German models

By Emanuel Derman
September 3, 2012

I have begun to write what will be a regular column for the German newspaper Frankfurter Allgemeine Zeitung (FAZ), and the first one just appeared this Saturday Sep 1 2012, translated into German. Here is the introduction to the column written by Frank Schirrmacher.

And here below is the original text of the column in English, from which the German was translated.

The good days are here once again for models of the physical world: after a drought of almost fifty years, physicists at CERN have discovered what seems to be the long-awaited Higgs boson. But we are living through a period of bad days for models of the social world, where I am using the word ‘model’ in the sense of Gilbert and Sullivan’s Major-General Stanley in The Pirates of Penzance, who sang: “I am the very model of a modern Major-General.”

On August 16 South African police fired on striking black miners. On August 17 the members of Pussy Riot were sentenced to two years imprisonment, the Russian judge commenting that the members had showed complete lack of respect for believers. Who would have thought, more than twenty years after the end of apartheid and the fall of the Berlin wall, that a black government would shoot black protestors, and that a Russian court would sentence people for offending what used to be the opiate of the masses? Who would have foreseen that political power and business success would go so hand-in-glove in both countries?

As models for living, apartheid and communism failed twenty years ago. What is sad nowadays are the failures of corporate capitalism, their replacement that has disappointed not only in South Africa and Russia, but in the USA and Europe too. There is something awry with the workings of the current model. This is a time for indignation. Here are just a few of the current scandals.

Banks first. In late July HSBC set aside $700mm to cover fines and expenses for the possible laundering of drug money. Only a month earlier, Barclays agreed to pay $450mm to regulators to settle allegations that it manipulated LIBOR, the interest rate that is the benchmark for business and consumer loans worldwide. Shortly thereafter Standard Chartered, after some bluster, quickly agreed to pay $340mm to settle charges that it concealed transactions used to fund terrorist groups.

I like to think of utilities as a good model for banks. Banks are given the privilege of making loans that create the money and credit necessary to prime a modern economy, and in that sense are akin to the power companies that keep the country running. But banks have been utilities running wild. It’s astonishing that charges of malfeasance are settled when institutions pay fines, mere money, and that the fines, which are relatively small compared to profits, hurt the shareholders but not the individuals responsible for the misdeed. Banks as institutions get away with things that individuals could not.

I’ve described sins of corporate commission, but there are sins of omission too. Visa, MasterCard, Paypal, Western Union and Bank of America have at various times refused to transmit payments to Wikileaks. Whatever your opinion of Julian Assange and Wikileaks, it’s hard to understand why a bank with government privileges should have the authority to decide arbitrarily to whom and to whom not to transmit money. Especially when, according to the NY Times of 28 Sep 2006, “Bank of America acknowledged yesterday that its lax operations allowed South American money launderers to illegally move $3 billion through a single Midtown Manhattan branch.”

Model failures go beyond the financial sector. In April Johnson & Johnson was merely the latest pharmaceutical company ordered to pay a giant fine, in their case more than $1.2 billion for minimizing the dangers of Risperdal, an antipsychotic drug increasingly prescribed for young children.

As for the internet, once foolishly dreamed of as idealistically non-commercial, the distribution of news and the arts is increasingly based on  giving consumers content “for free” in exchange for the right to sell their personal information to advertisers. Here too, the business model violates traditional standards of privacy, albeit with the tacit consent of the audience. I am reminded of a paragraph from a letter that Aldous Huxley wrote in the late 1940s to George Orwell:

“Within the next generation I believe that the world’s leaders will discover that infant conditioning and narco-hypnosis are more efficient, as instruments of government, than clubs and prisons, and that the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging them and kicking them into obedience.”

_____

Which individual within the corporation actually laundered money or manipulated LIBOR or decided arbitrarily to cut the flow of funds to certain people or institutions? It is only when individuals within the corporation directly and personally suffer the consequences of their individual misdeeds that other corporate employees will hesitate before committing similar acts.

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There is something awry with the current model of attaining political power too. When I grew up in South Africa during the Fifties and Sixties, there were big issues to fight over — one man one vote, the right to live where you wanted, detention without trial — and politicians tried to lead the nation, by persuasion if they could, in the direction they thought was right. Nowadays, where I live, most politicians with a hope of getting elected don’t lead; they try to figure out what positions will make them electable, and then aim to transform themselves into the person that holds those positions. Advertising, of course, plays a big part in achieving this temporary transsubstantiation.

There are giant issues facing the country and the world. It would be wonderful once again to see leaders like the very model leaders of a generation or two ago, men like South Africa’s Mandela and de Klerk and Russia’s Gorbachev, who, rather than fulfilling their preprogrammed destinies, looked at where their country was going and then tried to get one step ahead of fate.

3 comments

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Congrats on the new column!

“…looked at where their country was going and then tried to get one step ahead of fate.”

I think I know what you mean, but there is a lot of overlap between that ideal and this practice:

“… they try to figure out what positions will make them electable, and then aim to transform themselves into the person that holds those positions. ”

Bismarck spoke of catching up with the galloping hoof beats of history, but modern politicians have reduced that ‘gallop’ to a “Gallup” [poll].

The problem isn’t so much that politicians have adopted better empirical techniques, it’s that they also apply a biased filter to the results: act on only that part of the public will that is to the advantage of Big Money.

Posted by SethOnReuters | Report as abusive

Congratulations, from me too, on your new column! (I have been curious: Do you speak German and Dutch? I noticed that you said the column was translated for publication in FAZ. Probably a good idea, unless fluent!) Please consider continuing to re-post the English language versions of your FAZ columns here on Reuters, if possible?

I think the analogy of consumer and merchant banking with utilities is reasonable. Both are in a position of public trust, are regulated and held to safety standards. Banking *was* a reputable field. Bankers held positions of trust in the community. They were not all sturm and drang, but rather, reliable, stable types, much like the mechanical and electrical engineers that I recall at the Tennessee Valley Authority and the Electric Power Research Institute. Something is clearly amiss, as this is no longer true.

I don’t like to laud the practices of a country notorious for civil rights abuses, namely, the People’s Republic of China. Yet this certainly makes one pause: A corner-cutting, kickback and corruption scheme that led to the deaths and injury of dozens of mine workers was punished with the execution of the mining official who was most directly accountable, and imprisonment of several public officials responsible for mining safety regulation (in early 2011). Chinese bankers and finance ministry officials who grossly betray the public trust are punished less publicly but just as severely. That wouldn’t happen in the U.S.A…..

Quibble time. You said:
“Visa, MasterCard, Paypal, Western Union and [BofA]… refused to transmit payments to Wikileaks… it’s hard to understand why a bank with government privileges should have the authority to decide arbitrarily to whom… to transmit money…” particularly in light of BofA’s enabling of South American money launderers.

Remember, businesses have the right to refuse service. Also of concern: If they are domiciled in the U.S.A., they must abide by U.S. laws and acquiesce to the wishes of government authority. Julian Assange was neither a U.S. resident nor U.S. citizen, and was engaged in activities that, at the time, seemed likely to negatively impact the government of the United States. (Things worked out differently than anyone expected, although Assange probably anticipated a messy aftermath, which makes it all the more remarkable that he did well, what he did).

Posted by EllieK | Report as abusive

Read your todays article in the FAZ…You gave a good examnple what to do today on and on: While our forefathers fougth to have an existence, we have to save the essenz…

Posted by m.quiske | Report as abusive