Philadelphia Reflections is a history of the area around Philadelphia, PA
... William Penn's Quaker Colonies.

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Opposition to Privatized Social Security

The Brookings Institution

The counter-attack on personal accounts was instantaneous, vociferous, and distorted. It alleged what was clearly not true ("taking our social security away from us"), and failed to bother about more plausible threats (entitlements like Medicare seem likelier targets of fiscal stringency). There is no history of similar agitation about IRAs. or other tax sheltered savings incentives of the same model, and no claims have been made that such programs have caused problems. This uproar seems to emanate principally from AFL/CIO headquarters in Washington, where Mr. Sweeney seems to be the leader. Labor Unions are spending considerable money and effort to stifle this proposal before it can develop momentum. The Brookings Institution contains people like Henry Aron and Reichsauer, who surely understand the true issues involved, but have apparently retreated into silence. What is there about this relatively tame proposal, not particularly useful nor particularly harmful, which threatens the interests of organized Labor?

Teamsters

With no plausible incentives in sight, we resort to speculation about motives. Either Labor suspects President Bush of devious plans, or has devious plans of its own. The most obvious motive a Republican President might have, and one which is more or less acknowledged, is to "starve the beast", or force reductions in government spending by tax-cutting deficits. However, privatized retirement accounts would not seem to be a very plausible move in that direction. More likely, Labor has its own interests in the benefits and retirement area that seem threatened by privatized accounts. The notorious retirement fund of the Teamsters is only one example of the long-standing involvement of unions in member benefits. Aside from funds directly controlled by unions, their involvement in Blue Cross boards and negotiations, and their influence on state employee retirement funds has been highly treasured. Workers Compensation is another example of heavy union influence in non-paycheck member compensation. Indeed, it is roughly the case that unions control the employees, while the stockholders control the management. There is imperfect agency in both cases, but until recently it has not been conceivable that unions would dominate corporate directors. But with progressive dispersal of stockholder shareholding, and recombination of those voting rights into mutual and pension funds, even the House of Morgan can be seen to appeal to pension fund managers for control of the company. We've turned over a flat stone in corporate governance, and what is crawling out is the source of some concern.
To some extent, the same issue is raised in the Human Resources departments of corporations, constantly exercising delegated control over employees, and constantly in contact with insurance and pension executives of various ranks. Management controls, or thinks it controls, two thirds of employee income, but HR controls the remaining third, spending most of it on insurance plans of one sort or another. At the board level, mutual funds generally lean toward management whenever pension funds raise stockholder rights issues. But index funds and government savings plans could easily induce some subtle changes in sympathies. It's speculative, of course. But is it possible this is the real battleground, with partial privatization of social security only an opening skirmish?

Murky Crisis

One of the Wall Street's better maxims advises: Never let your competitors smell blood. Talking too much can injure perfectly honorable firms because in business there is usually a vulnerable time before opportunities can be consolidated, or miscalculations corrected. Trial and error innovation is progress. Transparency, humbug.

This prevailing wisdom can lead to mysteries like the present one, where thousands of well informed professionals struggle to puzzle out an explanation for pretty dramatic events, yet after six months no one can be entirely sure how bad things really are. When the subprime credit crisis began in August 2007, the number of outstanding mortgages was quickly approximated, and from that it appeared impossible for overall losses to exceed $90 billion. Six months later, write-offs at least that large have been declared, but estimated future losses now range around $600 billion, give or take $300 billion. But wait, in a zero-sum game, winners must match losers so the economy as a whole should remain unchanged. Even if winners and losers are in different nations, the result would at worst be weakening of one currency and strengthening of the other; after the adjustment world-wide wealth would remain unchanged. Real world-wide losses in a crash relate to whether wealth is created or destroyed, not whether it has been transferred from one firm to another. As an aside, the supply-side viewpoint is that taxes effectively remove wealth from the private sector for protracted periods and therefore are equivalent to dropping into a black hole; but liberals mostly dispute this, so it is not discussed here.

One of the indisputable ways to expand or contract wealth is, unexpectedly, through a change in prevailing interest rates. When interest rates rise or fall, the value of debt or bonds goes in the opposite direction. So, when derivatives or efficiencies lower interest rates, wealth is created. When realism, panic -- or fear of inflation -- cause interest rates to rise, wealth gets destroyed. What matters most to individuals is whether they own bonds during the time when interest rates are changing. No one necessarily gets any richer; in an inflation, bondholders lose money because money truly disappears. The only way to make money in this situation is to sell short, but that's too special and too small to affect this discussion.

So recently, spreads widened, or the risk premium returned to historic levels, or subprime mortgages got more expensive, or six other ways of saying the same thing: interest rates went up, value was destroyed. Anyone holding a certain kind of bond lost money, and may not be able to pay his bills. Because the problem was large and world-wide, no one could be sure who was holding the bag, transactions stopped, the credit market "froze up". Some very prominent firms soon declared losses of $5-10 billion each, so anyone might be an unsafe counterparty. Even if time passed and other firms did not declare losses, general distrust persisted, for a complex reason.

A Wall Street broker is required to mark to market, every day. Active traders, trying to keep as little inventory as possible, constantly face the possibility of imbalances, temporary cash shortages, which would make them unable to pay bills. Therefore, when interest rates go up, Wall Street investment firms lose a lot of money on the underlying bonds in their hands and must declare so publicly. Firms hate it, because it could well trigger margin calls from their lenders. If no shares are traded, however, the price of the shares appears to remain at its price at the last trade. That's what is often meant by markets "freezing up" ; if no one registers a sale at a lower price, it can't be meaningfully "marked to market." Banks, by stark contrast, are allowed to play by different rules. When the value of their bonds or other securities goes down, the accounting rules permit them to declare the bonds are a long-term investment, where they do not need to be marked to market. Investment banks thus must declare huge losses when they haven't sold anything, while commercial banks may hold exactly the same portfolio and declare no loss at all. Whether this disparity is fair or unfair, wise or unwise, is entirely beside the present point. The disparity confounds the general inability to say who is in trouble, thus whether the economy is in dire straits or just experiencing a state of confusion. At the least, it makes banks appear to be solid and solvent, while other investment institutions may appear to be in worse trouble. Aside from investors losing money by making wrong choices, there is a political risk in an election year that Congress or regulators could make wrong choices. A reckless young French trader happened to underline this risk, quite pointedly.

America was having a bank holiday on Martin Luther King's birthday, so our financial markets were closed but European markets were open. While American traders sat helplessly at home watching the news, European stock markets abruptly collapsed on heavy selling. Federal Reserve Chairman Bernanke promptly dropped short-term interest rates by seventy-five basis points (0.75%) between meetings of his board, creating a panic situation the next morning. It seems in retrospect that he had not been informed that a rogue trader at a prominent French bank had obligated that bank for $75 billion of unauthorized positions, which bank authorities promptly liquidated at a $7 billion loss soon after they discovered it. The newsmedia concentrated on the racy story of a French scalawag, but there was a more important story. Because of bewildering financial convulsions whose full dimensions may not be known for another year, Ben Bernanke the financially best-informed person in the World got into a panic and made a choice he might not have made if he had the full facts. If that was the case, poor intergovernment communication unnecessarily gave us a dose of inflation to contend with. Or, perhaps Bernanke got a needed wake-up call that the economy risks getting tangled up for several years by banks trying to ride out their bond portfolios to maturity instead of making loans. Refusing to acknowledge losses is what gave Japan a recession which is now in its fifteenth year. Try this nightmare: if the American consumer quits buying imported goods, Japan then China could collapse with consequences beyond conjecture. It is impossible to imagine Congress restraining itself in such a mess, and nearly impossible to imagine their getting it right when they do act.

As if to illustrate the point, the Carlyle Capital collapse in March 2008 demonstrated how violently markets can now be roiled by even a small quirk in the banking system when huge volumes of money are propelled through it by computers before the rest of the financial world wakes up. A prudent banker would normally make a loan for appreciably less than the value of the collateral. Depending on the historic volatility of the collateral, it might be reasonable to lend 80%. But Carlyle was an investment fund, selling shares to the public worth several hundred million dollars. Borrowing $20 billion from banks, especially Deutchebank, Carlyle bought mortgage-backed securities for the investment fund. Before things collapsed, Carlyle had bought $21 billion of real estate loans but had received only a twentieth of that from investors. The market price of the secutities thus only had to fall by 3% before the whole structure became insolvent. In the conventional 80% collateral example, a 3% decline would still leave it with a 17% cushion. Extreme leverage of this new sort would probably never have been considered by the German bank if it related directly to mortgages without a complicated middle-man. Whether anyone at the German bank realized this transaction was substantially the same thing at 20 times the risk is presently unknown, but it seems doubtful. The fact that at a relatively quiet moment DB suddenly called back its loan suggests that someone at the bank finally did wake up and ordered an end to the arrangement. Congress can now pass a law forbidding such structures if it wishes, but that will be mere grandstanding. Future textbooks of banking practice will surely all riducule the absurdity of this transaction; the risk of it nearly vanishes however at the moment of its wide spread recognition for what it is. Far worse would be for Congress to pass pious laws which essentially say that nothing innovative must ever happen for the first time, or that banks must stop using high-speed computers.

Veterans Hospital

Philadelphia VA Medical Center Home

At a recent meeting of the Right Angle Club, Stephen C. Bennett an administrator, and Alix Esposito a social worker, kindly addressed the club about the Veterans Hospital where they work. The federal government pushes its mass produced products into every city, but gradually a local flavor starts to creep in; how this process works is illustrated by the fact that Steve's grandfather Claude was once the manager of the Bellevue Stratford Hotel. The VA hospital may be a piece of Washington D.C. planted on Philadelphia soil, but Philadelphia will surely absorb it with the passage of enough time. The VA was once a part of the Veterans Administration, but now it is a part of Department of Veterans Affairs, run by a cabinet Secretary, no less. It's the second largest department of the federal government, and since the only bigger department is the Department of Defense, the combination of the two shows you how far we have come from the nation's original opposition to "standing armies". The fact that these two components of our war machine are separate, on the other hand, surely symbolizes some hidden tensions between our regular armed forces and the American Legion, or the hidden frictions between two congressional committees, or else some other mystery of bureaucratic politics.

The Veterans Administration was founded in 1930, the Philadelphia VA Hospital was built in 1950. Originally, it was designated as a Deans Hospital, signifying the intention to confer prestige and lessen friction with the medical schools. Originally, Philadelphia's VA was affiliated with several medical schools, but in time its proximity to the University of Pennsylvania led to the elimination of ties with other schools. Although the bed capacity is growing in reaction to America's successive wars, its open wards converted after 1960 to more semi-private style, and its focus of medical activity shifting with changes in medical science, the VA remains isolated from the rest of the city and the rest of Philadelphia medicine. Part of this is physical; the hospital is confined by the University of Pennsylvania, the parking complex next to the Amtrak lines, and the Woodland Cemetery, so there is little room to grow. And comparatively little commonality with the neighbors. There are 2000 employees and a $30 million budget, marooned in a sea of automobile traffic going elsewhere in a big hurry, too big to ignore but too small to influence the local culture.

Vietnam War

The patients are distinctly different from those you find in other hospitals. There is a great deal of chronic mental disorder, a heavy influence of alcohol and substance abuse and rehabilitation, and even some residential apartments for patients. On a national level, between a third and a half of homeless people are veterans, but for some reason in Philadelphia, only a tenth of the homeless are veterans. During the Vietnam War, the system of draft avoidance through educational exemptions resulted in that generation of veterans coming from an unusual concentration of low income and low educational subgroups. The system of government pensions and promotions tend to retain employees in the system for a lifetime. It's true that informal transfer arrangements allow a certain amount of migration to Florida (in the winter), or Maine (in the summer), or California (to see what LaLa land is all about), but those who do this stay within the VA system. Consequently, the interchange of ideas and techniques that professionals carry with them between hospitals is curtailed, confined somewhat to variations within the VA system, conforming to its social norms. An archipelago, although not exactly a gulag archipelago.

Veteran

But by far the greatest source of distinctiveness in the VA hospitals comes from the byzantine eligibility standards for the patients. The reimbursement systems of Medicare, private insurance -- which more or less copy each other -- changed around 1988 in a way that more or less eliminated psychiatric inpatient care in the community, especially if it lasts more than a month. The VA, on the other hand, was forced by circumstances to increase its attention to this area. Consequently, all social workers everywhere inquire immediately whether an addict or a schizophrenic might be a veteran. A differential sorting process quickly gets under way, with the VA as the preferred place to send such patients if at all possible. Non-veteran victims of the same conditions tend to have a worsened time of it, because the pressure on state and local governments to make some provision, has been relieved.

Walter Reed Hospital

At the other extreme, the social elite of the armed forces are not admitted, either. President Eisenhower was unquestionably a veteran, but he had his famous hospitalizations at Walter Reed Hospital. There's an income limit for VA admission, which automatically cuts off 20-year veterans above a certain rank, possibly major. And there are overlapping disability classifications for military hospitals and veterans facilities, with considerable latitude available to uniformed boards of three serving officers, only one of whom is a physician. The result is a general perception that if you have any influence at all, you can generally avoid the VA and be treated in a military hospital, probably in a VIP unit. Good for them; I'd take advantage of it if I had a chance, too. But by siphoning off the top brass, a lot of pressure to improve quality is removed as well. If a VA hospital had eight or ten Admirals and Generals as patients, with academy classmates coming to visit, it's safe to assume that courtesy, orderliness and cleanliness would instantly improve. And take it from me, the quality of care would improve, as well.

Look Out For That Ship!

Tales of the Sea abound, even a hundred miles from the ocean.

We are indebted to the President of the Maritime Law Association of the U.S., Richard W. Palmer, Esq., for both a strange definition, and an amusing story. An "allision" is a collision between a ship and a stationary object, such as a bridge or a dock. As you might imagine, the ship is almost invariably at fault, mainly through errors of the pilot, although hurricanes and other severe weather conditions can make a difference. Moving ships have been running into stationary objects for many centuries, and almost every allision contingency has been explored. Ho hum for maritime law.

The Delair railroad drawbridge over the Delaware River at Frankford Junction is just a little different. It was built in 1896 when the Pennsylvania RR decided it needed to veer off from its North East Corridor to take people to Atlantic City. For reasons relating to the afterthought nature of the bridge, the tower for the drawbridge is located half a mile away, out of direct vision of the ships going through. Also, a late development in the history of the river was the construction of U.S. Steel's Morristown plant, bringing unexpectedly huge ore boats from Labrador to the steel mill. The captains of the ships pretty much turned things over to the river pilots.

Shortly after this service was begun, the inaugural ore boat Captain had a little party with some invited guests. So it happened that the Commandant of the Port, the Admiral in Charge of the Naval Yard, and other equally high ranking worthies like the head of the Coast Guard were on the bridge of the ore boat, taking careful notes of the procedure. The ship tooted three times, the shore answered back with three toots. In real fact, they were connected by ship-to-shore telephone for most of the real business, but this grand occasion called for authentic nautical ceremony. Three toots, we're approaching your bridge. Three toots back, come ahead, the coast is clear. The admirals scribbled it all down.

As the ship approached the point of no-return, beyond which it can no longer stop or turn in time to avoid an allision, the people on the bridge were astounded to see a train crossing the bridge ahead. Several toots, loud profanity on the ship to shore phone. No worry, answered the bridge, we'll lift the drawbridge in plenty of time. But half a minute later the bridge controller made the anguished cry that the drawbridge was apparently rusted and wouldn't open, to which the captain shouted, "This ship is going to take away your blinkety blank bridge and sail right through it".

At this point, the pilot took matters into his own hands, and violently threw the rudder hard left, swinging the ship sideways, and soon nudging the bridge with some damage, but nothing like the damage of a head on allision. Lawsuit.

The attorneys for the railroad were pretty high-powered, too, and had piles of legal precedents to cite. But they were quite unprepared for Dick Palmer to put the Commandant of the Port on the witness stand, reading slowly and painfully from his very detailed notes about the conversations on the bridge, about the approaching drawbridge. And so, Philadelphia can claim to have one of the very few instances where a ship ran into a bridge -- and the court found the bridge to be entirely at fault.

Central Bankers Refine the Art of Diplomacy

Nancy Wentzler

Nancy Wentzler, Deputy Controller of the U.S. Currency, recently dramatized the arcane world of international currency exchange for the Global Interdependence Center's 25th annual Monetary and Trade Conference, held this year at Drexel University. For the most part, controlling currency operates flawlessly as far as the rest of us can tell. But every few years a sudden banking crisis pops up somewhere, pressuring a lot of bureaucrats in many countries to act quickly without a fire drill. Displaying panic could spread into world financial collapse, but so could acting too slowly.There's often a need for that most conflicting of all predicaments, the clear need to act outside of established channels. Hedge funds and private equity funds greatly increase the pace of banking panics, and if panic-stricken, can now send multi-billions from one place to another in fractions of a moment. In that same moment, everybody involved is in a meeting, or else frantically calling somebody. Even if the right person is identified, located, and takes the call, there is natural hesitation to take risky advice from a stranger without an identifiable track record. Protocol-driven supervisory bureaucracies may be suddenly forced to contend with professional traders whose whole life consists of calls roughly like this: "Hi, Joe, this is Bill. Buy me a gazillion shares of XYC at the market." To which Joe's answer commonly would be, "You got it. Thanks for the order, Bill. 'Bye. "

Benjamin Franklin at the French Court

The potential for sudden fires calls out for fire drills. It also calls for prior establishment of social networking among those who may have to depend on each other in a crunch. Whether by repeatedly dealing with each other or by social gatherings, or even just by immersing in trade gossip, it must somehow become possible for them to make quick assessment of the person on the other end of the phone. Is he sound or flighty, can he be depended on to keep his word, or will he take for the hills.

Well, it sounds like a diplomatic corps, doesn't it? For the briefest of moments, one person represents the views of his country. The rest of his life is spent preparing for that moment. The most familiar American example is Benjamin Franklin, for eight years our ambassador to France. Franklin received heavy criticism for spending American money on social functions in Paris. John Adams in particular was outraged to see Franklin engaged in a constant series of dinners, balls, Royal parties, and salons; he was obviously having the time of his life, year after year. After all, he really only accomplished two tangible things -- he signed the Alliance with France which effectively won the war, and he signed the Treaty of Paris where Britain agreed to stop fighting.