Risk Rap

Rapping About a World at Risk

Regulation and Social Democracy

Last year during the height of the banking crisis I remember Larry Kudlow stating that the US market has a choice. It could pursue the EU model of high regulated markets producing low consistent returns or the American model of less regulation and volatile cycles of high risk and potentially higher returns. If the sole focus of government was the peace of mind and well being of investors Mr. Kudlow’s observation would be valid. Government however must consider a larger community of stakeholders in its scope of concern. Regulatory oversight, the harmony of capital and labor and the incubation of an economic culture that is favorable to and supportive of SMEs are the critical questions confronting all governments particularly those in developed economies.

The EU’s social democratic economic models embody the best and worst aspects of these issues. The social democratic state attempt to combine entrepreneurial impulses of capitalism with the management and administration of social welfare for all its citizens. Democratically “elected administrators” use the apparatus of the state to facilitate and manage the competing interests of capital and labor, free markets and regulation while seeking to balance an entrepreneurship friendly culture with long term sustainability.

Yesterday a toxic tsunami of aluminum sludge coated 16 square miles of pristine Hungarian countryside. It is a telling example of a severe risk event that confronts modern life. A lassiaz-faire approach to the event is not viable and offers no solace to those harmed by this assault. Communities cannot be asked to suffer a market response that promises to correct the problem of the next instance of this event. The construction of better berms and the implementation redundant protection devises to safeguard against this risk for the future is little compensation to those who were killed, injured and lost property or livelihoods as a result of MAL Zrt poor risk management practices.

Better to suffer a regulatory initiative that is based on an understanding of an economic ecosystem as complex and inhabited by competing interests of diverse stakeholders. The ecosystem including the shareholders of MAL Zrt, residents of the surrounding communities, plant workers (also community residents), small businesses (SME) and down stream farmers making a living on arable land and access to clean water all have a stake, albeit competing, in the safe operation of the plant. The possibility that the toxic sludge may find its way into the Danube poses a threat to the water supply of other eastern European nations. This elevates this catastrophic event to other EU jurisdictions. The inter-dependencies and interconnectedness of the pan-regional and larger global economy requires vigorous regulatory safeguards, mitigation initiatives and enforcement response.

The true cost of this event is potentially staggering. It supersedes the narrow interest and economic value of shareholders rights and capital invested in MAL Zrt. Bad economic behavior exemplified by BP’s Horizon Deepwater failure to install redundant protective devises to keep production costs to a minimum, ended up costing BP shareholders and Gulf Coast stakeholders dearly.

State intervention in markets and the reemergence of managed economies is a reality of the global economy. The “managed economy” of the Peoples Republic of China places western style “free market” economies at a disadvantage. The managers of the PRC efficiently deploy and manage capital, effect trade and market protections and scrupulously manage currency valuation. It has created enormous social wealth for China and has contributed to its rapid rise as a preeminent world power. China’s rise requires better coordination of private capital and government to marshal a competitive market response to the challenges posed by managed economies to free and open markets of western democracies. The massive pools of capital deployed by sovereign wealth funds of oil producing regencies and the growing insurgency and power of underground economic activity also pose significant challenges to the viability of unregulated markets.

America’s free market model that eschewed regulation since the 1980’s evolved into a mercantile economy with a weakened economic base. The outsourcing of manufacturing infrastructure loosened free market impulses that left in its place a debtor nation whose warped economy depended on housing/commercial real estate construction (collateral creation/securitization), credit marketing, retailing and a service sector that was designed to support the new economic paradigm. It is a model that has proven itself to be wasteful, costly and unsustainable.

Deregulation has led to the dislocation of the capital markets from the real economy. It has contributed to the massive disparities in social wealth and a crumbling infrastructure. Milton Friedman’s mistaken belief that free market impulses would preserve infrastructure investment has been proven incorrect. Ironically this has added to the government’s burden to provide social assistance to segments of the population disenfranchised from economic participation. Some believe that the basis for the prosecution of the wars in Iraq and Afghanistan are economic stimulus programs designed to keep the economy going due to the vacuum created by the loss of manufacturing.

China’s example nor the resurrection of the soviet socialist model is not a desirable alternative for western democratic capitalist societies. Centralized control and state economic planning is rife with inefficiencies. State run economies threatens liberty, stifles innovation and encumbers economic dynamism. The virtues of capitalism (innovation, dynamism, liberty) needs to be encouraged and blended into the new economic reality of a highly dependent and interconnected world that requires cooperation, coexistence, sustainability, fair asset valuation, and the equitable sharing of resource and responsibility. SME’s are at the forefront of innovation, value creation and dynamism and will play a leading role in the creation of new social-political values as sources of sustainable growth and wealth in the emerging economic paradigm.

You Tube Music Video: Franz Liszt, Hungarian Rhapsody No.2 Orchestra

Risk: regulatory, capitalism, sustainability

October 6, 2010 Posted by | democracy, economics, government, labor, politics, real estate, recession, regulatory, risk management, SME | , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Knowledge is Good

The state college and university system is confronted with mounting challenges as state and federal funding sources continue to trim budget allocations to these vital institutions. State funded college education is a critical social service and support institution that provides higher education opportunities to our lower and middle class citizens. The availability of affordable and accessible public education is critical to maintain an efficiently functioning democratic society. Education offers economically disadvantaged people the hope of social advancement, cultural assimilation and a chance to realize the greater aspirations of America’s promise.

As state funding for higher education decreases, consumers will have to pay more. Colleges will need to scale back offerings and will be required to become more of a market driven enterprise. They will also need to rely more on the largess of alumni and corporate support to remain economically viable.

Cutting state colleges loose to navigate the ebbs and flows of the market economy threatens institutional independence and moves state education services one step closer to privatization. On the positive side this will encourage and inform institutional development and program initiatives that address the needs of the diverse communities’ state colleges serve. This will tend to temper the “ivory tower” criticism of academic institutions; but they must not lose sight of state college’s principal mission to enlighten citizens, serve cultural needs, enhance economic advancement potential and advance the political liberties of citizens.

State colleges are not vocational schools. Nor are they pools of labor and intellectual capital created to support these requirements of capitalist enterprises. As state colleges become more dependent on private sources of funding, it risks that its institutional culture will assume characteristics and political biases to support and advance the interests of its funding sources. This is another dangerous example of how privatization is assuming control of functions previously considered the domain of the state. The privatization of certain military functions, administration of elections and leasing highway toll road administration to private interests signals the growing pervasiveness state capitalism and commercial control over social and governmental institutions.

A free society requires educational institutions to be free from the control of special interests. Partnerships between corporations and public education institutions are critical to the success and growth of both parties. Academic freedom and the protection of the marketplace of ideas must never be compromised for the want of funding and must be guarded at all costs.

“Eternal vigilance is the price of liberty” Wendell Phillips, the abolitionist wrote. Extra vigilance is required to assure that state education continues to be well funded and that the source of funds does not inhibit academic freedom and the ultimate liberty and freedom of expression of our citizens.

The challenge to maintain a standard of excellence, secure funding, maintain costs and create brand differentiation of the state college curriculum and service offering are keys to its survival. Like all market driven enterprises, state colleges need to create and market a unique value proposition. State colleges must balance course curriculum, services and institutional experience to equally serve its social constituents and commercial interests of its funding sources.

The experience of “No Child Left Behind” is a good example of a well intentioned policy that has harmed the primary education experience. NCLB’s places an emphasis on student’s ability to pass standardized tests. Test results are used as a metric to score the schools effectiveness and as a yardstick to reward good performance with additional funding. This program compromises the schools core education mission of instilling a love of learning to better prepare students to be productive members of society. NCLB more closely resembles a grant application process for capital funding that places the protection of the institution ahead of its mission to teach students.

Democracy requires citizens to possess an ability to question, reason and understand how dissimilar issues, events and disciplines intersect and connect in an increasingly complex world. State funded colleges are communities where these types of skills can be developed, nurtured and shared equally and dispersed widely to all members of the society.

That is what the original Lyceum was all about.

We close with a fight song from one of our great public universities, Hail to the Victors!

Risk: public education, civil liberties, informed electorate, participatory democracy, institutional bias, reputation risk, market risk

June 25, 2008 Posted by | education, government, pop, private equity, taxation | , , , , , , , , , , | 1 Comment