Tuesday, July 24, 2012

Glass Steagall, Happy Valley and The Dark Knight

July 24, 2012, 10:30 a.m.

Institutions, Conflicts of Interest, and Remedies

What do the global economic collapse, the Penn State outrage, and the Aurora, Colorado, massacre have in common?

They all involve institutional structures, behavior, and inherent conflicts of interest that produce predictable horrible consequences.

I. Glass Steagall

Following the Great Depression, it became so obvious as to be beyond denial that it is impossible to "regulate" the abuses that will occur if traditional banks are permitted to also function as "investment banks." The only truly effective prescription was recognized to be prophylactic: prohibit the combination.

The Glass Steagall Act was that prohibition. And it worked.

Until the "deregulation" mantra of the 1980s, and the growing political power of these "casino banks," ultimately led to the repeal of Glass Steagall during President Clinton's administration -- amidst Chicago-school promises and predictions of a "market" governed by "self-regulation."

A decade later we began living through the consequences of that self-regulation, and we've yet to dig ourselves out of the hole it's left in the world's economy.

It was inevitable this would happen. We're talking about an industry that manufactures nothing, and makes its money by buying and selling the symbols of money, and measures its firms' success by their ability to create ever-increasing profits quarter after quarter. The executives' conflicts of interest are in colored neon lights. The pressures to ultimately manipulate the LIBOR rate (with its impact on trillions of dollars of symbols of money), and sell electronic symbols of "assets" candidly named "sub-prime," are irresistible.

Why was Glass Steagall not re-enacted after 2008? Why were even feeble efforts at regulation opposed by many and watered down by all? Why did regulators sit idly by as the same guys who brought us down in 2008 continued the same practices in 2012?

Because the members of the U.S. House and Senate also have a conflict of interest. The American people have never demanded, in an organized and effective way, public financing of campaigns, or even that the most gross practices in political fundraising be reigned in. Institutionally, our political system is awash with cash.

Every morning when the sun comes up, a senator who wishes to be re-elected knows that, by sundown, he or she has to find, somewhere, $10,000 for their next campaign. Let me repeat that. A senator must raise, every day, seven days a week, 365 days a year, $10,000. (See, Nicholas Johnson, "Campaigns: You Pay $4 or $4000," Des Moines Register, July 21, 1996, p. C2.)

If that was your task where would you go? The notorious bank robber, Willie Sutton, said he robbed banks because "that's where the money is." That's where the money still is, and that's where elected officials go.

But there's a price that you and I pay for this system. These campaign contributions (or more accurately, bribes) are not "gifts," they are "investments." (Investments, incidentally, with a pay-back of something between $1000-to-$1 to $2000-to-$1. See, Nicholas Johnson, "Campaigns: You Pay $4 or $4000," Des Moines Register, July 21, 1996, p. C2.) Because if a politician expects to stay in politics, as they say in Texas, "You dance with the one that brung ya'."

This behavior by our elected officials may be greedy or unethical on the part of some. But it is for all a consequence of the institutions we have permitted to be built, and the inherent conflicts of interest they impose on the participants -- as much for elected officials who must beg for millions from special interests as for financial institutions' executives, whose performance is measured in profits and stock prices.

II. Penn State

It's one thing to try to overlook "the elephant in the living room."

But it is really difficult for a university's administration, students, coaches, players, faculty and staff to pretend that they do not see the elephants in the classrooms and lecture halls, student dorms, president's office -- and the herd of elephants trampling the grass on the campus grounds. See "College Football Scandals Larger Lessons."

The conflicts of interest, the pressures, are everywhere. A coach who is told to maintain his athletes' grades knows full well that he or she was hired, may be fired, and will be compensated, on the basis of wins and losses. A non-tenured faculty member is aware that the grade awarded class members who are starting football players may affect the outcome in Saturday's game -- and may fear the impact on their tenure decision. A football player may be forced to a choice between the afternoon lab sessions required for his medical school dreams, and the compulsory practices if he's to stay on the team. University presidents, athletic directors and other administrators, make decisions in an environment in which football is exceedingly important in recruiting students (with their tuition dollars; and possibly even the recruiting of some faculty), maintaining alumni loyalty (and contributions), school spirit locally and reputation nationally -- and, last but certainly not least, millions of dollars in skybox rental, season ticket, TV and bowl game revenue. "UI Held Hostage Day 378 - Feb. 3 - Athletics," and Nicholas Johnson, "Cheaper Than a Rain Forest," Iowa City Press-Citizen, February 3, 2007. And see, "Name Game & Other Moral Dilemmas"; and "Revenue is Needed."

This institutional structure, these conflicts of interest -- like those in the financial industry, and the impact of campaign finance on public policy -- are inevitable, they are built in. That doesn't excuse administrators' failure to act at Penn State -- nor University of Iowa administrators participation in an advertising campaign with a beer company that can't pass the laugh test. (Nicholas Johnson, "A Busch in the Hand is Worth . . .."

The solution? As with Glass Steagall, there are only two paths that I can see. Admittedly, as Robert Frost might have put it, "Higher education came to a fork in football's road -- and took neither." I am not so naive as to think either would ever be followed.

One is represented by the University of Chicago President and Chancellor Robert Maynard Hutchins' decision to simply abolish the school's football program.

Another is one I've written about over the years. Many in the sports business tell me it's a good idea -- but only privately, after insisting I never reveal their names, and acknowledging it will never be done.

In summary: keep "college football," but remove it from the academy. Treat it like the farm club system it is for the NFL. An independent, for-profit corporation would own the teams, pay the players and coaches. Schools could offer an education to players who wanted it, but there would be no "student-athlete" pretense, no requirement players be enrolled. See, e.g., "UI Held Hostage Day 378 - Feb. 3 - Athletics," and Nicholas Johnson, "Cheaper Than a Rain Forest," Iowa City Press-Citizen, February 3, 2007.

III. Guns and Media Violence

By now you've got the idea.

The extent of the NRA's control of elected officials -- like the control exercised by the financial community -- was most dramatically exhibited this week by the two leading candidates for president of the United States. Neither one of them, or any of their campaign staff, even whispered anything that could be interpreted as "gun control."

Other countries look aghast at our gun laws. What explanation can there possibly be for a policy that makes assault rifles, and other military killing equipment, available to ordinary citizens? See, "Guns Do Kill -- 30,000 Americans a Year," and Nicholas Johnson, "A Public Health Response to Handgun Injuries: Prescription -- Communication and Education," American Journal of Preventive Medicine (May/June 1993) ("So long as we are unwilling to adopt effective, fail-safe solutions--actually removing these instruments of carnage from our midst--the price exacted for this "freedom" will continue to be thousands of lives of children and adults.").

There are undoubtedly some elected officials who think this is a really nifty policy. But all are aware that if they do not vote the NRA line they will likely find themselves on the unemployment lines.

Media violence is also in some measure a function of a conflict of interest.

When I was concerned about the subject, as an FCC commissioner and subsequently as chair of the National Citizen Committee for Broadcasting, there were some 3,000 studies documenting the relationship between media violence (TV and film) and violence of various kinds in society.

But the fact is that violence sells. Variety reports "The Dark Knight's" $161 million opening weekend made it the highest grossing 2D film ever. If you were a studio CEO, how much of that would you be willing to sacrifice to get the support of violence critics? Hollywood TV writers used to complain about New York network executives who essentially ordered them to insert violence in shows (where the writers didn't think it was consistent with the story) to maintain ratings -- especially to carry over during the commercials.

Without regulation, the levels of violence (and sexploitation) in TV and film will continue to escalate up to the point at which the audience is (if ever) turned off by it, and revenues decrease rather than increase.

The bottom line: We are all responsible for our own behavior. There is no "excuse" for what happened on Wall Street, at Penn State, or the sale of assault rifles used in Aurora. But if each of us is to have the freedom to be the best that we can be, if we are ever to have a prayer of reducing the unethical behavior throughout our major institutions, we also must examine and reform the institutional structures, incentives and conflicts of interest that encourage the worst in each of us.

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