Gregg Easterbrook

Governments in Greece, Portugal, the United States and elsewhere are borrowing, and often wasting, money at a reckless pace. Why do banks and financial markets cooperate? Because there’s something in it for them.

They keep a little slice of the public money being borrowed or wasted. Only a sliver. But the more that is borrowed, the larger the sliver becomes.

This is the Sliver Strategy, and it underlies the ways many of the Western world’s wealthy institutions relate to government.

Here’s how the Sliver Strategy works. If government spends a moderate sum and an interest group gets a large share, this will be noticed and denounced. If government spends a gigantic amount  and the interest group gets a sliver, this won’t be noticed. But a sliver of a gigantic amount may be more than a large share of a moderate sum.

Many sovereign bonds and similar securities, for instance, are accompanied by credit-default swaps, which may amount to around half a percent of the amount borrowed. That’s just a sliver. But the more borrowed, the larger the sliver.

Half a percent of the low-end estimate on default swaps for bad Greek debt is $35 million.  Half a percent on the high-end estimate of the roughly $600 billion that Greece, Ireland, Portugal, Spain and Italy are — let’s just say in arrears on —  is $6 billion. Quite a sliver!

In the case of default swap fees, these proceeds go directly to the bottom line of financial companies, boosting short-term profits and pumping up executive bonuses. The more that is borrowed — by governments directly, or by quasi-government entities such as Fannie Mae — the bigger the sliver, and the bigger the executive bonuses.

In the case of many kinds of swaps, the fees are pure profit since if the loan defaults or otherwise goes south, the swap issuer will just shrug and claim penury. This is what happened in 2008 when AIG, the world’s largest issuer of default swaps, simply refused to cover the debts it had claimed to insure, handing a $182 billion bailout tab to U.S. taxpayers. Amusingly, AIG called its products “collateralized” default swaps, though it turned out there was little or no collateral. What a sense of humor those AIG crooks had! The swaps were pure profit — AIG took rich fees for providing nothing at all, other than a blessing that securities firms could use to pretend their issuances were backstopped against default.

How many AIG-like or Lehman-like slivers are out there right now in bad European debt? Nobody really knows. If it’s any consolation, the professional organization of derivatives and similar all-but-unregulated financial instruments promises “safe, efficient markets.”

Other kinds of Sliver Strategies have corrupting impacts on finance and government.

Why did big banks underwrite the liars’ loans that caused the housing bubble? Because they took origination fees and other payments, then passed the toxic debt along to taxpayers. The greater the loan volume the larger the sliver — and most of the slivers ended up in the pockets of the banks’ top management.

Why do defense contractors and  companies that build roads, rail and bridges love cost overruns? The more bloated the final bill, the larger their sliver. If the Godzilla attack helicopter program cost $10 billion and the contractor kept a third as profit, the public would be outraged. If exactly the same program cost $50 billion and the contractor got a tenth as profit, the public will be quiet — though the former is a far more cost-effective buy than the latter.

Why does the U.S. Congress support obvious boondoggles, such as $6 billion a year in  subsidies for corn ethanol production? A reverse Sliver Strategy is at play. The more money Congress wastes on corn ethanol, the more the ethanol lobby donates to members of Congress. The donations are but a sliver of the total subsidy — meaning the total subsidy must be large for the sliver to matter.

This incentive to hand out very large sums, in order to get back small sums as donations, is a hidden factor in many congressional decisions about agriculture policy, Social Security benefits and other issues. If members of Congress simply awarded themselves a couple hundred thousand dollars each for campaign expenses, the public would be furious. But if Congress gives away hundreds of billions of dollars, in order to ensure a couple hundred thousand dollars per member comes back as donations, the Sliver Strategy goes unnoticed.

The experience of Greece and Portugal — and perhaps the United States — shows that undisciplined borrow-and-spend depresses economic performance. So you’d think institutions with a major stake in national economic success, such as banks and industrial sectors, would resist government’s impulse to borrow.

Instead they are enablers, because the Sliver Strategy puts a cut directly into their pockets. It is one of the insidious reasons many nations’ balance sheets look steadily worse.

TOP SECRET:

The Washington Post has done a great job with its series showing that in the wake of 9/11, hundreds of private companies and nearly 854,000 people have gone to work in classified areas. Are they doing a great job? Maybe. There hasn’t been another 9/11. Are they trampling civil liberties? Maybe.

From years of observing Washington, my worry is that the new security bureaucracies are just like other bureaucracies — featherbedded with five people for each one who’s needed, groaning under the weight of senior managers who do little but fight over the signing of memos, dedicating 75 percent of daily time and effort to the staff’s own comforts and sinecure.

But we’re not allowed to question them because everything they do is secret! Set aside that federal agencies long have stamped TOP SECRET on newspaper articles or commercial airline itineraries. Federal personnel love the word “secret,” and all its variations, because it makes them seem more important.

In the post 9/11 reality, calling offices and companies TOP SECRET exempts them from scrutiny of need or cost-effectiveness. Where there is no scrutiny, there is overspending, empire building and fraud. How much of the last few years’ run-up in the national debt may trace to waste and featherbedding in the numerous new agencies and contractors hiding behind a claim that they are tracking down terrorists?

CLIMATE CHANGE:

It was sad to hear on Monday of the death of climate researcher Stephen Schneider, 65, of Stanford University, whom I knew slightly and debated on two occasions. Schneider was a true believer in the dangers of global warming. He was a warm and broadminded man, open to the opinions of others. He exhibited none of the shrillness that colors the climate-doomsday crowd.

Schneider thought greenhouse gas regulation would not happen until a reasonable middle ground is found between the doomsday left and naysayer right. No such middle ground is in view on any current horizon — this week’s acrimonious collapse of talks in the Senate about a greenhouse gas bill is evidence. Harsh, strident ideology on both sides is a reason the Senate bill failed. If all players in the climate change debate had even half the personal grace and geniality Schneider possessed, progress would be proceeding apace.

A small sidelight of Schneider’s career was that he played himself in the 1993 CBS miniseries Fire Next Time — nothing to do with the great James Baldwin book. The show depicted a United States reduced to ruins by global warming. Plus, survivors were in constant danger of exposure to bad dialogue! Set in the year 2017, the miniseries was classic Hollywood galimatias, showing a post-apocalyptic landscape unlike anything projected even by worst-case analysis. In the miniseries, Schneider appears as an aging scientist, lamenting that nothing was done while there was time. I wish he had been given the chance to live until 2017 and see that the world will be mostly fine.

Though scientific evidence of climate change continues to accumulate, polls show public belief in global warming is softening. A minor reason is the Climate-gate nonsense — the posting, on the Web, of hacked emails showing that prominent scientists on the global warming left were using data gimmicks while trying to shout down skeptics. Perhaps, but whoever did the hacking was violating the confidentiality of the correspondence of others, and we ought to be suspicious of the motives of unethical people.

Why hasn’t there been a backlash against the Climate-gate hacker — would we applaud someone who stole letters from a neighbor’s mailbox? The University of East Anglia, the place that was hacked, also looks bad, since its much-publicized “vindication” of the researchers involved was conducted by a committee paid for by the school. Of course the hired hands “vindicated” the organization that signed their paychecks! But enough already of Climate-gate.

More important to rising disbelief in climate change is that the Intergovernmental Panel on Climate Change, the United Nations agency that produces global warming studies, allowed itself to be hijacked by Al Gore and a few other phonies. When the IPCC shared the Nobel Prize stage with Gore, it consented to being equated in the public mind with Gore’s relentless self-promotion. A decade ago, the IPCC was apolitical. Now it’s a marketing organization, selling the climate-doomsday brand. A new authority on climate change is needed to supplant the IPCC.

Also diluting belief in climate change is high-and-mighty behavior of some – surely not all — in the science community. Recently the environmental radio show Earthbeat ran a segment in which Susan Hassol, who’s in the instant-doomsday camp, claimed that scientists researching global warming are subject to “McCarthyism.” McCarthyism? Most climate scientists enjoy academic tenure, while being darlings of the P.C. cocktail-party circuit.

Last year the federal government awarded $7 billion in climate change research grants, making life cushy for climate scientists. I don’t recall Joe McCarthy giving billions of dollars to State Department China hands! One climate pessimist, Michael Mann of Penn State, has indeed received unfair treatment from the far right, but then again Mann is a holier-than-thou type who is quick to denounce those who disagree with him, and one reaps what one sows.

Crying McCarthyism merely because scientists who make political claims receive political criticism — what else would you expect? — is self-righteous. This is the sort of behavior Stephen Schneider would have nothing to do with, and yet another reason his loss is felt.