Necessity of First-best Policy Academy
for Economy and Government

Dr. Sankarshan Acharya
Research Center for Finance and Governance

November 9, 2011

Why are the rich reluctant to heed the call for more taxes as their fair share? 

One can rationally assume: 

  1. The rich are at least as responsible as the poor. 
  2. The rich have a greater stake in the economy than the poor. 
  3. The rich know that by paying more taxes they may help reduce the budget deficit.  This act of benevolence will obviate accusations for not contributing their fair share.  Their help to restore normalcy in the economy can let them enjoy their richness without hassles. 
  4. The rich care for their own welfare like the poor do. 

Why do the rich, excluding the Buffets of the world, then appear to be reluctant to pay their fare share in taxes? 

My rational inference is that many high earners have been locked up in ever losing leveraged financial hedging shenanigans which guarantee windfalls for their counter parties, the mega financial holding companies. The high incomes feed the heads I win and tails you lose shenanigans which perpetuate profits of financial holding companies, but with a colossal destruction of capital earned by the real producers of globally competitive goods, services and ideas.  The financial catastrophe of 2008 is simply a symptom of the deeper capital-destructive malaise of the financial system.

The prevailing financial system gives an unfair advantage only to the mega financial holding companies: (a) access to cheapest source of credit from the insured deposits and Fed funds via their banking subsidiaries, and (b) preemptive knowledge about buying and selling prices (of actual investors) via their market making subsidiaries. My research shows that this system is unconstitutional and economically inefficient.  

The profit generated by the mega banks is miniscule as compared to the massive destruction of capital arduously accumulated by the real (rich and poor) producers of globally competitive goods, services and ideas.  I have written vividly about this since 2003 in a book, Prosperity: Optimal Governance, Banking, Capital Markets, Global Trade and Exchange Rate, and communicated with you and other political leaders in various memos. 

The prevailing system will beget only second-best status for all.  The mega bankers who have instituted the head I win tails you lose system may guarantee profits for them in the short-run and they may believe that everyone is dead in the long-run.   The human gene must have survived the onslaught of virulent dinosaurs.  The memory in the human gene especially about survival instincts may be eternal to make a newborn baby cry for food for survival.  But the massive destruction of capital would eventually (ex post) expose the prevailing system, if the 2008 financial catastrophe has already not done so, and perhaps reverse the unconstitutional transfers when the shenanigans are transparent, especially, to the rich among the effective producers of globally competitive goods, services and ideas.  

I have written how to get out of this capital-destructive system in a memo on “begetting first-best status for the principals” including the rich who have been locked in such financial hedging.  This memo proposes to transfer the de facto insolvent mega banks to government conservatorship.  This legitimate proposal has been immediately countered by the established pundits, bankers and government officials with a strategy to boost home values through lower mortgage interest rates and principal reductions.  The prompt response shows that no established pundit, government official or banker wants to close the de facto insolvent too-big-to-fail banks, proving, thus, a failure of the Dodd-Frank Act of 2010. 

The necessity of cutting the interest rate and loan principal is presented in Prosperity since 2003.  But such cuts will not end the capital-destructive financial shenanigans that continue to sap the economy, burden the government due to diminished tax collections, and depress the households (rich and poor) due to unemployment, underemployment and wealth erosion. Even the students at Harvard have recognized the failure established punditry in explaining the financial catastrophe.

The failure of the established punditry necessitates creation of a First-Best Policy Academy (FPA), as the only path to begetting the first-best status for principals (the effective producers).

As someone whose research (at NYU) forms the basis of the 1991 US government rule for foreclosure of under-capitalized banks, who strongly contested (as a financial economist at the Federal Reserve) over-leveraging of banks through multi-tier holding company structure, and who successfully pursued for adoption of safe central banking and consolidated minimum capital norms for bank holding companies with the Congress (while on the faculty at University of Illinois), I am deeply concerned about the findings of the  Congress-appointed Financial Crisis Inquiry Commission released in January 2011:

The failure of established experts in the academy, industry and government caused a manmade (avoidable) crisis.

This finding is disconcerting because the same experts continue to rule the roost while the econom y and employment remain gloomy. 

The nation was undoubtedly jolted by the greatest financial shock ever faced by mankind:  Great Panic withdrawals in 2008 from the previously uninsured money market funds (about $3.5 trillion) and previously uninsured bank debt (about $6 trillion).  My safe central banking proposal submitted to the Congress since 2003 was adopted to stem the domino of panic withdrawals in 2008, but only after trillions of dollars of wealth was unnecessarily destroyed. Bank holding companies are now required to have minimum capital on a consolidated basis.  But preemptive adoption of my proposed first-best policies could have saved mega financial firms like Bear Stearns, Lehman Brothers and Merrill Lynch and preserved trillions of dollars of hard-earned wealth of the Country.

Businesses and households-who produce the most competitive products, services and ideas around the world-are still reeling under the economic shock of the Great Panic.  These productive, creative and responsibly servicing businesses and households make the Country anywhere in the world.  The Country within a politically defined nation generates the surplus or deficit in trade and props the currency for prosperity, security and stability for all including those who are incapable or unwilling to produce, create or serve responsibly.   The Country is obviously vital for first-best (efficient) and competitive status of an economy.  Yet the Country faced an avoidable Great Panic in 2008, which wiped out trillions of dollars of hard-earned wealth and jeopardized the economy in its aftermath. 

The purpose of this memo is to convince you to help establish a First-Best Policy Academy (FPA) to beget first-best status for the Country, which is vital for the business and the economy.  This memo also presents in the postscript (1) how first-best policy research triumphed and prevailed and (2) the odyssey and efficiency of first-best policy research.

The existing universities, institutes and industry research centers have made outstanding contributions in the fields like science, engineering, medicine, technology and mathematics.  But it is disconcerting that the experts in the academy who have helped establish the prevailing economic system are responsible for causing continual financial depressions and crashes.  These experts have recently admitted before the Financial Crisis Inquiry Commission (FCIC) appointed by the Congress that they had no clue about the Great Panic, the Great Recession of 2008, or the ensuing economic calamity.  The FCIC has released its report in January 2011 to declare that the crisis was manmade due to a failure of the indubitable agents, who control the economy and hard-earned wealth of the Country.  The agents comprise (i) the experts anointed by the existing academy, (ii) banking and financial regulators culled from them, and (iii) custodians of the financial industry trained by the same experts. 

Why is a First-best Policy Academy (FPA) necessary? 

  • The same failed second-best finance-economic policy experts rule the roost within the existing academy of finance and economics located in various universities and research centers.
  • Despite the reputation stemming from their association with top universities and institutes, the second-best policy promoting experts in the existing academy of finance and economics have been deemed by the US Congress as useless for protection and preservation of the hard-earned wealth of the Country, which is necessary for the economy, security and stability.
  • In spite of the failure and unwillingness of the journals controlled by the failed second-best policy promoting experts, these experts still count publications in the same failed journals for promotion and salary raise of faculty in the existing academy of finance and economics.  The existing academy’s procedures, thus, perpetuate the same failed second-best policy wisdom which has caused the Great Panic, Great Recession and ensuing economic hazard for the Country.
  • The rewards like Nobel Memorial Prizes in economics and chaired banking professorships have been created in the existing academy by the bankers, who have failed to beget first-best status for the Country.  These rewards have been considered to be significant indicators of wisdom as broadcast in the media controlled by the agents.  The Country has so far accorded importance to such awards due to their wide publicity and parallel association with the true Nobel Prizes in science, literature and peace. 
  • The Nobel Memorial Prizes in Economics are chosen by the same failed second-best policy experts in the existing academy of finance and economics.  They are based on citations of papers which (a) promote or follow the same failed second-best policy wisdom, (b) is oblivious or critical of first-best policy wisdom, and (c) which is printed by the journals and publishers controlled by the failed agents.
  • The hard-earned wealth of the Country cannot simply be enhanced and preserved by the existing academy of finance and economics, unless the university administrations replace the experts, followers and subscribers of the failed second-best policy wisdom with successful first-best policy researchers and pursuer. The existing universities are unlikely to replace the failed second-best policy wisdom as long as they can share (through donations) the booty generated by the unconstitutional and inefficient usurpation of the Country’s wealth by the banking and financial titans.

It is impossible to replace so many experts with few available first-best policy experts, in a short period, to fulfill the urgent need of the economy. 

It is, therefore, prudent to start a new First-best Policy Academy (FPA), which will (a) publish a rigorous first-best journal by accepting only first-best policy research geared to beget first-best status for the Country based on long-run general equilibrium, (b) train students and scholars in the nitty-gritty of finance and economics and, equally importantly, for first-best governance/management of banks and financial institutions, and (c) wean the immensely talented faculty away from the existing academy of finance and economics who pine for pursuing first-best policy research but are afraid of being penalized by the second-best policy agents. 

Without the FPA, graduates of the existing academy of finance and economics (irrespective of the name and fame of their universities) can fail simultaneously, again and again in future, like they did in 2008, to destroy the hard-earned capital of the Country.

The failure of the existing academy to produce finance-economics experts to safeguard the first-best status of the Country necessitates a new First-best Policy Academy to promote and preserve the first-best status for the Country.

I look forward to hearing from you.

With profound regards,

Dr. Sankarshan Acharya
Director, Center for Constitutional Capitalism
Founder, Pro-Prosperity.Com and Citizens for Development

Postscript

1. How First-best Policy Research Triumphed and Prevailed?

Do you know who presaged accurately a looming financial crisis and pursued vigorously for adoption of first-best policies with the US Congress since 2003 to preemptively avert the Great Panic, which was faced by the Country in 2008?   It is yours truly, the author of an unprecedented bank foreclosure rule, which was enacted in the Federal Deposit Insurance Corporation Improvement Act of 1991.  

With a degree from the Indian Institute of Technology, I joined Northwestern University’s doctoral program in finance offered by the Kellogg Business School with fellowships and scholarships.  With a doctoral thesis on valuation of latent assets, I joined the faculty of the New York University’s Stern School of Business in 1986.  When I saw the 1987 stock market crash across my office windows in Wall Street, I was naturally drawn to explore the latent causes of periodic economic recessions and market crashes in the history of the US.  

My research (coauthored and published in the Journal of Finance in 1989) found that the systemic banking failures, which caused periodic financial crises and shocks, could be optimally averted via a rule to foreclose banks, i.e., whenever a bank’s capital-to-assets ratio fell below an optimal threshold obtained in a dynamic (long-run) general equilibrium model of the economy.  The bank foreclosure rule was unprecedented in the history of USA where only banks had the power to foreclose businesses and households. 

The Congress enacted the optimal bank foreclosure rule into law in the Federal Deposit Improvement Act of 1991. This drew me to the Federal Reserve at Washington D.C. as a financial economist to help implement the law. 

At the Fed, I observed how top regulators permitted mega banks to transgress the new bank foreclosure rule through the bank holding company structures.  The BHCs would hold as little as one-tenth of the minimum required capital-to-assets threshold on a consolidated basis to leverage up their debt for ten-fold enhancement in return on their equity to lavish executives with hefty compensations.  This has been the source of piling up of enormous risk on the Country while enriching those who did not produce, create or serve responsibly.

Since I strongly contested the transgression of the bank foreclosure rule in meetings among top regulators and banking chieftains during (1991-1994) at the Fed, my first-best policy research papers have been systematically blocked through camaraderie and funding of journal editors and academics with banking chairs.  

My first-best policy research papers have been refused for publication in the same top journals where I have published other significant papers.  The journals would return my submission fees without reviews or with some tangential comments like my model is too mathematical or the results are political.  This appears to me as their way to perpetuate subjugation of the Country based on power derived from usurpation of the Country’s wealth through unconstitutional rules and regulatory practices.  My research proves that the unconstitutional rules and regulatory practices are economically inefficient (second-best).  

My research also obtains first-best (efficient) policies.  It attains an unprecedented economic paradigm to reach and preserve first-best status for the Country, as dreamt by the American founding fathers via the constitution they scripted.  The same Constitution is also sworn in even by the second-best policy promoting agents. 

My research does not stem from serendipity, divinity or precocity.  It is based on a more general dynamic stochastic programming model of the economy than ever scripted in the literature on first-best or second-best policies.  By restricting my long-run general equilibrium model, one can obtain myopic models of the economy with second-best policies which have been accorded Nobel Memorial Prizes in economics instituted by a bank. 

The agents noticed my arguments as compelling. They, therefore, shut down publicity of my general equilibrium model in the media they control by presuming that first-best policies would never be followed by the Country.  The agents must have argued with the Congress that no research unpublished in top journals could be used to form rules of governance of banks and financial institutions.  The agents must have believed that I wouldn’t even be counted in the statistics of extinguished pursuers of first-best status for the Country.

The prevailing system is, thus, designed and promoted by a net-work of established second-best policy promoting agents (academic experts, regulators and banking chieftains) to guarantee first-best status for them by subjecting the Country to second-best existence through continual financial depressions.  

2. The Odyssey and Efficiency of First-best Policy Research

Someone-who was among the ten-most rising authors in finance, who had received one of the highest pays upon graduation from a top business school, who came to the Federal Reserve on a special package meant to attract technical experts, and who received significant pay raises during leave of absence from NYU-has been financially ruined (and hence economically subjugated) simply for conducting first-best policy research to beget and preserve the first-best status for the Country.  

This enlightening experience was worse than that of Mahatma Gandhi (the nonpareil non-violent crusader for freedom) being thrown out of the first-class compartment of a train despite having a first-class ticket.  I have relentlessly argued with the conductors (second-best policy promoting agents) in their language (general economic equilibrium) that the train (financial system based on second-best policies) would crash and cause havoc to the passengers (Country) including the conductors if my first-best policy discoveries were not adopted preemptively.  The agents noticed my arguments as compelling.  They, therefore, shut down publicity of my general equilibrium model in the media they control by presuming that first-best policies would never be followed by the Country or by the drivers of the train the Country was on (the Congress).  The agents must have argued with the Congress that no research unpublished in top journals could be used to form rules of governance of banks and financial institutions.  The agents must have believed that I wouldn’t even be counted in the statistics of extinguished pursuers of first-best status for the Country.

A deep understanding and experience within the prevailing system actually enlightened me further that survival of the Country rests on individuals like me whose financial liberty is inherently dependent on preservation of hard-earned financial liberty of the Country.  I knew the agents were attempting to undermine my professional, intellectual and economic survival because of my pursuits for the first-best status of the Country.  I did not surrender to them.  But I had to quit the epicenter of second-best policy promoting agents (the Federal Reserve) to communicate with the drivers (US Congress) about the impending crash of the train in which the Country was dumped for a ride. 

It took sometime after I left the Fed to perfect the art of writing my general equilibrium model in plain English to present theorems and proofs without math to show the first-best (efficient) nature of the policies discovered since 1991 for governance of the banking and financial system. I completed a book of such theorems and proofs in 2003, entitled, Prosperity: Optimal Governance of Banking, Capital Markets, Global Trade and Exchange Rate.

I wrote my first memo directly to the Congress in March 2003 with a copy of a published paper, entitled, Safe Banking, and a warning that the financial system faced a meltdown with trillions of dollars of losses to taxpayers due to a transgression of the bank foreclosure rule, unless my first-best policy of safe central banking was adopted promptly.  

My book Prosperity was liked by the Cambridge University economics editor, but was denied for publication by the CUP publisher for inclusion in the list of its books.  I used to communicate with the CUP economics editor until 2008, but he was significantly silent after I wrote to him how a timely publication of this book by CUP could have convinced the Congress to enact my first-best policies in 2003 to avert the 2008 Great Panic, Great Recession and ensuing economic hazard for the Country.  The only response I received from CUP, thereafter, was hacking of my computer by the CU Computer Center at throttle speed to delete my email correspondence with journal and book editors.  After my computer shut down due to hacking, I backed up the files before connecting to the internet again.  The retrieved data shows an elaborate network of secret sites, which used my computer as a terminal to transfer my files and then crash my system at the end. I informed the matter to the US Congress and President in early 2009 by offering copies of all the data and emails stored in my computer freely to the agents if they promised a stop the unwarranted harassment.  This resulted in an anti-PC hacking law passed in late 2009.       

The Congress not only blamed the established agents for causing a manmade (avoidable) crisis, but also adopted two significant first-best policies I had pursued with the Congress since 2003: safe central banking for previously uninsured money market funds and bank debts, and consolidated minimum capital requirements for bank holding companies.  The agents not only admitted their failure before Congress.  They also prevaricated before the FCIC by testifying that no one in the academy, industry or government saw the crisis coming.  They presented a book written by a Yale expert published by the Oxford University Press and promoted by the current Fed Chief and his cohorts to portray the financial catastrophe as a slap by the invisible hand (god).   The Congress did not believe in such second-best policy expertise which invoked god for the failure of a manmade system.  The Congress already knew about my first-best policy research memos and papers.  The FCIC received my fresh memos and rejoinders during the FCIC hearings. The FCIC also knew about the Congress adopting the above two significant first-best policies.

The only stark choice before you, thus, is to help institute the FPA to serve the best interests of the Country in which your stake is far greater than that of others.  The Country cherishes the likes of Steve Jobs among you who dedicate their lives for serving the Country that props them as the only enlightened strategy of Nirvana.

After the humiliation of being thrown out of a first-class compartment, Mahatma Gandhi resolved to serve for political liberation of the Country because his own liberty and survival also depended on his actions.  Such resoluteness dawns on some stakeholders of the Country from time to time whenever common survival is jeopardized.  It is incidental, therefore, that my first-best policy research and unusual tryst with the second-best policy promoting agents made me resolute to work for the survival of thehard-earned financial liberty of my Country as my only path to Nirvana

I started treading through a dark endless tunnel since 1991.  The only light was the truth discovered trough first-best policy research.  Unwarranted rejection of such profound discovery via blind reviews only enlightened me about the net-work of second-best policy promoting agents.  My only weapon was a longing for nothing, but to continue selflessly in the direction of discovered truths.  I expected nothing, even a ray of hope, before death. 

My journey has been incredibly efficient, though.  The Country has paid someone-who has struggled for preserving its hard-earned financial liberty-less than twenty percent of that earned by the failed second-best policy experts and less than one percent of the failed Masters of the Universe who have thwarted such struggle.

The strategy for preserving the hard-earned financial liberty of my Country has succeeded immensely and efficiently.  The truths about my first-best policy discoveries have triumphed and prevailed.  But the second-best policy promoting agents have not left the scene.  They are still ruling the roost.  This is why the FPA is necessary and urgent for you to help establish.      

The human gene must have survived the onslaught of virulent dinosaurs.  The memory in the human gene especially about survival instincts may be eternal to make a newborn baby cry for food for survival.  See Acharya, S. (2011), “A Unifying Philosophy of Governance,” http://pro-prosperity.com/A-Unifying-Philosophy-of-Governance.html

See Acharya, S. (2011), “Optimal Governance for Prosperity amid Stability,” available at http://pro-prosperity.com/Research/Prosperity%20amid%20Stability%20-%20A%20New%20Economic%20Paradigm.pdf

See Acharya, S. and Dreyfus, J.F. (1989), “Optimal Bank Reorganization Policies and Pricing of the Federal Deposit Insurance,” Journal of Finance.

See Acharya, S. (2010), “Economically Efficient Constitutional Governance,” http://pro-prosperity.com/Research/moralhazardliberty.pdf

For a rational rendition of terms like divinity and precocity, see Acharya, S. (2011), “A Unifying Philosophy of Governance,” available at http://pro-prosperity.com/A-Unifying-Philosophy-of-Governance.html

See Acharya, S. (2011), “Begetting first-best status for principals,” http://pro-prosperity.com/Begetting%20first-best%20status.html

Exact references are in a 45-page paper being available on request for sharing discretely.

See Acharya, S. (2011), “A Unifying Philosophy of Governance,” available at http://pro-prosperity.com/A-Unifying-Philosophy-of-Governance.html