Erasmian Considerations

De Jasay on Speculation

2004-08-10T23:01:00.000-04:00

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"'.

QUOTE

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.

UNQUOTE

The 9/11 Commission: Another PATRIOT blunder?

2004-08-04T15:36:00.000-04:00

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.

http://online.wsj.com/article_print/0,,SB109157478231382198,00.html

Mercenaries and free markets

2004-04-19T14:34:00.000-04:00

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
By DAVID BARSTOW

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.

De Long on Freedom of Capital Movements

2004-03-12T22:32:00.000-05:00

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

http://www.j-bradford-delong.net/movable_type/2004_archives/000378.html

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.

Time to fight back the police state?

2004-03-08T19:41:00.000-05:00

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
STEWART'S FOLLY

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

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."

German justice better than US?

2004-03-04T23:56:00.000-05:00

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.

dangerous thinking in Italy

2004-01-21T19:02:00.000-05:00

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.

the works of Roland Vaubel

2004-01-04T15:51:00.000-05:00

Roland Vaubel is a professor in the department of Economics at the university of Mannheim in Germany.

He was, together with Angelo M. Petroni, one of the key participants to the European Constitutional Group, which published 10 years ago (1993) a blueprint for a Liberal (libertarian in US terms) European Constitution. The failure of the Giscard constitutional dirigisme will make the work of the European Constitutional Group a leading contender for a better approach to an European Institutional setup more respectful of liberty and competition.

Vaubel has written in English but is not well known in America. A search for references to his works in the Cato Institute web site, one of the preeminent libertarian organizations, yields nothing, although certainly Ed Crane knows him.

On the subject of institutional competition, I recommend in English:
a) Enforcing Competition among Governments - in Constitutional Political Economy n. 10 (1999)
b) The Centralisation of Western Europe - IEA Hobart Paper n. 127 (1995)
c) The constitutional reform of the European Union - in European Economic Review n. 41 (1997)
d) introduction to: Political Competition, Innovation and Growth - with P. Bernholz and M.E. Streit - Berlin, Springer (1998)

Prof. Vaubel is the only author I know who extensively researched and quotes the key principles of political philosophy underpinning the necessity of Competition among Governments, also called "institutional competition".
He refers appropriately to Kant's "Idea of Universal History from a Cosmopolitan Standpoint", as well as Weber, Hayek, Tiebout and Douglass North; especially notable is the reference to Brennan and Buchanan (1980) - the power to Tax - published by Cambridge University Press.

The key thesis of Vaubel is that "horizontal competition among governments not only requires the removal of barriers to trade, capital movements and migration and the enforcement of private contracts. State Governments must not only be prevented from protecting their territorial tax and regulatory monopolies against inter-jurisdictional substitution by the market. They must also be prevented from setting up tax and regulatory cartels among themselves." (Vaubel (1999) pag 328).
Vaubel goes on to observe that with the virtual completion of the internal free market in the EU, the problem is now the setting up of barriers between the EU and the outside world, and internally the stifling of inter-jurisdictional competition due to the imposition of "harmonization" and regulatory cartels.

As the protectionists erect barriers to private competition under the guise of "anti-dumping" and "unfair competition", governments in the EU and OECD do quite the same under the excuse of "unfair tax competition" and "regulatory arbitrage". The prescription of Vaubel is simple: setting up a directly elected competiton authority among governments, independent of the Commission and of National Governments. He calls this an "European Court of Review".

Vaubel also notes in the end that getting political consensus on this proposal will be quite difficult, for both the median voter and EU institutions have a vested interest in getting patronage and extending their powers by limiting inter-governmental competition.

Along the lines of Kant, who observed long ago that a "world government" would lead to an insufferable tyranny, Vaubel concludes that a competitive order for Governments does NOT require a supra-national Government!

In a different note I shall discuss the shortcoming of the prevailing economic literature on federalism and tax competition, epitomized by the work of Wallace E. Oates [an essay on fiscal federalism - JEL Sept 1999] which based all his work an the flawed goal of maximizing Government power, starting from the axiom: "the mobility of economic Units can seriosly constrain attempts to redistribute income". Obviosly only a Socialist would accept such a premise!

2004-01-04T15:09:00.000-05:00

it is blogworkz
get it at:

http://homepage.mac.com/soapdog/blogworks/index.html

On Power - a comment on Bertrand de Jouvenel

2003-12-31T14:18:00.000-05:00

The importance of Bertrand de Jouvenel’s “Du Pouvoir” (Treatise on Power) can be compared to John Locke’s Two Treatises on Government.

The book, published originally in French by Bourquin in Geneva in 1945 is available in english as a hard-to-find edition (see amazon: http://www.amazon.com/exec/obidos/tg/stores/offering/list/-/031322515X/all/ref=sr_pb_a/104-6795681-2051919).

Why is Jouvenel’s book so relevant? It is a comprehensive review from a philosophical perspective of the increase of the extent of Power over the course of the last centuries, to which corresponds the broadening of war, as the Power (whichever Government embodies it) has been able to mobilize all the resources of the society in the pursuit of its goals, including war. Quoting from the book: “ Francois premier had less than 50 000 soldiers at Marignan, Louis XVI had 180 000, Frederic the Great had 195 000 and Napoleon 240 000. Three million people were armed at the end of the Napoleonic wars, the first world war killed or maimed five times more. We end up where barbaric tribes started: we rediscovered the lost art of starving civilians, annihilating cities and dragging captives in servitude. We do not need barbaric invasions, we are our own Huns!” (op. cit, pp. 28-31). In my opinion, this is very pertinent to the techniques adopted by the US Government in its interpretation of “total war”, which encompasses suspending US citizens habeas corpus rights and includes killing civilians and assassinating enemy chiefs. Such behavior had beeen long banished as barbaric since the Renaissance, but has been re-discovered by the Germans in the XX Century, forcing others to follow in the escalation, culminated in the deliberate extermination of civilians ordered by Truman at Nagasaki.

Jouvenel’s main topic is not war, but a thorough analysis of the metaphysical theories underpinning the legitimation of Power: civil obedience, theories of Sovereignity (divine and of the people), organicist theories. Here Jouvenel notes convincingly that all theories originally intended to limit the extent of Power have been over time abused to justify its expansion.

The key point is the observation that to the extent Power was supposed to be delegated from a divine Sovereign to a specific regime (even monarchical) as agent with a finality (such as the common good) , then abuses of Power or its corruption could be a valid reason for opposing or even replacing a specific government or regime. Under the Rousseauvian "volonte generale" and subsequent holistic theories where the Sovereign is identified with the People, there cannot be such a limit to Power. It is a dire prediction, but sadly true that People's sovereignity is the origin of an enormous extension of political Power and tyranny.

He reviews the positions of Thomas Aquinas, Bellarmin, Necker, Hobbes, Rousseau, Hegel, among others.

He underlines the fundamental distinction between the individualistic foundations of classical political theories and the holistic modern theories, starting from Hegel and the socio-biologists or organicists such as Comte and Spencer. There is a very nice quotation from the De Republica of Cicero: “Res Publica, res populi, populus autem non omnis hominum coetus quoquo modo congregatus, sed coetus multitudinis juris consensu et utilitatis communione sociatus”.

The analysis of the history and development of Political Power is by itself quite important in its comprehensiveness. Jouvenel – who is considered a Liberal in the European sense – does not subscribe to the Austrian theories (e.g. Hayek’s) of the market catallaxis as an effective social cordination and discovery insitution. He laments the weakness of the “intermediate social corps”, the backbone of civil society, between individuals and the State which is characteristic of contemporary Society. In my opinion this may be very true of Europe, but to a much lesser degree in America, where private associations and churches always had – as noted by Tocqueville – a much greater importance in organizing the civil society.

Jouvenel is very pessimistic in its conclusion, but fundamentally correct, in my view, when he observes that in the final analysis what matters in a civilized society are the “mores” (moeurs in French), which cannot be developed by the political process and even less by the State, but by civil society alone.

Institutional Competition is Good - but this is puzzling

2003-12-06T17:50:00.000-05:00

The following is a column published by Ann Woolner for Bloomberg News. It discusses the competition among courts for accepting corporate reorganizations (so-called Chapter 11 or Chapter 7) in the US.

The interesting observation concerns the tendency of courts to favor the parties that decide where to file: the lawyers (higher fees) and the management of the debtor companies (approval of reorganization plans friendly to the incumbent management). The result is startling: the failure rates of reorganizations in Manhattan and Delaware is very high (almost 30%).

For a supporter of liberty and institutional competition, the answer must be in expecting that lenders and creditors in general will stipulate in contracts and loan agreements in advance either arbitration or the court of reorganization.

A legislative solution or fixed rules for locating jurisdiction have merit, but are unfair because create monopolies locally. If your local court is biased you are stuck...

QUOTE

Who Wants FAO? Enron? WorldCom? Bankruptcy Courts: Ann Woolner

Dec. 5 (Bloomberg) -- Something is wrong when FAO Schwarz, America's most stylish toy store, files for bankruptcy protection for the second time in a year and this time just as Christmas shopping revs up.

Surely something is amiss when companies like Enron and WorldCom deceive investors, go broke and then trot off to bankruptcy court with their lawyers charging $600 to $800 an hour.

Disparate developments? Maybe not. Evidence grows that they are symptoms of the same, disturbing problem: bankruptcy judges eager to lure the big cases into their courts.

Competition among bankruptcy courts doesn't get the sort of attention lavished on, say, the Olympics or the Masters golf tournament. But for more than a decade it's been just as real.

The problem with this sport is that to reel in the truly big cases, judges curry favor with the ailing companies and the lawyers who represent them.

``Cases are not going to be filed in courts that are not liberal with fees,'' says Gerald Munitz, a Chicago bankruptcy lawyer.

Astronomical hourly rates can be blamed on lots of causes, but competitive judging means that friendly courts offer no meaningful curb.

Beyond fees, eager-to-please courts are more likely to grant debtors important advantages, refrain from appointing trustees and agree to reorganization plans, say critics.

Courts in Competition

``It is corrupting the bankruptcy courts,'' says Lynn LoPucki, a University of California at Los Angeles law professor who studies bankruptcies. ``Now that the courts are in competition, companies that are filing and their lawyers have control.''

His research shows that the big winners of the bankruptcy competition, the courts in Wilmington and Manhattan, are also the courts where Chapter 11 reorganizations are most likely to fail. There, reorganized companies come back for another try.

``For FAO Schwarz to file a Chapter 11 twice in one year is absurd,'' Munitz said. ``It suggests a complete breakdown in the system.''

FAO, in fact, filed in Wilmington. Both times.

There was a time when bankruptcy petitions were filed in the company's hometown, quaintly enough. Congress changed the law in 1978 to let companies file where they had even the tiniest of assets or in the locale where they incorporated.

New Freedom

Lawyers didn't fully realize this new freedom until Eastern Air Lines took famous advantage of it in 1989. In a classic case of tail wagging dog, Eastern's lawyers used the company's airport hospitality operation, the New York-incorporated Ionosphere Club, to file in Manhattan and escape a hostile environment in hometown Miami.

And while the Manhattan bankruptcy bench was building its docket of mega-cases, so was Wilmington's.

Delaware had no big bankruptcies from out-of-state companies until 1990, when Continental Airlines and United Merchants and Manufacturers filed there, says LoPucki.

Seven years later, it had landed 13 of the 15 reorganizations filed by large, publicly traded U.S. companies in 1996, he says.

As for reorganizations of all sizes, the Manhattan court had 924 for the 12 months ending Sept. 30, while tiny Delaware came in second with 475, according to federal court statistics.

Streamlined Procedures

Competition is not always bad, of course. The Delaware bench worked to streamline its procedures and let lawyers know they could get a quick hearing on crucial ``first-day'' filings, for example.

``Because it's a specialized court, there's predictability as to what's going to happen in the case,'' says Bankruptcy Court Clerk David Bird. Now the Delaware court, with only two judges and a request for four more stuck in Congress, is so overwhelmed that it calls in visiting judges from around the country to help and, ironically enough, would welcome requests to shift cases elsewhere, Bird says.

Especially worrisome about intra-court competition are cases in which the alleged miscreants are still running the show. During Enron's first eight weeks in bankruptcy court in Manhattan, Kenneth Lay was still chief executive officer.

With multimillion dollar bonuses paid to executives just before the filing, and with evidence of continuing paper- shredding, Enron's situation called for an immediate appointment of a trustee to make sure assets weren't being shoveled out the back door, says LoPucki.

Angry Former Workers

If Enron had filed in its hometown of Houston, which is full of angry ex-employees and Enron investors, there would have been ``a much greater likelihood that a trustee would have been appointed,'' says Hugh Ray, a Houston bankruptcy lawyer, who has a piece of Enron's legal work.

Was something lost to creditors before Lay's resignation? Maybe not. Enron named a chief executive officer, Stephen Cooper, a few days after Lay left, and five months later the court appointed an examiner to investigate what happened at Enron.

WorldCom, likewise, had a choice of venues. Its lawyers chose Manhattan ``because of the experience of the court with large, complex cases,'' says Marcia Goldstein, a WorldCom lawyer with Weil, Gotshal & Manges.

As for lawyers' pay, ``Fees are not an issue in most of the venues that handle big cases,'' says Goldstein.

No surprise there.

Choosing Locations

A debtor's lawyer with a choice of places to file considers ``what's going to have a better result for the client, not what's going to have a better result for the attorneys,'' she says.

No surprise there, either.

And yet, LoPucki determined that reorganization failure rates are higher in Manhattan -- where 23 percent of large public companies must refile -- and in Delaware, where the number is 30 percent. This compares with 5 percent for all other courts.

There could be lots of reasons for this, beginning with the fact that the most complex bankruptcies are the ones most likely to land in Delaware or Manhattan.

We do know that when bankruptcy courts compete, the debtors and the lawyers who represent them benefit, one way or the other.

Representing some of Enron's creditors, Aaron Cahn was among the lawyers who asked U.S. Bankruptcy Judge Arthur Gonzalez in New York City to move the case to Houston. It came as no surprise that Gonzalez declined.

Cahn says he believes more was at work than the law.

``I'm willing to assume that Judge Gonzalez was anxious to keep the case at any cost,'' says Cahn. ``For anybody who's anxious to make a mark in this profession, being associated with this case is an attractive opportunity.''

Last Updated: December 5, 2003 12:24 EST

UNQUOTE

Corporate Governance in America

2003-12-06T12:26:00.000-05:00

At Disney, Stanley Gold and Roy Disney have resigned protesting the cronyism of Eisner, who has used the pretext of corporate governance guidelines to pack the board and its committees with personal friends. The stratagem employed by Eisner to disenfranchise shareholders are "independent directors", an elitist concept devised by Fabian socialists requiring directors not to have an economic interest in the business at hand. This has the perverse effect of banning directors who are also shareholders to be active in board committees and deliberations! The folly of this principle, which is codified in most of European stock exchange regulations has been denounced by only a few voices, notably Claude Bebear or AXA and Warren Buffett.
As Bebear noted, when a large shareholder is not deemed independent, then the only directors chosen will be golf buddies and personal friends of the Chairman. Exactly as it happened at Disney. I would argue that on the contrary, directors must have a personal stake in the business to align theis interest with all the investors. Otherwise corporate directors will become a cabal just like the EU technocrats, appointed by their peers and accountable to no one.
With the stock market surge of the current year, a new puzzle arises: will the shareholders clamor to enforce proper aligment of interest and stop cronyism at companies like Disney even when the share price rises? The Economist of December 4th, 2003 puts it best:

<<(At Boeing) didn't the board do the right thing, and prompt the firm's boss, Phil Condit, to fall on his sword? Yes, but not for reasons that would necessarily cheer fans of stronger governance—if by that is meant stronger exercise of ownership rights by shareholders. Boeing's big shareholders appear indifferent to Mr Condit's sudden departure. It remains to be seen whether Disney's shareholders will be moved by the complaints of Messrs Gold and Disney. The reason for shareholder complacency at both firms seems to be their share prices, which since March have shot up by 53% at Disney and 52% at Boeing.

Mr Condit may have gone because his biggest customer, the Pentagon, finally lost patience with all those stories about naughty behaviour at Boeing. Despite his many governance failings, Mr Eisner seems more secure at Disney than he has been for a long time—at least until Disney's performance begins to falter again. If they want real reform, America's biggest shareholders will have to learn how to get angry when they are making money, not just when they are losing it.>>

Endgame for the $

2003-09-16T19:19:00.000-04:00

Semi-Daily Journal: The Endgame for the U.S. Current-Account Deficit
Kevin Drum interviews Paul Krugman, and in the course of the interview Krugman thinks about the end of the U.S. trade deficit:

CalPundit: An Interview With Paul Krugman: What happens if these foreign countries do stop buying U.S. bonds? Is this a real concern, or a tinfoil hat kind of thing? Oh, I don't think China is going to [stop buying U.S. bonds in order] to pressure us. You can just barely conceive of a situation where they're mad at us because we're keeping them from invading Taiwan or something, but more likely they just start to wonder if this is really a good place to be putting their money. So what happens is a plunge in the dollar when they decide to stop buying and start cashing in, and a spike in U.S. interest rates. But you might also get in a situation where the interest rates the government has to pay to roll over its debt become so high that you get an accelerating problem, which is what happened in Argentina. What happened was that suddenly no one would buy Argentine debt unless they paid a twenty something percent interest rate, and everybody says, but if they have to roll over their debt at a twenty percent interest rate, there's no way they can pay that back. So the whole thing grinds to a halt and the cash flow just dries up.

And do you think that's a serious possibility for the United States? Yeah, just take the numbers as they now look, and that's where it heads. And you might say, OK, we can easily handle it. U.S. taxes are 26 percent of GDP in the U.S., in Canada they're 38 percent of GDP. If you raise U.S. taxes to Canadian levels there's plenty of money to cope with all of this. But politically we've got a deadlock, and it's hard to imagine that happening. So you say, but this can't happen, this is America, and I guess my answer is, is it? Is this the same country that we had in 1970? I think we have a much more polarized political system, a much more polarized social climate. We certainly aren't the country of Franklin Roosevelt, and we're probably not the country of Richard Nixon either, so I think we have to take seriously the possibility that things won't work out this time...

The U.S. current account deficit is unsustainable, and as Herb Stein used to like to say, if things are unsustainable they will stop. I used to think it would stop as demand in the rest of the world grew and demand for U.S. exports grew along with it. That's becoming less and less likely. So I have to agree with Paul that the current-account deficit will end one day when foreigners decide that the U.S. is not a good place to put their money, and the dollar falls in value by somewhere between 25% and 50% in a relatively short period of time. If Bush is reelected and continues his feckless fiscal policies, my bet is that this dollar crisis comes between three and five years from now.

What consequences does such a shift in capital flows and a collapse in the dollar entail? I do find myself much more optimistic than Paul Krugman. A large chunk of the U.S. net foreign indebtedness is nominal and is denominated in dollars. The end of confidence in the American economy and the drying-up of the capital inflow leads to a very rapid and steep decline in the dollar, yes. It leads to a rapid fall-off in imports, yes (and to a slower expansion of exports). But the further the dollar falls, the more U.S. gross indebtedness to foreigners shrinks. So I think (unless New York banks' derivative positions are such as to bankrupt them all if the dollar collapses) the landing is a relatively soft one, as opposed to the brutal hard landings of Argentina at the start of this decade or East Asia and Mexico at the middle of the last one.

My bet is that interest rates spike for a little while in response to the dollar collapse, and that the U.S. undergoes a small recession, but that within a couple of years the macroeconomy stabilizes and unemployment never goes very high.

The real disaster scenarios for the U.S. economy are further out: they come when politicians try to tell the baby boomers that the combination of the tax cuts of the 2000s and the failure to address entitlement spending growth means that they don't get their Medicare, their Medicaid, and their Social Security.

Posted by DeLong at 01:23 PM

Erasmus comments:
I think both De Long and Krugman are right about the fundamentals. THe crucial question is about timing. As theirs is still a minority view and the FED/FOMC just said (Sept 16) that they will keep rates low for some time, one can enjoy the ride for a while.
Usually however the markets wake up quite suddenly, like it happened in 1994 (T-Bonds) and in July this year, when rates on 10 year Treasuries rose 140 bp in a month. Much more will happen when the international credit markets will lose confidence in US Treasuries. SO it is reasonable to say that it will take time, but how much? WHat are the indicators that the flow is reversing? Alas the best indicator are long term interest rates themselves; I do not know of a reliable leading indicator of Long Term rates. So the thing to watch is the trend in interest rates, relative to Japan and Europe. In the meantime it is hard to stay just in cash, but one should keep some siginifcant reserves, in my opinion.

Laser Sailing

2003-08-29T20:50:00.000-04:00

Everything you need to know about the beast boats.
Note they are made in the UK.
The US trademark has been hijacked by Vanguard boats, who does not offer nearly the same range...

http://www.lasersailing.com/uk/boats/

Patents as a restriction on innovation

2003-08-29T18:16:00.000-04:00

Contrary to the predominant perceptions, patents (which are a monopoly right conferred by the sovereign) do not serve any useful economic purpose, any more that royal charters to the India Company did foster trade.

A good survey of the question has been written by Pierre DESROCHERS in the Quarterly Journal of Austrian Economics - Vol 1 N 4 (winter 1998).

These are my views, not Desrochers, but the reader could refer to the article to explore in more depth.

Innovation is an incremental process which moves in small steps, one innovation building on another. A good example is the software industry or mathematics, or physics.

Patents restrict innovation in several ways, the most important being that the patent process restricts the use of innovative steps and biases allocation of capital in the direction of patentable research. Where would be Geometry or Calculus if the Euclid foundation could claim a monopoly on Euclidean Geometry or Cauchy on differentiation?

In the software industry, all major innovations, such as the internet and Linux are unpatented. Of course crooked lawyers like Bill Gates or SCO will always try to stifle innovation by claiming a patent, but as the example of Windows shows, they act as a restraint on trade and generate a monopoly, which slows down innovation. It is interesting to note that Apple's new operating system, OS X, which is vastly superior to Windows, largely builds on UNIX, Cocoa and Darwin, three "open source" platforms developed by academics and by the open source software community of developers.

The current court case where SCO is suing IBM for allegedly using portions of Linux which they claim belong to the SCO UNIX code is a good case in point. It has been shown in depositions that all the code claimed by SCO/UNIX was written by third party developers under the open source (free) licence and the argument of SCO lawyers is quite lame and pathetic (copyright overrides the open source contract license). Such argument was put forward by the BOIES law firm, which specializes in ambulance chasing and clearly does not understand software (they lost their case against Microsoft). So the whole matter of patenting software is just an attempt to restrain trade.

Most of the patents issued and the most enforceable are in chemistry and pharmaceuticals, which explains why pharmaceutical prices are the highest in the US. Given the large number of chemical and pharma students graduating from India and China, one should expect that in 10 to 20 years the current predominance of US pharma firms will be broken. Not without a fight, of course. Indian firms already excel at the production of compounds and generic pharma and gradually they will increase their share of innovations. The US firms will be left defending their aging patents by regressive measures such as extending the life of existing patents or patenting new "delivery systems" (basically different packaging of the same product). But that will not stop them from declining.

Works of Erasmus

2003-08-27T20:59:00.000-04:00

Erasmus (Rotterdam 1467 - Basel 1536) is best known for the "Encomium Moriae" (Praise of Folly) which has been widely traslated and studied. It is a billiant humanistic essay. However there are very few comprehensive collections of Erasmus works which are accessible.
The "collected works of Erasmus" translated in English by RAB Mynors have been published by the University of Toronto Press, but it is a huge collection of volumes (close to twenty) and it is only good for Libraries.
It is especially difficult to find the ADAGES, I mean the complete collection (generally in two volumes) of Latin and Greek proverbs, annotated extensively by Erasmus.
A good anthology of Erasmus work has been published in French: Erasme - Collection Bouquins - Robert Laffont Paris 1992 - edited by: Claude BLum, Andre Godin, JC Margolin and Andre Menager. ISBN 2-221-05916-6 It also includes an excellent chronological table.
One of the most beautiful sermons Erasmus wrote is "de praeparatione ad mortem" - published in 1534. It is included in the french anthology but I could not find it in English!

Harvard Business Review on Corporate Blogging

2003-08-26T19:34:00.000-04:00

A pretty lame case study is published in the September 2003 issue.
THe most interesting comment is by Ray Ozzie of Groove Networks, who refers to a policy they have established for corporate blogging (see www.groove.net/weblogpolicy)

Roaming account for dialup

2003-08-26T19:06:00.000-04:00

Most dialup providers (like earthlink, or ATT, or even Yahoo) do not provide international roaming. THe only significant global roaming dialup service (or rather consortium) is iPass. However iPass would not open an account with individuals/small businesses. One solution I found, which is reasonable, is Central House, a reseller of iPass services (go to http://www.centralhouse.net/roam.htm). I used it on a recent trip to Europe and Asia and it works great. IT takes a day or so for Central House to confirm your subscription (fax is required), therefore it is best to contact them a few days before leaving. iPass provides a database of local dialups worldwide, which you can access using your central house account and a modem. Speeds in Europe and Asia can be as high as 48k. I still have to see wether one can put the account on dormant status to avoid monthly charges when one is not travelling...