Universities Need to Award Research on Stability, October 28, 2013 Sankarshan Acharya |
To: Honorable President Barack Obama Cc: Department of Justice, US Government; Others receiving through circulation Date: October 28, 2013 Dear President Obama, After the financial market meltdown of 2008, many elite universities like Oxford, Cambridge, NYU, U Penn, Princeton and financial associations as well as central banks held conferences on papers explaining systemic financial crashes. My papers - showing that financial crashes are inevitable because the established system is inefficient, unstable and constitutionally unfair – were not accepted. One can infer rationally that the elite experts were seeking models explaining periodic financial crashes while justifying the established system. The following details confirm that they failed to construct a model which could rationally justify the established system and explain occurrence of periodic financial crashes:
I. Why elite experts don’t like first-best efficient governance? The above narratives show unambiguously that my research on first-best efficient governance is peerless, seminal and antithetic to the research that has founded the established system and supported by the elite experts:
II. Devastation of Wealth Due to Second-best Philosophy The DOJ has recently levied $13 billion fine on JP Morgan. It looks large. But it is puny compared to the massive destruction of hard-earned home equities, jobs and private holdings in financial securities of smaller banks (e.g., Washington Mutual and Bear Stearns) perpetrated deliberately to cherry pick valuable assets, virtually freely, without assuming any liabilities owing to FDIC and FIRREA crafted by mega banks. The constitution protects private properties. JP Morgan’s shenanigans that destroyed private properties massively and the facilitating laws and institutions it lobbied to create are obviously unconstitutional. They are also inefficient due to the diffidence they inflict on productive citizens. Such diffidence decimates productivity, competitiveness, prosperity and security of the nation. Repaying the bailout funds is not a yardstick to measure JP Morgan’s contribution to the public exchequer, because the destruction of private wealth and employment it unleashed caused a very large decline in tax revenues and destabilization of the economy. In any case, the DOJ should focus on the epicenter of the second-best system (Goldman Sachs). Only after GS is thoroughly cleansed, if not vanquished, would the first-best system reign supreme and first-best status for citizens be attained. The US economy started prospering after the then largest investment bank (Drexel Burnham Lambert) vanished. Investment banking (except the pure service activity) has been for the robbers, by the robbers and of the robbers. The robbed wealth is shared with the elite academy (as research grants and chaired professorships) and lawmakers (in form of political contributions and lucrative employment for kith and kin) to concoct research papers on the second-best philosophy in top-rated journals and to use these papers for passing laws that perpetuate the system of robbery. The robbing strategy has worked for centuries because the robbed wealth could also be deployed to lure any emerging first-best efficient policy researcher to discontinue his research and, if he does not respond to the lure, use the blind referee procedure to block such research, stop pay raises and block career advancements until he is completely subdued and systemically purged. The second-best philosophers, however, failed to foresee the emergence of some researcher who would remain inured to harassments–with real pay cuts, stifled career, infliction of infamy via rejection of his research at elite journals and conferences, possible purge from the academy, threats of unemployment, ultimate penury and mendicancy–and would pursue persistently for passage of first-best efficient rules of governance. The mega banks did not expect that they and their anointed elite experts would, instead, fail due to their fight to block research on first-best efficient governance.[8] The epitome of investment banking has been Goldman Sachs. But Goldman along with most mega banks became bankrupt along in 2008. It had engaged in trading strategies designed to pull down the broader mortgage market and to undo the American household wealth tied to homes. It had funded elite experts who underhandedly harassed a first-best policy researcher. GS finally fell in the financial grave it had dug for others. The public knows that Goldman survived due to the massive transfer of public funds funneled via AIG and Fed, at the behest of the then Chairman of the Federal Reserve Bank of New York and the US Treasury Secretary (both GS alumni). The current spate of legitimate DOJ actions on mortgage fraud should–and I believe it would–extend to the epicenter of second-best governance, Goldman Sachs, which designed robbing shenanigans, funded research to support the same, and lobbied for laws establishing robbery-driven governance which crashed the mortgage market and precipitated an economic decline of USA: 1. For example, Goldman wrote a special agreement in 2007 with AIG to buy credit default swaps (put options), written on mortgage backed securities, from AIG. The agreement would transfer cash to GS from AIG whenever CDS values increased and to AIG from GS otherwise. The value of a CDS goes up as the price of the underlying mortgage security falls. Goldman artificially created mortgage-backed securities to sell them short to raise the value of its CDS holdings to transfer cash from AIG equal to the rise in the value of its CDS holdings. GS thus drained AIG cash reserves, fully. All other banks did not have such exclusive agreements with AIG. But they had to also sell mortgage-backed securities to stay competitive. This caused a catastrophic decline in the market prices of all mortgage backed securities. With the help of their buddies in the government, the mega short-sellers then usurped the private wealth of security holders of banks like Washington Mutual, Wachovia, Bear Stearns and Lehman Brothers without bearing any liabilities. Their ultimate usurpation target was and continues to be the valuable assets of Fannie and Freddie. They, their embedded media and academic gurus have been spreading a myth that mega private banks have rescued the irresponsible mortgage lenders (like those that fell and were acquired through FDIC and FIRREA) without any loss to taxpayers. They are deliberately silent about the massive destruction of private investments made in the fallen banks, loss of investor confidence as a result, and loss of tax revenues and employment due to the businesses wound down by the decimated investors. 2. The mega short-sellers–with privileged information due to clearing house data and order flows at their market making subsidiaries and with access to cheap government-guaranteed money–distort the constitutionally mandated free market economy by dumping artificially created financial securities. The distortion is designed to rob hard earned wealth of the crucial vast majority of persevering citizens. The robbed wealth is shared with elite experts who control top-rated journals publishing only papers supportive of the second-best system and rejecting antithetic research on first-best efficient system. The papers published in elite journals are then used as the basis to promote rules to rob. The contribution of such second-best activities (financial shenanigans, second-best academic research and lawmaking) to the real economy is vastly negative. Such activities will never beget first-best status for the crucial vast majority of persevering citizens or ensure stability, prosperity and security of the nation in long-run. The second-best activities will only lead to a decay in national competitiveness. Systemic robbing of hard-earned wealth of persevering citizens has historically crippled every empire. 3. Even trading between hedge fund executives of mutual fund companies like Fidelity with their fund managers need to be probed because of moral hazard due to fund managers lured by bonus for trades to transfer wealth from mutual funds to private hedge funds: I have circulated memos about how mutual funds almost invariably underperform the markets due to nibbling away by private hedge funds of mutual fund company executives. The elite experts have supported law to convert pure vanilla mutual funds to tiered mutual fund holding companies governed by boards of directors. I recently received an email from Dimensional Funds headed by David Booth who has donated profusely to the Booth School of Business at the U of Chicago. The email bragged about Dimensional Funds using intellectual guidance on beating the market from Eugene Fama. Fama received Nobel Memorial Prize in Economics this year for precisely the opposite reason cited by the Nobel Committee: Fama’s published research awarded by the Nobel Committee found it impossible to beat the market! Dimensional Funds’ advisors include the same Nobel Prize winners (Myron Scholes and Robert Merton) who were also partners of Long Term Capital Management that collapsed in 1998. The Nobel Committee and the Bank of Sweden appear to be thoroughly confused or ill-informed: it awards someone for published research which shows that investors cannot earn higher returns than that on the standard market indexes (the Nobel Funds are indeed invested in market indexed funds), while the Dimensional Funds’ managers claim superior returns due to guidance from the same Nobel awardees. The Dimensional Fund Company Executives, as well as other mutual fund company executives, have definitely ‘earned’ abnormally high wealth thanks to their mutual fund holding company structure permitted by law with the help of elite experts. They need to share their unseemly wealth with the elite academy willing to sell its integrity to trumpet that potential trading between financial company executives and mutual fund managers is free market capitalism that the lawmakers (sharing the robbed wealth as political contribution) should protect through law. The elite gurus propagate one theory that even wins Nobel Prize for indoctrination of common investors (including the Nobel Committee Fund Managers) while their disciples in the industry lobby for laws driven by a very different philosophy, for example, to facilitate robbing of mutual funds by hedge funds controlled by executives of the fund company through controlling bonus and salary of the fund managers. The mutual fund company structure should be disbanded forthwith. Only plain vanilla mutual funds should be permitted to diversify risks of investors without systemic underhand robbing by fund company executives. 4. Some elite experts have written a tome to prescribe disbanding of the government sponsored lenders (Fannie and Freddie).[9] They present no economic model of a truly free market economy to determine the price of credit (interest rate) in equilibrium between suppliers (creditors) and users (borrowers) of capital to justify their prescription. III. Stress in the Academy of Business/Economics The elite experts perpetuating the (second-best) system of robbery have been doing a disservice to the economy and to the universities that prop them. The universities will ultimately be hurt as the loot to share vanishes with the collapse of the second-best system and the regulators and elected officials proscribe the associated philosophy of robbery. After struggling very hard since 1991, the elite experts have failed to find errors in my model or to challenge robustness of my axioms or first-best efficient policies obtained in equilibrium.[10] They have harbored a mistaken belief that political and regulatory sponsors and university administrators will allow then to perpetuate a system of robbery based of lobbying with lavish political contributions. This belief now seems to be crumbling. The profound truth that the system of robbery could not be sustained forever must have already dawned on the top political, university and regulatory leaders around the world. Recent news reports tell that the second-best philosophy is being trashed around the world while first-best efficient policies are embraced by major economies like USA, Europe, China, India and Russia:
IV. Why should universities reward research on first-best efficient governance?
With profound regards, [1] Raj Chetty (October 20, 2013), “Yes, Economics is Science,” New York Times, http://www.nytimes.com/2013/10/21/opinion/yes-economics-is-a-science.html?pagewanted=2&_r=0&adxnnl=1&adxnnlx=1382497482-oiynTL2afEqxKc1pUx1S9A
[2] Acharya, S. (April 30, 2011), “Cause of the 2008 Financial Catastrophe: The Experts Deceived the Academy and the Nation by Surreptitiously Rejecting Research on Economically Efficient and Constitutional System of Money and Finance, and on Optimal Holding Company Organization and Capital Structure under Constitutional Governance & The Academy Needs A Center of Constitutional Capitalism Founded on Rigorous Research.” .” This paper is available on request.
[3] For all the references, see Acharya, S. (2013), “Arbitrage Pricing of Total Risk of Assets and First-Best Efficient Governance of Financial Markets,” http://pro-prosperity.com/Research/moralhazardliberty.pdf
[4] Acharya, S. (2013), “Coalition of Borrowers, Government-Regulated Lender, Interest Rate and Safe Central Bank in Equilibrium,” http://pro-prosperity.com/Research/Coalition%20of%20Borrowers.pdf
[5] Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, Lawrence J. White (2011), “Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance,” Princeton University Press.
[6] See Thomas B. Edsall (September 10, 2013), “Can the Government Actually Do Anything About Inequality?” New York Times. Nobel Laureate Joe Stiglitz of Columbia concedes that inequality is holding back recovery and even blames financialization of wealth as a problem, but does not elaborate what is about financialization that is causing the slide. See http://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/ and http://opinionator.blogs.nytimes.com/2013/10/13/inequality-is-a-choice/?ref=opinion
[7] Acharya, S. (2008), “Fallacy of Keynesian Philosophy,” http://pro-prosperity.com/Fallacy-of-Keyensian-Economic-Philosophy.html
[8] Acharya, S. (April 30, 2011), “Cause of the 2008 Financial Catastrophe: The Experts Deceived the Academy and the Nation by Surreptitiously Rejecting Research on Economically Efficient and Constitutional System of Money and Finance, and on Optimal Holding Company Organization and Capital Structure under Constitutional Governance & The Academy Needs A Center of Constitutional Capitalism Founded on Rigorous Research.” .” This paper is available on request.
9] Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, Lawrence J. White (2011), “Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance,” Princeton University Press.
[10] See Acharya, S. (2013), “Constitutional Capitalism for First-best Efficient Governance, Obtained in general equilibrium based on rational microeconomic analysis, devoid of parochial dogmas, politics or prejudice,” http://pro-prosperity.com/Constitutional%20Capitalism.html
[11 Acharya, S. (April 30, 2011), “Cause of the 2008 Financial Catastrophe: The Experts Deceived the Academy and the Nation by Surreptitiously Rejecting Research on Economically Efficient and Constitutional System of Money and Finance, and on Optimal Holding Company Organization and Capital Structure under Constitutional Governance & The Academy Needs A Center of Constitutional Capitalism Founded on Rigorous Research.” .” This paper is available on request.
[12] Washington Post Editorial Board, “Making a bad example of JPMorgan Chase,” October 23, 6:14 PM, http://www.washingtonpost.com/opinions/making-a-bad-example-of-jpmorgan-chase/2013/10/23/98bdb61a-3bf9-11e3-b7ba-503fb5822c3e_story.html
[13] ANNIE LOWREY and BINYAMIN APPELBAUM, “Summers pulls name from consideration for Fed chief,” New York Times, September 15, 2013, http://www.nytimes.com/2013/09/16/business/economy/summers-pulls-name-from-consideration-for-fed-chief.html?pagewanted=3&_r=0
[14] Clea Benson & Cheyenne Hopkins, “Fannie Mae Survival is Back on the Table in Washington,” Bloomberg News, Oct 15, 2013 3:30 PM CT, http://www.bloomberg.com/news/2013-10-15/fannie-mae-survival-is-back-on-the-table-in-washington.html
[15] “Europeans Import US Mortgage Models,” Wall Street Journal, October 7, 2013.
[16] George Chen (October 18, 2013), “Li at crossroads in the fight for economic changes,” http://www.scmp.com/business/banking-finance/article/1341500/li-crossroads-fight-economic-changes The Shanghai Financial Center was designed as “testing ground for free-market policies” by The area is a testing ground for free-market policies that Premier Li Keqiang. See http://www.bloomberg.com/news/2013-09-29/china-inaugurates-shanghai-trade-zone-in-financial-reform-drive.html . Chinese Premier Li’s surprising absence from the inauguration of the Shanghai Finance Trade is reported widely: http://www.uktradeinvestcanada.org/uktihome/premiumcontent/627160.html
[17] New York Times Editorial Board (October 21, 2013), “Beijing’s Assault on Academic Freedom,” http://www.nytimes.com/2013/10/22/opinion/beijings-assault-on-academic-freedom.html?_r=0 [18] See By Tom Braithwaite (September 19, 2013), “Hank Paulson Warns Regulatory Conflict,” Financial Times (New York): The former US Treasury secretary said reforms put in place after the 2008 crisis could lead to … supporting “regulators, exchange, clearing houses or national financial institutions.” http://www.ft.com/cms/s/0/7259f6d0-213e-11e3-a92a-00144feab7de.html#axzz2j3EXXERz [19] Hemali Chhapia, “More B-schools closing than new ones opening,” TNN Jul 1, 2013, 03.23AM IST [20] Oliver Staley (October 3, 2013), “Duke to NYU Missteps Abroad Lead Colleges to Reassess Expansion,”
Bloomberg News, http://www.bloomberg.com/news/2013-10-04/duke-to-nyu-missteps-abroad-lead-colleges-to-reassess-expansion.html
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