PictureRussel Wasendorf, Sr.
Russell Wasendorf Sr. is the CEO of Peregrine Financial Group, a major futures trading company. He recently confessed in a suicide note that he embezzled millions from clients for nearly 20 years. His suicide attempt was prevented by Cedar Falls police, who noticed his car had a hose running from its tailpipe to the interior.

While in the hospital, Wasendorf was arrested and charged with lying to regulators. He will likely face additional charges with the potential of a long prison sentence.

Wasendorf's confession/suicide note was released by federal authorities and has been published in multiple newspapers. It gives valuable insight into what drives a wealthy person to crime. Here are some highlights: 
  • "I was forced into a difficult decision: Should I go out of business or cheat?"
  • "I guess my ego was too big to admit failure. So I cheated."
  • "With careful concealment and blunt authority I was able to hide my fraud from others."
  • "If anyone questioned my authority I would simply point out that I was the sole shareholder."

We can all relate to the temptation to cheat when the chips are down. But few of us can relate to the pressure of thousands of people looking to you for help. Additionally, few of us work in an industry that worships greed. When combined, no wonder so many crimes are committed by executives in the financial services industry!

We miss the lesson of this crime if we only blame Wasendorf. Yes, he failed to follow regulations, and should have been arrested and forced out of business decades ago. But what is really going on? What is the bigger picture?

The overall problem is greed, especially in the financial services sector. We must ask ourselves: what value is being added by the financial services industry? Occasionally they help new companies raise money. They give us a safe place to store our money, and they make it easier to buy and sell things. But what value is provided by short-selling, futures, options, derivatives, or program trading?

While most financial transactions are complicated, they can all be subjected to a simple value-to-society test: Will the world be a better place afterwards? With most financial transactions, someone benefits from another person's misery. So, most financial transactions do not pass the value-to-society test.

In an industry driven by greed, the issue of value added to society never rises to the surface. Instead, it is ignored in the quest to make a buck at someone else's expense. This is why we need to redesign the entire financial services industry. We need to eliminate all transactions that basically rely on someone winning at someone else's expense.

The other problem underlying the Wasendorf case is accountability: most CEOs are not held sufficiently accountable to society. So, they let greed guide their decisions, and everyone else suffers. This is an easy explanation for how CEO compensation has continued to climb into the stratosphere while everyone else's pay declines. This is why we need to redesign corporate law so that CEOs are once again held accountable to society.

For details on how to reform the financial services industry and make CEOs more accountable to society, read Deep Economics, Part 5.

 
Italy just passed a law requiring one-third of board seats go to women. A few irreverent questions: 
  • Will this government regulation ruin Italy's economy? 
  • Will Italian corporations move to other countries that let them keep their old-boy networks intact?
Whenever someone proposes regulating boards of directors in the US, a chorus of Chicken Little warnings are sounded along the lines of the above questions. 

But European countries have been regulating corporate boards for a long time, and their skies never fell.
In the US, only 16% of board seats are held by women. What justifies this? Women just don't have what it takes? They aren't interested in these types of positions? 

If the US is ever going to bring corporations in line with our values, then we'll have to start regulating them. It's been amply proven that our highest values don't match theirs.
 
J.P. Morgan just lost $39 billion. The Senate Banking Committee wants to know why.

Jamie Dimon, Wall Street's darling CEO, presented his defense: plausible deniability. He was advised by his staff to not unwind risky positions, even though they started to show big losses.

Can any financial sector executive claim they fully understand the risks of their complex investments? We all know the answer is no. It's been proven over and over again.

Think about what this means. Bank CEOs who do not eliminate these mysterious, huge risks are not acting responsibly. They have no ethical claim to plausible deniability.
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Jamie Dimon
Remember Ronald Reagan and the Iran Contra affair? That was plausible deniability in action. Today's big-time CEOs use it all the time. Our government, especially the judicial branch, has essentially handed out stacks of "Get Out of Jail Free" cards to these executives. It has to stop.

The financial sector is trapped in a game of chicken. Huge CEO egos are involved. They have built fancy, souped-up cars with other people's money. And they are driving by remote control: if the cars crash, they don't get hurt. So nobody backs down.

All four large banks must simultaneously retreat to pre-Gramm-Leach-Bliley risk levels. Since the banks won't self-regulate, we need to re-post the speed limits. Gramm-Leach-Bliley eliminated speed limits, and all but a few of us lost. How long are we going to let this game of chicken last?
 
I just watched a Niall Ferguson presentation on the "The Six Killer Apps of Prosperity" (TEDTalks, on Netflix). These factors explain "The Great Divergence," or how the West came to dominate the East in terms of wealth, and how the East has now erased the West's advantage by adopting the killer apps themselves.

For context, it is useful to know that Ferguson endorsed Romney for President a year ago. His rationale: we need "a private-equity guy in the White House." Simultaneously, he dismissed the Occupy movement as "Occupopulists." If nothing else, this conservative has a dry wit.
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Niall Ferguson
Back to his thesis. Ferguson, and a vast number of conservatives like him, assume it is OK to sum the wealth of everyone living in a country, divide it by the total number of people in the country, and use the resulting average to compare nations, continents, or civilizations with one another. To make things exciting, conservatives then compete with one another to invent stories, called "theories," for why average wealth went up or down over time. 

For all his brilliance, Ferguson's work is flawed by an egregious statistical error: you can't use averages to describe skewed numbers! This tenet is taught in every introductory statistics class; it is a very basic principle. 

As we all know, wealth is highly concentrated –– or skewed. For example, in 2007 the top 10% owned an incredible 83% of all non-home wealth! (See Part 2, Disparity for more details.) 

Averages would allow Ferguson to proudly proclaim that average wealth has been rising in the US, when, in fact, wealth has been declining for most people. Since wealth has increased dramatically at the top, the average is inflated, and the important story impacting the greatest number of people is concealed.

Numbers can reveal the truth, or they can disguise it. It depends on your values. If you value compassion and the general welfare, then you studiously avoid averages in economics. But if you value greed or winning at any cost, then averages are a great tool for hiding the carnage.

Ferguson's failure to abide by the fundamental rules of statistics means his work is fundamentally flawed. It also means that every economist who uses averages is very likely making the same mistake. And, since there are lots of economists using averages, then ... well, I think I've made my point. The leading killer app in economics is averages.
 
Women need a 65% pay increase to reach men. In 2009, average personal income was $25,370 for women and $41,750 for men.

$25,370 is a very low income. It's barely over the poverty line for a family of four.

It would cost $2 trillion per year to fix this problem. That's a lot of money. For example, we spent $4.8 trillion in four years on the financial sector bailout.

The simplest explanation for why women are paid less than men is that it would cost a lot of money to pay them the same.
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From the US Census Bureau, Table 705, 2009
In classic economic terms, where markets are all-wise, the huge pay disparity between men and women can only mean one thing: women are worth far less than men. And, since the markets are never wrong, there must be a good, logical explanation for why women are worth less. Such as: women prefer lower paying jobs, or women don't perform as well as men.

But, if we make the far more rational assumption that women are just as capable as men and they want to earn as much as men, then we must conclude that the markets are not wise, and something else is going on. Indeed, all the evidence tells us the markets are anything but perfect, and that the cause of male/female pay disparity has nothing to do with capabilities or preferences, and everything to do with our values.

Take the Supreme Court's recent Wal-Mart decision. The following facts were uncontested: women fill 70% of the lower-paying hourly jobs, but only 33% of the higher-paying management jobs. If the Court valued fair pay, it would have ruled that Wal-Mart was obviously discriminating against women. But ever since Eisenhower's two and Nixon's four conservative appointments, the Supreme Court took a decisive turn in favor of corporate interests, and has rarely looked back.

We must ask ourselves: Do institutions like the Supreme Court and corporations value the same things we do? Certainly this can't be true. Otherwise, what kind of society are we –– one that values women less than men? And, if these institutions are not in alignment with our values, what are we going to do about it?
 
On the surface, it doesn't make sense. Why do poor white people vote for a party that doesn't care about them?

Poor Republicans want their government to do more, but their leaders refuse. To quote Romney: "I am not concerned with the very poor. We have a safety net there."

Republican leaders send a consistent message: if you don't like being poor, get a job or work harder.
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Mitt Romney
Such rhetoric encourages people to blame the other guy. With so much finger-pointing going on, it takes considerable effort to tune it out, and replace it with a different view of fellow citizens; one that is far more constructive.

Politicians often use blame to access the dark side of our personality. We are drawn to blame others when we are in pain, even though it never does us any good.

I was listening to conservative talk radio yesterday. The host made fun of people who say the economy is not fair. He mocked them. His tone oozed with disgust, disdain, even hatred. It was like anyone who thought the economy should be fair did not deserve an ounce of respect. There was absolutely no possibility in the host's mind that our economy should be fair. It was what it was, so get a job or work harder, you lazy bum!

Surely this is one of those destructive "blame tapes." Essentially it says: "People who complain about economic fairness are the problem. They are freeloaders, taking advantage of those who work hard. They hurt themselves, and our country."

Surely a more constructive tape would be something like: "How can we change our economy so that more people benefit? Or, how can we fix an economic system that consistently favors a few and puts everyone else at a disadvantage?"
 
It's big news: Facebook becomes a publicly traded company today with its Initial Public Offering (IPO). But who wins, we the people, or the wealthy few?

First, let's look at Facebook users. For them, the site is a great way to connect with people. Will the IPO enhance their user experience? Probably not. Facebook users are likely to see more ads, and have less privacy. Why? As a publicly traded company, Facebook's primary obligation is to please shareholders. Customer's are now secondary.

This is not an opinion; it is a fact, a legal reality. Facebook is incorporated in Delaware, as are most other large corporations. This tiny state sends a huge message: shareholders are number one. Delaware's legal code, called Title 8, does not mention customers, employees, local communities, society, or the environment. (For more information on Delaware and corporate law, see Part 2 of Deep Economics.)
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Mark Zuckerberg
So, as a publicly traded company, shareholder interests are now, by law, Facebook's top concern. The projected $16 billion of funds to be collected in the IPO comes at a huge price, and that price is to be paid by Facebook users. They will see more ads, and their privacy will continue to be compromised. It's not what they want, but it's what they will get, because shareholders are now Facebook's top priority.

Who benefits from the Facebook IPO? In short, only a small number of rich people. First, let's take the founders. Before the IPO, Mark Zuckerberg was worth $13.5 billion. Now he'll be worth $17 billion. Co-founder Eduardo Saverin was also a billionaire before the deal, and will be a bigger billionaire afterwards. But Saverin is concerned. He only has a few billion. He needs to be very careful about taxes now. So, he renounced his US citizenship and moved to Singapore. He got rich in the US, but now wants to enjoy his riches somewhere else.

Will loyal Facebook customers benefit by being able to purchase Facebook stock during the IPO? Of course not! The only people who get to buy IPO stock are ultra-rich investors. I wonder: How many of them have a Facebook page?

And last but not least are the banks. They were paid a lot of money to design and launch the IPO. And they will make even more money as people buy and sell Facebook stock.

So, today is a happy day for the wealthy few associated with Facebook, but hardly anyone else. Ask yourself: does the Facebook IPO reflect your highest and loftiest values? Do you support a few people getting rich at the expense of everyone else? To find out how capitalism can benefit a greater number of people, see Part 5 of Deep Economics.
 
In Part 1 of this entry we reviewed the story of how modern-day money originated with goldsmiths, and how everyone benefited. Now we go to the second part of the story. Be forewarned; it does not have the same happy ending.

One day, a particularly crafty goldsmith noticed that his inventory of depositor gold hardly changed from day to day, or even from month to month. He wondered: "What if I start loaning depositor money? If I work it right, I can earn interest on depositor money, and my depositors will never know the difference!"
So the crafty goldsmith loaned some gold to a few enterprising friends who wanted to expand their businesses. He made a schedule for them to pay back part of the gold loan every month, plus one percent interest on the outstanding balance. After this worked a few times, he realized that there was still a lot of unused depositor gold in his vault. So he started making more loans, and earning more interest. To be safe, he paid the local magistrate to review and approve each loan schedule.

Before long, other goldsmiths heard what the crafty goldsmith was up to, and started to do the same thing. Eventually, many goldsmiths quit their craft and became deposit and loan bankers.

For centuries, this story has been told by economists and other members of the ruling elite as a glorious tribute to industrious enterprise. Some like Milton Friedman and his enthusiasts go so far as to say growth of the banking greatly increased our quality of life and even freedom itself.

But huge ethical issues lurk in the shadows of this tale.
  • Who actually owned the deposited gold: the goldsmith or the depositor?
  • Did the banker ask depositors if it was OK to loan out their gold?
  • Did the banker ask depositors how much of their gold could be loaned out versus held in reserve?
  • Did the banker share any of the loan interest with depositors?
  • Did the relationship between the goldsmith/banker and the magistrate compromise the role the magistrate was supposed to play in protecting the interests of common citizens?
  • What happens to depositors if the banker cannot satisfy their requests to redeem their gold?
  • What happens to borrowers who have trouble paying back the loan?
Each one of these questions call on us to make ethical judgments. The answers unavoidably involve value judgments, or bias. So, the critical issue is: Who's interests are being served by our answers to these big ethical questions?

The sad tale of human history is that these questions are almost always answered with a heavy bias favoring the one percent, or the wealthy few. Deep Economics embraces a different approach: answering big economic questions with a strong bias for the 99 percent. Isn't it about time? Isn't that what protests all around the globe are essentially about?
 
Last Sunday 9 people came to my house. It was a "coming out" party. I had just published Deep Economics and now wanted to hear what impact it had on others. The major issue that surfaced for almost everyone boiled down to trust: Can we trust fellow citizens to do good if we give them more democratic power.

It was easy to imagine an American citizenry gone amok. The violence we hurl at one another every day is horrifying. If it was easier to amend 
the Constitution, could Christian fundamentalists ban together and marginalize non-Christians? Would gay marriage and abortion be constitutionally banned? Would Christian prayer be mandated in public schools? Would an oath of Christian allegiance be required before taking public office?

Then we were reminded of extreme examples of state-sponsored violence, like the Holocaust, or genocides in Bosnia, Rwanda, Cambodia, and even in the US of Native Americans.

The evidence against trusting fellow citizens is staggering.

But then one guest told of her recent jury duty experience. She was amazed by how everyone was called to the higher purpose of administering true justice. They came from all walks of life: conservative and liberal, rich and poor, etc. But they all worked together to do the right thing.

Isn't the evidence in favor of trust more compelling than the case for not trusting? Aren't most examples of state-sponsored evil enabled by an erosion of public accountability? Has the notion of benevolent dictatorship ever withstood the test of time?

Trust is extremely low in the US. In other words, fear is extremely high. There is only one known cure for fear: courage.

How can courage help us overcome fear and lack of trust? Maybe it starts by courageously accepting the evil and good in everyone, including ourselves. It takes tremendous courage to do this well. If we are wimpy about it, the realization that anyone can hurt us drives us back into fear. It takes courage to remain vulnerable while knowing we can be hurt by anyone at any time.

Our popular culture often portrays vulnerability as a weakness. We need more heroes who retain their vulnerability while under emotional attack. Our genetic coding tells us emotional violence leads to physical violence. But most of the time, it's not true. Courage helps us calm our physical response to emotional violence. It helps us stay grounded in our core values and not revert to counter-attacks of reciprocal or escalating emotional violence. It's a tall order. It means we need to trust that compassion will eventually win the day.

People have tremendous capacity for compassion. We are hard-wired with it. Compassion is impossible to kill, despite how our popular culture or life experiences undermine it.

It takes tremendous courage to trust that, over time, the majority will respond with compassion to our vulnerability and do good. The alternative–limited democracy–isn't working. It clearly fosters the spread of greed. More democracy, not less, is the solution. We need to summon our courage, practice vulnerability, and trust the people. Participative democracy is our next step. Let's take it.