I am organizing a seminar to take place in the fall at my law school on “global tectonics.” The theme will be the application of law to the problems created by what I call global tectonics. I intend to consider problems like the Ukraine, Boko Haram, Mexican drug violence and more. Students will be reading the globalization and rule of law literature and then examining these trouble spots where global social, political and economic tectonic plates are clashing. They will be asked to consider how or whether legal solutions to these situations are feasible. If you have any ideas for papers or other material for the seminar or would like to present work of your own please let me know. My campus email address is email@example.com.
Today’s Financial Times has a front page story on the newest stage of the Russian crisis. Putin’s Russia is being hit by both western sanctions as a result of its invasion of its sovereign neighbor, Ukraine, as well as by a glut in the supply of global oil.
This chart indicates the significant downward move in oil prices:
As a result, the world market is marking down the value of the Russian economy and hence the ruble is tanking in value.
In response, Putin is now forced to pump large amounts of cash into the banking system to keep key financial institutions afloat. The latest infusion amounts to close to $8 billion for three major banks. While the regime is claiming the ruble crisis is over, the FT story includes the following: “This is only the beginning,” said a senior executive at a large Russian financial institution. “Everyone is bracing for what comes after new year.”
Indeed the news about the bank infusion sent the ruble down again Friday after a rally earlier in the week. The overall damage of recent months is clear in the chart below:
Meanwhile in a recent speech Putin continued to make noise about diversifying the Russian economy which is another way of admitting that a quarter century of post-Cold War political and economic development has largely been a waste for the majority of Russians (and for much of the former eastern bloc as a whole it might as well be said, Ukraine first and foremost).
Thus, the Cold War may be over but we are far from resolving the fundamental imbalances in the global economy. These have now become so severe that countries like China and Russia are increasingly willing to confront the West with provocative actions like the Ukraine invasion and the assertion of Chinese sovereignty in the south China sea area.
It is understandable that we sympathize with the victims of this kind of aggression but pushing counties like Ukraine to choose Nato membership over genuine autonomy, which has been US policy for years, only stokes the tensions with Russia and provides Putin with political capital that he uses to shore up his own domestic position. Sanctions, too, are a dual edged sword. It is true that Russia needs the world economy but authoritarian forms of capitalism have been very stable over time. As the crisis deepens inside Russia it is just as possible that it will lead to greater centralization of power by Putin and his military and bureaucracy.
In the wake of the recent Hobby Lobby decision by the US Supreme Court readers may be interested in my earlier take on the corporate personhood debate published on line at Dissent Magazine here.
This post is co-authored by Stephen Diamond and Jennifer Kuan. Jennifer is an economist based at the Stanford Institute for Economic Policy Research. The post is based in part on an event study we conducted on the impact of Reg. NMS. We will be presenting the paper at the meetings of both ISNIE (Duke) and SASE (Northwestern) this summer.
A firestorm erupted on Wall Street recently sparked by author Michael Lewis’ accusation that the stock markets are “rigged.” Mr. Lewis’ bases his claim on the allegedly manipulative behavior of so-called “high frequency traders,” or HFTs, in today’s financial markets.
Our own study of the changing structure of those markets over several years leads us to conclude Mr. Lewis is correct when he contends many investors trade at a disadvantage to HFTs. We found a significant widening of “spreads,” and therefore costs to investors, following rule changes by the SEC in 2007. Significant structural reform will be needed to restore transparency and fairness to our financial system.
While the issues at stake are complex, the heart of the matter is that HFTs have largely replaced stock exchange “specialists” as intermediaries between buyers and sellers of shares. HFTs trade large volumes of stock, so they claim to provide “liquidity” to the markets. This sounds reassuring to investors who think they can easily buy or sell at reliable and visible prices.
In fact, HFTs are largely free of the obligations and oversight once imposed on specialists by the New York Stock Exchange. HFTs are not mandated to maintain an orderly market like specialists and often disappear at the very moment they are so desperately needed. There is evidence this kind of behavior contributed to events like the “flash crash” of May 2010 as well as the failed IPO of Facebook in 2012.
Exchanges are now eager to profit from HFTs’ vast trading volumes so they help HFTs exploit advantages over other investors, allowing the use of complex and arguably manipulative order types as well as selling them access to data about other investors’ orders. Other enablers of HFTs include the telecommunications firms that allow the HFTs to engage in “fiber arbitrage” to gain privileged high-speed access to data and markets. HFTs use these advantages to move more quickly and flexibly than other investors and thus to trade ahead of ordinary investors at a profit.
The most important enabler, however, is the federal government itself. In 1975 Congress mandated the creation by the SEC of a “national market system.” Congress decided that if the SEC could create computer-based competition with the long dominant New York Stock Exchange’s manual trading floor then costs for the average investor would fall.
The SEC implemented a wave of new rules over the next thirty-five years that did, in fact, reduce trading costs. New electronic markets such as the Nasdaq now compete effectively with the NYSE. Smaller startup companies like Intel, Apple and Microsoft, which did not meet the stringent listing standards of the NYSE, were able to access investor capital on the Nasdaq.
But this was not enough for the SEC. Their goal was an end to the NYSE’s dominance of trading in blue chip firms listed on the NYSE. As the Charlie Sheen character Bud Fox would famously say in the film Wall Street, they were “going after the majors.” One backer of the new approach was Bernie Madoff, who led the automation of the Cincinnati Stock Exchange in the 1980s to draw trading volume away from the NYSE.
The NYSE and the large banks that dominated its board resisted these efforts for many years. But new demand for faster trades from institutional investors provided the political support the SEC needed to push through Regulation National Market System, or Reg. NMS, in 2007.
This was the straw that broke the camel’s back.
Until 2007, despite the earlier rule changes by the SEC, the NYSE still handled more than 80% of the trading volume of companies listed there. The NYSE was a monopoly but it stabilized price changes with narrow spreads using a self-regulatory framework crafted over its 200-year history.
Two features were key to that framework. First, because large underwriting firms wielded significant influence at the non-profit member-owned NYSE, they could and did impose stringent standards on firms that wanted to list their shares on the Exchange. Second, to attract investors to trade on the Exchange those same underwriters insured that floor brokers and specialists behaved fairly. The result was good quality information about listing firms as well as orderly pricing facilitated by specialists in both bull and bear markets.
But Reg. NMS uprooted that system. Brokers could now route their clients’ trades to any electronic venue even if it meant that the client did not get a better price available on the NYSE floor. As a result, the volume of NYSE shares traded off the NYSE exploded. The motivation to own the Exchange in order to attract investors with orderly prices was gone and the underwriters quickly sold the Exchange to public investors.
With stock prices no longer kept in check by the NYSE’s longstanding rules, our study found that spreads widened, volatility increased and the cost to the average investor went up. Congress had a useful idea in 1975 when it helped create a market for risky technology start-ups and other small firms. They need to step in again to deal with the unintended consequences of that important innovation.
It was clear enough during the 2008 campaign but many ignored it. It became more clear as Obama took office and attempted to “engage” with authoritarian regimes all around the world. Even then the commentariat, particularly on the left, did not understand what was going on. One by one the left ignored the implications of Obama’s approach – in Tibet (snubbing the Dalai Lama, in Iran (snubbing the Green Revolution), in Venezuela (cozying up to Chavez), in Cuba (cozying up to Raul Castro), in Egypt (standing by the military), in Syria (erasing his own red line).
But now with the invasion of Ukraine by Putin the results of five years of Obama foreign policy are undeniably clear.
Obama has thought all along he could appease authoritarian regimes and lure them into a fantasy world of global trade and governance. The fact is that despite the end of the cold war more than 20 years ago authoritarian regimes persist and have shown incredible resiliency. China’s neo-stalinist model is working, for the party and its allies in the new entrepreneurial class. And in Iran, Syria and elsewhere, authoritarianism continues to draw widespread support. These authoritarians have no interest in neo-liberal fantasies about free trade and free markets. The volatility and instability of those markets, brought home to hundreds of millions when the western financial system collapsed in 2008, is fuel for the fires of the authoritarian alternative.
To this alternative Obama has no answer. He rode the wave of naive liberal left distaste for global war and politics to office and now that political capital has exhausted itself.
This is a huge problem for the American national security apparatus and for American global economic power as well. The country is led by someone who does not understand what is going on in the world and cannot craft a coherent response to it. He is wedded to a relativist outlook born in the pro-third world neo-stalinist rhetoric of the late 1960s that helped shape his early world view. He will not be able to shed that history or outlook and it is extremely difficult for the institutional apparatus of US power to act coherently when the White House is led by a team that is so intellectually and politically stunted.
But it is an equally large problem for the global left. This global left emerged in the late 1990s, a product too of the end of the Cold War. There was hope in the protests against the WTO and globalization that a new democratic alternative could emerge from below, linking the workers movements of Poland with those of Brazil, the environmental movements of the first world with the movements for agrarian reform in the third world. But since 9/11 that nascent left has spun this way and that completely disoriented by the continued health of authoritarian regimes. Thus the left has become largely only an anti-war left and sometimes worse, offering apologies for the behavior of regimes like those of Syria and Iran and no doubt now in defense of Putin. So much for the defenders of Pussy Riot.
The left must firmly declare its opposition to authoritarianism wherever it appears. To do so is not to give comfort to the war mongers on the right. Instead it will help establish the left as a credible alternative to US unilateralism. From that position the left must then begin to articulate a new foreign policy for the US based in our own deeply held democratic instincts and institutions. I began one such approach with the call for a new “Solidarity Doctrine” here.
The risks of the new era are now clear to all – the statist authoritarianism is in a clash to the death with western market fundamentalism. Neither can win but they can both destroy.
As I said in 2012:
“We have the technological and economic resources to solve these problems and build healthier alternatives. We know the institutional framework – democracy and freedom – that must be in place for those resources to be effective. Instead of developing a foreign policy that matches our resources with that institutional framework, we have instead used the crude tools of neo-conservative intervention or the dangerously naive relativism of spent late-60s ideology. A “Solidarity Doctrine” offers a new approach.”
My spring seminar, Law and Labor in the Fields, is underway.
Our first guest speaker will be here this coming week, Thursday, January 30. He is Frank Bardacke, the author of a magisterial and award winning new history of the United Farm Workers called Trampling Out the Vintage: Cesar Chavez and the Two Souls of the United Farm Workers published by Verso.
The event is open to the public and will take place in Room 333 in Bannan Hall on the Santa Clara University campus, 500 El Camino Real, Santa Clara, CA 95053. It starts at 4:05 and runs until 5:45. The talk and discussion will be followed by a reception to which all who attend the talk are invited.
There will be several other public talks during the semester. The schedule for the entire semester can be found here: Seminar Schedule.
The seminar is dedicated to the memories of both Cesar Chavez, who passed away 20 years ago last year and the late Herman Levy, our Santa Clara Law School colleague who played a key role in drafting the Agricultural Labor Relations Act, who passed away ten years ago.
Links to video of presentations can be found here.
My first time on NPR’s Marketplace! (But I would never the use the word “squat” outside the gym.)
I discussed this issue on Nightly Business Report with Julia Boorstin recently.
Vic Fleischer gets it right about tenure (even though I disagree with his views on VC’s carried interest.)
The recent downturn in the general economy is impacting legal hiring and too many recent law graduates got caught in the downdraft. The loans they thought they could afford have, for the time being, become unaffordable. They are suffering as are many millions of home owners, car owners and consumers.
I have argued here and elsewhere about the importance of providing debt relief and job programs for these highly trained graduates. Sadly the leading players in the “law school death watch” crowd refuse to endorse such efforts. Clearly they have another agenda altogether. This includes supporting law suits against law schools for specious allegations of fraud. (Lawyers suing law schools – sounds almost as desperate as screen writers writing about Hollywood.)
The calls by the “law school death watch” folks for shutting down law schools, firing faculty (including personal attacks on individual faculty who voice support for law schools’ academic role), increasing teaching loads and other short sighted efforts fail to recognize, as Yale’s Owen Fiss recently did with such eloquence, the unique value of our academic institutions, particularly the important role that law schools play in a law-bound society such as ours.
These calls also fail to account for the natural volatility of a capitalist economy. In other words, the very reason I think Fleischer is wrong about the “capital” as opposed to “labor” nature of carried interest points to the inherent cyclicality of our economy.*
Law schools and legal hiring have never been immune from these cycles, even in the heyday of the Kingsfield era. But as I explained in a recent paper here, we try to protect the law school from some of that cyclicality in order to maintain the law school’s integrity with respect to the surrounding society. Faculty accept lower salaries and the other perks of taking on the risks of the private marketplace in return for their commitment to pursue knowledge and train future lawyers. The entire society gains thereby.
And while the recent downturn has been more painful and long lasting than many in the recent past, it is only a shortsighted institution – apparently including venerable Seton Hall University – which throws away blithely its invested intellectual capital.
*As opposed to Professor Fleischer, I think it is credible to argue that carried interest represents risk taking that is distinct from wage labor, but that is more properly explored elsewhere (for example, by tax scholars Doug Kahn and Jeff Kahn here.) Of course, the thuggish and short sighted attacks he suffered for his work are beyond the pale.