog outfit has only 120 investigators to cover 34 ministries
and agencies. And these investigators, the report notes, “are closer
to clerks processing paperwork rather than investigators solving
crimes.” The CPI, according to the report, “is currently more of a
passive rather than a true investigatory agency. Though legally
empowered to conduct investigations, the combined security situation
and the violent character of the criminal elements within the
ministries make investigation of corruption too hazardous.”

CPI staffers have been “accosted by armed gangs within ministry
headquarters and denied access to officials and records.” They and
their families are routinely threatened. Some sleep in their office in
the Green Zone. In December 2006, a sniper positioned on top of an
Iraqi government building in the Green Zone fired three shots at CPI
headquarters. Twelve CPI personnel have been murdered in the line of
duty. The CPI, according to the report, “has resorted to arming people
hired for janitorial and maintenance duty.”

Radhi al-Radhi, a former judge who was tortured and imprisoned during
Saddam Hussein’s regime and who heads the CPI, has been forced to live
in a safe house with one of his chief investigators, according to an
associate of Radhi who asked not to be identified. Radhi has worked
with Stuart Bowen Jr., the Special Inspector General for Iraq
Reconstruction, who investigates fraud and waste involving U.S.
officials and contractors. His targets have included former Defense
Minister Hazem Shalaan and former Electricity Minister Aiham
Alsammarae. And Radhi himself has become a target of accusations. A
year ago, Maliki’s office sent a letter to Radhi suggesting that the
CPI could not account for hundreds of thousands of dollars in expenses
and that Radhi might be corrupt. But, according to the US embassy
report, a subsequent audit of the CPI was “glowing.” In July, the
Iraqi parliament considered a motion of no confidence in Radhi-a move
widely interpreted as retaliation for his pursuit of corrupt
officials. But the legislators put off a vote on the resolution. In
late August, Radhi came to the United States. He is considering
remaining here, according to an associate.

Corruption, the report says, is “one of the major hurdles the Iraqi
government must overcome if it is to survive as a stable and
independent entity.” Without a vigorous anticorruption effort, the
report’s authors assert, the current Iraqi government “is likely to
loose [sic] the support of its people.” And, they write, continuing
corruption “will likely fund the violent groups that our troops are
likely to face.” Yet, according to the report, the U.S. embassy is
providing “uncertain” resources for anticorruption programs. “It’s a
farce,” says a U.S. embassy employee. “There is a budget of zero
[within the embassy] to fight corruption. No one ever asked for this
report to be written. And it was shit-canned. Who the hell would want
to release it? It should infuriate the families of the soldiers and
those who are fighting in Iraq supposedly to give Maliki’s government
a chance.”

Beating back corruption is not one of the 18 congressionally mandated
benchmarks for Iraq and the Maliki government. But this hard-hitting
report–you can practically see the authors pulling out their hair–
makes a powerful though implicit case that it ought to be. The study
is a damning indictment: widespread corruption within the Iraqi
government undermines and discredits the U.S. mission in Iraq. And the
Bush administration is doing little to stop it.

For Iraq’s Oil Contracts, a Question of Motive
BY Peter S. Goodman  /  June 29, 2008

From the first days that American-led forces took control of Iraq, the
conquering army took pains to broadcast that it was there to liberate
the country, not occupy it, and certainly not to cart off its riches.
Nowhere were such words more carefully dispensed than on the subject
of Iraq’s oil.

As they surveyed facilities in the weeks after Saddam Hussein’s
government fell, American officials said they were merely advising
Iraqis on how to increase production to finance the democratic nation
being erected across desert sands that, conveniently, held the third-
largest oil reserves on earth.

Many critics of the invasion derided that characterization. In Arab
countries and among some people in America, there was suspicion that
the war was a naked grab for oil that would open Iraq to multinational
energy giants. President Bush had roots in the Texas oil industry.
Vice President Cheney had overseen Halliburton, the oil services
company. Whatever else happened, such critics said, energy players
with links to the White House would surely wind up with a nice piece
of the spoils.

Behind those competing conceptions was a fundamental reality that
forms the wallpaper for American engagement in the Middle East: oil,
and its critical importance to the American economy, has for decades
been a paramount interest of the United States in the region. Almost
everything the United States has tried to do there — propping up
autocrats or seeking democracy, fighting terrorism or withstanding
Soviet influence, or, in this case, toppling the dictator Saddam
Hussein — could affect the availability of oil for American markets
and therefore entailed some calculation about it.

Today, the question hanging over Iraq is whether its natural endowment
will be used to help create a sustainable new state, or will instead
be managed in ways that reward the cronies and allies of the country
whose army toppled Mr. Hussein. Or perhaps both at the same time.

That basic question was yanked back to the fore recently when word
emerged from Baghdad, in a report in The New York Times, that the
Iraqi oil ministry was close to awarding contracts to service its oil
fields to some of the largest Western oil companies. While relatively
small, these contracts could serve as a foot in the door for much more
lucrative licenses to explore widely for Iraqi oil.

Some 40 companies from around the world had jockeyed for the
contracts, but they were being awarded without competitive bids, the
report said. Those about to land the deals — Exxon Mobil, Shell, BP
and Total — had held oil rights in Iraq before Mr. Hussein
nationalized the fields and kicked them out more than three decades
ago. They all came from countries that had either been stalwart allies
of the Bush administration or — in the case of France, which is home
to Total — had lately increased their support for the American-led
campaign to isolate Iran.

Just as striking were the companies that failed to capture a foothold:
the Russian oil giant Lukoil, which had signed a deal to exploit a
huge field in southern Iraq while Mr. Hussein was still in power, only
to see it revoked just before he fell, and Chinese firms with their
own claims. Before the 2003 invasion, the Russian and Chinese
governments had lent muscle on the United Nations Security Council
toward fending off American-led sanctions aimed at the Hussein

Iraqi officials said the no-bid deals reflected nothing more than
pragmatic stewardship. Iraq needs to get more oil out of the ground to
finance reconstruction, they said, and the oil giants getting the
contracts have the skill to make that happen.

But those most suspicious of the Bush administration’s motives fixed
on the contracts as validation. They accused the administration of
pulling strings and shelving concerns about preserving Iraqi
sovereignty, in favor of expedient deal-making in a time of exploding
oil prices. “There does seem to be pressure from American officials
brought on the Iraqi oil ministry to favor friendly countries and
punish unfriendly countries,” said Michael T. Klare, a political
scientist at Hampshire College and author of the recent book “Rising
Powers, Shrinking Planet: The New Geopolitics of Energy” (Henry Holt).
“That’s the way it has to look to an outsider.”

In the days after word of the deals leaked out, three senators,
including Charles E. Schumer, the New York Democrat, demanded that the
Bush administration somehow cancel the contracts, arguing that they
would damage American credibility.

The White House disowned any role and said the senators were being
hypocritical. Here they were, in effect, accusing the administration
of orchestrating the deals, while calling for orchestration to make
them disappear. “Iraq is a sovereign country,” the White House
spokeswoman, Dana Perino, told reporters. “It can make decisions based
on how it feels that it wants to move forward.”

Sovereignty has been a subject wrapped in thorns ever since American-
led forces drove Mr. Hussein from his palace. Arguments over who
really makes decisions in Iraq, and for whose benefit, cut to the
heart of the very point of the war.

This tension has often hamstrung American efforts, making it difficult
for those on the ground to act decisively. When looting swept across
the country after Mr. Hussein’s government fell, American and British
forces traced their failure to crack down against civilians in part to
a reluctance to be seen as strong-armed occupiers. But their inaction
instead aroused the disgust of many Iraqis when the looters dismantled
much of the nation. Oil has been a more delicate area. Any future
Iraqi government would clearly need hefty oil revenues, and that
requires significant modernization.

In the early days after the Americans took over in May 2003, I drove
with a team from the United States Army Corps of Engineers in Kirkuk
to meet with the head of the North Oil Company, one of two state-owned
giants. The Americans were keen that North Oil hire a private security
firm to guard local installations.

On the way over, the American commanding officer reminded his men that
they were there as advisers, and should treat the Iraqi executive with
deference. But within minutes the Americans were haranguing the
company chief for moving too slowly. Later, the Americans vented about
how much easier things would be if they were simply running the show.
“I like to think of us as really nice conquerors,” one of the
Americans said.

The Pentagon dispatched Phillip J. Carroll, a former head of Shell’s
operations in the United States, to advise the Iraqi oil ministry.
Among critics of the war, it was assumed that Mr. Carroll was there to
make sure that Mr. Hussein’s allies would be walled out of the future
Iraqi oil business while the United States and its friends got the
choice opportunities.

Mr. Carroll dismissed such talk when I spoke with him shortly after he
arrived in Baghdad, but he signaled that the shelf life of any
contract dating back to Saddam might be brief. “There will have to be
an evaluation by the ministry of those contracts and a determination
of whether they were made in the best interests of the Iraqi people,”
Mr. Carroll said.

Five years later, the Iraqi oil ministry is about to hand out secretly
negotiated contracts to a few companies that Saddam Hussein removed,
while excluding firms from the countries that had better relations
with the dictator.

In an interview last week, Mr. Carroll said he assumed critics would
assert unsavory motives, but he said that missed the point. “These
companies are long familiar with Iraq and have wonderful technology
and loads of money,” he said. “The Iraqis could develop their own
skills by learning from the international oil companies.” But energy
experts argue that Iraq is one of the easier places on earth to summon
oil from the ground, making the pedigree of the companies less

No oil law has yet been agreed upon concerning how the oil royalties
will be shared among Iraq’s factions. So, as the Bush administration
enters its final months, much about the future of Iraq’s oil remains a
mystery — expect for which companies will get the first shot at the
rewarding business of extracting more of it.





Mugabe Victory in Zimbabwe Elections a ‘Joke’
BY Louis Weston & Peta Thornycroft  /  June 30, 2008

HARARE, Zimbabwe — President Mugabe was last night sworn in to a sixth
term as president of Zimbabwe, extending his 28 years in power after
officials proclaimed he had been re-elected by a landslide.
Maintaining the fiction that the vote was a contested poll, the
Zimbabwe Election Commission said that Mr. Mugabe received 2,150,269
votes — or more than 85% — against 233,000 for Morgan Tsvangirai, the
leader of the opposition Movement for Democratic Change who won the
first round in March.

Between the two polls Mr. Mugabe’s Zanu-PF movement launched a
campaign of violence against the opposition in which at least 86
people were killed, and Mr. Tsvangirai pulled out of the election.
“This is an unbelievable joke and act of desperation on the part of
the regime,” the MDC’s spokesman, Nelson Chamisa, said. “It qualifies
for the Guinness Book of Records as joke of the year. Mugabe will
never win an election except when he’s contesting against himself.”

Prayers at the inauguration were led by an Anglican ally who broke
away from the church, Nolbert Kunonga. “We thank you Lord for this
unique and miraculous day,” he said. “You have not failed our leader.”
Mr. Mugabe waved a Bible as he recited “so help me God,” to cheers
from his supporters.

Mr. Tsvangirai was invited to the event but declined. “The
inauguration is meaningless,” he said. “The world has said so,
Zimbabwe has said so. So it’s an exercise in self-delusion.”
Ambassadors in Harare were conspicuous by their absence from the

Although Mr. Mugabe offered to hold talks with the opposition the
absence of the word “negotiations” was noticeable and analysts said he
intends to remain in office as long as possible. “It is my hope that
sooner rather than later, we shall as diverse political parties hold
consultations towards such serious dialogue as will minimize our
difference and enhance the area of unity and co-operation,” Mr. Mugabe

Election observers from the Southern African Development Community
said that the poll failed to reflect the will of the people. Almost
400,000 Zimbabweans defied the threat of violent retribution by Mr.
Mugabe’s thugs to vote against him or spoil their ballot papers,
official results released on yesterday show.

According to the Zimbabwe Election Commission’s figures, the turnout
of 42% was almost exactly the same as the first round. But many
polling stations were virtually deserted throughout election day.
Papers were spoiled. With 21,127 votes in Bulawayo, Zimbabwe’s second
largest city and an opposition stronghold, Mr. Mugabe lost to the
combined total of 13,291 votes for Mr. Tsvangirai and 9,166 spoiled

Only a few independent observers were accredited for the election. And
the Zimbabwe Election Support Network — which mounted the most
comprehensive monitoring exercise in the first round — pulled out in
protest. Consequently, no unbiased verification of the figures is
possible and the true tallies may never be known.

For weeks, Zanu-PF militias have terrorized Zimbabweans, warning them
they will launch Operation Red Finger, which will target anyone whose
digit is not marked with ink to show that they cast a vote. They will
also target anyone who checks show to have backed Mr Tsvangirai.

Militias force some to vote for Zimbabwe’s Mugabe
BY Cris Chinaka  /  June 27, 2008

HARARE — Many Zimbabweans boycotted their one-candidate election on
Friday but witnesses and monitors said government militias forced
people to vote for 84-year-old President Robert Mugabe in some areas.
The vote, held despite a storm of condemnation from inside and outside
Africa, was denounced as a sham by Western powers and opposition
leader Morgan Tsvangirai.

Tsvangirai, who won the first round on March 29, pulled out of the
poll a week ago and took refuge in the Dutch embassy because of state-
backed violence he said had killed almost 90 of his supporters. He
told a news conference millions of people were staying away from the
polls despite intimidation. “What is happening today is not an
election. It is an exercise in mass intimidation with people all over
the country being forced to vote,” Tsvangirai said.

A witness in Chitungwiza town, south of Harare, told Reuters voters
were forced to hand the serial number of their ballot paper and their
identity details to an official from Mugabe’s ZANU-PF party so he
could see how they voted. The Zimbabwe Crisis Coalition rights group
said village heads had “assisted” teachers to vote in some rural areas
after forcing them to declare they were illiterate.

Turnout was low in urban areas where Tsvangirai’s Movement for
Democratic Change (MDC) is traditionally strong. But it was not clear
how many voters went to the polls in rural districts that are
difficult for independent journalists to visit. State television
denounced foreign media reports of low turnout. It showed long queues
in rural and semi-rural constituencies and said voters ignored appeals
to abstain.

The Zimbabwe Election Support Network, a monitoring group, said its
observers reported that traditional leaders forced people to vote in
most rural areas. It said the poll would not reflect the will of the
people. ZESN also reported militias and traditional leaders were
noting the names of voters and asking for the serial numbers of their
ballot papers as they left polling stations. ZESN said before the vote
it could not deploy properly because of intimidation of its monitors.
Tsvangirai had urged people to abstain but said they should vote if
they were in danger.

Turnout was much lower in many areas than in parliamentary and
presidential elections in March, when people queued from the early
hours. Tsvangirai won that poll but fell short of the majority needed
for outright victory. The G8 group of rich nations lambasted Zimbabwe
for going ahead with the run-off and the United States said the U.N.
Security Council may consider fresh sanctions next week. Tsvangirai
said pro-Mugabe militias had threatened to kill anybody abstaining or
voting for the opposition. Voters had their little finger dyed with
purple ink. “There is no doubt turnout will be very low,” said Marwick
Khumalo, head of monitors from the Pan African Parliament. Another
African election monitor, who asked not be to named, said turnout was
low except in some ZANU-PF strongholds.

Mugabe voted with his wife at Highfield Township, on the outskirts of
Harare. Asked how he felt, he told journalists: “Very fit, optimistic,
upbeat,” before being driven away. The African Union is optimistic it
can solve the Zimbabwe crisis. “I am convinced we will sort it out and
that our credibility will be maintained,” AU Commission chairman Jean
Ping said during a foreign ministers meeting in Sharm el Sheikh,
Egypt, ahead of an AU summit next week.

Tsvangirai said he understood South African President Thabo Mbeki
planned to recognise Mugabe’s re-election. But he said it would be a
“dream” to expect his MDC to join a national unity government with
Mugabe’s ZANU-PF. Mbeki, the designated regional mediator in Zimbabwe,
has been widely criticised for a soft approach towards Mugabe despite
an economic crisis that has flooded South Africa and other countries
with millions of refugees.

Nobel peace laureate Desmond Tutu, often seen as South Africa’s moral
conscience, said Mbeki must join other African leaders in declaring
Mugabe illegitimate if he claimed victory. Calling Zimbabwe’s crisis a
“sad tragedy,” Archbishop Tutu said Mbeki should admit his diplomatic
approach had failed. “Everybody would support him if he now turned the
screws on his colleague Mr Mugabe. I know he would be doing it
reluctantly,” Tutu told Reuters television.

In the affluent Greendale suburb of Harare in the morning there were
scores of people queuing for bread at a shopping centre but only 10 at
a polling station nearby. “I need to get food first and then maybe I
can go and vote … I heard there could be trouble for those who
don’t,” said Tito Kudya, an unemployed man. Mugabe has presided over
an economic collapse accompanied by hyperinflation, 80% unemployment,
food and fuel shortages. A loaf of bread costs 6-billion Zimbabwe
dollars, or 150 times more than at the time of the first round of

A middle-aged man waiting for a bus said it was dangerous to talk
about politics. “Your tongue can cost you your teeth,” he told
Reuters, adding that he would vote. Analysts said Mugabe was pressing
ahead with the election to try to cement his grip on power and
strengthen his hand if he was forced to negotiate with Tsvangirai. A
security committee of the Southern African Development Community
(SADC) called earlier this week for the vote to be postponed, saying
Mugabe’s re-election could lack legitimacy.

But Mugabe, who thrives on defiance, remained unmoved and said he
would attend an AU summit to confront his opponents. Mugabe says he is
willing to sit down with the MDC but will not bow to outside pressure.
U.S. Secretary of State Condoleezza Rice said in Japan that Washington
would raise the issue of further sanctions at the U.N. Security
Council. The European Commission described the run-off as “a sham.”

Zimbabwe’s Tipping Point?
By Roger Bate  /  June 27, 2008

“As I write, a few Zimbabweans are at the polls, some brought
forcibly, to vote in a meaningless election with only one candidate,
dictator Robert Mugabe. Mugabe’s party, ZANU PF, is vainly keeping up
the pretence that democracy exists in Zimbabwe — a fiction that not
even neighboring states are still willing to believe. The normally
vacillating UN has condemned Mugabe’s attempts to rig another election
now that Zimbabwe’s trading partners, Russia and China, have been
persuaded to add their voices; the Mugabe regime probably only has
weeks left.

On Wednesday, three members of the Southern African Development
Community (SADC), Swaziland, Angola, and Tanzania, urged Zimbabwe to
postpone today’s election, acknowledging that conditions in the
country would not permit it to be free and fair. Even the previously
silent South African ruling party, the African National Congress,
issued a statement noting that given “the ugly incidents and scenes
that have been visited on the people of Zimbabwe . . . a run-off
presidential election offers no solution to Zimbabwe’s crisis.” While
he did not mention Mugabe by name, former South African president
Nelson Mandela, speaking at a private dinner in London, cited the
“tragic failure of leadership” in Zimbabwe.

Mugabe’s downfall is long overdue, but he may also take down South
Africa’s president in the process. Thabo Mbeki’s inability to put any
pressure on Mugabe over the past eight years of election rigging and
violence has left his reputation in tatters. Dubbed Thabo “What
Crisis?” Mbeki, he seems to have lost any hope of the international-
diplomacy role he desired upon retiring as South African president
next April.

The fallout for those doing business with the regime is already
starting, too. Angry protestors are today gathering in Munich outside
the headquarters of Giesecke and Devrient, the company which is
printing the money used to prop up Mugabe’s regime. G&D printed
trillions of Zimbabwean dollars in February and March (432,000 sheets
of banknotes were sent to the government-controlled Reserve Bank of
Zimbabwe each week, equivalent to nearly Z$173 trillion (U.S. $32

Cato Institute analyst Stephen Hanke says that the Zimbabwean
government was “financing most of its spending” through money printed
and lent by the RBZ. As inflation deepened and tax revenues dried up,
the government demanded that RBZ print more and more money. G&D
enabled this to happen. This money was used to bribe the army prior to
the March election. The German Minister for Development, Heidemarie
Wieczorek-Zeul, told German radio this morning that she was demanding
that the company stop doing business with the Mugabe regime.

In Britain, pressure is building on Barclays Bank, which has affiliate
offices in Zimbabwe, to shut down operations there. According to a UK
treasury official, the bank has received hundreds of complaints and is
losing numerous valuable bank accounts. Furthermore, Anglo American —
the South African–British mining firm — which has new platinum
investments in Zimbabwe, was told by the British Government that it
was being monitored for any breach of existing sanctions. Like many
businesses, Anglo American argues (with little justification) that its
involvement benefits the Zimbabwean people. It may employ local
people, but all the revenue goes to the treasury — which provides hard
currency for the regime.

Most importantly, the Zimbabwean opposition Movement for Democratic
Change (MDC) has warned EU firms that licenses permitting foreign
companies to operate would be “revisited” when Mugabe is finally
overthrown. Roy Bennett, the MDC Treasurer, who spent many months in
jail for pushing a ZANU PF politician in 2006, says that all
“companies need to be careful because their rights will be
scrutinized.” He also warned that a future MDC government would not
repay recent loans to the Mugabe regime — a veiled threat to the
Chinese, North Koreans, and Malaysians who have financed weaponry and
military training for Mugabe’s army.

Universal Tobacco of Richmond, Virginia, also operates subsidiaries in
Zimbabwe. Like many businesses, they have faced difficult decisions
about remaining in the country, citing the employment of hundreds of
local people (in a country with 80 percent unemployment) as a key
reason not to leave. Unlike Anglo American, they employ many locals
and more of their activities reach the poor. When I interviewed
company officials some time ago about their tobacco processing
operations in Zimbabwe, the company defended its role — but said that
they were closely monitoring the situation. If the company wants to
operate in Zimbabwe, they’d better talk with opposition leaders soon —
waiting till Mugabe goes will be too late. The opposition wants
companies like Anglo American, Barclays, and Universal Tobacco to pull
out now — to remove the few solvent parts of a collapsing economy,
driving Mugabe to sue for a political resolution — and if the
companies don’t, they will be punished by a future MDC Government.

The saying, “It’s always darkest before the dawn” is applicable to
today’s Zimbabwe. For the millions suffering the privations of
Mugabe’s kleptocracy, it is as gloomy as it could be — but their
prospects could brighten in only a matter of weeks. It is up to
regional leaders and business leaders to ensure that is the case.”

[Roger Bate is a resident fellow at the American Enterprise

The African Union has an historic chance at its summit in Egypt to
unite against Robert Mugabe and chart a brighter future for his
country  /  June 28, 2008

Before Robert Mugabe voted yesterday, his enforcers had guaranteed him
a victory of sorts by murdering at least 90 people in his name. They
burned a six year-old boy alive in his home, along with his pregnant
mother. Another woman was found horribly dismembered in her kitchen.
Her crime: to have been married to an opposition councillor. Ten
thousand people have been injured. Two hundred thousand have been

The repugnant image of Zimbabwe’s dictator casting a ballot in his one-
candidate re-election insults the memory of his victims. It compounds
the suffering of their families and challenges the whole of Africa to
condemn him out of hand at last, to isolate him and to end his
country’s nightmare by hastening his departure from power.

Africa’s better leaders have a chance to shed their inhibitions and
start this process almost at once. Mr Mugabe has vowed to attend the
Africa Union summit at Sharm-el-Sheikh in Egypt on Monday, there to
confront anyone brave enough to denounce him and “see if those fingers
would be cleaner than mine”. His point is well taken. Too many AU
member states are still pernicious kleptocracies with little to boast
of by way of democracy. From the Republic of Congo to the summit’s
host country, led by the repressive Hosni Mubarak, misrule is the

But there are exceptions that keep hope alive. Ghana, Botswana,
Namibia and South Africa enjoy rankings comparable with some of the
EU’s newer members in a global survey of democratic institutions.
Botswana and South Africa beat Slovakia and Greece in international
corruption rankings. In Africa as elsewhere, there is a clear,
positive correlation between strong democratic credentials and strong
economic growth rates, and the countries that lead these tables are
leading a growing chorus of denunciation of the terror that Mr Mugabe
is inflicting on his people.

Without waiting for the lead offered by Nelson Mandela in London this
week, President Levy Mwanawasa of Zambia said that for Zimbabwe’s
neighbours to stay silent on its suffering would embarrass them and
the entire continent. Botswana has given warning that it may not
recognise the result of an election from which Morgan Tsvangirai was
forced to withdraw for fear of further butchery of his supporters. The
ANC has declared itself “deeply dismayed” by the violence (even if
South Africa’s President Thabo Mbeki has yet to see reality), and
Tanzania’s President has called the AU’s silence so far on Zimbabwe

These statements come late. Mr Mugabe’s wilful destruction of his
country started eight years ago. But Africa is finally taking a stand
and deserves recognition for it.

The AU must now heed Tanzania’s warning and go much farther, by
refusing to recognise either yesterday’s blood-soaked parody of an
election or the regime that will claim a spurious mandate for more
power as a result of it. For the bleak truth is that Zimbabwe’s plight
eclipses every green shoot of good governance elsewhere in Africa. In
the land of the six billion-dollar loaf, rampaging paramilitaries and
remorseless Zanu (PF) “re-education” teams have turned the fertile
heartland of southern Africa into a vortex of misery that is
destabilising the entire region.

The AU’s duty in the next 48 hours is clear. Zimbabwe’s neighbours in
the South African Development Community (SADC) have an even more vital
role. They must unite to isolate Mr Mugabe and his inner circle. With
their help, the world can tighten sanctions, targeting the few dozen
men with the blood of so many on their hands. Without it, the shame
that Mr Mugabe has heaped on his country will only spread.

Comment: intervention in Zimbabwe is the only solution
The idea that Mugabe will cave in to sanctions or diplomatic pressure is absurd
David Aaronovitch  /  June 24, 2008

Maybe this time,” sang Lord Malloch-Brown on the Today programme
yesterday. “Something’s bound to begin. It’s got to happen, happen
sometime. Maybe this time I’ll win.”

Well, all right, I am – like postmodernist scholars – decoding the
metatext. What the Minister of State for Africa, Asia and the UN
actually said was that the mood around the world had so turned against
Robert Mugabe and his various cronies that their combined diplomatic
effort would bring him down.

Till now, Lord Malloch-Brown allowed, there had only been a “fairly
limited set of measures” taken against the Zimbabwean President. This
was changing. The Australians were kicking out the kids of Zanu (PF)
officials being educated in Oz. The EU would be freezing bank
accounts. The African Union and the Southern African Development
Community would not be recognising Mr Mugabe’s imminent second-round
election theft thus delegitimising him, and the UN would “force in”
election observers to monitor that second-round (from which Morgan
Tsvangirai had already withdrawn) or – in a manner unspecified –
“force some change of government”. These were “powerful steps – as
long as you accept that there are pressures short of military action”.

Perhaps, I thought, his lordship simply knows something we don’t about
back-channels and internal divisions in Mugabe’s apparat. Because,
unless you regard the recent burnings, rapes, beatings, murders,
threats, arrests, starvings and raids as some kind of exotic preamble
to negotiation, then what seems clear is that the Zanu (PF) military-
security group has no intention of allowing any transfer of power to
an elected opposition, no matter what a whingeing world says about it.

Or am I missing a clue, cleverly hidden in the present repression? If
so, it seems that Morgan Tsvangirai of the Movement for Democratic
Change missed it too when he took refuge in the Dutch Embassy in
Harare on Sunday night. Recalling Bosnia, one can only hope that the
Dutch keep their embassies safer than they did their UN safe havens.

This obduracy on the part of the Zimbabwean junta is not so
incomprehensible. The regime represents that astonishing phenomenon,
the ideo-kleptocracy, which believes that its enrichment and
corruption is a historically necessary reversal of colonialism. “The
people of Zimbabwe,” one senior Zanu (PF) minister said yesterday,
“have declared war against any force that would recolonise Zimbabwe”;
and that would take away his money, power, foreign assets, yachts and
mistresses and – at best – slap him in chokey for the rest of his

What might embolden him is the record. He might reflect that, over
nearly 30 years, he and his comrades have repeated the same essential
pattern of behaviour, each time taking Zimbabwe’s people on another
downwards journey, and have got away with it over and over and over
again. For most of my adult life we have witnessed the incremental and
inevitable destruction of a nation, almost in slow motion. After
initially ignoring the repression and violence, we have for two
decades applied the same strategies of pressure, minor sanction,
condemnation, talks, aid and buck-passing, only to enjoy the same
flickering hopes, to bemoan their subsequent betrayal and to start

Right from the beginning it was all there, in Mugabe’s 1980 revelation
that he believed in a one-party state. It was evident in his 1982-83
suppression of the Ndebele-based opposition of Joshua Nkomo using the
notorious 5th Brigade trained by North Koreans; in the 20,000
resulting deaths and the use of starvation as a political weapon; in
the intimidation of the opposition by Zanu (PF) “youth brigades”
during the 1985 elections; in the 1987 absorption of Nkomo’s Zapu and
Mugabe’s extolling of “one single, monolithic and gigantic political
party”. But we didn’t take too much notice, because there were no
whites involved.

And then the farm grab started, ostensibly redistributing white land
to the poor, and in fact giving it to the ideo-kleptocrats, in whose
hands it became barren. It was all there, this time for the whites:
the roving groups of thugs, the murders and the round-ups. The same
with the stolen election of 2000. The same with the stolen election of
2002. The same with the stolen election of 2004. Each time there were
hopes that maybe the ageing Mugabe would mellow, or that his party
would bring down the curtain and begin to compromise and each time it
all got worse. We chucked him out of the Commonwealth, he macheted a
few more opponents, we refused to shake his hand, he killed another
opposition election worker.

We believed – understandably – in the crucial role of South Africa.
South Africa, led by Thabo Mbeki, in turn believed in quiet diplomacy,
in secret talks, in dignified exits that might be delayed by
incautious condemnations, in governments of national unity between the
raped Opposition and their rapers. Several times President Mbeki, who
dislikes Mugabe intensely, would manage to get the Zimbabwean leader
into talks about this or that aspect of an imaginary future – land
settlement, development, whatever – only to have Mugabe renege the
instant the two men were back in their own capitals.

And what do we imagine now? That Zambia’s crossness, Angola’s
criticism (only a few weeks after that country passed on Chinese
weapons to the armed forces of Zimbabwe) and Botswana’s rather valiant
anger will persuade the Harare murderers that the game is up,
especially now we are investigating freezing their European assets?
Again, one asks, do the diplomats know something we don’t, and that
the historical record fails to suggest? Is there some Zimbabwean
Admiral Dönitz or Juan Carlos, waiting to arrange the transition? Why
aren’t we just as likely to get Mugabe’s Heydrich, Emerson Mnangagwa,
the Joint Operations Command strongman?

“Military intervention,” said one BBC person yesterday, expressing the
views of the consensus, “is not a realistic option.” It might be
better if it was. How many South African or British soldiers would it
take to unseat the junta and disperse the Zanu (PF) “veterans”, who
are now veterans only of whipping and gouging defenceless people, or
raping women without the slightest chance of resistance?

Instead, the suffering people of Zimbabwe (life expectancy, 37) get
what the Foreign Secretary called yesterday “the worst rigged election
in African history”.


A Bad Man In Africa
BY Matthew Sweet  /  Mar 16, 2002

North of the Zambezi, they have long known about the suppression of
free speech, about the bloody redistribution of land along racial
lines, about politicians happy to employ armed – and sometimes
uniformed – mobs to kill their opponents. They are practices imported
to this region, along with the railways, by the British.

Unlike the African press, the Western media rarely invoke the name of
Cecil John Rhodes: nearly a century after his death – on 26 March 1902
– his name is more associated with Oxford Scholarships than with
murder. It’s easier to focus on the region’s more recent, less Anglo
white supremacists: Ian Smith, for instance, who – despite his
Scottish background – seems cut from the same stuff as those Afrikaner
politicians who nurtured and maintained apartheid farther south.

But it was Rhodes who originated the racist “land grabs” to which
Zimbabwe’s current miseries can ultimately be traced. It was Rhodes,
too, who in 1887 told the House of Assembly in Cape Town that “the
native is to be treated as a child and denied the franchise. We must
adopt a system of despotism in our relations with the barbarians of
South Africa”. In less oratorical moments, he put it even more
bluntly: “I prefer land to niggers.”

For much of the century since his death, Rhodes has been revered as a
national hero. Today, however, he is closer to a national
embarrassment, about whom the less said the better. Yet there are
plenty of memorials to him to be found. In Bishop’s Stortford, his
Hertfordshire birthplace, St Michael’s Church displays a plaque. The
town has a Rhodes arts centre, a Rhodes junior theatre group, and a
small Rhodes Museum – currently closed – which houses a collection of
African art objects. In Oxford, his statue adorns Oriel College, while
Rhodes House, in which the Rhodes Trust is based, is packed with
memorabilia. Even Kensington Gardens boasts a statue – of a naked man
on horseback – based on the central feature of his memorial in Cape

But his presence is more strongly felt – and resented – in the
territories that once bore his name. Delegates at the Pan Africanist
Congress in January argued that “the problems which were being blamed
on [President Robert] Mugabe were created by British colonialism,
whose agent Cecil Rhodes used armed force to acquire land for
settlers”. He is the reason why, during the campaign for the
presidential election in Zimbabwe, Mugabe’s Zanu-PF described its
enemies – white or black – as “colonialists”; why, when Zimbabwe
gained full independence in 1980, Rhodes’s name was wiped from the
world’s maps.

The prosecution case is strong. Rhodes connived his way to wealth in a
lawless frontier culture, then used that fortune to fund a private
invasion of East Africa. He bought newspapers in order to shape and
control public opinion. He brokered secret deals, issued bribes and
used gangs of mercenaries to butcher his opponents, seizing close to a
million square miles of territory from its inhabitants. Although he
did this in the name of the British Empire, he was regarded with some
suspicion in his home country, and when it suited him to work against
Britain’s imperial interests – by slipping pounds 10,000 to Parnell’s
Irish nationalists, for example – he did so without scruple.

Rhodes was born in the summer of 1853, the fifth son of a parson who
prided himself on never having preached a sermon longer than 10
minutes. A sickly, asthmatic teenager, he was sent to the improving
climate of his brother’s cotton plantation in Natal. The pair soon
became involved in the rush to exploit South Africa’s diamond and gold
deposits – and unlike many prospectors and speculators who wandered,
dazed and luckless, around the continent, their claim proved fruitful.

When Rhodes began his studies at Oriel College, he returned to South
Africa each vacation to attend to his mining interests – which, by his
mid-thirties, had made him, in today’s terms, a billionaire. By 1891,
he had amalgamated the De Beers mines under his control, giving him
dominion over 90 per cent of the world’s diamond output. He had also
secured two other important positions; Prime Minister of the British
Cape Colony, and president of the British South Africa Company, an
organisation that was formed – in the manner of the old East India
companies – to pursue expansionist adventures for which sponsoring
governments did not have the stomach or the cash. The result of his
endeavours produced new British annexations: Nyasaland (now Malawi),
Northern Rhodesia (now Zambia) and Southern Rhodesia (now Zimbabwe).

Rhodes imprinted his personality on the region with monarchical
energy: dams, railway engines, towns and anti-dandruff tonics were all
named after him. But his expansionist zeal was not always matched at
home in Britain. “Our burden is too great,” Gladstone once grumbled.
“We have too much, Mr Rhodes, to do. Apart from increasing our
obligations in every part of the world, what advantage do you see to
the English race in the acquisition of new territory?” Rhodes replied:
“Great Britain is a very small island. Great Britain’s position
depends on her trade, and if we do not open up the dependencies of the
world which are at present devoted to barbarism, we shall shut out the
world’s trade. It must be brought home to you that your trade is the
world, and your life is the world, not England. That is why you must
deal with these questions of expansion and retention of the world.”

At around the same time, Henry John Heinz was outlining a comparable
manifesto: “Our field,” he pronounced, “is the world.” By 1900, his 57
varieties were available in every continent. Global capitalism and
imperial expansion developed in collaboration; shared aims,
aspirations, patterns of influence. Today, most of the world’s
political empires have been dissolved and discredited, but the routes
along which capital moves remain the same. After Rhodes came Nestle,
Coca-Cola, BP, McDonald’s, Microsoft.

In 1896, Rhodes’s name was linked with the Jameson Raid – a disastrous
(and illegal) attempt to annex Transvaal territory held by the Boers,
and a principal cause of the South African War of 1899- 1902. His
reputation in Britain accrued a lasting tarnish. A defence of his
character, published in 1897 and co-authored by the pseudonymous
“Imperialist”, offers an insight into the charges against him:
“Bribery and corruption”, “neglect of duty”, “harshness to the
natives” and the allegation that “that Mr Rhodes is utterly
unscrupulous”. His lifelong companion Dr Leander Starr Jameson – a
future premier of the Cape Colony and the leader of the ill-fated raid
– added a postscript insisting that some of Rhodes’s best blacks were
friends: “His favourite Sunday pastime was to go into the De Beers
native compound, where he had built them a fine swimming bath, and
throw in shillings for the natives to dive for. He knew enough of
their languages to talk to them freely, and they looked up to him –
indeed, fairly worshipped the great white man.”

Did anyone buy this stuff? After Rhodes’s fatal heart attack on 26
March 1902, the death notices were ambivalent. News editors across the
world cleared their pages for obituaries and reports of public grief
in South Africa, but few wholehearted endorsements of his career
emanated from London. “He has done more than any single contemporary
to place before the imagination of his countrymen a clear conception
of the Imperial destinies of our race,” conceded The Times, “[but] we
wish we could forget the other matters associated with his name.”
Empire-builders such as Rhodes, the paper said, attracted as much
opprobrium as praise: “On the one hand they are enthusiastically
admired, on the other they are stones of stumbling, they provoke a
degree of repugnance, sometimes of hatred, in exact proportion to the
size of their achievements.” Jameson and “Imperialist”, it seems, had
not succeeded in rehabilitating their mentor.

But the story of Rhodes’s posthumous reputation is just as complex and
contentious as that of his life and career. And curiously, his
sexuality was one of the main battlegrounds. In 1911, Rhodes’s former
private secretary Philip Jourdan wrote a biography of his late
employer in order to counter “the most unjust libels with reference to
his private life [which] were being disseminated throughout the length
and breadth of the country”. Despite the aggressive romantic
attentions of a Polish adventuress and forger named Princess Catherine
Radziwill, Rhodes was indifferent to women and gained a reputation for
misogyny. His most intense relationships were with men – his private
secretary Neville Pickering, who died in his arms; Jameson, whom he
met at the diamond mines in Kimberley where, the doctor recalled, “we
shared a quiet little bachelor establishment”; and Johnny Grimmer, of
whom Jourdan (defeating the purpose of his memoir) said: “He liked
Johnny to be near him… The two had many little quarrels. On one
occasion for a couple of days they hardly exchanged a word. They were
not unlike two schoolboys.”

Rhodes’s excuse for remaining single was the one used today by members
of boy bands: “I know everybody asks why I do not marry. I cannot get
married. I have too much work on my hands.” Instead, he accumulated a
shifting entourage of young men, known as “Rhodes’s lambs”. It’s
probable that these relationships were more homosocial than
homosexual, but that didn’t stop the gossips or biographical
theoreticians. In 1946, Stuart Collete suggested Rhodes was “one of
those who, passing beyond the ordinary heterosexuality of the common
man, that the French call l’homme moyen sensual, was beyond
bisexuality, beyond homosexuality and was literally asexual – beyond
sex. It appears to have had no literal meaning to him except as a
human weakness that he understood he could exploit in others”. The
same biographer wove these comments into an analysis of Rhodes’s
appeal to another set of posthumous acolytes: the Nazis.

As the 20th century moved on, Rhodes’s memory became increasingly
attractive to extreme (and eventually moderate) right-wing opinion.
Oswald Spengler’s The Decline of the West (1918) hailed him as “the
first precursor of a Western type of Caesar – in our Germanic world,
the spirits of Alaric and Theodoric will come again – there is a first
hint of them in Cecil Rhodes”.

It’s easy to see why Spengler, and later Hitler, were fans. Asked by
Jameson how long he would endure in memory, Rhodes replied: “I give
myself four thousand years.” To the journalist WT Stead he said: “I
would annex the planets, if I could. I often think of that.” When, in
1877, he first made his will, he urged his executors to use his
fortune to establish a secret society that would aim to redden every
area of the planet. He envisioned a world in which British settlers
would occupy Africa, the Middle East, South America, the Pacific and
Malay islands, China and Japan, before restoring America to colonial
rule and founding an imperial world government. “He was deeply
impressed,” Jameson recalled, “with a belief in the ultimate destiny
of the Anglo-Saxon race. He dwelt repeatedly on the fact that their
great want was new territory fit for the overflow population to settle
in permanently, and thus provide markets for the wares of the old
country – the workshop of the world.” It was a dream of mercantile
Lebensraum for the English: an empire of entrepreneurs, occupying
African territories in order to fill them with Sheffield cutlery, Tate
& Lyle’s Golden Syrup and Uncle Joe’s Mint Balls.

But it was Rhodes’s Alma Mater that did most to brighten his prestige.
In 1899, Oxford University, an institution with a long and continuing
history of accepting money from morally dubious millionaires, agreed
to administer a more cuddly and less clandestine version of the
“Imperial Carbonari” of the 1877 will: the Rhodes Scholars. In 1903,
the first names were selected. A group of men fitted for “manly
outdoor sports”, who would display “qualities of manhood, truth,
courage, devotion to duty, sympathy for the protection of the weak,
kindliness, unselfishness and fellowship” – men such as Bill Clinton,
the CIA director Stansfield Turner, the first Secretary General of the
Commonwealth Sir Arnold Smith, and the Nato Supreme Commander Bernard

By 1936, ML Andrews was praising Rhodes’s “vision of world peace, to
be brought about by the domination of the English-speaking nations”.
In the same year the Gaumont-British film company produced the
hagiographic movie, Rhodes of Africa. Two years later, the little
Rhodes Museum was founded in Bishop’s Stortford. When it reopens next
year, children will, for a fiver, be able to sign up as one of
“Rhodes’s Little Rhinos”.

A 1956 children’s book, Peter Gibbs’s The True Book About Cecil Rhodes
– one of a series that also profiled Marie Curie, Captain Scott and
Joan of Arc – is the best example of how, in the mid-20th century,
Rhodes was reclaimed as a national hero. More unalloyed in its
enthusiasm for Rhodes than any comparable 19th-century text, it makes
for queasy reading. Especially, perhaps, if you were voting in
Zimbabwe last weekend. Southern Rhodesia, it reports, is now “tamed
and civilised and cultivated, and many thousands of white people have
settled there, and made it their home. Today there are beautiful
modern towns; homes, gardens, parks, towering blocks of offices and
flats; factories, railways and airports. It is a new and thriving
country of the British Commonwealth, where but recently only savages
and wild animals dwelt. And it started from the dreams of one young
Englishman – Cecil Rhodes”.

When natural resources are a curse
BY John Kay  /  Financial Times  /  12 November 2003

It is in human, rather than natural resources, that the origins of
material prosperity are to be found. John describes why natural
resources may be a burden rather than a blessing for some developing

Saudi Arabia has more natural resource wealth per head than any large
nation in the world. But it is a troubled country, whose potential
instability is held in check by an increasingly fragile autocracy. It
is as much a target for terrorism as the US, and more vulnerable.

For centuries, natural resources were believed to be the bedrock of
national prosperity. Expeditions were launched and wars fought to
obtain silver, gold and diamonds, to find Lebensraum and to secure oil

Yet prosperity today is not based on natural resources. The World Bank
has prepared estimates of the value of such endowments – oil and other
minerals, forests, agricultural land – for most big economies. Only a
few rich countries such as New Zealand and Canada have resources in or
on the ground whose value exceeds a year’s industrial production.
European countries such as Germany and Belgium generate income every
two or three months greater than the entire value of their resource

Jeffrey Sachs, the economist, has found that among poor countries
ownership of resources depresses growth rather than stimulates it.*
Abundant resources are a problem, not a benefit. Resource discoveries
attract gamblers, crooks and opportunists, from Francisco Pizarro and
Robert Clive to Cecil Rhodes, and it is not by such people that great
businesses and disinterested governments are built.

Joseph Conrad’s Heart of Darkness was the result of his discovery of
the horror unleashed in the Congo by the plundering of its assets. The
curse of Mr Kurtz lingered in the Congo even after the Belgians pulled
out. The country was immersed in a civil war that ended only when one
of the nastiest kleptocracies in recent history seized power. When
Joseph Mobutu’s regime collapsed, the country’s infrastructure was in
ruins, its mines were idle and the money that commercial lenders and
the World Bank had disgracefully continued to provide for 20 years had
been dissipated through foreign bank accounts.

The once-poor countries that have grown explosively in post-colonial
decades – such as South Korea, Taiwan, Hong Kong and Singapore – are
exceptionally poor in natural resources, as is Japan.

Those countries where stable if undemocratic political structures have
maintained control of resources, as in Saudi Arabia, have been better
off. But they have still enjoyed little economic growth. In an economy
distorted by oil wealth it is impossible for the basic manufacturing
industries that represent the first stages of economic development to
come into being. Wages and exchange, boosted by resource exports, are
too high. In the most prosperous oil states, even jobs in service
industries are filled by immigrants.

Imperialism was largely motivated by the search for resources.
Colonialism ended, and territorial expansions petered out, because the
cost of these adventures exceeded their benefits. It is no accident
that one of the world’s richest countries – Switzerland – is also one
of its most inward-looking. Few resources. No empire, no wars, just
ever-increasing wealth.

The distribution of natural resources remains a source of
international instability, but for different reasons. Resources have
been discovered in countries that have neither the political nor the
economic institutions to handle them. Lucky are those countries – such
as Canada, Australia and New Zealand – where the discovery of
resources coincided with the import of cultures and political systems
to cope with them. Lucky is Botswana, almost the only poor country in
which good government and diamond mines have brought prosperity to
many. But the luckiest of all are those countries such as Norway and
Iceland that made large resource discoveries when they already enjoyed
developed economic and political institutions. It is in human, rather
than natural, resources that the origins of material prosperity are to
be found.

* J. Sachs and A. Warner, Natural Resource Abundance and Economic

The Curse of Riches  /  BY Geoffrey Wheatcroft  /  Nov 3, 2007
on DIAMONDS, GOLD AND WAR by Martin Meredith Simon & Schuster, pp.
569, ISBN 9780743286183

“When the second half of the 19th century began, South Africa was
barely even a geographical expression, as Metternich had
contemptuously called Italy. It certainly wasn’t a country, but merely
an ill-defined area which included two Boer republics, the Transvaal
and the Orange Free State, two British colonies, the Cape and Natal,
and a number of African principalities. The British had acquired the
Cape from the Dutch during the Napoleonic wars not quite in a fit of
absence of mind, but with little enthusiasm, and although the Cape of
Good Hope itself was of great strategic importance, commanding the
passage to India and the Far East, James Stephen of the Colonial
Office unpresciently called the lands of the interior ‘the most
sterile and worthless in the whole Empire’.

Everything was changed by geology, or by its accidental interaction
with human history. Just as it’s a random fact of life, but full of
significance for all of us, that Shiites, although only a one-in-five
minority among Muslims as a whole, happen to sit on top of most of the
world’s oil, so a capricious Providence decided to place most of the
world’s diamonds and gold beneath the bush and desert south of the
Tropic of Capricorn.

How this changed the whole course of South African — and to no small
extent world — history is the enthralling story told by Martin
Meredith in Diamonds, Gold and War.

First came the rush to Griqualand, where immensely rich diamond pipes
were found in 1871. Diggers flooded in and created a vast patchwork of
little claims. After feuding and rebellion, a few men, led by Cecil
Rhodes, Alfred Beit and Barney Barnato, gradually established control
of the mines, while the British ruthlessly acquired what had been a
disputed territory. The diamond town was now named Kimberley, for the
Colonial Secretary of the time (which is why American girls are still
called, at third hand, after the Norfolk village whence the Wodehouse
family took their title).

If the diamonds had lain in a debatable land, the immense gold field
discovered in 1886 did not. ‘The ridge of white water’ —
Witwatersrand — belonged to the Transvaal, or South African Republic,
a statelet of sorts created by Dutch-speaking Boers escaping
northwards from British rule. Incomers came in large numbers to the
Rand and its new boom town called Johannesburg, which was soon
producing an immense output of gold, and which was soon also in a
state of unarmed revolt against the Transvaal.

But there was a fascinating difference between these two mining
business, of which Meredith could have made more. In both cases a
cartel was established, but with diametrically opposite purposes.
Although Kimberley fuelled the great new fashion for engagement rings,
the demand for diamonds was essentially artificial, and with such a
limitless and easily mined supply the price fluctuated wildly, often
plunging downwards. And so the answer for the mine owners was monopoly
in the strict sense of a sellers’ market, controlling production and
thus keeping up the price.

By contrast, from the early 18th century until the Great War the price
of gold was fixed by the gold standard. The Rand was incomparably the
greatest gold field ever found in terms of quantity, but its quality
was very poor, so that in order to make the field payable, as mining
managers say, costs had to be controlled by means of monopsony, a
buyers’ market for the crucial commodity of labour, whose price could
be kept down. It is not too much to say that from these financial and
geological facts the whole history of modern South Africa flows.

Throughout the 1890s the Randlords, the mine owners, chafed under the
regime of Paul Kruger. In 1895 Rhodes promoted the disgraceful Jameson
Raid with the help of the brutally unprincipled Joseph Chamberlain,
now Colonial Secretary.

Far from learning restraint from the failure of the Raid, Chamberlain
sent out as High Commissioner Alfred Milner, a different brand of
villain, who colluded with Rhodes to bring about the Boer war in 1899.

Meredith gives one of the best accounts I have read of how this was
done, a scoundrelly business which has few parallels in British
history, apart from the way we were taken into the Suez escapade and
the present Iraq war, and which no Englishman can read to this day
without a sense of shame.

Militarily disastrous to begin with, morally calamitous at the end,
the Boer war earned this country deep hatred throughout the world. But
the way in which the British dealt with South Africa after the war was
almost worse in terms of its longer effects.

The wretched Milner tried to encourage large British immigration,
supposing that a balance of three to two British to Boer among the
white population would provide safety but that ‘if there are three
Dutch to two of British, we shall have perpetual difficulty’ (he was
right about that), while his oppressive and insulting treatment of
those Dutch inflamed feeling, and may even have stimulated the growth
of Afrikaans as a literary language.

In his eagerness to restore the mines to profitability, Milner
fatefully allowed the introduction of dirt-cheap Chinese indentured
labourers, with awful consequences both human and political. ‘Chinese
slavery’ destroyed any British claim to moral superiority, although
the haughty Milner could do no more than respond petulantly about
‘perpetual faultfinding, this steady drip, drip of deprecation, only
diversified by occasional outbursts of hysterical abuse’. Then the
black majority were deprived of almost all such rights as they had
enjoyed before, a job thoroughly done by the time Meredith’s book ends
with the creation of the Union of South Africa in 1910. What was
called apartheid after 1948 was different in degree rather than kind
from the previous system.

Much of this story, and plenty of the anecdotes, will be familiar to
those of us who have read or indeed written books on the subject, but
Martin Meredith has made good use not only of recent scholarly work
but also of contemporary sources, some of which were unknown to me.
The illustrations are also excellent, though why on earth is there no
list of them after the contents page? He offers no striking new
interpretation, but tells the story lucidly so that the reader can
draw his own moral. It was the Boer war that inspired Kipling’s phrase
‘no end of a lesson’, but those words might be used of the whole story
of South Africa since that day nearly 140 years ago when a few shiny
pebbles were picked up besides a dry watercourse in Griqualand.”

Diamonds – A Blessing or Curse?
By Michael Russell  /  May 30, 2007

“Diamonds should be known as the ‘misery stone’ because of the over-
importance we have placed on them since the Great Hole of Kimberly was
formed in the nineteenth century. Throughout history, diamonds have
always attracted attention and with the discovery of every large new
stone a ‘story’ or tale spread around that gem and so the legends

During the Colonial times, Cecil Rhodes and Charles Rudd founded “De
Beers”, a company created to mine and market diamonds; and no other
business has enjoyed so much protection from the crown and successive
governments since then. This created a diamond monopoly for that
business and at one stage it accounted for over 80% of the world’s
supply and trade in diamonds.

No other company or business has enjoyed such protectionism as De
Beers and its right to trade in raw or uncut diamond gem stones in
both South Africa and on the world markets. It was only by the late
nineteen eighties that its iron-like grip on the market started to
loosen. However, as the past shows they will not be laying down their
so-called ‘divine right’ to trade in diamonds very easily.

In South Africa today it is still a criminal offence for anyone to
trade the raw uncut stones without going though De Beers. There is an
entire police department known as the Diamond and Gold Squad whose
sole purpose is to uncover and prosecute people who want to, or are
trying to, do this. Would this situation exist in the United States or
any country that values the individual’s right to pursue their chosen
path to business success? Of course it would not be tolerated!

Because of the grip this company wanted to have on the entire market
the diamond has become one of the most overpriced commodities around.
Its artificially high price has attracted some of the most notorious
and greedy minded people in the world and it has been used to fund
wars all over the African continent.

At one time or another “blood diamonds” (which is what the illegally
mined stones became known as) have funded dictators, coups and rebels
alike in central and West Africa over the last 20 years. Great
publicity was made about these diamonds and the world was encouraged
not to support or buy them at all. However, how do you stop people
trading in things one can pick up like a bit of dirt and then turn
around and get thousands of dollars for it?

One can’t!  De Beers – or the Central Selling Organization (CSO is the
marketing arm of the company) – has been behind some very successful
sales and marketing campaigns over the last 5 decades, starting with
the well known marketing slogan “a diamond is forever!”

Now with the advent of laboratory made artificial gemstones where you
can now purchase a “diamond” made in the lab at 5% of the cost of the
real stone and not be able to tell the difference, there are some
people predicting the end of the diamond as we know it. We don’t
believe this will happen if this De Beers has its way and keeps alive
just a few of the tales that have accompanied this precious stone in
becoming the most talked about stone in history!”


Fact Sheet: National Strategy to Internationalize Efforts Against

Today, The President Unveiled His National Strategy To
Internationalize Efforts Against Kleptocracy, Pledging To Confront
High-Level, Large-Scale Corruption By Public Officials And Target The
Proceeds Of Their Corrupt Acts. This Strategy Is A New Component Of
His Plan To Fight Corruption Around The World. Public corruption
erodes democracy, rule of law, and economic well-being by undermining
public financial management and accountability, discouraging foreign
investment, and stifling economic growth and sustainable development.

* Kleptocracy Is A Threat To The Governments And Citizens Of Both
Developing And Developed Countries. Corruption by senior officials in
executive, judicial, legislative, or other official positions in
government can destabilize whole societies and destroy the aspirations
of their people for a better way of life.

The President’s National Strategy To Internationalize Efforts Against

This New National Strategy Builds On The President’s Commitment Made
With The G-8 Leaders At Their Recent Summit In St. Petersburg. At the
G-8 summit, President Bush committed to promote legal frameworks and a
global financial system that will reduce the opportunities for
kleptocracies to develop and to deny safe haven to corrupt officials,
those who corrupt them, and the proceeds of corrupt activity.

* The Strategy Has As Its Foundation In The President’s
Proclamation, Made In January 2004, To Generally Deny Entry Into The
United States Of Persons Engaged In Or Benefiting From Corruption.

* The Strategy Advances Many Of The Objectives In The National
Security Strategy By Mobilizing The International Community To
Confront Large-Scale Corruption By High-Level Foreign Public Officials
And Target The Fruits Of Their Ill-Gotten Gains.

* The Strategy Reaffirms The President’s Commitment To Ensure That
Integrity And Transparency Triumph Over Corruption And Lawlessness
Around The World, Expand The Circle Of Prosperity, And Extend
America’s Transformational Democratic Values To All Free And Open

Specifically, The Strategy Promotes Our Objectives By Committing To:

* Launch A Coalition Of International Financial Centers Committed
To Denying Access And Financial Safe Haven To Kleptocrats. The United
States Government will enhance its work with international financial
partners, in the public and private sectors, to pinpoint best
practices for identifying, tracing, freezing, and recovering assets
illicitly acquired through kleptocracy. The U.S. will also work
bilaterally and multilaterally to immobilize kleptocratic foreign
public officials using financial and economic sanctions against them
and their network of cronies.

* Vigorously Prosecute Foreign Corruption Offenses and Seize
Illicitly Acquired Assets. In its continuing efforts against bribery
of foreign officials, the United States Government will expand its
capacity to investigate and prosecute criminal violations associated
with high-level foreign official corruption and related money
laundering, as well as to seize the proceeds of such crimes.

* Deny Physical Safe Haven. We will work closely with
international partners to identify kleptocrats and those who corrupt
them, and deny such persons entry and safe haven.

* Strengthen Multilateral Action Against Bribery. The United
States will work with international partners to more vigorously
investigate and prosecute those who pay or promise to pay bribes to
public officials; to strengthen multilateral and national disciplines
to stop bribery of foreign public officials; and to halt bribery of
foreign political parties, party officials, and candidates for office.

* Facilitate And Reinforce Responsible Repatriation And Use. We
will also work with our partners to develop and promote mechanisms
that capture and dispose of recovered assets for the benefit of the
citizens of countries victimized by high-level public corruption.

* Target And Internationalize Enhanced Capacity. The United States
will target technical assistance and focus international attention on
building capacity to detect, prosecute, and recover the proceeds of
high-level public corruption, while helping build strong systems to
promote responsible, accountable, and honest governance.

The President’s Announcement Builds On Established U.S. Leadership In
The International Fight Against Corruption. The U.S. actively supports
development and implementation of effective anticorruption measures in
various international bodies and conventions. In addition to the G-8,
we have promoted strong anticorruption action in the:

* UN Convention Against Corruption
* OECD Anti-Bribery Convention and the OECD Working Group on
* Financial Action Task Force (FATF)
* Council of Europe Group of States Against Corruption (GRECO)
* OAS Mechanism for Implementing the Inter-American Convention
Against Corruption
* Asia Pacific Economic Cooperation Forum’s Anticorruption and
Transparency (ACT) Initiative
* Broader Middle East and North Africa (BMENA) “Governance for
Development in Arab States” (GfD) Initiative.


From the archive, originally posted by: [ spectre ]



MUGABE : MY PEASANTS “RICHEST IN WORLD”,zimbabwes-central-bank-introduces-10-million-zimbabwe-dollar-note.html

Zimbabwe’s central bank introduces 10 million Zimbabwe dollar note  /
17 Jan 2008

Johannesburg/Harare – President Robert Mugabe’s government, stricken
by chronic hyperinflation, announced Thursday it was to introduce a 10
million Zimbabwe dollar note. Economists said they believed it was the
highest denomination of any currency in the world.

Central bank governor Gideon Gono was quoted on state radio as saying
that the bank would begin releasing a set of three new notes – 1
million, 5 million and 10 million – on Friday.

The issue of new notes follows nearly three months of banking chaos as
cash dried up and queues, sometimes hundreds of metres long, became a
permanent feature outside commercial banks.

Zimbabwe is in its 10th year of economic crisis, marked by the world’s
highest rate of inflation, the fastest shrinking gross domestic
product in a country not in a state of war, the most rapidly
collapsing currency and unemployment of over 80 per cent. Economists
blame the reckless economic policies steered by the 83-year-old

Economists said the disappearance of cash was a result of inflation
estimated at 50,000 per cent – the government has banned publication
of official figures – that forces shoppers to pay with brick-sized
bundles of near-worthless notes for a few simple groceries.

A year ago, the highest denomination was 10,000 Zimbabwe dollars, then
worth about 7 US dollars. The new 10 million Zimbabwe dollar note is
1,000 times last January’s top note, and worth 3 US dollars. During
the year there were three separate new issues of notes as inflation
continued to soar.

“As monetary authorities we once again assure the nation that we are
in full control of the currency situation,” Gono said Thursday.

Economists say that the hyper-inflation is a result of the
government’s stated policy of printing cash when it runs out of money,
and price controls that have caused the supply of goods in shops to
disappear, only to resurface on the black market.

The government stopped issuing banknotes in 2003 when it replaced them
with temporary “bearer cheques” stamped with an expiry date, although
the bank renews their validity on expiry.

Economists say it is apparent that state economic policy is shot
through with confusion and indecision. In early December, Gono
announced that the introduction was “imminent” of a new currency
denominated 1,000th of the current system – 17 months after he last
sliced three zeroes off the country’s money.

However, the new notes failed to appear, and, without explanation, the
bank brought out 250,000, 500,000 and 750,000 Zimbabwe dollar bearer
cheques instead. The 750,000 Zimbabwe dollar note is barely enough to
buy a copy of the state-controlled daily newspaper.

The new notes have made no impact on the queues. “Long ago they should
have produced the 10 million note,” said an economist who asked not to
be named. “This is economic policy-making on the hoof.”

About 300 people milled about the entrance of the Beverley Building
Society office in Harare’s Avondale suburb on Thursday morning.

“The security guard says they start queuing at 1:00 am,” said a shop
owner next door. “Only the first hundred or so manage to get cash. At
16:30, when the bank closes, they go away, but they come back the next
morning again, because cash is so short they can only draw Zimbabwe
dollars 5 million at a time.”


Zimbabwe bank issues $10million bill
but it won’t even buy you a hamburger in Harare  /  19th January 2008

Forget the glitzy restaurants of New York and London: only in Zimbabwe
would a hamburger actually cost millions of dollars. The central bank
of the southern African country has a issued a 10million Zimbabwe
dollar note. The move increases the denomination of the nation’s
highest bank note more than tenfold.

Even so, a hamburger in an ordinary cafe in Zimbabwe costs 15 million
Zimbabwe dollars. The hope is that such a move will help end chronic
cash shortages and disperse long, chaotic lines at banks and automated
teller machines.

Reserve Bank Governor Gideon Gono said in a statement the 10 million
Zimbabwe dollars notes will be issued along with 1 million and 5
million Zimbabwe dollars bills. Previously, the highest existing note,
introduced last month, was for 750,000 Zimbabwe dollars.

The new 10 million note is the equivalent of about £2 at the dominant
black market exchange rate. A hamburger at an ordinary cafe costs
about 15 million Zimbabwe dollars (£3). That hamburger has trebled in
price this month amid shortages of bread, meat and most basic goods.
Zimbabwe faces the world’s highest official inflation of an estimated
25,000 per cent. Independent financial institutions say real inflation
is closer to 150,000 per cent.

Acknowledging the inflation crisis, Gono said individuals would be
allowed to withdraw an increased limit of 500 million Zimbabwe dollars
(£100) in a single daily withdrawal, up from 50 million (£10). He said
special arrangements were being made to pay soldiers, police and other
uniformed services “because it is not desirable to see them queuing
for cash”. Gono said with higher denomination bills businesses might
be tempted to again raise prices of scarce goods.

“If this happens the whole objective of solving the cash shortages and
to bring convenience to the people will be defeated,” he said. In
August 2006, the central bank slashed three zeros from the nation’s
old currency.


New Zimbabwe Law Allows for Eviction of Remaining White Farmers
BY Peta Thornycroft  /  07 October 2006

Zimbabwe’s parliament has passed a new land law that allows eviction
of remaining white farmers. This is the latest chapter in a six-year
controversial land-redistribution program.

Only a few hundred of more than 4,000 white farmers remain on their
land in Zimbabwe. Under the land redistribution program announced by
President Robert Mugabe in 2000, commercial farms were seized,
ostensibly for the resettlement of landless blacks.

For six years, hundreds of white Zimbabwean farmers have been to court
to try to avoid losing their farms, the businesses on their land and
their homes.

Under a 2005 constitutional amendment, ownership of all white-owned
land reverted to the state. However, the government did not have the
power to evict farmers from state land they occupied, without lengthy
legal battles.

Now, under the new law, white farmers have 90 days from the date
President Mugabe rubber stamps the law to leave their homes and
businesses, without recourse to the courts.

However, not all in the ruling ZANU-PF administration want the last
white farmers to leave. The governor of the central bank, Gideon Gono,
has been lending those still on their land money to grow crops.

The two vice presidents, Joyce Mujuru and Joseph Msika, have
repeatedly said recently that they want productive white farmers to

However, Lands Minister Didymus Mutasa told VOA last week that only he
controls what happens to land, and he has made it clear to western
diplomats in recent months he wants all white farmers off Zimbabwe’s

Before the land-reform program, Zimbabwe was not only able to feed
itself, but was a net exporter of food to the region, and commercial
agriculture was the largest foreign currency earner and the largest

Now, Zimbabwe is bankrupt. It depends on food imports, and, last week,
the United Nations World Food Program said it had run out of money to
continue to feed hundreds-of-thousands of people in need.

“…Zimbabweans know how to riot – they turned out in the streets in
1997 and 1999…”


Mugabe makes more Zim millionaires
BY Ethan Zuckerman  /  January 18, 2008

Amanda Atwood was complaining a week back about Zimbabwe’s $750,000
notes: “most of us aren’t very comfortable operating in base 75,” and
even those who learn to count with the bills discover that they don’t
buy much – they’re insufficient to purchase a newspaper.

Her post was titled, “Bring on the (hundred) million dollar bearer”.
And Gideon Gono, the comically incompetent central bank governor, has
done one better, introducing $10 million bills. They’ll buy a
newspaper, and perhaps a kilo of sugar… though probably not for much
longer. The bills are worth about $4 USD on the black market, but with
inflation at over 50,000% a year, they won’t keep their value more
than a couple of weeks.

I was struck by the image above, stolen from the BBC’s piece on the
new bill. The bill is exactly the same color, layout and design as a
$20 bill I’ve been carrying in my wallet since my trip to Zimbabwe 15
months ago. That bill has now expired – it wasn’t currency, per se,
but a “bearer check”, entitling me to $20 from the Zimbabwe Reserve
Bank if I redeemed it before July of 2007.

When I wrote about that $20, it was worth about $0.025 USD – a silly
amount of money to represent with a bill, but still a functional piece
of currency. At the moment, that bill is worth $0.00000005 cents, or 5
hundred-millionths of a cent.

It’s hard to know what advice one would give Gono at this juncture.
“Stop printing worthless money” is the conventional wisdom… but that
worthless money is what pays the salaries of government employees,
particularly of the police and security services that allow Mugabe to
remain in power. Weimar Germany ended hyperinflation by issuing a new
currency that was pegged to a gold standard, where each bill could be
converted into a bond valued at a certain quantity of gold. In such a
system, you can’t keep printing money without having gold to back it,
which forces control of the money supply. Other nations have
“dollarized”, either pegging their currency to a more stable currency
or literally beginning to use the other nation’s currency, as Ecuador
did in 2000. But pegging your currency to another nation’s means you
have no control over monetary policy… and means you actually have to
have revenues to pay those salaries, as South Africa gets pretty upset
if Zimbabwe starts printing rand.

At a certain point in hyperinflationary nations, people simply stop
using currency and return to the barter system. This is hugely
inefficient for developed economies – imagine paying your cable bill
in bags of flour. (This isn’t entirely far-fetched. When my father
worked as a small-town lawyer two decades ago, at least one
outstanding bill was settled in cordword. But it’s pretty
inconvenient.) That hasn’t happened entirely in Zimbabwe. Instead,
Zimbabweans find themselves aware of prices in several different
currencies, purchasing essential goods like toothpaste from “runners”,
who smuggle cases of goods in from Botswana or South Africa. Buying
petrol requires either shopping on the black market, or having access
to dollars, pounds or rand to buy the vouchers that can be exchanged
for petrol. And, of course, people get it wrong, like a businessman
who gave his employees sufficient holiday bonuses to let them travel
to their villages and back… until the cost of busfare tripled, and his
employees were stranded at home.


Zimbabwe bank to issue $10m bill
BY Peter Biles  /  18 January 2008

Zimbabwe’s central bank is to introduce new higher-denomination
banknotes in an effort to ease the critical shortage of cash in the
country. Zimbabwe has been in economic decline for the past eight
years, with annual inflation widely thought to be in excess of

The highest value note that will go into circulation on Friday is
worth 10m Zimbabwean dollars. But that is worth less than US$3.90 (£2;
2.60 euros) on the black market. The introduction of the new
banknotes, or “bearer cheques” as they are officially called, is a
further attempt to stabilise the Zimbabwean economy.


There have been long queues every day at banks as people have
struggled to withdraw cash. The government’s only response is to print
more money – and that is seen as the main reason for the
hyperinflation. There have been no official inflation figures
published for the past three or four months.

Zimbabwe’s Reserve Bank governor, Gideon Gono, has called on the
business community not to increase prices every time new measures are
taken to adjust the currency. The new higher denomination bank notes
are certain to cause more confusion and they may only bring short term
relief. In the meantime, many people have become dependent upon
imported goods, there are still severe shortages of fuel and power
supplies remain erratic.


Shopping for nothing

“Rumours of imported toothpaste being sold at absurdly low prices (can
anything counted in millions be considered ‘low’?), had me scurrying
to a supermarket today with a few bricks of cash wedged into a
suitcase sized handbag.

Usually, my toothpaste purchases involve deals with ‘runners’ who
cross into South Africa or Botswana for a living. The price I pay then
is a combination of the price it costs in South Africa; the price of
transport which has to factor in inflationary fuel costs; the price of
the bribe to avoid a long queue; another bribe to the customs official
to dodge duty OR, if that isn’t paid, the astronomical duty the runner
needs to pay; an further indeterminate price – a figure from fresh air
– based on the runner’s future projection for how much Rands or Pula
will cost him when bought on the local forex blackmarket; and then
finally the runner’s profit margin.

Toothpaste ends up extortionately expensive, but I need it, and I need
the services the runner supplies, so I grit my toothpaste-requiring
teeth and buy it.

What was galling for me the last time was that my runner arrived with
a bulk batch of the WRONG brand. I had no choice but to buy it, but I
feel irritated every morning when I brush my teeth with toothpaste I
dislike. Hence my feverish rush to the supermarket today.

Of course the ‘cheap’ ‘toothpaste was completely sold out. I could see
where it was by the brand name labelling the empty space on the shelf.
I also noticed however, that the price was not very cheap at all, and
totally different to the price paid by my friend less than a week
before. This means that the first batch sold at a lower price had
already sold out once, and been replaced with the next batch at an
inflationary higher price, and that had sold out already too. So my
trip, using valuable scarce fuel, was wasted and cost me money.

As usual I am observing the inflationary rise in prices in the space
of a week, and I am also noticing the scarce supply of toothpaste in
our town and I am thinking this is something to blog. But top of my
mind, if I am honest, is envy for the lucky fresher-breathed sods who
beat me to it and snapped up a tube or two. I wish my rumour grapevine
was a little more efficient! Rather than writing this blog I wish I
was right now brushing my teeth with a better brand of toothpaste!

But you know what… ? Beggars can’t be choosers and I’m lucky to have
the foul stuff I’m using at the moment. Other Zimbabweans can’t buy
food, and I really shouldn’t be so caught up with things so trivial.”



A long expensive journey home  /  February 14th, 2008

“I occasionally use a ‘runner’ to buy things I need that are no longer
available to buy in Zimbabwe. A group of us place an order, and the
runner nips across the border to South Africa or Botswana and buys it
for us. Fees vary from runner to runner, but it’s usually about 20% of
the value of the goods (although I have heard of some people paying
cheaper rates). Given my recent first-time experience at paying a
bribe, I asked him how runners fared with their regular cross-border

He told me when they left South Africa, they made sure they had plenty
of Rands, in small denominations, easily accessible in their pockets.
Bribe payments begin right from the start of their journey. Apparently
the South African police routinely stop the buses and vehicles heading
towards the Zimbabwean border. Lengthy ‘harassment’ (his word) over
paperwork or the amount of goods in the vehicle ensues. The driver
does a quick whip around, and all the passengers chip in a few Rand
which is handed over and the problem goes away.

I had noticed, on a trip I made to South Africa last year, that the
police did seem to be stopping all the vehicles with Zimbabwean number
plates and lots of passengers. My fellow passenger and I assumed this
was to do with the refugee crisis, but neither of us could understand
why they would stop people LEAVING the country. Surely this is what
they want to happen if it was a refugee issue? Now I wonder if we were
witnessing bribing on a grand scale going on.

The runner told me that when the vehicle reached the border post
bribing increased further. If the queues were very long, a bribe
helped people to jump to the front. He pointed out that this is very
important if cross border trading is your job: “Time is money”, he

He told me that those passengers travelling on dubious documents faced
heavier bribes than he did to persuade the officials to turn a blind
eye. What was interesting about this nugget of information was his
comment that the border officials – on both sides – wanted Zimbabweans
with suspicious paperwork to leave the country and go back to
Zimbabwe. This meant the bribes paid while leaving the country tended
to be ‘reasonable’. I was told that officials know that the crisis in
the country will drive the people back to South Africa, most likely
using the same suspicious paperwork. At this point the bribes become
very steep because the desperate person trying to find a way back to
the land of employment will pay almost anything to get in: “It is
better to get a little money on the way out, so you can make a lot of
money when they return”, he said. “You don’t want those people to be
stuck in South Africa”.

The bribes don’t stop there. Once through the border, the intrepid
Zimbabwean traveller faces endless harassment by the Zimbabwean
police: the runner told me that the police tended to stop all the
vehicles laden with passengers and goods. “What are they after?”, I
asked. It turns out the Zimbabwean police will make passengers slowly
unpack their entire possessions on the side of the road, demand
customs clearance payments (even though they have no mandate to do
customs work) and threaten to seize goods. Again, R10 from each
passenger smoothes the way and makes harassment and hassle disappear.
So, to answer ,my question, they are ‘after’ a bribe.

The runner I was talking to took pains to explain to me that this was
one of the reasons why the goods he brought in cost so much more than
if they had been bought in South Africa. He said he could pay as much
as R500 in a trip, through bribes to border officials on both sides,
and the police on both sides. This is a cost passed on to Zimbabwean
customers like me.”


A Long, Hard Slog in Zimbabwe

As Hyperinflation Puts Even Bus Fare Out of Reach, One Man’s Trek
Embodies Plight of Foot Commuters
BY Craig Timberg  /  February 7, 2008

A slender moon shadow stretches out on the road before Willard Chitau
as he takes his first quick, purposeful steps toward his workplace. It
is 4:27 a.m. Nine miles to go.

Buses have begun to stir, spewing their smoky diesel fumes into the
darkness. But like many Zimbabweans, Chitau can no longer afford the
ever-rising fares in a country where hyperinflation, estimated at more
than 26,000 percent, is the world’s worst. A single round trip to his
job at a lumber yard costs 10 million Zimbabwean dollars, nearly a
week’s salary.

“Five million this way,” Chitau says as he points his slim left arm
forward, toward Harare, the crumbling economic heart of Zimbabwe.
“Five million this way,” he says as he points backward, toward his one-
room home in Epworth, a sandy slum far beyond the city’s tree-lined

So Chitau, 33, desperate to support his wife and two young children,
has joined Zimbabwe’s growing legions of foot commuters. They make
journeys that almost anywhere else would be epic. Here they are

Along the way they trace the decline of a nation, passing clinics
short of drugs, schools short of teachers, stores short of food. They
walk on crumbling roads whose darkened streetlights are remnants of an
era, just a decade ago, when Zimbabwe was one of Africa’s most
prosperous nations instead of one of its most troubled.

Chitau did not always live so far from work. During Operation
Murambatsvina — President Robert Mugabe’s 2005 slum clearance
campaign, which left 700,000 people homeless, jobless or both —
police forced Chitau to tear down his house in a dense Harare
neighborhood much closer to the lumber yard, he said.

So he sent most of his belongings to his family’s rural village and
settled into the small, dark room in Epworth. There he sleeps with his
wife, 4-year-old son and 3-month-old daughter on a concrete floor, a
single wool blanket beneath them. A warm morning bath, which would
consume precious firewood, is beyond their means. So is breakfast or
even a cup of tea to cut the early morning chill.

The economy has been in free fall since Mugabe encouraged the invasion
of white-owned commercial farms by landless black peasants in 2000.
Although many Zimbabweans say land redistribution was needed to right
historic wrongs, the way it happened was chaotic and often violent; it
devastated successful businesses while triggering hyperinflation and
leaving many poor blacks — the supposed beneficiaries of the program
— without steady paychecks. An estimated 3 million people have since
fled the country.

Sometimes Chitau finds odd jobs for extra cash, or his wife helps by
selling vegetables. When there’s enough money, he even takes the bus
some mornings. But today the monthly rent is due. Because prices go up
here unevenly, it’s only 9 million Zimbabwean dollars, about $1.50 in
U.S. currency, but that still means a struggle for a man paid in local
bills worth less than $9 a month.

“I need to search for money very hard so that I will survive,” Chitau
says, his swift, smooth stride unbroken. Cars pass. Buses pass.
Cyclists wearing suits and ties pass. A barefoot man who has broken
into a jog passes, too. But mainly it is Chitau who overtakes other
pedestrians as the miles slip by.

The only thing that can slow him down is rain, he says. The shoes he
wears most days look as though they have sloshed through a hundred
storms. The brown leather is softened, largely detached from the
rubber soles. The laces are gone. But this morning is dry and clear,
with a fat crescent moon and a spray of stars twinkling overhead.

After nearly half an hour of walking, as the faintest light begins to
warm the eastern horizon, Chitau steps past Sophia Manjiva, 45, a
single mother clutching a closed umbrella who says she is pleased to
have company. She has heard many tales of robberies along this dark

Manjiva says her monthly pay as a maid in a private home is 20 million
Zimbabwean dollars — less than $4 in U.S. currency. With that she
feeds, clothes and schools her two youngest children, ages 10 and 13.

As hyperinflation erodes her pay, making even staples like cooking oil
and cornmeal difficult to buy, Zimbabwe’s deteriorating infrastructure
complicates her work. Chronic power blackouts and water shortages mean
that several times a day she must fetch water from a well near the
house she cleans, then carry full buckets back upstairs, she says.
That’s after walking 2 1/2 hours to work and before walking 2 1/2
hours back home. “I get tired, but there is nothing to do,” Manjiva
says as Chitau begins to open up the distance between them.

At 5, the sky turns a soft blue, streaked by pinkish clouds, as a
diffuse pre-dawn glow lights the faces of rows of sunflowers gazing
east. White-robed members of Zimbabwe’s popular Apostolic churches
kneel in prayer on the dewy grass. Birds begin chirping tunes that,
under the circumstances, sound improbably upbeat.

Yet the growing light reveals unmistakable signs of frustration with
Zimbabwe’s decay.

Epworth’s most singular natural feature — stacks of rounded, beige
boulders — bear snatches of spray-painted graffiti: “Vote MDC.” The
initials refer to the Movement for Democratic Change, the fractured
opposition party that in March will seek, for the fourth time, to
defeat Mugabe’s ruling party after 28 years of unbroken control.

But Chitau doesn’t want to talk about politics when the feared Central
Intelligence Organization remains a well-funded marvel of efficiency
amid collapsing government services. Arrests, beatings and humiliating
sting operations are common tactics against those who complain too
loudly. “It’s my country, but I’m afraid” to talk about Zimbabwe, he

Shortly before 6, Chitau reaches Harare’s outskirts, where the names
of the suburbs — Chadcombe, Cranborne, Queensdale — echo the
country’s British colonial past. Sand gives way to dark soil, shacks
to large, tile-roofed homes.

Chitau closes in on a group of women carrying empty bags and baskets.
They, too, are coming from Epworth, but their destination, the
bustling Mbare market near downtown Harare, is even farther than
Chitau’s lumber yard.

They earn the equivalent of two or three U.S. dollars a day, the women
explain, by buying vegetables at Mbare, then carrying them back to
Epworth to sell. The bus would cut their profits by half or more. A
few minutes later, Chitau indulges his one daily luxury, buying a
cigarette from a street vendor squatting by the side of the street.
The cost is 400,000 Zimbabwean dollars, or about 7 cents.

“By smoking, I can’t feel as hungry,” Chitau explains as he inhales
deeply from the cigarette and briefly slackens his pace. A few steps
later, he tosses the burned-out butt. Tea is still four hours away. It
will be seven hours until lunch, when a plate of sadza — the snow-
white cornmeal mush that is southern Africa’s staple food — will be
his first meal since last night, he says. His pace quickens again.

The sun is up now, casting long shadows as Chitau passes the two-hour
mark in his journey. He crosses an intersection where the traffic
light, like most in Harare, is not working. A passing van — such
vehicles are used almost universally as taxis here — slows to let out
a passenger. Its radio is tuned to the 7 a.m. newscast, which like all
radio and television reports in Zimbabwe carries only government
propaganda. The announcer complains that sanctions imposed on Mugabe’s
government by the United States and European countries are undermining

As the van pulls off, Chitau bears left from Chiremba Road onto Robert
Mugabe Road, a commercial strip where businesses are struggling to
stay open. Among the estimated 20 percent of Zimbabweans who have
jobs, many have simply stopped coming to work now that the value of
their salaries has fallen below the cost of commuting.

Chitau arrives at his lumber yard at 7:13 a.m., after 166 minutes of
nearly continuous walking. As often happens on rainless mornings such
as this, he is early. Chitau can savor the next 47 minutes until his
workday begins.

He says, “Now I must rest.”


Inflation now incalculatable
from The Worker Reporter  /  January 2008

ZIMBABWE’S inflation has reached levels where it is now difficult to
calculate it, the Central Statistical Office (CSO) has revealed.

After more than two years of allegedly cooking the books on inflation
and the cost of living, the government last month threw in the towel
on the calculation of official figures reflecting the country’s
accelerated economic decline, with the CSO professing that it could no
longer calculate inflation, cost of living and related figures.

The CSO operates on a standardised system based on consumer baskets
and extrapolations of the average living costs of families in the
cities and rural areas.

With Zimbabwe’s economy entirely in the hands of cross border traders
and the black market, the government statistician’s traditional
“family basket” has been left empty.

Last month, the office came under fire from economists and scholars
after it produced consumer price index and cost of living figures that
were based on products that were not readily available in the shops.
The last calculations estimated inflation at 8,000 percent.

Independent calculations place Zimbabwe’s rate of inflation between
14,000 and 15,000 percent. With no cash in the banks and no food in
the shops, economists in the country are at wit’s end on how to come
up with credible figures to reflect the state of the economy.

The Great Wall that separates pro-government economists from those
considered to be ardent critics of government has been dwarfed by the
shortages, as they now concur that price controls  imposed by
government in June have imposed a freeze on production as well,
raising the demand for grocery imports from South Africa, Botswana and
other neighbouring countries.

A chief economist with a prominent Zimbabwean bank recently said
price controls had increased the rate of inflation due to an increase
in demand for commodities that have vanished from retail outlets, most
of which are now available at inflated prices on the black market.

“I’m not at liberty to disclose the details, but price controls have
contributed to an increase in the rate of inflation. I am informed
that several committees have been appointed by government to assess
the impact of price controls on inflation, but so far, indications are
that increased dependence on the black market and demand for foreign
currency to import commodities missing from our retailers has driven
inflation upwards.”

Panic buying and the sharp decline in production triggered by strict
controls on profit margins has left many supermarket shelves gaping,
therefore enlarging the market for imported commodities like cooking
oil, soap and even toiletries.

The CSO’s inflation and cost of living figures are based on a consumer
basket that is filled in local supermarkets that are easily accessible
to everyone.

However, with local supermarkets empty and people buying a loaf bread
for $1,5 million on the black market instead of the government’s
$200,000, inflation would easily be in the six digit region.

Locally available products like sugar and maize meal are occasionally
sold at a few shops where people stand in queues for long hours, while
they are readily available at high prices on the black market, where
prices are regulated by demand, availability, and the whims of

Government imposed a blanket freeze on price increases on June 18 2007
in response to increases in the prices of commodities.

Then, state-run newspapers excitedly declared war against the retail
and manufacturing sector, cheering president Robert Mugabe and Reserve
Bank of Zimbabwe governor, Gideon Gono into the suicidal clampdown on

The government imposed price freeze distorted the demand and supply
patterns in the country’s business sector, driving the bulk of trade
to the black market and resulting in some companies cutting down on
production, while other closed down to avoid incurring losses.

“Price controls are not sustainable in the practical sense because the
scarcity of commodities in retail outlets will get worse and the cost
of getting these goods on the black market will go up,” said economist
Mr John Robertson, adding, “Many prices rise because of scarcity, and
price controls do nothing to overcome those shortages.”

He said the increase in the importation of foodstuffs from countries
like South Africa, Botswana and Mozambique would drive foreign
exchange rates up, therefore inflating the cost of food.

“Before the price cuts, individuals were spending money on importing
industrial goods and other materials, but now the money is being spent
on importing food and this has pushed the cost of foodstuffs further

“The money to buy traded goods will be bought on the black market, and
predictably, the rate will go up by margins around 200 per cent or

Sources within CSO said that figures had been difficult to obtain as
far back as May, when the shortages worsened, but the department had
been pressured to release moderate figures.

The goods that are usually used for indexing are not readily available
in local retail outlets that are easily accessible to the average
family therefore the index would be unrealistic and distorted.

CSO has said it will wait for the goods to be available and then start
calculating the economic indicators. This leaves the calculation of
these figures in the hands of experienced accounting firms like
PriceWaterHouse Coopers and Ernst&Young.



Brief History of the Union Movement in Zimbabwe
By Godfrey Kanyenze and Blessing Chiripanhura, September 2001

The union movement in Zimbabwe dates back to the period of
colonisation (1890) and the establishment of capitalist relations of
production. The central role played by capital in the colonisation of
the country, and the creation of a capitalist mode of production in
Zimbabwe does underlie the privileged role capital was able to carve
out for itself in the country. The British South Africa (BSA) Company,
under Cecil John Rhodes, came to Zimbabwe in search of a second gold
rand, following the extensive discovery and exploitation of the
mineral in South Africa. The country only became a British Colony in
1923, after 33 years of company rule.

During the initial phase of colonisation, the focus of economic policy
was on the mining sector. The settlers had been inspired to move to
the north of the Limpopo River by the hope of finding a second Gold
Rand. When it became clear the expected huge gold deposits were not
there, the value of the BSA Company s shares on the London Stock
Exchange collapsed. As a way of minimising the loss, the BSA Company
shifted its attention from mining towards agriculture (see Rukuni and
Eicher (eds, 1994).

Faced with serious labour shortages, the colonial regime resorted to
coercive ways of recruiting labour. At first, taxes were introduced as
a means to force locals into wage employment. A hut and poll tax were
introduced in 1894. However, the tax instrument failed to ensure a
steady flow of labour. Since taxes could be paid in kind, locals
resorted to this method of payment. In addition, they sold their
produce to raise the money required by the tax authorities. Faced with
low wages and poor working conditions, workers responded by deserting
their employers. Worried by the resistance of locals to wage
employment, employers had to recruit from other countries such as
Malawi, Zambia, Mozambique and even as far north as Ethiopia.

To create a stable workforce, additional measures were taken in the
form of the Masters and Servants Ordinance of 1901, which made it a
criminal offence to break a labour contract. In addition, Pass Laws
were passed in 1904 to limit the movement of workers as well as to
help in enforcing employment contracts. These laws effectively put
workers under the control of their employers.

When it became clear that these measures were inadequate, more brutal
instruments were used, notably, land expropriation. Although various
pieces of legislation were enacted to deprive Africans their rights to
land, the most far-reaching were the Land Apportionment Act of 1930
and the Land Tenure Act of 1969. These measures were meant to deprive
the blacks of their sole source of livelihood, land, and make them
dependent on wage employment. In addition, the separation of the
husband from the rest of the family was calculated to keep wages low.
The Industrial Conciliation Act (ICA) of 1934 legalised the formation
of white trade unions while making black unions illegal. This meant
that black workers were still governed by the Masters and Servants
Ordinance of 1901. The Act also had the effect of barring blacks from
skilled jobs as they could not take up apprenticeships. The Act made
provisions for the setting of wages for white employees, while those
for blacks were left to the whims of the employer.

Following unrest emanating from widespread poverty, the Howman
Commission was appointed in 1944. The Commission found that blacks
were generally very angry with the way they were being treated. It
recommended the establishment of a wage board for black workers and
the need to pay a wage that is sufficient to meet the needs of the
family and not a single person. Failure to address these issues
culminated in the 1948 general strike which started in Bulawayo. The
striking workers agreed to go back to work following promises by
government to establish a National Native Labour Board. The Board
published Labour Regulations in January 1949, which recommended the
introduction of a minimum wage, job grading and measures to improve
urban housing.

The strike had a strong impact. In an address to the Legislative
Assembly, the then Prime Minister, Sir Godfrey Huggins observed that:

“We are witnessing the emergence of a proletariat and in this country
it happens to be black. They are demanding a place under the sun and
we have to face up to it,” (quoted in ZCTU, ibid).

Notwithstanding such a forward-looking approach, the Hudson Commission
which was appointed to examine the causes of the1948 general strike
came up with measures to tighten control over workers. As a result,
the Subversive Activities Act of 1950 was passed. This Act gave the
State powers to arrest and detain workers  leaders and to control
strikes. Realising the futility of suppressing the growth of trade
unionism, government amended the Industrial Conciliation Act in 1959.
The Act legalised the formation of trade unions, albeit under strict
conditions. Trade unions could only be registered if they were
representative, non-political, financially healthy and with the
consent of the employer.

Under this Act, three categories of workers were recognised, namely
the skilled, who were whites, semi-skilled who were coloureds and the
unskilled, who were black. In this way, the Act maintained the
segmentation of the labour market along racial lines. Under the Act,
trade union funds were not to be used for political purposes, trade
unionists were denied the right to affiliate with any political party
or political organisation, people arrested under the Unlawful
Organisations (political parties) Act could not hold posts in the
trade unions, donations from outside organisations had to be approved
by the Minister of Labour and the right to strike was denied. Under
such onerous conditions, few black trade unions bothered to register
such that by 1960, only two were registered.

However, inspite of the existence of such draconian labour laws, trade
unions played an active role in the nationalist struggles of the 1950s
and 1960s. In any event, it was not easy to separate trade unionism
and political activism. Because of the thin line separating the two,
trade unions were incarcerated during the 1960s and 1970s. Sachikonye
summarised the impediments faced by trade unionists during the
colonial era as follows:

* police harassment (there were 68 unionists in detention in
* absence of continuity in leadership due to harassment;
* the privileged but divisive status of the white labour
* divisive role of international labour bodies;
* the creation and presence of an industrial reserve army to pull
down wage costs;
* internal power struggles in unions; and
* financial problems due to an erratic and optional check off
system (1986: 251).

At the time of independence in 1980, there were as many as 6 national
trade union centres, namely, the African Trade Union Congress (ATUC),
the National African Trade Union Congress (NATUC), the Trade Union
Congress of Zimbabwe (TUCZ), the United Trade Unions of Zimbabwe
(UTUZ), the Zimbabwe Federation of Labour (ZFL) and the Zimbabwe Trade
Union Congress (ZTUC). The first historic event after independence was
the bringing together of the 52 existing unions to a Congress on
February 28, 1981 where the Zimbabwe Congress of Trade Unions (ZCTU)
was formed. At this Congress, unionists that were closely associated
with the ruling party, ZANU (PF) took over the reigns of the labour
movement. Thus, during the first 5 years of independence, the
relationship between ZANU (PF) and by extension, government and the
ZCTU was largely paternalistic. It was only after the collapse of the
corruption-ridden executive of the ZCTU, and its second Congress held
in 1985 that a more independent leadership, largely drawn from the
larger and more professionally run unions that the relationship
between the ruling party and the ZCTU was reduced to arms-length.

Thereafter, the ZCTU steered a more independent and increasingly
confrontational position. The divide between the ZCTU and government
widened when the former opposed attempts by the latter to introduce a
one-party state in Zimbabwe in the late 1980s following the merger
between the two major parties, ZANU (PF) and ZAPU in 1987. The
relationship was particularly strained following the introduction of
the Economic Structural Adjustment Programme (ESAP) in 1991. As the
hardships arising from the market-based reforms deepened, government
increasingly resorted to draconian measures to shore up its waning
political support. As issues of governance deteriorated, the ZCTU
increasingly became the torch-bearer for alternative governance.
Together with 40 other civil society groups, the ZCTU spearhead the
formation of an alternative party, the Movement for Democratic Change
(MDC), whose top leadership came from the labour movement. The MDC was
officially launched as an opposition party on 11 September 1999, 8
months before the June 2000 Parliamentary elections. In the June
elections, the labour-backed MDC garnered 57 seats, while the ruling
party ZANU (PF) settled for 62 seats, with one seat going to ZANU
(Ndonga). Clearly, therefore, the ZCTU played a key role in changing
the political landscape of Zimbabwe.


by Michael K. Salemi

Inflation is a sustained increase in the aggregate price level.
Hyperinflation is very high inflation. Although the threshold is
arbitrary, economists generally reserve the term hyperinflation to
describe episodes where the monthly inflation rate is greater than 50
percent. At a monthly rate of 50 percent, an item that cost $1 on
January 1 would cost $130 on January 1 of the following year.

Hyperinflations are largely a twentieth-century phenomenon. The most
widely studied hyperinflation occurred in Germany after World War I.
The ratio of the German price index in November 1923 to the price
index in August 1922–just fifteen months earlier–was 1.02 × 1010. This
huge number amounts to a monthly inflation rate of 322 percent. On
average, prices quadrupled each month during the sixteen months of

While the German hyperinflation is better known, a much larger
hyperinflation occurred in Hungary after World War II. Between August
1945 and July 1946 the general level of prices rose at the astounding
rate of over 19,000 percent per month, or 19 percent per day.

Even these very large numbers understate the rates of inflation
experienced during the worst days of the hyperinflations. In October
1923, German prices rose at the rate of 41 percent per day. And in
July 1946, Hungarian prices more than tripled each day.

What causes hyperinflations? No one-time shock, no matter how severe,
can explain sustained (i.e., continuously rapid) price growth. The
world wars themselves did not cause the hyperinflations in Germany and
Hungary. The destruction of resources during the wars can explain why
prices in Germany and Hungary would be higher after them than before.
But the wars themselves cannot explain why prices would continuously
rise at rapid rates during the hyperinflation periods.

Hyperinflations are caused by extremely rapid growth in the supply of
“paper” money. They occur when the monetary and fiscal authorities of
a nation regularly issue large quantities of money to pay for a large
stream of government expenditures. In effect, inflation is a form of
taxation where the government gains at the expense of those who hold
money whose value is declining. Hyperinflations are, therefore, very
large taxation schemes.

During the German hyperinflation the number of German marks in
circulation increased by a factor of 7.32 × 109. In Hungary, the
comparable increase in the money supply was 1.19 × 1025. These numbers
are smaller than those given earlier for the growth in prices. In
hyperinflations prices typically grow more rapidly than the money
stock because people attempt to lower the amount of purchasing power
that they keep in the form of money. They attempt to avoid the
inflation tax by holding more of their wealth in the form of physical
commodities. As they buy these commodities, prices rise higher and
inflation accelerates.

Hyperinflations tend to be self-perpetuating. Suppose a government is
committed to financing its expenditures by issuing money and begins by
raising the money stock by 10 percent per month. Soon the rate of
inflation will increase, say, to 10 percent per month. The government
will observe that it can no longer buy as much with the money it is
issuing and is likely to respond by raising money growth even further.
The hyperinflation cycle has begun. During the hyperinflation there
will be a continuing tug-of-war between the public and the government.
The public is trying to spend the money it receives quickly in order
to avoid the inflation tax; the government responds to higher
inflation with even higher rates of money issue.

How do hyperinflations end? The standard answer is that governments
have to make a credible commitment to halting the rapid growth in the
stock of money. Proponents of this view consider the end of the German
hyperinflation to be a case in point. In late 1923, Germany undertook
a monetary reform creating a new unit of currency called the
rentenmark. The German government promised that the new currency could
be converted on demand into a bond having a certain value in gold.
Proponents of the standard answer argue that the guarantee of
convertibility is properly viewed as a promise to cease the rapid
issue of money.

An alternative view held by some economists is that not just monetary
reform, but also fiscal reform, is needed to end a hyperinflation.
According to this view a successful reform entails two believable
commitments on the part of government. The first is a commitment to
halt the rapid growth of paper money. The second is a commitment to
bring the government’s budget into balance. This second commitment is
necessary for a successful reform because it removes, or at least
lessens, the incentive for the government to resort to inflationary
taxation. Thomas Sargent, a proponent of this second view, argues that
the German reform of 1923 was successful because it created an
independent central bank that could refuse to monetize the government
deficit and because it included provisions for higher taxes and lower
government expenditures.

What effects do hyperinflations have? One effect with serious
consequences is the reallocation of wealth. Hyperinflations transfer
wealth from the general public, which holds money, to the government,
which issues money. Hyperinflations also cause borrowers to gain at
the expense of lenders when loan contracts are signed prior to the
worst inflation. Businesses that hold stores of raw materials and
commodities gain at the expense of the general public. In Germany,
renters gained at the expense of property owners because rent ceilings
did not keep pace with the general level of prices. Costantino
Bresciani-Turroni has argued that the hyperinflation destroyed the
wealth of the stable classes in Germany and made it easier for the
National Socialists (Nazis) to gain power.

Hyperinflation reduces an economy’s efficiency by driving agents away
from monetary transactions and toward barter. In a normal economy
great efficiency is gained by using money in exchange. During
hyperinflations people prefer to be paid in commodities in order to
avoid the inflation tax. If they are paid in money, they spend that
money as quickly as possible. In Germany workers were paid twice per
day and would shop at midday to avoid further depreciation of their
earnings. Hyperinflation is a wasteful game of “hot potato” where
individuals use up valuable resources trying to avoid holding on to
paper money.

The recent examples of very high inflation have mostly occurred in
Latin America. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay
together experienced an average annual inflation rate of 121 percent
between 1970 and 1987. One true hyperinflation occurred during this
period. In Bolivia prices increased by 12,000 percent in 1985. In Peru
in 1988, a near hyperinflation occurred as prices rose by about 2,000
percent for the year, or by 30 percent per month.

The Latin American countries with high inflation also experienced a
phenomenon called “dollarization.” Dollarization is the use of U.S.
dollars by Latin Americans in place of their domestic currency. As
inflation rises, people come to believe that their own currency is not
a good way to store value and they attempt to exchange their domestic
money for dollars. In 1973, 90 percent of time deposits in Bolivia
were denominated in Bolivian pesos. By 1985, the year of the Bolivian
hyperinflation, more than 60 percent of time deposit balances were
denominated in dollars.

What caused high inflation in Latin America? Many Latin American
countries borrowed heavily during the seventies and agreed to repay
their debts in dollars. As interest rates rose, all of these countries
found it increasingly difficult to meet their debt-service
obligations. The high-inflation countries were those that responded to
these higher costs by printing money.

The Bolivian hyperinflation is a case in point. Eliana Cardoso
explains that in 1982 Hernan Siles-Suazo took power as head of a
leftist coalition that wanted to satisfy demands for more government
spending on domestic programs but faced growing debt-service
obligations and falling prices for its tin exports. The Bolivian
government responded to this situation by printing money. Faced with a
shortage of funds, it chose to raise revenue through the inflation tax
instead of raising income taxes or reducing other government spending.

About the Author
Michael K. Salemi is an economics professor at the University of North
Carolina in Chapel Hill.

Further Reading

– Bomberger, William A., and Gail E. Makinen. “The Hungarian
Hyperinflation and Stabilization of 1945-1946.” Journal of Political
Economy 91 (October 1983): 801-24.
– Bresciani-Turroni, Costantino. The Economics of Inflation: A Study
of Currency Depreciation in Post-War Germany. 1937.
– Cagan, Phillip. “The Monetary Dynamics of Hyperinflation.” In
Studies in the Quantity Theory of Money, edited by Milton Friedman.
– Cardoso, Eliana A. “Hyperinflation in Latin America.” Challenge
January/February 1989: 11-19.
– Holtfrerich, Carl-Ludwig. The German Inflation 1914-1923: Causes and
Effects in International Perspective. 1986.
– Salemi, Michael. “Hyperinflation, Exchange Depreciation, and the
Demand for Money in Post World War I Germany.” 1976.
– Salemi, Michael, and Sarah Leak. Analyzing Inflation and Its
Control: A Resource Guide. 1984.
– Sargent, Thomas J. “The Ends of Four Big Inflations.” In Sargent.
Rational Expectations and Inflation. 1986.

From the archive, originally posted by: [ spectre ]



“Under the Bush Administration, the “shadow government” of private
companies working under federal contract has exploded in size. Between
2000 and 2005, procurement spending increased by over $175 billion
dollars, making federal contracts the fastest growing component of
federal discretionary spending. … Federal spending on Halliburton
contracts increased over 600% between 2000 and 2005.”



From the archive, originally posted by: [ spectre ]


Libby’s Source Was Vice President Richard Cheney — Not Journalists

Cheney Told Aide of C.I.A. Officer, Lawyers Report

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Who Told Dick Cheney?
George Tenet Resigns for Family Reasons

“I consider Cheney a good friend-I’ve known him for thirty years.
But Dick Cheney I don’t know anymore.”


Harriet Miers covered-up Texas Lottery crimes

“If a first-year law student wrote that and submitted it in class, I
would send it back and say it was unacceptable.”,0,1244386.story?coll=la-home-headlines



“Undersecretary of Defense Douglas Feith, whom most of you probably
know Tommy Franks said was the stupidest blankety, blank man in the
world.  He was.  (Laughter.)  Let me testify to that.  He was.  Seldom
in my life have I met a dumber man.  (Laughter.)   And yet – and yet
– this man is put in charge.  Not only is he put in charge, he is
given carte blanche to tell the State Department to go screw itself in
a closet somewhere.  Now, that’s not making excuses for the State
Department; that’s telling you how decisions were made and telling
you how things got accomplished.”

  – Lawrence Wilkerson, ret. Army colonel, chief of staff to Sec.
State Powell
    in talk to the New America Foundation

“We cannot quote what Wilkerson actually said about DOD’s Doug Feith,
for example, because many of your spam-gards will block the words.
Given the locale, it was quite astonishing, however accurate.”–%20WEB.htm