Tuesday, April 28, 2015

“Comparing double standards with debt-ridden Greece,” The Colorado Springs Business Journal, April 24-30, 2015, 25.

Double Standards

Just as banks are tested by standards different from those they apply to their customers, so are countries that owe a great deal of money, like Greece.

How “healthy” are the largest banks? If derivatives are not considered as part of banks’ assets (Fed), then they can withstand another financial crisis without bailouts (with 13% capital); accounting practices of the FDIC claim that they cannot (with only 5%).

While our political leaders and the moneyed elite espouse conservative ideals of small government, you can readily find them courting military contracts (of big government spending, if not waste) and prohibiting the laissez faire market forces of recreational marijuana sales, infusing government control.

What about endorsing the proliferation of houses of ill spirit (if not ill repute) in the center of downtown because of sales revenues, while responding to their dangerous prospects with the surveillance of street cameras (Big Brother).

Pointing out these kind of inconsistencies may seem like sound medicine, but as many scholars remind us, facts seldom change beliefs. So, what does? 

Perhaps a trauma or a crisis, the kind that shakes the very foundation on which such beliefs rest. The imminent threat of a Greek default on its Eurozone debt provides a good case study.

The so-called cradle of democracy, Greece, has a population of 11 million and an annual GDP of about $240 billion. By comparison, Colorado has a population of around 5 million and an annual GDP larger than $270 billion.

With over $300 billion in foreign debt, Greece is rumored to be on the verge of default. All the questions about the adverse repercussion of a default—from creditor-banks and their respective government guarantees to a potential exit from the Eurozone—may miss some moral issues related to this situation.

To begin with, as David Graeber (2014) reminds us, the very notion of debt is bound by two unrelated moral principles. One has to do with the obligation one ought to feel about repaying borrowed money, and the other is that lenders of money are considered inherently evil.

Those who fail to repay what they owe are then considered evil. How do we view individuals who take out mortgages and default on them, or those filing for personal bankruptcy to wipe clean their debts?

But by the same token, we also consider lenders to be evil, whether under the influence of Jesus’ condemnation of the money-changers in the Temple, or more recently the bailout of banks who gambled foolishly and received taxpayers’ help.

In local communities like ours, the very notion of public works of any sort, like the City of Champions, is considered problematic (evil?) because public debt may saddle the community with additional taxes. But what if debt is labeled investment? Will the next mayor go on record in support of such investments?

The Greek case study is much more complex than we are led to believe from sensational headlines that ensure the volatility of the stock-market (where brokerage firms enjoy the ride).

If we remain on the moral level for a minute, we should ask whether or not one country has a moral duty to help another? Though philosophical in nature, the answer is commonly couched in practical, utilitarian terms: yes, as long as it can afford it.

The Greek government, says Frank Jordans (AP), is reminding the German government—its largest creditor—that after WWII Greece was among 22 countries that agreed to halve Germany’s debt (1953).

More concretely, Greece has definite reparation claims against Germany from its WWII occupation of Greece: billions of euros worth of infrastructure destruction, millions of euros as compensation for massacres of resistance groups and Jews, about $7.7 billion of an interest-free loan made in 1942. This isn’t an exhaustive list.

So, who is the debtor and who is the creditor? On balance, who owes whom how much? Is there a moral injunction for aid among nations, even when it’s called debt?

The Germans, leading the Eurozone’s claims against Greece, insist that it’s the moral failings of the Greeks, as individuals and as a society, that have contributed to their current crisis: lazy tax evaders who expect the state to spend more than it can afford.

This systematic irresponsibility has raised the question every parent asks: should I enable bad behavior? If I punish, will I lose my child?

And punishment is expected in the Greek case, from austerity measures that hurt the poor to leaving the European Union, the kind of punishment our local leaders inflict on young entrepreneurs who haven’t made it yet to the top.

Can a small local startup expect the same royal treatment reserved for the military-technological complex? What will the next mayor do?

Raphael Sassower is professor of philosophy at UCCS. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com


Monday, April 20, 2015

“Why not let student-athletes pay taxes?” The Colorado Springs Business Journal, April 17-23, 2015, 25.

Let Student-Athletes Pay Taxes

As tax season comes to a close and all the standard complaints against the IRS is heard, there are some who might be more than happy to pay taxes, if they only got paid for their services.

Student-athletes aren’t paid, despite the fact that March Madness has netted their respective 32 universities about $1 billion with around 30 million viewers for the championship game. Total viewing of all the games was larger than the 2015 Super Bowl of 120 million. 

The NCAA remains steadfast in its reasoning for not “professionalizing” collegiate sports, claiming athletes aren’t “employees,” but instead amateurs. Given the amount of money involved here, many find this stance both unfair and hypocritical.

The designation of student-athlete is also a legal ploy that shields universities from paying any compensation for injuries while playing for the team; no workers’ compensation can be claimed or granted to “non-employees.”

Unlike the competition to attract student-athletes, coaches’ salaries at high profile institutions are rising to levels seen only in professional sports. In basketball, just look at Mike Krzyzewski of Duke at $9.7 million, Rick Pitino of Louisville at $5.8 million, and John Calipari of Kentucky at $5.5 million. In football, note the compensation of Nick Saban of Alabama at $7.3 million, Bob Stoops of Oklahoma at $5.25 and Jim Harbaugh at Michigan $5 million.

True, only about 10 Division I athletic programs are profitable, according to most reports, but the accounting used for this assessment is always problematic. Even so-called “losing” programs can attract alumni contributions and help significantly with freshmen recruitment in ways difficult to measure, but that surely exist.

Assuming that university presidents will never collectively decide to turn their “professional” athletic programs into truly amateur ones, where the love of sports and student spirit reign, is there a middle ground between these two poles?

From its inception with Adam Smith, economic literature has always tried to keep a core of moral values afloat so as to justify private property, for example, and market exchanges.
Given the sheer size of the collegial athletic market, is there any moral ground for outlawing student compensation? Academic scholarships are usually counted as a compensation but in fact carry with them very low marginal cost (of having one more student in a class when 30 others are already paying).

If the outright payment to athletes is inappropriate, how about establishing a personal account for each athlete and contributing to it $50,000 annually. If an athlete plays for four years, his/her account reaches $200,000 (plus interest) and s/he has a nice nest-egg upon graduation.

Given that only 2% of student-athletes ever make it to the professional leagues, the other 98% may at least have some financial compensation for their contributions to the coffers of their Alma Maters.

As for injuries, student-athletes should be added to university employees’ plans, so that their treatment and rehabilitation over the years will be covered by proper insurance. If it’s good enough for the coaches, why not extend it to their players?

The University of Texas (Austin) athletic revenue for 2012-13 was in excess of $165 million; a million or two set aside for graduating athletes would easily allow the program to retain its overall net profits.

Since there is no reasonable economic argument against sharing the revenue of athletic programs with those on whose backs success is achieved, and since there is no moral argument against it either, what is the obstacle to this common sense proposal?

Perhaps it’s the myth of amateurs competing solely for the love of the sport, as if this competition is happening in an economic vacuum and all amateur athletes share the same motivation.

Or it may harken back to gladiators who competed in the arenas for their lives, and if lucky enough, for their freedom. True, athletes are not slaves in the technical or legal sense of the term, but on an economic level, they are treated as such.

Even if we solve the financial dimension, what about the “student” part of the designation? The hypocrisy here is even more upsetting. From Ronald Smith’s Pay for Play (2010) to Jay Smith & Mary Willingham’s Cheated (2015), it becomes clear that athletes’ education is compromised.

It’s not only scandalous that student-athletes are cheated out of their rightful share of the money they earn for their universities, it’s even more alarming that they are exploited for their talents with complete disregard to their academic work.

If 98% of student-athletes never make it to the professional arena, and if they lack the skills higher-education is supposed to provide them with, what are they supposed to do?
We should let student-athletes pay taxes, it’s the right thing to do!

Raphael Sassower is professor of philosophy at UCCS. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com

Tuesday, March 24, 2015

“How should America’s banks be tested?” The Colorado Springs Business Journal, March 20-26, 2015, 23.

How Should Banks be Tested?

What do tests really test? This may seem a silly philosophical question, but educators and government agencies are keen to figure this out.

My concern here isn’t with education, but with banking. Usually the banks do the testing: Are you credit-worthy? What’s your score?

Any one of us who ever took out a car loan, house mortgage, or business loan knows what obstacles we had to overcome to be found “worthy” of a loan, passing a test.

We should recall that if banks borrow money from federal sources at around 0.25% and just charge twice as much, 0.5%, then their gross profit is 100%! Charging 2.5% (and paying only 0.25%) provides 1,000% gross profit margin. Wouldn’t you want to own a bank?

But banks must pass tests, too: according to a government “stress test,” 31 of the largest US banks somehow passed: in case of a financial crisis, they seem to have enough cash reserves to manage their leveraged portfolios.

Given that Forbes claims that just five banks control more than half of the $15 trillion of the financial industry, the test of 31 banks ranges close to 80% of financial assets. More tests will be coming, so there may be some unexpected surprises in the next few weeks.

We have heard since the Great Recession by Republicans and Democrats alike that without a healthy banking system our economy would collapse, so this should be good news to all Americans, no?

What would you say if I told you that all my students always pass my courses? Wouldn’t you suspect grade-inflation, low standards, or simply academic incompetence?

Passing is passing, and if all students or banks deserve to pass the test, why quibble? Isn’t the Millennia Generation big on giving trophies in athletic contests even to losers for just showing up?

Well, if everyone on Wall Street seems delighted with banks, it’s because self-congratulation is part of game, making sure that the banking welfare system (with government subsidies and bailouts) shields bankers from Main Street and pesky regulators.

But, the cozy and perhaps too intimate bond financial institutions enjoy with their regulators—and the politicians who enjoy their campaign largesse—isn’t shared by everyone.

Most surprisingly, the naysayers don’t only include the Occupy Wall Street members of yesteryear or the Tea Party when its members objected to the banking bailout; instead, it’s the Oracle of Omaha, Warren Buffett, who has had some nasty comments about the financial industry, despite (or because of) his intimate knowledge of its leaders and their practices.

Reuters reports that in his latest letter to his shareholders, he said: “Periodically, financial markets will become divorced from reality—you can count on that . . . never forget that 2+2 will always equal 4. And when someone tells you how old-fashioned that math is—zip up your wallet, take a vacation and come back in a few years to buy stocks at cheap prices." Instead of reflecting reality, Wall Street is mired in fantasy.

As The New York Times reported only days ago, Buffett mockingly calls the “the Street’s denizens” “money-shufflers” who “don’t come cheap” and who have “expensive tastes.” Does he really mean it? 

When your personal fortune is $72 billion and your tastes remain relatively upper-middle-class, you can say whatever you want. Are these just cheap shots? Or is there an argument here? And if there is one, is it an economic or moral one?

When Buffett laces his Letter with a description of Wall Street bankers as those who “are always ready to suspend disbelief when dubious maneuvers are used to manufacture rising per-share earnings, particularly if these acrobatics produce mergers that generate huge fees for investment bankers,” then it’s clear that economics is at the heart of his critique.

At one point, Buffett argues that “Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 percent to 50 percent premiums over market price for publicly held businesses. The bankers tell the buyer that the premium is justified for ‘control value’ and for the wonderful things that are going to happen once the acquirer’s C.E.O. takes charge.” But, this isn’t true; they mislead.

So, if you are confused about why new mortgages aren’t spurring the housing market even though mortgage rates are at historical low levels, or if you are puzzled why business loans aren’t as easily obtained as expected, just remember: if a bank borrows at 0.25% and invests in US Treasury bonds that yield (February 28, 2015) 4.79%--why bother with risky lending to the public it’s supposed to serve?

Have the banks passed your financial, not to mention moral test?

Raphael Sassower is professor of philosophy at UCCS. He can be reached at rsassower@gmail.com See previous articles at sassower.blogspot.com