Sunday, August 18, 2013

Larry Summers, Stephen Leacock, and Women

Below is a letter to Mr. Stephen Leacock, a Canadian writer, humorist, and academic, who died in 1944.
Dear Mr. Leacock:
Recently, I had the pleasure of reading your 1922 book, My Discovery of England. As it would no doubt not surprise you, I found it amusing, even though some of it is a bit dated from my vantage point in the early 21st century.
Your book does not strictly limit itself to England but makes room for some of your favorite notions. You might have wanted to constrain yourself on some of these, especially if you cared to appeal to readers some ninety years in the future, about whom, though, you probably did not give much thought. But your passages on the aptitudes and appropriate education of women, which begin as a criticism of Oxford University’s policy of admitting women but quickly become more general, are really over the top.
I should point out in this connection that an American, Mr. Lawrence H. Summers, currently very much alive and a sometimes academic, found himself in a heap of trouble when he made remarks more than eight years ago about the underrepresentation of women in the science and engineering professions. He was at the time President of Harvard University, but found his tenure in that position cut short the following year, owing in part to these remarks. Mr. Summers is an economist and is hoping to become head of the U.S. central bank, but his remarks on women in the sciences are still remembered, especially by those who would prefer someone else for the job.
While you apparently did not harbor ambitions to be head of the Bank of Canada, content with your career as a famous humorist, writer, and professor of Political Economy and Chair of the Department of Economics and Political Science at McGill University, there is some superficial similarity between you and Mr. Summers. I would not want to stretch it too far. Your sense of humor – I think it would not insult Mr. Summers to say – is vastly different and more developed than his. I do believe, though, that you both rightly share a high regard for your own abilities.
Further, I suppose 1922 was a much different time than 2005 when Mr. Summers made his remarks, in particular with respect to what we now call “political correctness.” Still, your remarks about women, which go way beyond anything Mr. Summers said, have the ability to grate.
For his part, Mr. Summers hypothesized that the curve representing the distribution of native abilities in the hard sciences is somewhat fatter at the very high end for men than for women. He did not say that the average women had less ability than the average man. He makes clear that he is “talking about people who are three and a half, four standard deviations above the mean in the one in 5,000, one in 10,000 class. Even small differences in the standard deviation will translate into very large differences in the available pool…” Now whether or not there are such differences in the far-out tails of the distributions of certain intellectual abilities between the populations of men and women is highly debatable, as Mr. Summers was quickly made to realize. He even seemed to have an inkling he was headed for trouble. From the transcript of the event, at the conclusion of Mr. Summers’ remarks, there was this exchange between him and the moderator:
Q: Well, I don't want to take up much time because I know other people have questions, so, first of all I'd like to say thank you for your input. It's very interesting – I noticed it's being recorded so I hope that we'll be able to have a copy of it. That would be nice.
LHS: We'll see. (LAUGHTER)
But Mr. Leacock, in your book, you are talking about averages, not far-out tails. In fact, you dismiss the exceptional woman as irrelevant. Let me quote you:

The fundamental trouble is that men and women are different creatures, with different minds and different aptitudes and different paths in life. There is no need to raise here the question of which is superior and which is inferior (though I think, the Lord help me, I know the answer to that too). The point lies in the fact that they are different.
But the mad passion for equality has masked this obvious fact. When women began to demand, quite rightly, a share in higher education, they took for granted that they wanted the same curriculum as the men. They never stopped to ask whether their aptitudes were not in various directions higher and better than those of the men, and whether it might not be better for their sex to cultivate the things which were best suited to their minds. Let me be more explicit. In all that goes with physical and mathematical science, women, on the average, are far below the standard of men. There are, of course, exceptions. But they prove nothing. It is no use to quote to me the case of some brilliant girl who stood first in physics at Cornell. That's nothing. There is an elephant in the zoo that can count up to ten, yet I refuse to reckon myself his inferior.
And you keep on going, digging a deeper hole for yourself, at least as far as posterity is concerned:
The careers of the men and women who go to college together are necessarily different, and the preparation is all aimed at the man's career. The men are going to be lawyers, doctors, engineers, business men, and politicians. And the women are not.
There is no use pretending about it. It may sound an awful thing to say, but the women are going to be married. That is, and always has been, their career; and, what is more, they know it; and even at college, while they are studying algebra and political economy, they have their eye on it sideways all the time. The plain fact is that, after a girl has spent four years of her time and a great deal of her parents' money in equipping herself for a career that she is never going to have, the wretched creature goes and gets married, and in a few years she has forgotten which is the hypotenuse of a right-angled triangle, and she doesn't care. She has much better things to think of.
Mr. Summers also addressed this issue, but in a somewhat different way, and does not draw your conclusion that there should therefore be a difference in the curriculum offered to men and to women. Here is part of what he said:
…I've had the opportunity to discuss questions like this with chief executive officers at major corporations, the managing partners of large law firms, the directors of prominent teaching hospitals, and with the leaders of other prominent professional service organizations, as well as with colleagues in higher education. In all of those groups, the story is fundamentally the same. Twenty or twenty-five years ago, we started to see very substantial increases in the number of women who were in graduate school in this field. Now the people who went to graduate school when that started are forty, forty-five, fifty years old. If you look at the top cohort in our activity, it is not only nothing like fifty-fifty, it is nothing like what we thought it was when we started having a third of the women, a third of the law school class being female, twenty or twenty-five years ago. And the relatively few women who are in the highest ranking places are disproportionately either unmarried or without children, with the emphasis differing depending on just who you talk to. And that is a reality that is present and that one has exactly the same conversation in almost any high-powered profession. What does one make of that? I think it is hard-and again, I am speaking completely descriptively and non-normatively-to say that there are many professions and many activities, and the most prestigious activities in our society expect of people who are going to rise to leadership positions in their forties near total commitments to their work. They expect a large number of hours in the office, they expect a flexibility of schedules to respond to contingency, they expect a continuity of effort through the life cycle, and they expect – and this is harder to measure – but they expect that the mind is always working on the problems that are in the job, even when the job is not taking place…
Part of the difference, of course, is that Mr. Summers is speaking about the people who get to the top of their professions and you are talking about averages. But you really get into trouble when you discuss what is most appropriate for women. What were you thinking? If you were around today, you would have noticed great changes in the role of women in society. You would not have lasted, much less reached, the pinnacle of the Department of Economics and Political Science at McGill University if you were still writing such things. Fortunately, for this book, the issue of women suffrage for federal elections in Canada had already been settled, though women had to wait until 1940 to vote in Quebec provincial elections. You wisely forgo discussion of this issue, though you are said to have opposed women suffrage.
Nonetheless, I did enjoy your book, filled as it with wry and pointed observations. Your political outlook could probably be characterized as socially and economically conservative, sprinkled with some libertarianism. While I would agree with your attitude towards prohibition, some of the other things you propound as obvious may seem less so to many of us today. Your aversion to government intervention of interference in the economy (“bring back the profiteer”) is a case in point. Perhaps, as you experienced the 1930s, your ideas about the proper role of government in the economy evolved. Not being an expert on the evolution of your ideas, I do not know.
Also, I daresay, you seem to have the notion that societies are fixed. It is this view of a static society that seems to cramp your imagination. Philosophical conservatives have a point when they say that much of human nature is fixed, but this inclines them too much toward a pessimistic and fatalistic view.  Societies are dynamic. We can debate whether the American civil rights leader of the mid twentieth century, Dr. Martin Luther King, Jr., was mostly correct when he said (the statement may not have been original): “The arc of the moral universe is long, but it bends toward justice.” But what is irrefutable is that societies are dynamic, and what seemed impossible at one point in time may become considered normal at some future point. Sometimes it does not even take that long. Look at the evolution of attitudes toward same-sex marriage in many western industrial countries.
It is, though, your views on women which are the most shocking. They marred the otherwise enjoyable experience of reading your book.
                                                                        Sincerely yours,

                                                                        Norman Carleton                                                                                         

Tuesday, August 13, 2013

CFTC Investigating Goldman’s Aluminum Warehouse Practices

According to news reports, the CFTC is currently investigating allegations that Goldman Sachs has been manipulating the price of aluminum by releasing it too slowly from warehouses it owns through a subsidiary. The CFTC will probably develop a fuller story of what did or did not happen than was contained in the original New York Times article on this subject, which I criticized. This is clearly something the CFTC should investigate.

A Brief Note on Possible Abuses of NSA Information

When I posted some comments on the NSA in July, I was worried about potential abuses of NSA information in the future. I was unaware of any current abuses. On August 7, though, Reuters published an article that reports on possible misuse of NSA information by the Drug Enforcement Administration (“DEA”) and the IRS.  Apparently, there was an IRS manual that was used to train law enforcement agents “to ‘recreate’ the investigative trail to effectively cover up where the information originated [the NSA], a practice that some experts say violates a defendant's Constitutional right to a fair trial.”  According to the article, the origin of the initial information was concealed “not only from defense lawyers but also sometimes from prosecutors and judges.”

Probably any law enforcement agents engaged in this practice justified it to themselves because it helped in their fight against bad guys. But it is not the way law enforcement is supposed to work.

Tuesday, August 6, 2013

The Senate Banking Subcommittee Hearing on Commodity Activities of Financial Holding Companies (July 23, 2013)

In my previous post, I discussed the problems with a New York Times article on aluminum that seemed timed to precede by a couple of days a hearing held by a subcommittee of the Senate Banking Committee on the permissible activities of financial holding companies. The hearing focused on whether these companies should be permitted to own affiliates involved in such activities as storing physical commodities or generating electricity. The hearing itself did not produce any insights into the aluminum issue but it did usefully shed light on the legal and regulatory developments that resulted in some financial holding companies, notably J.P. Morgan Chase and Goldman Sachs, being in these businesses.
Three witnesses at the hearing argued that financial holding companies involvement in these types of activities should either be prohibited or sharply curtailed: Tim Weiner of MillerCoors, Joshua Rosner of Graham Fisher & Co., and Saule Omarova, an associate law professor at the University of North Carolina at Chapel Hill. Joshua Rosner is the coauthor of Reckless Endangerment, a book I criticized in this blog post. I know Saule Omarova slightly. She was a senior adviser to Randall Quarles when he was Treasury Under Secretary for Domestic Finance in the George W. Bush Administration. I do not know her party affiliation, if any, but many Republicans who follow these issues likely disagree with her forcefully presented and strong opinions on the issues discussed at the hearing.

One witness, Randall D. Guynn, a partner and head of the Financial Institutions Group at the law firm, Davis Polk & Wardwell, argued that no changes needed to be made to curtail financial holding companies activities with respect to physical commodities or electric power generation. Interestingly, both Randall Quarles and Saule Omarova have also worked at Davis Polk. Quarles was at one point the co-head of the Financial Institutions Group.
In his testimony, Mr. Weiner implies that MillerCoors purchases and obtains aluminum through the LME market. However, he does not say that MillerCoors obtains the bulk of the aluminum it uses in this manner. Given the delays he claims, up to 18 months for “aluminum users like MillerCoors,” this is doubtful. There does not appear to be any shortage of beverages in aluminum cans available for purchase by American beverage drinkers. What is most likely is that companies needing aluminum obtain it directly from the companies that produce it. What MillerCoors is apparently upset about, as mentioned in my previous post, is the increase in the “premium” they have to pay. The reason for that remains unclear. Unfortunately, none of the Senators at the hearing questioned Weiner on these issues.

Whether Goldman was deliberately manipulating the aluminum market by its warehouse practices, though, is a separate issue from whether financial holding companies should be in this business at all. Saule Omarova in her testimony and a draft law article she cites in her written statement provides interesting background to the legal development resulting in permitting financial holding companies into the physical commodity business. I also agree with her that financial holding companies should not be permitted to do this. They have conflicts of interest and financial advantages provided by the federal government that argue strongly for limiting what lines of business are permissible for these companies.

“Shuffle of Aluminum” – A Disappointing Investigative Article in the New York Times

On July 20, the New York Times posted an article on its website, “A Shuffle of Aluminum, but to Banks, Pure Gold,” which appeared on the front page of the Sunday edition the next day. The article’s thesis is that Goldman Sachs, through a subsidiary, Metro International, has been keeping the price of aluminum artificially high and collecting unjustified storage fees. The article alleges that they do this by being excessively slow in delivering aluminum out of warehouses designated as good delivery points for aluminum futures trading on the London Metal Exchange (“LME”). Also, the article maintains that Metro shuffles aluminum among around different warehouses in Detroit in order to satisfy LME rule requirement regarding minimum deliveries of aluminum out of approved warehouses.
The article attracted a good deal of attention, especially among those who distrust or have a professional interest in disparaging Wall Street. It was timed to precede by a couple of days a hearing before a subcommittee of the Senate Committee on Banking, Housing, and Urban Affairs focusing on whether financial holding companies, such as Goldman, should be in the physical commodity business at all. There is also now a private lawsuit against Goldman and the LME charging them with antitrust violations by limiting the amount of aluminum available and keeping the price artificially high.

I am not an expert on the aluminum market and do not know whether the allegations against Goldman and the LME have any merit. However, while the Daily Show made fun of those who found the New York Times article confusing, the New York Times article was badly written and, in my view, not ready to print. While the reporter, David Kocieniewski, is on to something, he did not fully explore the issue.
One problem with the article is that the story of a “merry-go-round of metal” appears to be based on interviews with forklift drivers. They are certainly worth talking to, but the reporter did not apparently see or ask for the documentation behind the movements, nor did he obtain an explanation from either Metro or Goldman. In its reply to the article, Goldman states that “it is the owners of the metal who direct warehouse operators to dispose of stored metal or transport metal from LME-approved warehouses to warehouses outside the LME system to meet their own needs or objectives.” Kocieniewski should have explored this issue.  

The article also does not address how the major purchasers of aluminum obtain the metal. It suggests that they buy it on the LME futures markets and stand for delivery. Futures markets, though, are usually used for hedging and speculation, not as marketplaces used to obtain a physical commodity. Some contracts, of course, culminate in delivery, but the amounts are usually not that significant. The reason for a delivery option is that the potential for or threat of delivery ensures that prices in the cash and futures markets converge at the time that the futures contract matures.
Another problem with the article is that it does not discuss the reason aluminum in storage has increased. On this point, Mr. Charles Li, the CEO of HKEx, the Hong Kong firm that now owns the LME, argues that aluminum producers did not cut production and that the global slowdown in the world economy led to reduced demand. The futures markets started pricing aluminum too high relative to the spot price; that is, the cost of aluminum in the cash market plus the cost of carry (storage, interest, and insurance) is lower than the futures market price. This occurred in a situation where the cost of carry had decrease because interest rates had fallen. In such a situation, the obvious arbitrage is to buy the physical aluminum, put it (or keep it) in storage, and sell an equal amount on the futures market. This effectively locks in a profit, though it is not entirely riskless. The risk to this position is that the short position on the futures market may require variation margin payments if the price of aluminum increases (the loss on the short position is offset by a gain in the market value of the physical aluminum, but that does not bring in cash until the position is sold).

Theoretically, this arbitrage should continue until the futures price equals the spot price plus the cost of carry by raising the spot price and lowering the futures price. The arbitrage also has the effect of locking up some aluminum in storage, and it is owned for a time by arbitrageurs who never intend to use the metal for any industrial purpose.
Goldman, in its rebuttal to the Times article claims, however, that “approximately 95 percent of the aluminum that is used in manufacturing is sourced from producers and dealers outside of the LME warehouse system,” and that “aluminum stored in Metro warehouses amounts to approximately 1.5 million tonnes, compared with global aluminum production in 2012 of about 48 million tonnes.” The Times article should have incorporated a discussion of the sources of aluminum to users and addressed the contention that there is no shortage of aluminum to those who want it.

A point on which both Mr. Li and the Times article agree is that there has been an increase in the “premiums” purchasers of physical aluminum have to pay over the spot price due to the warehouse delays. It is not clear why large companies, such as MillerCoors or Coca-Cola, do not have the ability to strike a more favorable deal on premiums with companies such as Alcoa. There is probably an explanation, but the Times article does not provide it.
Another omission from the Times article, particularly significant due to its timing preceding the Congressional hearing on permissible businesses for financial holding companies, is the apparent intent of Goldman and J.P. Morgan Chase to exit the metal warehouse business. The Financial Times reported on July 14, i.e., before the New York Times article appeared, that these two firms “are seeking to sell their metal warehousing units just three years after their controversial entry to the industry, even as a proposed rule change by the London Metal Exchange is likely to reduce the attractiveness of the business.” The New York Times could have usefully mentioned this.

While one can understand that the Times wanted to publish this article before the Congressional hearings, not all the necessary reporting had been done. The news editors should have insisted that the reporter develop more information. Somewhat surprisingly, the editors of the editorial pages wrote an editorial on this subject that was better than the news article. You can read it here.