Trump to channel Nazi Economy Minister Hjalmar Schacht?

David Frum took a shot today on KRCW at predicting what Trump’s economic policy is likely to be. Frum says it will be a heavy dose of debt financed spending on arms and infrastructure which will help boost industrial employment for (largely) white male workers. That will, Frum insightfully suggests, buy him some popularity, perhaps enough to guarantee a second term.

To those who think recalling history is important this should remind people of the policies implemented by the Nazis under Minister of the Economy Hjalmar Schacht. Massive infrastructure spending (the autobahn, for example) was linked to autarkic trade policy as a way to deal with the collapse of the German economy. The financial hunger of the Nazi regime soon turned to the assets of its Jewish population with Schacht (who expressed some opposition to the more extreme anti-semitism of the Nazi party) suggesting that Jewish property be held in trust by the government rather than outright expropriation.

Schacht funded the industrial and military expansion of the Hitler regime in part by the issue of a new basically fraudulent form of government debt known as MeFo Bills. These were used to hide a massive government debt. Today on CNBC Trump advisor Larry Kudlow basically admitted Trump would be forced to inflate debt in order to cover his planned spending because planned tax cuts won’t generate sufficient growth in GDP.

Countries that try to inflate their way out of economic problems end up in deeper trouble. The signs point to a similar path in the new Trump era.

Remember: the securities laws cover unicorns just like every other species!

The big news in Silicon Valley this week was the Wall Street Journal report that “unicorn” medical testing startup Theranos is being investigated by both the Department of Justice and the Securities and Exchange Commission.

This follows the recent visit by SEC Chair Mary Jo White to the Valley where she made clear that the SEC was focused on potential securities law issues related to highly valued startup companies. As I made clear in a book chapter I wrote for a collection edited by UCLA’s Steve Bainbridge, the securities laws prohibit fraud at both public and private companies.

When the pipeline to an IPO slowed for the tech sector in the wake of the dotcom crash many companies opted to stay private longer. When the credit crisis hit that problem deepened. But as the recovery took hold money flooded into certain sectors in the Valley and valuations of many companies soared, giving rise to the “unicorn” label – entities with more than a billion dollar valuation but still privately or closely held.

But just because a company has not yet engaged in a public offering of its shares does not mean the prohibitions agains securities fraud do not apply. They do, even where there is an exemption available that allows a company to limit the disclosure it provides investors. In fact, this is a regulatory framework I am explaining to my securities law students this week.

Don’t blame Bernie – of course the banks can be broken up

In a recent interview, a very confused New York Daily News reporter continually mixed up the Treasury Department and the Federal Reserve in the face of a very straightforward statement of presidential candidate Bernie Sanders that Congress can give the President power to impose changes on the structure of the financial system “under Dodd Frank.”

Well, the Treasury is an agency of the executive branch while the Federal Reserve is an independent hybrid public-private entity. The former is an extension of the power of the President while the latter has autonomy that limits, understandably, Presidential influence. Apparently in the minds of financial journalists the two entities can be conflated without consequence.

Sure enough Secretary Clinton jumped on the bandwagon and slyly and indirectly suggested on Morning Joe that Bernie Sanders does not “seem” to know enough about how the economy works to be qualified as president.

Now that we have cleared up the fact that it was the Daily News reporter who was confused not Sanders, let’s focus on the agency that a President does control, the Treasury. When Sanders said he wanted to use Dodd-Frank to break up the big banks one could consider that from two angles. First, does the current language of that law enable the federal government to break up the banks; and second, could Dodd-Frank be amended to give the federal government the power it needs to break up the banks. Since Sanders talked about going to Congress to empower the government to break up the banks it seems reasonable to conclude he means the latter, second method.* But he is taking the view that any such amendment would be consistent with Dodd-Frank, a necessary extension consistent with the spirit of what Congress intended to do.

I think he is right about that – Dodd Frank cannot be viewed in isolation or as a static statement by Congress. In fact, many aspects of the statute are clearly aimed at collecting information and monitoring the ongoing behavior of the financial system so that Congress can decide if further change to the financial system is necessary. This summary of the key features of Dodd-Frank authored by a major corporate law firm that advises banks makes clear the role of the statute in enabling Congress and the President to maintain ongoing live and dynamic oversight that could and should lead to further changes in banking structure.

One key feature of the Act? A Financial Stability Oversight Council (FSOC) which has several key roles including (according to that law firm): “identifying risks to U.S. financial stability that may arise from ongoing activities of large, interconnected financial companies as well as from outside the financial services marketplace, promoting market discipline by eliminating expectations of government bailouts, responding to emerging threats to financial stability.”

No wonder the authors of this report tell their banking clients in summation: “There will be much more to come once the studies mandated by the Dodd-Frank Act are completed. There also is every reason to believe that the rule-making process will be a long and winding road.”

In fact, in part, Dodd Frank did restructure the banks by implementing the so-called Volcker Rule which forbids proprietary trading by banking entities.

Recent controversies, post Dodd-Frank, suggest that such active oversight is warranted. JPMorgan, for example, had no idea that it was building up a huge bet on synthetic credit INSIDE the very part of the bank that was supposed to be reducing risk! The London Whale scandal would likely have led to a break up of the bank in a rational world and certainly should have led to the dismissal of its CEO. Arguably this was a form of proprietary trading and thus in violation of Dodd Frank (although the Volcker Rule provisions were not finally passed until after this particular scandal – just good luck?) Can anyone not believe that Sanders and the Minneapolis Fed President Neil Kashkari are raising alarms about a serious ongoing problem in the financial system?

Please note I am not taking a position here on whether all the banks should be broken up. I do think that the repeal of Glass Steagall did unleash serious problems and enabled a hidden bubble to build up inside large banks that blew up in 2007-08. For a full discussion of the normative debate about whether to break up the banks consider the comments expressed at a Brookings Institution conference by Kashkari of the Minneapolis Fed recently here.

*Given the opportunity to expand on his earlier comments to the Daily News on the Morning Joe program today (April 8) Senator Sanders confirmed that he intends to use both existing Dodd-Frank provisions and additional legislation. He pointed specifically to Section 121 of Dodd-Frank which allows the Federal Reserve with the backing of FSOC to impose structural changes on banks including restricting product offerings or terminating activities.

Chinese state cracks down on Berkeley labor education effort

A major blow to the idea that there can be engagement with the Chinese state unions as described in the Wall Street Journal.

Another account here:

Chinese state cracks down, but workers keep fighting | REDFLAG.

Sadly, some in the law school world operate under the same illusions as some in our democratic labor movement. See my exchange with NYU professor Rick Hills here and here.

A Fall 2016 seminar on “global tectonics” – call for papers

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 sdiamond@scu.edu.

Henry Manne, 1928-2015

Steve Bainbridge writes here of the passing of Henry Manne, one of the most important legal thinkers of the late 20th century. I did not know Henry at all personally until one evening a few years ago I was very pleased, out of the blue, to receive an email from him commenting on a paper of mine that had been posted on SSRN. That led to a brief but fruitful exchange of ideas about law and capitalism that proved very helpful in my own thinking and apparently, while he was perhaps just being polite in saying so, in his own thinking as well. Henry was someone who I think, alongside the late Benoit Mandelbrot whom I also was privileged to get to know in a similarly random way, should have received a Nobel Prize. Henry’s work and ideas will be of significance for a very long period of time and deserve careful study.

Putin dances to the tune of fictitious capital

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:

ChartBuilder-1

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:

ChartBuilder

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.

Leading study of JD’s million dollar value published in Journal of Legal Studies

The widely respected Journal of Legal Studies has now published “The Economic Value of a Law Degree,” the most important and widely discussed study of the value of earning a JD authored by legal scholar Michael Simkovic and economist Frank McIntyre.

The study concludes based on exhaustive empirical analysis that includes the impact of the recent recession that “a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

A working paper version of the article released last year triggered an intense debate because it provided strong empirical evidence that, despite the difficulties of recent law school graduates, over a career a JD had significant value relative to entering the workforce with only a BA. The concrete data assembled by the authors flew in the face of the anecdotal approach taken by most critics of the JD who dominated discussion of the future of law school in the wake of the economic crisis.

Here is the full abstract from the article:

“We investigate the economic value of a law degree and find that for most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. The median and 25th-percentile earnings premiums justify enrollment. We track lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We incorporate unemployment and disability risk and measure earnings premiums separately for men and for women. After controlling for observable ability sorting, we find that a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

Some critics claimed, inaccurately, that the paper was not subject to peer review. It was, however, peer reviewed prior to its circulation in working paper form and now has been published in a leading refereed journal published by the University of Chicago Press.

As the economic recovery from the collapse of the 2008-10 period continues its momentum there is some evidence that applications to top tier JD programs remain strong with applicants with very LSATs now having increased. Nonetheless, second and third tier schools remain challenged to survive the prolonged economic cycle. This study, however, is likely to reinforce the argument that the JD and law schools remain a viable and important economic institution.