The Hour Between Dog and Wolf: Risk-taking, Gut Feelings and the Biology of Boom and Bust by John Coates
Reprinted by arrangement of Penguin Press, a member of Penguin Group (USA), Inc. Copyright (c) 2012 by John Coates
A question remains: if women could have such a tonic influence on the markets, why are there so few women traders? Why are women not pushing their way onto the trading floors, and why are banks and hedge funds not waving them in? Women make up at most 5 percent of the traders in the financial world, and even that low number includes the results of diversity pushes at many of the large banks. The most common explanations ventured for these numbers are that women do not want to work in such a macho environment, or that they are too risk averse for the job.
There may well be a kernel of truth to these explanations, but I do not place much stock in them. To begin with, women may not like the atmosphere on a trading floor, but I am sure they like the money. There are few jobs that pay more than a trader in the financial world. Besides, women are already on the trading floor: they make up about 50 percent of the sales force, and the sales force sits right next to the trading desks. So women are already immersed in the macho environment and are dealing with the high jinks; they are just not trading. Also, I am not convinced women are as easily put off by a male environment as this explanation assumes.
There are plenty of worlds once dominated by men that have come to employ more women: law and medicine, for example, were once considered male preserves but now have a more even balance between men and women (although admittedly not at the top echelons of management). So I am not convinced by the macho environment argument.
What about the second-mentioned explanation, that men and women differ in their appetite for risk? There have been some studies conducted in behavioral finance that suggest that on computerized monetary choice tasks women are more risk averse than men. But here again, I am not entirely convinced, because other studies, of real investment behavior, show that women often outperform men over the long haul, and such outperformance is, according to formal finance theory, a sign of greater risk taking. In an important paper called “Boys Will Be Boys,” two economists at the University of California, Brad Barber and Terrance Odean, analyzed the brokerage records of 35,000 personal investors over the period 1991–1997 and found that single women outperformed single men by 1.44 percent. A similar result was announced in 2009 by Chicago-based Hedge Fund Research, which found that over the previous nine years hedge funds run by women had significantly outperformed those run by men.
Barber and Odean traced the women’s outperformance to the fact that they traded their accounts less. Men on the other hand tended to overtrade their accounts, a behavior the authors take as a sign of overconfidence, a conviction on the part of the men that they can beat the market. The trouble with overtrading is that every time you buy and sell a security you have to pay the bid–offer spread plus any commission, and these costs add up so quickly that they substantially diminish returns. Is the superior performance of women risk takers due to their lower transactions costs? Or is part of it due to higher risk taking? Or perhaps to better judgment? How can we reconcile the experimental findings that women are more risk averse with the data on their actual returns, which suggests either greater risk taking or better judgment? There is a clue that may help solve this mystery.
As mentioned, women make up about 5 percent of an average trading floor. But these numbers change dramatically when we leave the banks and visit their clients, the asset-management companies. Here we find a much higher percentage of women. The absolute numbers are not large, because asset managers employ far fewer risk takers than banks; but at some of the big asset-management companies in the United Kingdom women make up as much as 60 percent of the risk takers. This fact is, I believe, crucial to understanding the differences in risk taking between men and women. Asset management is risk taking, so it is not the case that women do not take risks; it is just a different style of risk taking from the high-frequency variety so prevalent at the banks. In asset management one can take time to analyze a security and then hold the resulting trade for days, weeks or years. So the difference between men’s and women’s risk taking may be not so much the level of risk aversion as it is the period of time over which they prefer to make their decisions.
Perhaps men have dominated the trading floors of banks because most of the trading done on them has traditionally been of the high-frequency variety. Men love this quick decision making, and the physical side of trading. But do trading floors today really need so many of these rapid-fire risk takers? Banks certainly do need them; but with the advent of execution-only boxes of the sort discussed in Chapter 2, we are now in a position to disaggregate the various traits required of a risk taker—a good call on the market, a healthy appetite for risk and quick reactions—and let computers provide the quick execution. Increasingly, all that is required of risk takers is their call on the market and their understanding of risk once they put on a trade; and there is no reason to believe men are better at this than women. Importantly, the financial world desperately needs more long-term, strategic thinking, and the data indicate that women excel at this. As banks, hedge funds and asset-management companies assess their current needs and more data emerges on the performance of women risk takers, the financial institutions will come, I believe, to hire more and more women.
Besides letting the market take its natural course, there is a policy that could hasten the hiring of women. That is to alter the period of time over which a risk taker’s performance is judged. To repeat a point made in the last chapter, the trouble in the financial world right now is that performance is measured over the short haul. Bonuses are declared yearly, and within this year there is a lot of pressure on traders to trade actively—floor managers do not like to see people sitting on their hands, even if it may be the right thing to do—and to show profits on a weekly basis. Perhaps this aggressive demand for short-term performance has prevented banks from discovering the high long-term returns of which women are capable. The solution to this problem is quite simply to judge women risk takers—all risk takers for that matter—over the long haul. Here again this goal could be served by calculating bonuses over the course of a full business cycle. Should we do that, we might find banks and funds not worrying too much about a slow period in a trader’s returns, but only about their returns over the cycle. The market would come to value the stability and high level of women’s long-term performance, and banks might naturally start to select more women traders. Affirmative action would not be needed.
There is, however, another perspective, a troubling one, from which to view this and any other proposed solution to the problem of market instability. It has been suggested to me that we should not try to calm the markets, because bubbles, while troublesome, are a small price to pay for channeling men’s testosterone into nonviolent activities. Andrew Sullivan, in an article mentioned in Chapter 1, has expressed a similar concern. Ruminating about the role of testosterone today, he worries that the real challenge facing us is not so much how to incorporate women more fully into society but how to stop men from seceding from it. A chilling thought.
Keynes entertained somewhat the same concern, and concluded that capitalism, rather than any of the other economic systems on offer during the 1930s, was the preferred antidote to our violent urges, quipping that it is better to terrorize your checkbook than your neighbor. So maybe it is better to have testosterone vented in the markets than elsewhere.
I do not think that follows. We tend to get extreme behavior of the sort that gives testosterone a bad name when we isolate young males. This phenomenon can be observed in the animal world, and most vividly among elephants. In the absence of elders, young male elephants go into musth prematurely, a condition in which their testosterone levels surge forty to fifty times above baseline, and then they run amok, killing other animals and trampling villages. In South Africa, park rangers have found a solution to the problem: they have brought in an elder male elephant, and his presence has calmed the rogues.
This example from the animal world is admittedly more extreme than anything we find in human society, but it does dramatically illustrate the point I am making. There may be times when we want young males to be cut loose, perhaps during times of war. But when it comes to allocating the capital of society, the financial sector’s allotted goal, we probably do not want volatile behavior. We want balanced judgment and stable asset prices, and we are more likely to get these if we have the whole village present—men and women, young and old.
I like this policy of altering the biology of the market by increasing the number of women and older men in it. It strikes me as eminently sensible, and my hunch is that it would work. To argue for it one need not claim that women and older men are better risk takers than young men, just different. Difference in the markets means greater stability. There is, however, one point about which I have much more than a hunch, about which I am as certain as certain can be—that a financial community with a more even balance between men and women, young and old, could not possibly do any worse than the system we have now. For the one we have now created the credit crisis of 2007–8 and its ongoing aftershocks, and there is quite simply no worse outcome for a financial system.
Lastly, this policy has some decent science behind it. It provides a good example of how biology can help us understand and regulate the financial markets, and it does so, moreover, in a manner that is not in the least bit threatening.Back to the top
Private Empire: ExxonMobil and American Power by Steve Coll
Reprinted by arrangement of Penguin Press, a member of Penguin Group (USA), Inc. Copyright (c) 2012 by Steve Coll.
A few days before the Exxon Valdez ran onto Bligh Reef, tens of thousands of Hungarians marched through Budapest. The demonstrators turned the commemoration of an 1848 uprising against Austrian rule into a revolt against Soviet-backed communism. “Resign!” they shouted outside downtown buildings housing Communist Party bureaucrats. “Freedom! . . . No more shall we be slaves!” They carried flags from Hungary’s pre-Communist era and demanded the withdrawal of Soviet military forces. “Ivan, Aren’t You Homesick?” and “Legal State, Not a Police State” declared their protest signs.
The defiant march added to the cracks spreading that spring through the structures of global politics. The Berlin Wall fell a few months later, in November. The Soviet Union fissured and then disappeared. Democratic and free-market revolutions and revivals swept through Central Europe, Africa, Asia, and Latin America. Ethnic, religious, and territorial conflicts, long subdued by the cold war, erupted one after another. The world was remade, tossed, liberated—and reopened for international business.
The Valdezwreck stunned Exxon and its rising leader, Lee Raymond. The disaster would change the corporation profoundly. Internal reforms imposed by Raymond in response to the accident would turn one of America’s oldest, most rigid corporations into an even harder, leaner place of rule books and fear-inspiring management techniques. At the same time, Raymond and the rest of Exxon’s leaders would gradually pass through the introspection triggered by the Valdezspill and seek out the oil and gas plays that opened so unexpectedly after 1989. An age of empire beckoned America and Exxon alike.
In a bracingly short time, Anglo-American optimism and idealism about free markets, foreign investment, and the rule of law found adherents in the most unlikely world capitals. Brand-new nations brimming with oil and gas and others previously closed to Western corporations hung out FOR LEASE signs to lure geologists from Houston and London: Russia, Kazakhstan, Azerbaijan, Angola, Qatar, and tiny Equatorial Guinea, on the West African coast, soon to market itself through its Washington lobbyists as the “Kuwait of Africa.” These post–cold war opportunities for American, British, French, and Italian oil companies could be ambiguous, risky, and sometimes fleeting. Resentful nationalism and suspicion of the United States and Europe persisted in many capitals of the new oil powers. State-owned petroleum companies from China, India, Brazil, and elsewhere were rising quickly as competitors. Exxon might be America’s largest and most powerful oil corporation, but it would require all the political influence, financial resources, dazzling technology, speed, and stamina that its leaders could muster to seize the lucrative oil deals made possible by communism’s fall and global capitalism’s revival.
The United States now stood unchallenged as a worldwide military power. Exxon’s empire would increasingly overlap with America’s, but the two were hardly contiguous. Pentagon policy, after the Soviet Union’s demise, sought to keep international sea-lanes free; to reduce the global danger of nuclear war, terrorism, and transnational crime; to manage or contain Russia and China; to secure Israel; and to foster, against long odds, a stable Middle East from which oil supplies vital for global economic growth could flow freely. Exxon benefited from the new markets and global commerce that American military hegemony now protected. Yet the corporation’s activity also complicated American foreign policy; Exxon’s far-flung interests were at times distinct from Washington’s. Lee Raymond would manage Exxon’s global position after 1989 as a confident sovereign, a peer of the White House’s rotating occupants. Raymond aligned Exxon with America, but he was not always in sync; he was more akin to the president of France or the chancellor of Germany. He did not manage the corporation as a subordinate instrument of American foreign policy; his was a private empire.
Exxon’s power within the United States derived from an independent, even rebellious lineage. The corporation had been hived off from John D. Rockefeller’s Standard Oil monopoly in 1911, after a bruising antitrust campaign led by economic reformers and populist politicians. The visceral hostility toward Washington sometimes eschewed by Exxon executives eight decades later suggested some of them had still not gotten over it.
Exxon’s size and the nature of its business model meant that it functioned as a corporate state within the American state. Like its forebearer, Standard, Exxon proved across decades that it was one of the most powerful businesses ever produced by American capitalism. From the 1950s through the end of the cold war, Exxon ranked year after year as one of the country’s very largest and most profitable corporations, always in the top five of the annual Fortune 500 lists. Its profit performance proved far more consistent and durable than that of other great corporate behemoths of America’s postwar boom, such as General Motors, United States Steel, and I.B.M. In 1959, Exxon ranked as the second-largest American corporation by revenue and profit; four decades later it was third. And more than any of its corporate peers, Exxon’s trajectory now pointed straight up. The corporation’s revenues would grow fourfold during the two decades after the fall of the Berlin Wall, and its profits would smash all American records.
As it expanded, Exxon refined its own foreign, security, and economic policies. In some of the faraway countries where it did business, because of the scale of its investments, Exxon’s sway over local politics and security was greater than that of the United States embassy. In impoverished African countries increasingly important to Exxon’s strategy, such as Chad, the weight of the corporation’s investments and the cash flow it shared with local governments overwhelmed the economy and became the central prize in violent local contests for power. In Moscow and Beijing, Exxon’s independent power and negotiating agenda competed with and sometimes attracted more attention than the démarches issued by American secretaries of state. Yet the corporation could also be insular and even passive in the faraway places where it acquired and produced oil and gas. It fenced off local operations and separated its workforce from upheaval outside its gates. If its oil fl owed and its contract terms remained intact, then Exxon often followed a directive of minimal interference in local politics, especially if those politics were controversial, as in the case of the African dictatorships with which the corporation partnered, or the countries, such as Indonesia and Venezuela, where civil conflict swirled around Exxon properties. In Washington, Exxon was a more confident and explicit political actor. The corporation’s lobbyists bent and shaped American foreign policy, as well as economic, climate, chemical, and environmental regulation. Exxon maintained all-weather alliances with sympathetic American politicians while calling as little attention to its influence as possible.
The cold war’s end signaled a coming era when nongovernmental actors—corporations, philanthropies, terrorist cells, and media networks— all gained relative power. Exxon’s size, insularity, and ideology made its position distinct. Unlike Walmart or Google (to name two other multinational corporations that would rise after 1989 to global influence), the object of Exxon’s business model lay buried beneath the earth. Exxon drilled holes in the ground and then operated its oil and gas wells for many years, and so its business imperatives were linked to the control of physical territory. Increasingly, the oil and gas Exxon produced was located in poor or unstable countries. Its treasure was subject to capture or political theft by coup makers or guerrilla movements, and so the corporation became involved in small wars and kidnapping rackets that many other international companies could gratefully avoid.
The time horizons for Exxon’s investments stretched out longer than those of almost any government it lobbied. “We see governments come and go,” Lee Raymond once remarked, an observation that was particularly true of Washington, with its constitutionally term-limited presidency. Exxon’s investments in a particular oil and gas field could be premised on a production life span of forty or more years. During that time, the United States might change its president and its foreign and energy policies at least half a dozen times. Overseas, a project’s host country might pass through multiple coups and political upheavals during the same four decades. It behooved Exxon to develop influence and lobbying strategies to manage or evade political volatility.
American spies and diplomats who occasionally migrated to work at Exxon discovered a corporate system of secrecy, nondisclosure agreements, and internal security that matched some of the most compartmented black boxes of the world’s intelligence agencies. The corporation’s information control systems guarded proprietary industrial data but also sought to protect its long-term strategic position by minimizing its visibility. Exxon’s executives deflected press coverage; they withheld cooperation from congressional investigators, if the letter of the law allowed; and they typically spoke in public by reading out sanitized, carefully edited speeches or PowerPoint slides. Their strategy worked: Exxon made a fetish of rules, but it rarely had to justify or explain publicly how it operated when the rules were gray.
As the Valdezwreck made obvious, Exxon’s massive daily operations—soon to produce 1.5 billion barrels of oil and gas pumped from the ground each year, and 50 billion gallons of gasoline sold worldwide—posed huge environmental risks. After the Valdez, Exxon would become again, as it had been in the first decades of Standard Oil’s existence, the most hated oil company in America.
When gasoline prices soared, American commuters felt powerless before its influence. In effect, Exxon was America’s energy policy. Certainly there was no governmental policy of comparable coherence. After fitful, failed efforts to wean itself from imported oil during the 1970s, the United States had evolved no effective government-led energy strategy. Its de facto policy was the operation of free markets amid a jumble of patchwork subsidies, contradictory rules, and weak regulatory agencies. The very weakness of policy favored Exxon. As the public’s frustration grew over rising pump prices and dependence on oil imports that transferred billions of dollars to hostile regimes overseas, Exxon became a natural lightning rod. The corporation managed this criticism with the same coolheaded patience and indifference that it employed to endure political risk in tinpot African dictatorships. Compromise was not the Exxon way.Back to the top
Steve Jobs: The Exclusive Biography by Walter Isaacson
Reprinted by permission of Simon & Schuster, Inc. All Rights Reserved. Cover art by Albert Watson.
How This Book Came to Be
In the early summer of 2004, I got a phone call from Steve Jobs. He had been scattershot friendly to me over the years, with occasional bursts of intensity, especially when he was launching a new product that he wanted on the cover of Time or featured on CNN, places where I’d worked. But now that I was no longer at either of those places, I hadn’t heard from him much. We talked a bit about the Aspen Institute, which I had recently joined, and I invited him to speak at our summer campus in Colorado. He’d be happy to come, he said, but not to be onstage. He wanted instead to take a walk so that we could talk.
That seemed a bit odd. I didn’t yet know that taking a long walk was his preferred way to have a serious conversation. It turned out that he wanted me to write a biography of him. I had recently published one on Benjamin Franklin and was writing one about Albert Einstein, and my initial reaction was to wonder, half jokingly, whether he saw himself as the natural successor in that sequence. Because I assumed that he was still in the middle of an oscillating career that had many more ups and downs left, I demurred. Not now, I said. Maybe in a decade or two, when you retire.
I had known him since 1984, when he came to Manhattan to have lunch with Time’s editors and extol his new Macintosh. He was petulant even then, attacking a Time correspondent for having wounded him with a story that was too revealing. But talking to him afterward, I found myself rather captivated, as so many others have been over the years, by his engaging intensity. We stayed in touch, even after he was ousted from Apple. When he had something to pitch, such as a NeXT computer or Pixar movie, the beam of his charm would suddenly refocus on me, and he would take me to a sushi restaurant in Lower Manhattan to tell me that whatever he was touting was the best thing he had ever produced. I liked him.
When he was restored to the throne at Apple, we put him on the cover of Time, and soon thereafter he began offering me his ideas for a series we were doing on the most influential people of the century. He had launched his “Think Different” campaign, featuring iconic photos of some of the same people we were considering, and he found the endeavor of assessing historic influence fascinating.
After I had deflected his suggestion that I write a biography of him, I heard from him every now and then. At one point I emailed to ask if it was true, as my daughter had told me, that the Apple logo was an homage to Alan Turing, the British computer pioneer who broke the German wartime codes and then committed suicide by biting into a cyanide-laced apple. He replied that he wished he had thought of that, but hadn’t. That started an exchange about the early history of Apple, and I found myself gathering string on the subject, just in case I ever decided to do such a book. When my Einstein biography came out, he came to a book event in Palo Alto and pulled me aside to suggest, again, that he would make a good subject.
His persistence baffled me. He was known to guard his privacy, and I had no reason to believe he’d ever read any of my books. Maybe someday, I continued to say. But in 2009 his wife, Laurene Powell, said bluntly, “If you’re ever going to do a book on Steve, you’d better do it now.” He had just taken a second medical leave. I confessed to her that when he had first raised the idea, I hadn’t known he was sick. Almost nobody knew, she said. He had called me right before he was going to be operated on for cancer, and he was still keeping it a secret, she explained.
I decided then to write this book. Jobs surprised me by readily acknowledging that he would have no control over it or even the right to see it in advance. “It’s your book,” he said. “I won’t even read it.” But later that fall he seemed to have second thoughts about cooperating and, though I didn’t know it, was hit by another round of cancer complications. He stopped returning my calls, and I put the project aside for a while.
Then, unexpectedly, he phoned me late on the afternoon of New Year’s Eve 2009. He was at home in Palo Alto with only his sister, the writer Mona Simpson. His wife and their three children had taken a quick trip to go skiing, but he was not healthy enough to join them. He was in a reflective mood, and we talked for more than an hour. He began by recalling that he had wanted to build a frequency counter when he was twelve, and he was able to look up Bill Hewlett, the founder of HP, in the phone book and call him to get parts. Jobs said that the past twelve years of his life, since his return to Apple, had been his most productive in terms of creating new products. But his more important goal, he said, was to do what Hewlett and his friend David Packard had done, which was create a company that was so imbued with innovative creativity that it would outlive them.
“I always thought of myself as a humanities person as a kid, but I liked electronics,” he said. “Then I read something that one of my heroes, Edwin Land of Polaroid, said about the importance of people who could stand at the intersection of humanities and sciences, and I decided that’s what I wanted to do.” It was as if he were suggesting themes for his biography (and in this instance, at least, the theme turned out to be valid). The creativity that can occur when a feel for both the humanities and the sciences combine in one strong personality was the topic that most interested me in my biographies of Franklin and Einstein, and I believe that it will be a key to creating innovative economies in the twenty-first century.
I asked Jobs why he wanted me to be the one to write his biography. “I think you’re good at getting people to talk,” he replied. That was an unexpected answer. I knew that I would have to interview scores of people he had fired, abused, abandoned, or otherwise infuriated, and I feared he would not be comfortable with my getting them to talk. And indeed he did turn out to be skittish when word trickled back to him of people that I was interviewing. But after a couple of months, he began encouraging people to talk to me, even foes and former girlfriends.
Nor did he try to put anything off-limits. “I’ve done a lot of things I’m not proud of, such as getting my girlfriend pregnant when I was twenty-three and the way I handled that,” he said. “But I don’t have any skeletons in my closet that can’t be allowed out.” He didn’t seek any control over what I wrote, or even ask to read it in advance. His only involvement came when my publisher was choosing the cover art. When he saw an early version of a proposed cover treatment, he disliked it so much that he asked to have input in designing a new version.I was both amused and willing, so I readily assented.
I ended up having more than forty interviews and conversations with him. Some were formal ones in his Palo Alto living room, others were done during long walks and drives or by telephone. During my two years of visits, he became increasingly intimate and revealing, though at times I witnessed what his veteran colleagues at Apple used to call his “reality distortion field.” Sometimes it was the inadvertent misfiring of memory cells that happens to us all; at other times he was spinning his own version of reality both to me and to himself. To check and flesh out his story, I interviewed more than a hundred friends, relatives, competitors, adversaries, and colleagues.
His wife also did not request any restrictions or control, nor did she ask to see in advance what I would publish. In fact she strongly encouraged me to be honest about his failings as well as his strengths. She is one of the smartest and most grounded people I have ever met. “There are parts of his life and personality that are extremely messy, and that’s the truth,” she told me early on. “You shouldn’t whitewash it. He’s good at spin, but he also has a remarkable story, and I’d like to see that it’s all told truthfully.”
I leave it to the reader to assess whether I have succeeded in this mission. I’m sure there are players in this drama who will remember some of the events differently or think that I sometimes got trapped in Jobs’s distortion field. As happened when I wrote a book about Henry Kissinger, which in some ways was good preparation for this project, I found that people had such strong positive and negative emotions about Jobs that the Rashomon effect was often evident. But I’ve done the best I can to balance conflicting accounts fairly and be transparent about the sources I used.
This is a book about the roller-coaster life and searingly intense personality of a creative entrepreneur whose passion for perfection and ferocious drive revolutionized six industries: personal computers, animated movies, music, phones, tablet computing, and digital publishing. You might even add a seventh, retail stores, which Jobs did not quite revolutionize but did reimagine. In addition, he opened the way for a new market for digital content based on apps rather than just websites. Along the way he produced not only transforming products but also, on his second try, a lasting company, endowed with his DNA, that is filled with creative designers and daredevil engineers who could carry forward his vision. In August 2011, right before he stepped down as CEO, the enterprise he started in his parents’ garage became the world’s most valuable company.
This is also, I hope, a book about innovation. At a time when the United States is seeking ways to sustain its innovative edge, and when societies around the world are trying to build creative digital-age economies, Jobs stands as the ultimate icon of inventiveness, imagination, and sustained innovation. He knew that the best way to create value in the twenty-first century was to connect creativity with technology, so he built a company where leaps of the imagination were combined with remarkable feats of engineering. He and his colleagues at Apple were able to think differently: They developed not merely modest product advances based on focus groups, but whole new devices and services that consumers did not yet know they needed.
He was not a model boss or human being, tidily packaged for emulation. Driven by demons, he could drive those around him to fury and despair. But his personality and passions and products were all interrelated, just as Apple’s hardware and software tended to be, as if part of an integrated system. His tale is thus both instructive and cautionary, filled with lessons about innovation, character, leadership, and values.
Shakespeare’s Henry V—the story of a willful and immature prince who becomes a passionate but sensitive, callous but sentimental, inspiring but flawed king—begins with the exhortation “O for a Muse of fire, that would ascend / The brightest heaven of invention.” For Steve Jobs, the ascent to the brightest heaven of invention begins with a tale of two sets of parents, and of growing up in a valley that was just learning how to turn silicon into gold.Back to the top
Volcker: The Triumph of Persistence by William L. Silber
Reprinted by permission of Bloomsbury Press. All Rights Reserved.
Prologue: The Three Crises of Paul Volcker
On Thursday, January 21, 2010, Paul Volcker and Vice President Joseph Biden flanked Barack Obama behind the lectern in the White House’s Diplomatic Reception Room. After a yearlong battle among the administration’s economic advisers, the president was about to unveil the financial regulatory plan Volcker had advocated. Volcker’s main adversaries, Treasury Secretary Timothy Geithner and White House National Economic Adviser Lawrence Summers, stood like soldiers at parade rest awaiting the president’s orders. Volcker radiated his usual cheer, as though he were attending a funeral rather than celebrating a victory.
The president offered a brief history in his opening remarks. “Over the past two years more than seven million Americans have lost their jobs in the deepest recession our country has known in generations . . . This economic crisis began as a financial crisis when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses…
“Limits on the risks major financial firms can take are central to the reforms that I have proposed . . . I’m proposing a simple and common sense reform, which we’re calling the Volcker Rule, after this tall guy behind me.”
Obama hooked his thumb like a hitchhiker in Volcker’s direction, just in case the assembled press had failed to notice the financial giant standing behind him. The president cracked a smile, and Vice President Biden laughed. Volcker nodded his large head, apparently enjoying the recognition he deserved. Few knew how upset he was.
Volcker had been fighting a losing battle for a year, pushing his vision of regulatory reform, including a comprehensive plan to restrain banks from reckless risk taking. Geithner and Summers had beaten down his proposals, labeling them a throwback to the 1950s, when commercial banks were different from the rest of finance.
Volcker’s testimony before the House Banking and Financial Services Committee on September 24, 2009, caught the attention of Vice President Joseph Biden, who said, “His position makes sense to me and it’ll make sense to the American people.” Biden urged Obama to reconsider, rescuing Volcker from the Dumpster.
Volcker had met with the president in the Oval Office immediately before the news conference on January 21, 2010, but the Volcker Rule designation caught him by surprise. The christening had been a last minute suggestion to Obama by David Axelrod, the president’s chief political strategist. Most people would have paid for the naming rights to a presidential initiative, but not Paul Volcker. Paul thought the label with his name attached sounded boastful, like a Madison Avenue advertisement. He also worried that the Volcker Rule label would narrow his life into two words of limited scope.
Volcker had always fought like a zealot to get his way, but withdrew when the limelight reflected too brightly off his brow. This time he relented. He lent his name to Obama’s initiative because this would be his last chance to set the American monetary system on the right course. Volcker had emerged from the shadows twice before, launching new financial arrangements in August 1971 and in October 1979, when crises threatened to undermine American leadership in world finance. January 2010 would be his third and final installment.
In 1982, when skyrocketing interest rates threatened to bankrupt Mexico and impair the capital positions of America’s largest banks, Volcker papered over the problem with questionable loans. In 1984, when Continental Illinois, the seventh- largest bank in the United States, nearly failed, he helped rescue the embattled giant from bankruptcy, and in the process sanctioned the problematic principle of Too Big to Fail in American finance. Both bailouts permitted the battle against inflation to proceed.
Volcker chose to defend an ambitious goal, sustaining both the domestic and the international integrity of the U.S. currency. Some view the two faces of the dollar as separate objectives, but he insists, “They are the same. Preserving purchasing power at home promotes confidence in the dollar abroad.” His success as an inflation fighter revived trust in the Federal Reserve System and maintained the greenback as the world’s reserve currency.
Volcker’s victory over inflation had unintended consequences. The generation of economic growth and low inflation that followed between 1987 and 2007 fostered a myth that the business cycle had disappeared and encouraged excessive risk taking by consumers and investors, who borrowed more than they could reasonably expect to repay. The crisis simmered as regulators relaxed safeguards no longer needed under the so- called Great Moderation.
Paul Volcker expected trouble.
In a speech at Stanford University in February 2005 he warned that “The capital markets which have been so benign in providing flexibility . . . can become a point of great vulnerability.” And then predicted “Big adjustments will inevitably come . . . And as things stand it is more likely than not that it will be financial crises rather than policy foresight that will force the change.” Volcker knew whereof he spoke. His prediction that crisis would force change came from experience. In 1971 he proposed allowing “foreign exchange crisis to develop without action or strong intervention by the U.S.,” and to use “suspension of gold convertibility” as negotiating leverage for currency revaluation. In 1979 he used the growing popular disgust with the inequities of inflation to galvanize support. “People were prepared to sacrifice to win the battle. I could not have pushed the anti- inflation program without favorable public opinion.” In 1984 he agreed with Senator John Heinz at hearings in the Senate that “an inevitable consequence” of the Federal Reserve’s tight monetary policy and high interest rates might be a crisis that forced Congress and the president to reduce the federal deficit. Congress passed the Gramm- Rudman-Hollings Act the following year, a first step toward budgetary reform that cheered financial markets, despite its flaws.
Almost no one paid attention to Volcker’s warning in 2005. He was old, old- fashioned, and a worrier by nature. He had been eclipsed by time and circumstance. Less than 10 percent of young adults knew who had preceded the then- chairman of the Federal Reserve, Alan Greenspan, when Volcker gave his 2005 speech.
The monetary meltdown that began in 2007 changed everything. Volcker returned in 2010 to repair the system he had rescued twice before, and as with those earlier efforts, his plan combined principle and compromise to achieve a noble goal. But unlike 1979, when he was the sheriff , and unlike 1971, when his position at Treasury carried administrative power, Volcker relied primarily on patience and persistence to implement his plan. The Volcker Rule became law on July 21, 2010, a testament to the moral authority he had earned in fifty years of public service.Back to the top
What Money Can’t Buy: The Moral Limits Of Markets by Michael J. Sandel
Reprinted by permission of Farrar, Straus and Giroux, Allen Lane. All Rights Reserved.
1. Jumping the Queue
Nobody likes to wait in line. Sometimes you can pay to jump the queue. It’s long been know that, in fancy restaurants, a handsome tip the maître d’ can shorten the wait on a busy night. Such tips are quasi bribes and handled discreetly. No sign in the window announces immediate seating for anyone willing to slip the host a fifty-dollar bill. But in recent years, selling the right to cut in line has come out of the shadows and become a familiar practice.
Long lines at airport security checkpoints make air travel an ordeal. But not everyone has to wait in the serpentine queues. Those who buy first-class or business-class tickets can use priority lanes to take them to the front of the line for screening. British Airways calls it Fast Track, a service that also let’s high-paying passengers jump the queue at passport and immigration control.
But most people can’t afford to fly first-class, so the airlines have begun offering coach passengers the chance to buy line-cutting privileges as an a la carte perk. For an extra $39, United Airlines will sell you priority boarding for your flight from Denver to Boston, along with the right to cut in line at the security checkpoint. In Britain, London’s Luton Airport offers an even more affordable fast-track option: wait in the long security line or pay £3 (about $5) and go to the head of the queue.
Critics complain that a fast track through airport security should not be for sale. Security checks, they argue, are a matter of national defense, not an amenity like extra legroom or early boarding privileges; the burden of keeping terrorists off airplanes should be shared equally by all passengers. The airlines reply that everyone is subjected to the same level of screening; only the wait varies by price. As long as everyone receives the same body scan, they maintain, a shorter wait in the security lines is a convenience they should be free to sell.
Amusement parks have also started selling the right to jump the queue. Traditionally, visitors may spend hours waiting in line for the most popular rides and attractions. Now, Universal Studios Hollywood and other theme parks offer a way to avoid the wait: for about twice the price of standard admission, they’ll sell you a pass that lets you go to the head of the line. Expedited access to the Revenge of the Mummy thrill ride may be morally less freighted than privileged access to an airport security check. Still, some observers lament the practice, seeing it as corrosive of wholesome civic habit: “Gone are the days when the theme-park queue was the great equalizer,” one commentator wrote, “where every vacationing family waits its turn in democratic fashion.”
Interestingly, amusement parks often obscure the special privileges they sell. To avoid offending ordinary customers, some parks usher their premium guests through the back doors and separate gates; others provide an escort to ease the way of VIP guests as they cut in line. This need for discretion suggests that paid line cutting – even in an amusement park – tugs against a nagging sense that fairness means waiting your turn. But no such reticence appears on Universal’s online ticket site, which touts the $149 Front of Line Pass with unmistakable bluntness: “Cut to the FRONT of all rides, shows and attractions!”
If you’re put off by queue jumping at amusement parks, you might opt instead for a traditional tourist sight, such as the Empire State Building. For $22 ($16 for children), you can ride the elevator to the eighty-sixth floor observatory and enjoy the spectacular view of New York City. Unfortunately, the site attracts several million visitors a year, and the wait for the elevator can sometimes take hours. So the Empire State Building now offers a fast track of its own. For $45 per person, you can buy an Express Pass that lets you cut the line – for both the security check and the elevator ride. Shelling out $180 for a family of four may seem a steep price for a fast ride to the top. But as the ticketing website points out, the Express Pass is “a fantastic opportunity” to “make the most of your time in New York – and the Empire State Building – by skipping the lines and going straight to the greatest views.”
The fast-track trend can also be seen on fairways across the United States. Increasingly, commuters can buy their way out of bumper-to-bumper traffic and into a fast-moving express lane. It began during the 1980s with car pool lanes. Many states, hoping to reduce traffic congestion and air pollution, created express lanes for commuters willing to share a ride. Solo drivers caught using the car pool lanes faced hefty fines. Some put blow-up dolls in the passenger seat in hopes of fooling the highway patrol. In an episode of the television comedy Curb Your Enthusiasm, Larry David comes up with an ingenious way of buying access to the car pool lane: faced with heavy freeway traffic en route to an LA Dodgers baseball game, he hires a prostitute – not to have sex but to ride in his car on the way to the stadium. Sure enough, the quick ride in the car pool lane gets him there in time for the first pitch.
Today, many commuters can do the same – without the need for hired help. For fees of up to $10 during rush hour, solo drivers can buy the rent to use car pool lanes. San Diego, Minneapolis, Houston, Denver, Miami, Seattle, and San Francisco are among the cities that now sell the right to a faster commute. The toll typically varies according to the traffic – the heavier the traffic, the higher the fee. (In most places, cars with two or more occupants can still use the express lanes for free.) On the Riverside Freeway, east of Los Angeles, rush-hour traffic creeps along at 15-20 miles an hour in the free lanes, while the paying customers in the express lane zip by at 60-65 mph.
Some people object to the idea of selling the right to jump the queue. They argue that the proliferation of fast-track schemes adds to the advantages of affluence and consigns the poor to the back of the line. Opponents of paid express lanes call them “Lexus lanes” and say they are unfair to commuters of modest means. Others disagree. They argue that there is nothing wrong with charging more for faster service. Federal Express charges a premium for overnight delivery. The local dry cleaner charges extra for same-day service. And yet no one complains that it’s unfair for FedEx, or the dry cleaner, to deliver your parcel or launder your shirts ahead of someone else’s.Back to the top
Why Nations Fail: The Origins of Power, Prosperity and Poverty by Daron Acemoglu and James A. Robinson
Reprinted by permission of Crown Business, Profile Books. All Rights Reserved.
So Close and Yet So Different
The economics of Rio Grande
The city of Nogales is cut in half by a fence. If you stand by it and look north, you’ll see Nogales, Arizona, located in Santa Cruz County. The income of the average household is about $30,000 a year. Most teenagers are in school, and the majority of the adults are high school graduates. Despite all the arguments people make about how deficient United States’ health care system is, the population is relatively healthy with a high life expectancy by global standards. Many of the residents are above 65 and have access to Medicare. It’s just one of the many services the government provides that most take for granted, such as a road network linking them to other cities in the area and to the rest of the United States, electricity, telephone, sewage, public health, and last but not least, law and order. The people of Nogales can go about their daily activities without fear for life or safety and not constantly afraid of theft, expropriation or other means of losing their investments in their businesses and houses. Equally important, the residents of Nogales, Arizona take it for granted that, with all of its inefficiency and occasional corruption, the government is their agent. They can vote to replace their mayor, congressmen and senators; they vote in the presidential elections that determine who will lead their country. Democracy is second nature to them.
Life south of the fence, just a few feet away, is rather different. While the residents of Nogales, Sonora, live in a relatively prosperous part of Mexico, the income of the average household is about one third of that in Nogales, Arizona. Most adults in Nogales, Sonora do not have a high school degree, and many teenagers are not in school. Mothers have to worry about high rates of infant mortality. Poor public health conditions mean that even after survival beyond the age of one, health conditions are not good. It’s no surprise that the residents of Nogales, Sonora do not live as long as their northern neighbors. They also don’t have access to many public amenities. Roads are in bad condition south of the fence. Law and order is in worse condition. Crime is high, and opening a business is a risky activity. Not only do you risk robbery, but getting all the permissions, and greasing all the palms just to open is no easy endeavor. Residents of Nogales, Sonora live with politician corruption and ineptitude every day. In contrast to their northern neighbors, democracy is a very recent experience for them. Until the political reforms of 2000, Nogales, just like much of Mexico, was under the corrupt control of the Institutional Revolutionary Party, `Partido Revolucionario Institucional’. No surprise that many Mexicans, among them inhabitants of Nogales, Sonora, risk life and limb crossing the heavily guarded US-Mexico border.
How could the two halves of what is essentially the same city be so different? There is no difference in geography, the weather, or the types of diseases prevalent in the area since germs do not face any restrictions crossing back and forth between the US and Mexico. Of course, health conditions are very different, but this has nothing to do with the disease environment; it is because the people south of the border live with inferior sanitary conditions and lack decent health care.
But perhaps the residents are very different. Could it be that the residents of Nogales, Arizona are grandchildren of migrants from Europe, while those in the south are descendents of Aztecs? Not so. The backgrounds of people on both sides of the border are quite similar. After Mexico became independent from Spain in 1821, the area around `Los dos Nogales’ was part of the Mexican state of Vieja California and remained so even after the Mexican-American War of 1848. Indeed, it was only after the Gadsden purchase of 1853 that the United States border was extended into this area. It was Lt. N. Michler who, while surveying the border, noted the presence of the `pretty little valley of Los Nogales.’ It was here, on either side of the border, that the two cities formed. The inhabitants of Nogales, Arizona and Nogales, Sonora, share ancestors, like the same food, the same music, and we would hazard to say, they have the same `culture’.
Of course, there is a very simple and obvious explanation for the differences between the two halves of Nogales that you’ve long since guessed: the very border that defines the two halves. Nogales, Arizona is in the United States. Its inhabitants have access to the economic `institutions’ of the United States that enable them to choose their occupations freely, acquire schooling and skills and encourage their employers to invest in the best technology leading to higher wages for their employees. They also have access to political institutions that allow them to take part in the democratic process, elect their representatives and replace them if they seriously misbehave. In consequence politicians provide the basic services ranging from public health to roads and law and order that the citizens demand. Those of Nogales, Sonora are not so lucky. They live in a different world shaped by different institutions. These different institutions create very disparate incentives for the inhabitants of the two Nogaleses and for the entrepreneurs and businesses willing to invest there. These incentives created by the different institutions of the Nogaleses and the countries in which they are situated are the main reason for the differences in economic prosperity on the two sides of the border.
Why are the institutions of the U.S. so much more conducive to economic success than those of Mexico or for that matter the rest of Latin America? The answer to this question lies in the way the different societies formed during the early colonial period. An institutional divergence took place then with implications lasting into the present day. To understand this divergence we must begin right at the foundation of the colonies in North and Latin America.Back to the top