Tuesday, August 10, 2004

De Jasay on Speculation 

Here is a crisp explanation of why speculators are essential and are a positive factor in any maket.

It is taken by the review by Anthony de Jasay of Claude Bebear's book: ils vont tuer le capitalisme.

Incidentally the second part of De Jasay's comments, when he argues about the practical impossibility of a speculator "inventing" market momentum (manipulation) over the medium term is a great confutation of Soros "Reflexivity"'.


The whirlwind of speculation

Nobody seems to like speculators. A defender of capitalism, however, ought to like them, rather than accusing them of generating vicious spirals. A speculator in stocks or currencies hopes to anticipate what the next man, and the one after that man, will do, and seeks to beat them to it. If he thinks there will be a buying spree, he will buy now, and if he expects a selling spree, he will sell now. He will sell what he has bought before the buying spree is exhausted, and buy back what he has sold before the selling spree is exhausted. If his anticipations were right, he will make money, and he will lose money if they were wrong. Obviously, however, if he was right and has made money, by beating the next man to both the purchase and the sale, he will have lifted the price when it was still low and lowered it when it was already high. In other words, if he was successful, he will have smoothed down the swing in the price that would otherwise have taken place. A market with active and successful speculators will be less volatile than it would otherwise be. Contrariwise, if he anticipated wrongly, he will have accentuated the swing and "destabilized" (forgive the trendy word) the market. As Nicholas Kaldor, no apologist for capitalism, has shown in a famous paper, speculators are benign if they make money and harmful if they lose it; but if they lose enough, they are wiped out and the harm stops. There is no vicious spiral, and the Tobin tax is otiose

In Mr. Bebear's book, however, the speculator does not anticipate a movement that is going to take place. Instead, he initiates and causes it. He sells (as a typical manager Mr. Bebear dislikes bears more than bulls), and his selling sets off an avalanche of other selling, driving the price down to a level where he will buy back low what he has sold high. A man of vast experience of the securities markets seems really to believe that speculators, or at least some of them, have this magic power over the expectations of other market participants. However, if even a single one had such a power, his every move would set off moves by hordes of others in the same direction. The more he speculated, the more slavishly would others follow his infallible lead, the more money he would make, and the more powerful would be the next whirlwind he could set off. Before long, he would own the world. But this is not how the economy really works, and Mr. Bebear must know it.


Wednesday, August 04, 2004

The 9/11 Commission: Another PATRIOT blunder? 

Most of the commentaries about the recommendations of the 9/11 Commission have focused on the bureaucratic reorganization of the intelligence services. Much less was discussed about two series of proposals which are prominent in the report:

1) the introduction of national forms of identification supported by biometrics in the US

2) an emphasis on border control and screening of passengers on planes

The first point is quite simple. The damage to liberty from a further increase in the power of Government over its citizens bears no proportion to the benefits. biometrics would not have prevented 9/11 and will do nothing to fight terrorism, but they are very effective to limit trade and freedom of movement for everyone else. the biometrics lobby, like the farm lobby and other lobbies, are just asking for lucrative government contracts.

The second point is even more simple. With tens of millions of people moving across US borders each year, the probability of catching a handful of people is negligible. Sealing borders is a silly illusion, a waste of resources and a criminal act (witness the dozens of poor mexicans shot at the border every year, Berlin Wall style).

Lastly, are we not fighting the last war? As can be seen by the situation in Israel and Iraq (where security is much tighter than in the US) car and truck bombs at malls and major buildings are the most likely problem. CAPPS and PaTRIOT measures which kill liberties of all Americans have no bearing on that.

Why can heavy trucks still circulate through Manhattan all day long? Why not simply restrict vans and trucks to certain hours? Do we need to wait a rush hour attach on the Rockefeller Center? But major Bloomberg is more interested in parking tickets...

See also the excellent editorial "CZARDOM" on the WSJ dated August 3rd, 2004 about the creeping abuse of influence by the commission, who is taking advantage of the summer recess by flooding the media with proposals which are destructive of basic liberties and rightfully belong to Congress not a bunch of publicity seeking panelists.


Monday, April 19, 2004

Mercenaries and free markets 

The curent developments in Iraq, where the US administration and private contractors are relying to a significant amount on mercenaries instead of on the Army, is an interesting test of the free market ideas of Rothbard (and hayek to some extent).

The full article is reproduced at the bottom of this blog.

One could easily dimiss the issue by saying that because all the Iraq military operation is a government initiative, funded with government money, it is irrelevant whether forced labor is used (military draftees), or a volounteer regular army (like the US currently) or mercenaries, or a combination of all three.

In a sense that is true. Pure Rothbardians would argue that without governments there would be no IRAQ war and so on.

That is only part of the story. By way of analogy the use of mercenaries in Iraq is an experiment in what could happen if domestic security were to be privatized.

I am interested in this aspect, not on the issue of military effectiveness of mercenaries, as I am not a specialist in military issues.

Two things are clear however in the case of the mercenaries in Iraq:
1) being people having no regard for principles, but literally hired guns, they are likely to behave in a way which will further alienate the Iraqi citizens. It is just another chapter in the miserable failure of Mr. Bremer.
2) the source of funds being government money, a large inflation of costs is likely, with the attending corruption in Washington (well beyond Halliburton we will find out that firms getting the best deals have friends in the right places).

Back to the privatized security.

In a privatized security environment, the mercenaries are hired by private parties. Say two neighbors. If the two neighbors clash, the mercenaries intervene. Hopefully some private arbitrator agreed in advance will prevent things to escalate to the level of Pashtun Vendettas.

The problem with mercenaries is that, as happened in the middle ages, they are also used by local war lords to extend influence over a territory and exchange "protection" for serfdom. Then the next chapter is citizens creating "free cities" to escape from the yoke of the barons.

Rothbard's argument is that this is exactly what the State does ot its Citizens, but he has no argument explaining why local barons are better than a national prince. There is a lot of literature in France about this subject (from the Cardinal de Retz against Mazarin).

The second problem is that they are unreliable and they lose wars against a "well organized militia" of citizens. It is important not to confuse Jefferson position in favor of the right of citizens to bear arms and revolt against the government - which is an essential feature of the balance of powers - with the generalized use of militias and mob rule.

The abuse of mercenaries by the Bush administration in my opinion will bring disrepute to the US and further reinforce the claims for government monopoly of force.

Two bad inintended consequences of the action of an ignorant bunch of politicians.

There is worse: the ethicists. It is amusing to see that the mercenary companies are polishing up their marketing by vetting recruits (trying not to hire the worst assassins, but why if you have to fight assassins) and by instituting quality processes and hiring ethicists. Very much like the nazis having chaplains in the army....

April 19, 2004

Security Companies: Shadow Soldiers in Iraq

his article was reported by David Barstow, James Glanz, Richard A. Oppel Jr. and Kate Zernike and was written by Mr. Barstow.

They have come from all corners of the world. Former Navy Seal commandos from North Carolina. Gurkas from Nepal. Soldiers from South Africa's old apartheid government. They have come by the thousands, drawn to the dozens of private security companies that have set up shop in Baghdad. The most prized were plucked from the world's elite special forces units. Others may have been recruited from the local SWAT team.

But they are there, racing about Iraq in armored cars, many outfitted with the latest in high-end combat weapons. Some security companies have formed their own "Quick Reaction Forces," and their own intelligence units that produce daily intelligence briefs with grid maps of "hot zones." One company has its own helicopters, and several have even forged diplomatic alliances with local clans.

Far more than in any other conflict in United States history, the Pentagon is relying on private security companies to perform crucial jobs once entrusted to the military. In addition to guarding innumerable reconstruction projects, private companies are being asked to provide security for the chief of the Coalition Provisional Authority, L. Paul Bremer III, and other senior officials; to escort supply convoys through hostile territory; and to defend key locations, including 15 regional authority headquarters and even the Green Zone in downtown Baghdad, the center of American power in Iraq.

With every week of insurgency in a war zone with no front, these companies are becoming more deeply enmeshed in combat, in some cases all but obliterating distinctions between professional troops and private commandos. Company executives see a clear boundary between their defensive roles as protectors and the offensive operations of the military. But more and more, they give the appearance of private, for-profit militias � by several estimates, a force of roughly 20,000 on top of an American military presence of 130,000.

"I refer to them as our silent partner in this struggle," Senator John W. Warner, the Virginia Republican and Armed Services Committee chairman, said in an interview.

The price of this partnership is soaring. By some recent government estimates, security costs could claim up to 25 percent of the $18 billion budgeted for reconstruction, a huge and mostly unanticipated expense that could delay or force the cancellation of billions of dollars worth of projects to rebuild schools, water treatment plants, electric lines and oil refineries.

In Washington, defense experts and some leading Democrats are raising alarms over security companies' growing role in Iraq.

"Security in a hostile fire area is a classic military mission," Senator Jack Reed of Rhode Island, a member of the Armed Service committee, wrote last week in a letter to Defense Secretary Donald H. Rumsfeld signed by 12 other Democratic senators. "Delegating this mission to private contractors raises serious questions."

The extent and strategic importance of the alliance between the Pentagon and the private security industry has been all the more visible with each surge of violence. In recent weeks, commandos from private security companies fought to defend coalition authority employees and buildings from major assaults in Kut and Najaf, two cities south of Baghdad. To the north, in Mosul, a third security company repelled a direct assault on its headquarters. In the most publicized attack, four private security contractors were killed in an ambush of a supply convoy in Fallujah.

The Bush administration's growing dependence on private security companies is partly by design. Determined to transform the military into a leaner but more lethal fighting force, Mr. Rumsfeld has pushed aggressively to outsource tasks not deemed essential to war-making. But many Pentagon and authority officials now concede that the companies' expanding role is also a result of the administration's misplaced optimism about how Iraqis would greet American reconstruction efforts.

The authority initially estimated that security costs would eat up about 10 percent of the $18 billion in reconstruction money approved by Congress, said Capt. Bruce A. Cole of the Navy, a spokesman for the authority's program management office.

But after months of sabotage and insurgency, some officials now say a much higher percentage will go to security companies that unblushingly charge $500 to $1,500 a day for their most skilled operators.

"I believe that it was expected that coalition forces would provide adequate internal security and thus obviate the need for contractors to hire their own security," said Stuart W. Bowen Jr., the new inspector general of the authority. "But the current threat situation now requires that an unexpected, substantial percentage of contractor dollars be allocated to private security."

"The numbers I've heard range up to 25 percent," Mr. Bowen said in a telephone interview from Baghdad. Mark J. Lumer, the Pentagon official responsible for overseeing Army procurement contracts in Iraq, said he had seen similar estimates.

But Captain Cole said that the costs were unlikely to reach that level and that the progress of reconstruction would eventually alleviate the current security problems.

Still, in many ways the accelerating partnership between the military and private security companies has already outrun the planning for it.

There is no central oversight of the companies, no uniform rules of engagement, no consistent standards for vetting or training new hires. Some security guards complain bitterly of being thrust into combat without adequate firepower, training or equipment. There are stories of inadequate communication links with military commanders and of security guards stranded and under attack without reinforcements.

Only now are authority officials working to draft rules for private security companies. The rules would require all the companies to register and be vetted by Iraq's Ministry of Interior. They would also give them the right to detain civilians and to use deadly force in defense of themselves or their clients. "Fire only aimed shots," reads one proposed rule, according to a draft obtained by The New York Times.

Several security companies have themselves been pressing for the rules, warning that an influx of inexperienced and small companies has contributed to a chaotic atmosphere. One company has even enlisted a former West Point philosopher to help it devise rules of conduct.

"What you don't need is Dodge City out there any more than you've already got it," said Jerry Hoffman, chief executive of Armor Group, a large security company working in Iraq. "You ought to have policies that are fair and equal and enforceable."

Company executives argue that their services have freed up thousands of troops for offensive combat operations.

But some military leaders are openly grumbling that the lure of $500 to $1,500 a day is siphoning away some of their most experienced Special Operations people at the very time their services are most in demand.

Pentagon and coalition authority officials said they had no precise tally of how many private security guards are being paid with government funds, much less how many have been killed or wounded. Yet some Democrats and others suggest that the Bush administration is relying on these companies to both mask the cost of the war and augment an overstretched uniformed force.

Mr. Rumsfeld has praised the work of security companies and disputed the idea that they were being pressed into action to make up for inadequate troop levels.

Still, the government recently advertised for a big new contract � up to $100 million to guard the Green Zone in Baghdad.

"The current and projected threat and recent history of attacks directed against coalition forces, and thinly stretched military force, requires a commercial security force that is dedicated to provide Force Protection security," the solicitation states.
Danger Zones: Rising Casualties and Deal Making

The words did not match the images from Iraq.

At a Philadelphia conference last week, a government official pitched the promise of Iraq to dozens of business owners interested in winning reconstruction contracts.

William H. Lash III, a senior Commerce Department official, said Baghdad was flowering, that restaurants and hotels were reopening. He told of driving around Baghdad and feeling out of place wearing body armor among ordinary Iraqis. In any case, he joked, the armor "clashed with my suit," so he took it off.

But the view from Iraq is considerably less optimistic, with contracting companies and allied personnel alike hunkering down in walled-off compounds. "We're really in an unprecedented situation here," said Michael Battles, co-founder of the security company Custer Battles. "Civilian contractors are working in and amongst the most hostile parts of a conflict or postconflict scenario."

One measure of the growing danger comes from the federal Department of Labor, which handles workers' compensation claims for deaths and injuries among among contract employees working for the military in war zones.

Since the start of 2003, contractors have filed claims for 94 deaths and 1,164 injuries. For all of 2001 and 2002, by contrast, contractors reported 10 deaths and 843 injuries. No precise nation-by-nation breakdown is yet available, but Labor Department officials said an overwhelming majority of the cases since 2003 were from Iraq.

With mounting casualties has come the exponential growth of the little-known industry of private security companies that work in the world's hot spots. In Iraq, almost all of them are on the United States payroll, either directly through contracts with government agencies or indirectly through subcontracts with companies hired to rebuild Iraq.

Global Risk Strategies, one of the first security companies to enter Iraq, now has about 1,500 private guards in Iraq, up from 90 at the start of the war. The Steele Foundation has grown to 500 from 50. Erinys, a company barely known in the security industry before the war, now employs about 14,000 Iraqis.

In many cases companies are adapting to the dangers of Iraq by replicating the tactics they perfected on Special Forces teams. One, Special Operations Consulting-Security Management Group, has recruited Iraqi informants who provide intelligence that helps the company assess threats, said Michael A. Janke, the company's chief operating officer.

The combination of a deadly insurgency and billions of dollars in aid money has unleashed powerful market forces in the war zone. New security companies aggressively compete for lucrative contracts in a frenzy of deal making.

"A lot of firms have put out a shingle, and they're not geared to operate in that environment," said Mr. Hoffman, the Armor Group chief executive.

One security company, the Steele Foundation, recently turned down an $18 million contract for a corporation that wanted a security force deployed within only a few days; Steele said it simply could not find enough qualified guards so quickly. Another company promptly jumped at the contract.

"They just throw bodies at it," said Kenn Kurtz, Steele's chief executive officer.

Early on in the war, private security contractors came mostly from elite Special Operations forces. It is a small enough world that checking credentials was easy. But as demand has grown, so has the difficulty of finding and vetting qualified people.

"At what point do we start scraping the barrel?" asked Simon Faulkner, chief operating officer of Hart, a British security company. "Where are these guys coming from?"

When four guards working for a subcontractor hired by Erinys were killed in an attack in January, they were revealed to be former members of apartheid-era security forces in South Africa. One had admitted to crimes in an amnesty application to the Truth and Reconciliation Commission there. "We were very alarmed," said Michael Hutchings, the chief executive of Erinys Iraq. "We went back to our subcontractors and told them you want to sharpen up on your vetting."

Troops and Guards: Distinctions Are Hard to Keep

For private security contractors, the rules of engagement are seemingly simple. They can play defense, but not offense. In fact, military legal experts say, they risk being treated as illegal combatants if they support military units in hostile engagements.

"We have issued no contracts for any contractor to engage in combat," Mr. Lumer, the Army procurement official.

What has happened, Mr. Lumer said in an interview, is that the Pentagon has, to a "clearly unprecedented" degree, relied on security companies to guard convoys, senior officials and coalition authority facilities.

No one wants regular troops "standing around in front of buildings," he said. "You don't want them catching jaywalkers or handing out speeding tickets."

But in Iraq, insurgents ignore distinctions between security guards and combat troops. And what is more, they have made convoys and authority buildings prime targets. As a result, security contractors have increasingly found themselves in pitched battles, facing rocket-propelled grenades, not jaywalkers..

It is in those engagements, several security executives said, that the distinctions between defense and offense blur most. One notable example came two weeks ago, when eight security contractors from Blackwater USA helped repel a major attack on a coalition authority building in Najaf. The men fired thousands of rounds, and then summoned Blackwater helicopters for more.

In an interview, Patrick Toohey, vice president for government relations at Blackwater, grappled for the right words to describe his men's actions. At one moment he spoke proudly of how the Blackwater men "fought and engaged every combatant with precise fire." At another he insisted that his men had not been engaged in combat at all. "We were conducting a security operation," he said.

"The line," he finally said, "is getting blurred."

And it is likely to get more blurred, with private security companies lobbying for permission to carry heavier weapons.

"We will keep pressing for that," said Mr. Faulkner, the Hart executive � especially after four of his men spent 14 hours on a roof of their building in Kut fighting off 10 times as many insurgents. Another Hart employee was killed in the assault, his body later dismembered by the mob.

"I cannot accept a situation where four of our people are being besieged by 40 or 60 Iraqis, where they're talking to me on a telephone saying, `Who's coming to help?' " Mr. Faulkner said.

They are also seeking ways to improve communications with military units.

Two weeks ago, a team of private security guards fought for hours to defend a coalition authority building in Kut. They later complained that allied Ukrainian forces had not responded to their calls for help.

Even routine encounters between allied forces and private security teams can be perilous. Mr. Janke, the security company executive and himself a former Navy Seal, said that in a handful of cases over the last year, jittery soldiers had "lit up" � fired on � security companies' convoys.

No one was killed, but standard identification procedures might have prevented those incidents, Mr. Janke said.

Sorting out lines of authority and communication can be complex. Many security guards are hired as "independent contractors" by companies that, in turn, are sub-contractors of larger security companies, which are themselves subcontractors of a prime contractor, which may have been hired by a United States agency.

In practical terms, these convoluted relationships often mean that the governmental authorities have no real oversight of security companies on the public payroll.

In other cases, though, the government insists that security companies abide by detailed rules. A solicitation for work to provide security for the United States Agency for International Development, for example, contains requirements on everything from attire to crisis management.

"If a chemical and/or biological threat or attack occurs, keep the area near the guard post clear of people," the document states, adding in capital letters, "Remember, during the confusion of this type of act, the guards must still provide security for employees or other people in the area."

The words are emphatic, but empty.

Government contracting officials and company executives concede that private guards have every right to abandon their posts if they deem the situation too unsafe. They are not subject to the Uniform Code of Military Justice, nor can they be prosecuted under civil laws or declared AWOL.

Scott Earhart said he left Iraq because he was disgusted at the risks he was asked to take without adequate protection or training.

Mr. Earhart, 34, arrived in Iraq in October to work as a dog handler for a bomb-detection company hired by Custer Battles. A former sheriff's deputy in Maryland, he said that there were not enough weapons and that his body armor was substandard.

"If you didn't get to the supply room in time you wouldn't have a gun," he said.

Mr. Earhart said the breaking point came when he was asked to drive unarmed to Baghdad from Amman, Jordan. "I felt my safety was in jeopardy," he said.

Mr. Battles, of Custer Battles, said that it had taken longer than expected to get weapons shipments, and that the company had had "growth issues, like everybody else." But, he emphasized, "under no circumstances did we let people out into the field without proper equipment."

Clearer Rules: Search for Standards, Even a Philosophy

For more than a decade, military colleges have produced study after study warning of the potential pitfalls of giving contractors too large a role on the battlefield. The claimed cost savings are exaggerated or illusory, the studies argue. Questions of coordination and oversight have not been adequately resolved. Troops could be put at risk.

Several senior American commanders in Iraq and Kuwait, or who have recently returned, expressed mixed feelings about the use of private security companies.

"The key thing is there are many requirements that are still best filled with combat units that can call on gunship support � Apache and Kiowa Warriors overhead � medevac, and just plain old reinforcements," one senior Army general wrote in an e-mail message to The Times. "Our task is to outsource what MAKES SENSE given the enemy situation."

In an unusual reversal of roles, the push for industry standards is coming from security executives themselves. In Washington, Pentagon lawyers are reviewing the rules governing security companies. At the same time, coalition authority and Iraqi officials are drafting operating rules for the private security companies.

The draft rules urge the use of "graduated force" � first shout, then shove, then show your weapon, then shoot. And they spell out when the guards may use deadly force. But they do not cover precisely how security operators will be screened and trained.

For now, companies are often writing their own rules and procedures for Iraq.

"It's an industry that if it's not careful could easily blend into what is usually referred to as war profiteers or soldiers of fortune or mercenaries," "It is a very ill-defined operating space right now," Mr. Battles said. "We draw the lines."

Custer Battles went so far as to hire an expert in military ethics, Paul Christopher, who taught philosophy at West Point. Mr. Christopher is helping the company define its place and policies in the chaos of Iraq.

"He's the anti-Rambo," Mr. Battles said. "This is a deep thinker."

Eric Schmitt contributed reporting from Washington for this article.

Friday, March 12, 2004

De Long on Freedom of Capital Movements 

Brad de Long, of Berkeley, Discusses his change of view from favorable to less positive about freedom of capital movements. The article is at:


Here are excerpts from his argument, followed by my comments.

"There appeared to be four important reasons to be in favor of removing capital controls: (1) The direct boost to production and productivity to follow from the removal of this barrier to market exchange. (2) The reduction in corruption and improvement in the quality of government that we hoped would follow. (3) The fact that our social welfare function places a higher weight on the utility of the poor than does the social welfare function implicitly maximized by the market, and so we place a large positive value on the improvement in the income distribution that follows from enlarging the supply of the scarce factor--capital--in capital-poor countries. And (4) the external benefits that flow from learning-by-doing using modern machinery and from capital imports as a carrier of technological knowledge."

Quite frankly, the last 2 arguments are not the relevant ones, as they are purely utilitarian and most importantly, because they assume that:
3) a social welfare function exists and should guide policy
4) the direction of capital flows can be evaluated from the outside; that is that an inflow into developing countries is "good" and from these countries into mature economies is "bad".

"It is very nice that Mexican workers and entrepreneurs are gaining experience in export manufactures, and exporting enough to the U.S. to run a trade surplus. But the flip side of the trade surplus is the capital outflow. Should capital-poor Mexico really be financing a further jump in the capital intensity of the U.S. economy? In the Treasury in 1993, I naively projected that after NAFTA there would be a net capital flow of some $10 to $20 billion a year for decades to come as investors around the world built factories in low-wage Mexico that now had guaranteed tariff-free access to the largest consumer market in the world. Instead, the capital flow has gone the other way."

This actually proves the merit of free trade. Rather than a "sucking sound" of businesses going to Mexico, the interdependence of the US and Mexico has increased.. That is clearly positive.

In addition, there is nothing wrong with Mexico investing in the US!

"It is not possible for a card-carrying neoliberal like me to wish for any but the most minor of controls to curb the most speculative of capital flows. Capital markets can get the allocation of investment badly wrong, but governments are likely to get it even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible."

This is in fact the core argument in favor of free capital movements. De Long states it as valid here, but omitted it at the beginning!

"But the hope for a repetition of the late nineteenth-century experience, in which core investors' money gave peripheral economies the priceless gift of cutting decades off the time needed for successful economic development, has so far proved vain."

Empirically, this is not true considering the vast foreign investment into China and the related economic development! As to Mexico, there are other reasons why Mexico's dirigiste economy does not develop faster.

Monday, March 08, 2004

Time to fight back the police state? 

I was probably not alone in being alarmed and surprised reading about the sweeping law (section 1001 of the federal code) which criminalizes lying to governnent agents. That was the law used against Martha Stewart and many others, as can be seen from the attached article from the New York Times of March 8, 2004.

I do not think that it is enough to "be aware" that "with the government you are always on the record" and one can always take the fifth and refuse to talk, as some lawyers say.

Such a law essentially precludes an individual from arguing his own case when questioned. Given the immense power and arsenal of intimidation at the disposal of the federal government, including blackmailing a person offering plea bargaining, immunity for cooperation and sheer intimidation through electronic surveillance (see in particular the book "the soft cage" by Parenti), it is very hard and expensive for an individual to simply take the fifth and refuse to talk. Just the cost of hiring defense attorneys against the government (who has much deeper pockets) can ruin an individual (not Martha Stewart, but most people are not that affluent).

It is time for citizens interested in liberty to fight back. We hope that Mr. Silverglate will be able to pursue a challenge and we need to support these efforts.

March 7, 2004

There's a Reason Your Mother Told You Not to Lie

N the end, the case turned out to be a slam dunk.

After months of debate about whether prosecutors made Martha Stewart a target because of her fame and after an apparently serious setback to the government's case only a few days earlier, jurors on Friday convicted Ms. Stewart of four counts of conspiracy and obstruction of justice. They had begun deliberating only two days earlier.

The quick conviction may not settle the public debate over whether Ms. Stewart was treated fairly. But defense lawyers for white-collar criminal cases say the focus on Ms. Stewart's celebrity misses the point. The real lesson of the case, they say, is that it once again proves the potency of a little-known federal law that has become a crucial weapon for prosecutors.

The law, which lawyers usually call 1001, for the section of the federal code that contains it, prohibits lying to any federal agent, even by a person who is not under oath and even by a person who has committed no other crime. Ms. Stewart's case illustrates the breadth of the law, legal experts say.

Ms. Stewart was convicted of obstruction of justice and making false statements to F.B.I. agents and investigators from the Securities and Exchange Commission who were investigating her for insider trading. (Her former broker, Peter E. Bacanovic, was convicted of four out of five counts of conspiracy and obstruction of justice.)

But Ms. Stewart was never charged with criminal insider trading, suggesting that if she had simply told investigators the truth she would not have faced criminal charges. The only counts the jury considered related to her behavior during the investigation.

"This was a classic case of the cover-up being worse than the crime," said Seth Taube, a white-collar defense lawyer at McCarter & English, a law firm in Newark. "It's an easy case to prove a lie."

That disturbs civil libertarians, who say that 1001 charges typically criminalize behavior that most people would not recognize as illegal.

"This 1001 law is really a remarkable trap," said Harvey Silverglate, a criminal defense lawyer in Boston.

People lie all the time to colleagues, friends and family, Mr. Silverglate said, and unless they are legal experts they probably do not know that lying to any federal investigator is illegal even if they are not under oath.

And F.B.I. agents and other investigators usually do not tape-record their conversations, so people can be convicted of making false statements based only on an investigator's notes, which may not exactly reflect what was said.

"Any casual conversation between a citizen and a person of the executive branch is fraught with the possibility that you can be convicted of lying," Mr. Silverglate said. If the government wants to make sure it is being told the truth, he added, it should put people under oath. "That's why we have perjury laws - because we tell people this time you're under a special formal obligation to tell the truth," he said. "And by the way, you'll notice it doesn't run in both directions, so a federal agent can lie to you, can trick you, in order to get information."

But prosecutors, and even some defense lawyers, say that 1001 charges are an essential tool that allow the government to punish witnesses or defendants who mislead investigators. Even if the prosecutors eventually decide not to bring criminal charges for the actions that initially prompted their investigation, lying should be taken seriously, Mr. Taube said.

"The fact that lying to the government can be a crime when the government doesn't charge the underlying offense doesn't bother me," he said. "You have an absolute right in this republic not to talk to the government, but it makes sense if you open your mouth that you should choose your words wisely."

Mr. Taube said Ms. Stewart's conviction offered an important lesson to anyone being interviewed by the F.B.I. or other federal agencies. "Fundamentally, if they make an appointment with you and sit down, you've got to know you're on the record," he said. "With the government, you're always on the record."

Thursday, March 04, 2004

German justice better than US? 

The Supreme Court in Germany states that the state cannot not abandon principles of justice, however grave the crime.

How long it will take for the Justices in the US to wake up to this simple truth?
Why the judges have become subservient to calculations of public utility instead of applying the principles of the rule of law?

KARLSRUHE, Germany (Reuters) - The only man convicted over the Sept. 11 attacks won the right to a retrial Thursday in a German appeal ruling that prosecutors said would hamper their pursuit of extremists.

Mounir El Motassadeq, a Moroccan, was jailed for 15 years in February 2003 for conspiring to murder nearly 3,000 people in the 2001 attacks on America and for membership of a terrorist organization, a German al Qaeda cell which included three of the suicide hijackers.

Supreme Court judge Klaus Tolksdorf said the state could not abandon principles of justice, however grave the crime.

"The fight against terrorism cannot be a wild, uncontrolled war," he said.

The successful appeal was likely to be seen by the United States and German authorities as a major setback. German Interior Minister Otto Schily had described the original conviction as an important success in the war on terror.

"It is quite clear that higher hurdles have been set for the prosecution of terrorism," state prosecutor Rolf Hannich said.

The U.S. embassy declined to comment.

Wednesday, January 21, 2004

dangerous thinking in Italy 

The Parmalat scandal is creating a "free for all" environment, where all sort of interventionist proposals are being peddled under the excuse that "we have to do something to prevent this from happening again".

From a variety of fronts all sorts of proposals have been made:
to enhance European harmonization of corporate governance
to change the regulatory powers of the Bank of Italy
of course to support the milk producers
to ban the use of foreign finance subsidiaries
to refund bondholders who bought through banks

It is useful to recall that legislation concocted "on the spur of the moment" is likely to be primarily influenced by populist motives and by an ill-conceived notion that the design of ad hoc regulations can be effective.

First of all, a lot about what happened is yet to be discovered, but most importantly care should be taken to assess the systemic implications of regulations. As a general principle, as unpopular as it may seem to say it:
1) the markets know best how to value assets and allocate capital; when a business is bankrupt, it is often preferable to sell the parts which can be sold to the highest bidder; the Government or the Courts are not qualified to manage businesses!
2) bygones are forever bygones in economics (to quite Hicks); losses which have occurred cannot be reversed and to dig deeper by supporting financially a loss-making enterprise is only destroying value for everyone.
3) investment is about risk. There cannot be profitable growth and enterprise without financial instability; regulations can be useful, but should not (underline should) eliminate risk. Otherwise we fall back to oriental despotism, where commerce is forbidden unless specifically authorized by the sovereign. The last one to try that route was Mao in China for 25 years, and his system was booted out by Deng Xiaoping.

The recent proposals mentioned by the Italian Economics Minister in a statement to the parlament on January 15th include something very dangerous, when it is suggested that a black list is established regarding "legal havens", or jurisdictions whose contracts the Italian law would not respect or recognize, for instance disregarding corporate entities and statutes. Given the absence of a readily enforceable international civil jurisprudence and the weakness of the WTO, an aggressive unilateral stance by a given country or cartel of countries could be very detrimental in creating a medieval system of princes recognizing each other on a bilateral basis or only respecting the use of force. The US State of Delaware is at great risk of ending up in such a list. Let us see if the are asleep or awake at the US State Department...

For the sake of clarity, let me emphasize that again institutional competition is essential; if a government finds inconvenient to respect contracts stipulated under alien jurisdictions, too bad for them; there is no god-given power in any government to have the "cornerstone" of legislation. Quite on the opposite it is from the interplay of different legal systems and contract forms that insitutional progress occurs.

To blame some foreign jurisdictions for the Parmalat scandal is very hypocritical by the Italians: the fraud was made in italy by Italians and to blame the instruments used is like blaming the car makers for the way cars are driven.

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