Tuesday, October 11, 2005

Investors of the World, Unite!

NYT / October 9, 2005

Investors of the World, Unite!

LONG before Page 1, where he describes today's financial environment as "a pathological mutation" of capitalism, John C. Bogle, the founder and former chief executive of the Vanguard Group of mutual funds, makes clear what went wrong and who is to blame.
From the book's dedication (to his 12 grandchildren): "my generation has left America with much to be set right."
From the acknowledgments: "Capitalism has been moving in the wrong direction. We need to reverse its course so that the system is once again in the interest of stockholder-owners rather than in the interest of managers."
In case anyone has missed the point, Mr. Bogle, in his introduction, deliberately echoes "The Decline and Fall of the Roman Empire," by Edward Gibbon, to underscore that the markets have lost their way, adding that by the end of that epic, "the Roman Empire was no more."
Subtle Mr. Bogle is not.
Readers understand that, even when reading the resounding blurbs at the front of the book. They are from the likes of Arthur Levitt, the former chairman of the Securities and Exchange Commission; Henry Kaufman, former vice chairman of Salomon Brothers; and Burton G. Malkiel, a Princeton economics professor.
In fact, all you really need to know about where Mr. Bogle is heading is the title: "The Battle for the Soul of Capitalism: How the Financial System Undermined Social Ideals, Damaged Trust in the Markets, Robbed Investors of Trillions - and What to Do About It." (Yale University Press, $25). The book will be in stores soon.
Here is Mr. Bogle's clear, well-reasoned and forcibly stated argument in a nutshell: Over the last 100 years, we have moved from "owner's capitalism," a system in which the bulk of investment returns went to the people who put up the risk capital, to "manager's capitalism," which provides "vastly disproportionate rewards" to those hired to watch their interests - people like company executives and mutual fund managers.
How does he feel about the change? "Managers' capitalism is a betrayal of owners' capitalism, a system that worked with remarkable effectiveness for the better part of two centuries." And he blames three groups for this shift:
Managers of corporate America He is particularly critical of how management chooses to pay itself. The "megagrants" of stock options to senior executives, he says, can lead to managers trying to make the stock price climb as quickly as possible, potentially forsaking the needs of the company they are supposed to serve. He also criticizes the "onset of quarterly earnings guidance, accompanied by financial engineering designed to produce the promised results," a situation that he says has been "abetted by the attendant laxity in traditional accounting standards."
Ultimately, he holds corporate boards responsible for allowing both situations to occur. "The failure of corporate governance lies at the heart of why corporate America went astray," he writes.
Financial institutions "The stockholders of investment America - dominated by our giant financial institutions - hold awesome power," Mr. Bogle writes. "Yet these firms all too rarely exercise that power."
He is referring to institutions such as investment and pension funds. They don't exercise that power, he says, because they don't hold a stock long enough to care about how the company is run. They just want the share price to go up, abrogating what he sees as their ownership responsibility.
Mutual Funds Fees and charges are far too high, Mr. Bogle contends, adding that "the fund industry is the consummate example of managers' capitalism gone awry."
"While the shareholder wealth consumed by the managers of corporate America has been far from trivial," he writes, "the shareholder wealth consumed by the managers of mutual funds has been enormous."
He adds: "More than one-fifth of the robust annual gross returns generated for investors in the financial markets - stocks, bond and money markets alike - during the past two decades has been siphoned off by fund managers," who, he contends, have placed their own interests "ahead of fund owners."
None of these allegations are new. Critics of corporate America have long argued that pay and stock option awards for executives no longer have any basis in reality. (Mr. Bogle points out that in 1980, total pay for the average C.E.O. was 42 times that of the average worker; by 2004, the multiple was 280.)
Other arguments have also been heard before. There is the idea that investment banks and pension funds, with few exceptions, have not taken a stand against decisions of companies in which they invest.
Finally, the firm that Mr. Bogle founded, Vanguard, has argued for years that the fees charged by its competitors are far too high, which, of course, is one way to get across the point that Vanguard is a lower-cost alternative.
But just because the arguments aren't new or may be somewhat self-serving doesn't detract from their legitimacy. On the other hand, you can certainly quibble with his proposed solutions. After all his tough talk, they are surprisingly weak. A main recommendation from Mr. Bogle, who describes himself as a lifelong Republican, calls for a new "national commission to recommend policies that respond to the development of our 'intermediation society.' "
You would have expected him to call for free-market solutions to what are, after all, free-market problems.
Still, the fact that he is standing up and railing against a system that has helped make him well known should generate some attention.
Ultimately, as even he concedes, it is up to the shareholders to insist that things change. After all, he asks, "when the owners of corporate America don't care about governance, who on earth should care?"

Monday, October 10, 2005

The market in fear

Essay 26 September 2005

The market in fear

Politics has become a contest between different brands of doom-mongering.
by Frank Furedi

Fear is fast becoming a caricature of itself. It is no longer simply an emotion or a response to the perception of threat. It has become a cultural idiom through which we signal a sense of unease about our place in the world.
Popular culture encourages an expansive, alarmist imagination through providing the public with a steady diet of fearful programmes about impending calamities - man-made and natural. Now even so-called high culture cannot resist the temptation of promoting fear: a new exhibition in the Museum of Modern Art in New York has the theme of 'The perils of modern living'. Fear is also the theme that dominates the Eighth Contemporary Art Biennial of Lyon. Natasha Edwards writes about the 'art of fear' that haunts this important exhibition of contemporary European art.
But the more we cultivate a twenty-first century sensibility of anxiety, the more we can lose sight of the fact that fear today is very different to the experience of the past.
Throughout history human beings have had to deal with the emotion of fear. But the way we fear and what we fear changes all the time. During the past 2,000 years we mainly feared supernatural forces. In medieval times volcanic eruptions and solar eclipses were a special focus of fear since they were interpreted as symptoms of divine retribution. In Victorian times many people's fears were focused on unemployment.
Today, however, we appear to fear just about everything. One reason why we fear so much is because life is dominated by competing groups of fear entrepreneurs who promote their cause, stake their claims, or sell their products through fear. Politicians, the media, businesses, environmental organisations, public health officials and advocacy groups are continually warning us about something new to fear.
The activities of these fear entrepreneurs serves to transform our anxieties about life into tangible fears. Every major event becomes the focus for competing claims about what you need to fear. Take the aftermath of Hurricane Katrina. It is not bad enough that we have to worry about the destructive consequence of this terrible catastrophe: according to some fear entrepreneurs, there is more to come. They claim that global warming will turn disasters like Katrina into normal events. Free-market ideologues blame 'Big Bureaucracy' for the mismanagement of the rescue operation. Critics of President George W Bush point the finger at the war in Iraq. And Bush blames local government. In the meantime, some contend that New Orleans represents God's punishment for human sin, while others suggest that the whole event is driven by a hidden conspiracy against the black race.
The fierce competition between alarmist fear entrepreneurs helps consolidate a climate of intense mistrust. Is it any surprise that many African Americans believe that the Bush administration sought to save New Orleans' white districts by flooding black neighbourhoods, through deliberately engineering the levee breaks?
The catastrophe that wreaked havoc in Louisiana was also a test of our humanity. But sadly we were encouraged to interpret the event in the worst possible terms. Most of the stories about rape, looting, gang killings and other forms of anti-social behaviour turned out to be just that - stories. But for a while we became distracted from empathising with our fellow human beings as we feared for the breakdown of civilisation.
It is not simply the big events like Katrina that are subjected to competing claims on the fear market. Imagine that you are a parent. For years you have been told that sunshine represents a mortal danger to your child, and that you must protect them from skin cancer by minimising their exposure to the sun. Then, this summer, a report is published that raises concerns about the rise of vitamin E deficiency among children who have been far too protected from the sun. So what do you do? The fact is that a growing range of human experience - from natural disasters to children's lives in the outdoors - is now interpreted through competing claims about fear.
Our misanthropic reaction to the catastrophe in New Orleans is reproduced daily in response to far more mundane events. That is why society cannot discuss a problem facing children without going into panic mode. Research shows that when viewers see an image of a child on a TV news item, they automatically anticipate a negative story. So a majority of people who were asked to give their interpretation of a photo of a man cuddling a child responded by stating that this was a picture of a paedophile instead of an act of a loving father.
A brief history of fear
In one sense, competing claims about what to fear is not a phenomenon unique to current times. During the Cold War, ideological conflicts were often conducted through the medium of fear. While some politicians argued for expanding arms expenditure by raising alarm about the threat of communism, others demanded disarmament and appealed to the public's fear of nuclear weapons. However, the promotion of competing alarmist claims is very different to the situation in the past.
Fear has lost its relationship to experience. When confronted with a specific threat such as the plague or an act of war, fear can serve as an emotion that guides us in a sensible direction. However, when fear is promoted as promiscuously as it is today, it breeds an unfocused sense of anxiety that can attach itself to anything. In such circumstances fear can disorient and distract us from our very own experiences. That is why fear has acquired connotations that are entirely negative.
It is worth recalling that, historically, fear did not always have negative connotations. The sixteenth-century English philosopher Thomas Hobbes regarded fear as essential for the realisation of the individual and of a civilised society. For Hobbes and others, fear constituted a dimension of a reasonable response to new events. Nor does fear always signify a negative emotional response. As late as the nineteenth century, the sentiment of fear was frequently associated with an expression of 'respect' and 'reverence' or 'veneration'. From this standpoint, the act of 'fearing the Lord' could have connotations that were culturally valued and affirmed. Today, by contrast, the act of fearing God is far less consistent with cultural norms. One important reason for this shift is that fearing has tended to become disassociated from any positive attributes.
One of the distinguishing features of fear today is that it appears to have an independent existence. It is frequently cited as a problem that exists in its own right, disassociated from any specific object. Classically, societies associate fear with a clearly formulated threat - the fear of plague or the fear of hunger. In such formulations, the threat was defined as the object of such fears: the problem was death, illness or hunger. Today, we frequently represent the act of fearing as a threat itself. A striking illustration of this development is the fear of crime. Today, fear of crime is conceptualised as a serious problem that is to some extent distinct from the problem of crime. That is why politicians and police forces often appear to be more concerned about reducing the public's fear of crime than reducing crime itself.
Yet the emergence of the fear of crime as a problem in its own right cannot be understood as simply a response to the breakdown of law and order. It is important to note that fear as a discrete stand-alone problem is not confined to the problem of crime. The fear of terrorism is also treated as a problem that is independent of, and distinct from, the actual physical threat faced by people in society. That is why so many of the measures undertaken in the name of fighting terrorism are actually oriented towards managing the public's fear of this phenomenon.
The generalised fear about the health effects of mobile phones has been interpreted as a risk in itself. In Britain, the Independent Expert Group on Mobile Phones, which was set up in 1999 by the then health minister Tessa Jowell, concluded that public anxiety itself could lead to ill health. The report of this committee noted that such anxieties 'can in themselves affect' the public's wellbeing. In the same way, anxiety about health risks is now considered to be a material consideration in determining planning application. Fear is treated as an independent variable by public bodies.
The legal system has also internalised this trend. In the USA, there is a discernible tendency on the part of courts to compensate fear, even in the absence of a perceptible physical threat. This marks an important departure from the practices of the past, when 'fright' - a reaction to an actual event - was compensated. Now, the fear that something negative could happen is also seen as grounds for making a claim. For example, it has been argued that people who feel anxious about their health because an incinerator is to be sited near their homes ought to be compensated.
A market in fear
Political debate is often reduced to competing claims about what to fear. Claims about the threat of terrorism or child obesity or asylum seekers compete for the attention of the public. In this way, our anxieties become politicised and turned into a politics of fear. Health activists, environmentalists and advocacy groups are no less involved in using scare stories to pursue their agenda than politicians devoted to getting the public's attention through inciting anxieties about crime and law and order.
The narrative of fear has become so widely assimilated that it is now self-consciously expressed in a personalised and privatised way. In previous eras where the politics of fear had a powerful grasp - in Latin American dictatorships, fascist Italy or Stalin's Soviet Union - people rarely saw fear as an issue in its own right. Rather, they were frightened that what happened to a friend or a neighbour might also happen to them. Today, however, public fears are rarely expressed in response to any specific event. Rather, the politics of fear captures a sensibility towards life in general. The statement 'I am frightened' tends to express a diffuse sense of powerlessness.
Fears are often expressed in the form of a complaint about an individual, such as 'Bush really scares me' or 'he's a scary president'. Ironically, in the very act of denouncing Bush's politics of fear, the complainant advances his own version of the same perspective by pointing out how terrifying the president apparently is.
And yet, the politics of fear could not flourish if it did not resonate so powerfully with today's cultural climate. Politicians cannot simply create fear from thin air. Nor do they monopolise the deployment of fear: panics about health or security can just as easily begin on the internet or through the efforts of an advocacy group as from the efforts of government spindoctors. Paradoxically, governments spend as much time trying to contain the effects of spontaneously generated scare stories as they do pursuing their own fear campaigns.
The reason why the politics of fear has such a powerful resonance is because of the way that personhood has been redefined in mental health terms. Increasingly, people are presented as individuals who lack the emotional resources to cope with the challenges of life.
Take the recent report on the legacy of the Chernobyl disaster. You have to read this three-volume, 600-page report very carefully to discover the good news that the number of deaths caused by the accident at the nuclear reactor at Chernobyl is under 50. Despite claims that thousands will eventually die and that even more could suffer terrible physical pain, the news is reassuring. The study found no evidence of decreased fertility among the affected population, nor an increase in congenital malformations. However, in line with the temper of our times the report concluded that the big problem posed by Chernobyl is the mental health of the affected people. The belief that people are unable to cope with misfortune and pain underpins our perception of the problems we face.
There is nothing novel about claim-making activities based on fear. Throughout history claim-makers have sought to focus people's anxiety towards what they perceived to be the problem. However, the activities of fear entrepreneurs today do not represent simply a quantitative increase over the past. In the absence of a consensus over meaning, competitive claims-making intrudes into all aspects of life.
In the private sector, numerous industries have become devoted to promoting their business through the fear market. In some cases, entrepreneurs seek to scare the public into purchasing their products. Appeals to personal security constitute the point of departure for the marketing strategy of the insurance, personal security and health industries. Fear is used by the IT industry and its army of consultants to sell goods and services.
In certain instances it is difficult to clearly delineate the line that divides the fear economy from the promotion of anxiety and the anticipation of a disaster. It is worth recalling that for a considerable period of time the Y2K problem, also known as the millennium bug, was regarded as the harbinger of a major disaster. The scale of this major internationally coordinated effort and the massive expenditure of billions of dollars to deal with possible technologically induced crisis was unprecedented. Only a tiny minority of IT experts was prepared to question those devoted to constructing the 'millennium bug problem'.
Even social scientists, who usually make an effort to interrogate claims about an impending disaster, failed to raise any questions about the threat. One IT industry commentator, Larry Seltzer, noted that 'looking back on the scale of the exaggeration, I have to think that there was a lot of deception going on'. He added that the 'motivation - mostly consulting fees - was all too obvious'. But nevertheless it was not simply about money. Seltzer believes that there were also 'a lot of experienced people with no financial interest who deeply believed it was a real problem'.
Despite the growth of the fear economy, the exploitation of anxieties about potential catastrophes, the promotion of fear is primarily driven by cultural concerns rather than financial expediency. One of the unfortunate consequences of the culture of fear is that any problem or new challenge is liable to be transformed into an issue of survival. So instead of representing the need to overhaul and update our computer systems as a technical problem, contemporary culture preferred to revel in scaring itself about various doomsday scenarios.
The millennium bug was the product of human imagination that symbolised society's formidable capacity to scare itself. But who needs a millennium bug when you have global warming? Today global warming provides the drama for the fear-script. Virtually every unexpected natural phenomenon can be recast as a warning signal for the impending ecological catastrophe. Nothing less than a complete reorganisation of economic and social life can, we are led to believe, save the human species from extinction.
Contemporary language reflects the tendency to transform problems and adverse events into questions of human survival. Terms like 'plague', 'epidemic' or 'syndrome' are used promiscuously to underline the precarious character of human existence. The word plague has acquired everyday usage. The adoption of an apocalyptic vocabulary helps turn exceptional events into a normal risk. This process can be seen in the way that the occurrence of child abduction, which is fortunately very rare, has been transformed into a routine risk facing all children. In the same way, threats to human survival are increasingly represented as normal. As the sociologist Krishnan Kumar argues, the apocalyptic imagination has become almost banal and transmits a sense of 'millennial belief without a sense of the future'.
The fear market thrives in an environment where society has internalised the belief that since people are too powerless to cope with the risks they face, we are continually confronted with the problem of survival. This mood of powerlessness has encouraged a market where different fears compete with one another in order to capture the public imagination. Since September 2001, claim-makers have sought to use the public's fear of terrorism to promote their own interests. Politicians, businesses, advocacy organisations and special interest groups have sought to further their selfish agendas by manipulating public anxiety about terror.
All seem to take the view that they are more likely to gain a hearing if they pursue their arguments or claims through the prism of security. Businesses have systematically used concern with homeland security to win public subsidies and handouts. And paradoxically, the critics of big business use similar tactics - many environmental activists have started linking their traditional alarmist campaigns to the public's fear of terror attacks.
The politicisation of fear
Although the politics of fear reflects a wider cultural mood, it did not emerge spontaneously. Fear has been consciously politicised. Throughout history fear has been deployed as a political weapon by the ruling elites. Machiavelli's advice to rulers that they will find 'greater security in being feared than in being loved' has been heeded by successive generations of authoritarian governments. Fear can be employed to coerce and terrorise and to maintain public order. Through provoking a common reaction to a perceived threat it can also provide focus for gaining consensus and unity.
Today, the objective of the politics of fear is to gain consensus and to forge a measure of unity around an otherwise disconnected elite. But whatever the intentions of its authors, its main effect is to enforce the idea that there is no alternative.
The promotion of fear is not confined to right-wing hawks banging on the war drums. Fear has turned into a perspective that citizens share across the political divide. Indeed, the main distinguishing feature of different parties and movements is what they fear the most: the degradation of the environment, irresponsible corporations, immigrants, paedophiles, crimes, global warming, or weapons of mass destruction.
In contemporary times, fear migrates freely from one problem to the next without there being a necessity for causal or logical connection. When the Southern Baptist leader Reverend Jerry Vines in June 2002 declared that Mohammed was a 'demon-possessed paedophile' and that Allah leads Muslim to terrorism, he was simply taking advantage of the logical leaps permitted by the free-floating character of our fear narratives. This arbitrary association of terrorism and paedophilia can have the effect of amplifying the fear of both. The same outcome is achieved when every unexpected climatic event or natural disaster is associated with global warming. Politics seems to only come alive in the caricatured form of a panic.
In one sense, the term politics of fear is a misnomer. Although promoted by parties and advocacy groups, it expresses the renunciation of politics. Unlike the politics of fear pursued by authoritarian regimes and dictatorships, today's politics of fear has no clearly focused objective other than to express claims in a language that enjoys a wider cultural resonance. The distinct feature of our time is not the cultivation of fear but the cultivation of our sense of vulnerability. While it lacks a clearly formulated objective, the cumulative impact of the politics of fear is to reinforce society's consciousness of vulnerability. And the more powerless we feel the more we are likely to find it difficult to resist the siren call of fear.
The precondition for effectively countering the politics of fear is to challenge the association of personhood with the state of vulnerability. Anxieties about uncertainty become magnified and overwhelm us when we regard ourselves as essentially vulnerable. Yet the human imagination possesses a formidable capacity to engage and learn from the risks it faces. Throughout history humanity has learned from its setbacks and losses and has developed ways of systematically identifying, evaluating, selecting and implementing options for reducing risks.
There is always an alternative. Whether or not we are aware of the choices confronting us depends upon whether we regard ourselves as defined by our vulnerability or by our capacity to be resilient.

Frank Furedi is professor of sociology at the University of Kent. His new book, The Politics of Fear: Beyond Left and Right, is published by Continuum.


Game Theorists Win Nobel for Economics

NYT / October 10, 2005
Game Theorists Win Nobel for Economics
An American and an Israeli who worked independently of one another for decades were awarded the 2005 Nobel in economic science today for research on game theory that changed the way conflicts as diverse as trade wars and arms races are analyzed.
The $1.3 million Nobel Memorial Prize in Economic Science went to Thomas Schelling of the University of Maryland and Harvard and Robert Aumann of the Hebrew University of Jerusalem for writings published almost five decades ago that laid the analytical groundwork for the study of conflict and cooperation in the social sciences today, said the Royal Swedish Academy of Sciences, which administers the prize.
"Their work has transformed the social sciences far beyond the boundaries of economics," the prize committee said in announcing the winners today. "Current economic analysis of conflict and cooperation builds almost uniformly on the foundations laid by Aumann and Schelling."
"Game theory" is a mathematical method of analyzing the strategies that different "players" - be they governments, business partners or criminals - choose to achieve the best possible outcome for themselves in a given interaction.
Dr. Schelling, 84, a professor emeritus of economics at both the University of Maryland and Harvard, developed his vision of game theory in the early years of the cold war against the backdrop of the nuclear arms race between the United States and the Soviet Union.
In his influential book, "The Strategy of Conflict," first published in 1960, Dr. Schelling showed, for example, that a party could strengthen its bargaining position if it worsened its own options and that uncertain retaliation was more credible than actual retaliation. He used game theory to make the case that the credible threat of atomic weapons created by the 1945 bombing of Hiroshima was a key factor in ensuring that neither side in the cold war made use of their vast nuclear arsenals in the decades after.
"These insights have proven to be of great relevance for conflict resolution and efforts to avoid war," the academy said.
If Dr. Schelling's work has been widely recognized for establishing game theory as a major tool in the social sciences, Dr. Aumann's main contribution lies in pushing the mathematical framework of game theory forward, the academy said.
A mathematician at the Hebrew University of Jerusalem, Dr. Aumann, 75, was the first to develop a full mathematical analysis of so-called infinitely repeated games, in 1959, establishing what outcomes are sustainable over time in long-term social relationships between negotiating partners. His work demonstrated why cooperation is easier to secure the longer a relationship lasts and the fewer parties are involved in the negotiations. It has most notably been used to explain the behavior of companies competing in a capitalist marketplace, for example by demonstrating why, contrary to previous theories, price cartels can survive over time and how institutionalized cooperation is one response to conflict.
"Insights into these issues help explain economic conflicts such as price wars and trade wars," the prize committee's statement said. "The repeated-game approach clarifies the raison d'ĂȘtre of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements."
It is not the first time that a researcher on game theory has won a Nobel: John Nash, a Princeton mathematician who was the subject of a movie inspired by the 1998 book "A Beautiful Mind" by Sylvia Nasar, a former reporter for The New York Times, shared the economics award with two others in 1994.
Dr. Schelling began his career with work on the Marshall Plan, the American plan to rebuild a Europe devastated by World War II, spending two years Denmark and France and working in the White House before going to teach at Harvard in 1958. He is best known for his work on analyzing strategies in the context of global security, but also applied game theory to issues like environmental policy, racial segregation and organized crime.
Dr. Aumann was born in Frankfurt, Germany, before his family fled the Nazi regime in 1938 and settled in Israel. He holds American as well as Israeli citizenship. The two men, who will share the prize money, have never worked together.. "They linked us together because he is a producer of game theory and I am a user of game theory," Dr. Schelling told The Associated Press. "I use game theory to help myself understand conflict situations and opportunities."
It was the sixth year in a row that an American won or shared the economics prize.
Most recently, Edward C. Prescott, an Arizona State University professor, and the Norwegian Finn E. Kydland, an economics professor at the University of California, Santa Barbara, received the award last year for their work to show that innovative technologies and shocks, like a sharp increase in oil prices, play a much greater role in causing booms and busts than demand fluctuations.
The Nobel prize in economics is the only one of the Nobel awards that was not established in the will of the Swedish inventor and industrialist Alfred Nobel. Unlike the medicine, physics, chemistry, literature and peace prizes, which were first handed out in 1901, the economics award was established separately in 1968 by Sweden's central bank.
The academy's full announcement and biographies of the winners are available at http://nobelprize.org.