Thursday, March 23, 2023

Part I

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President Biden’s First Veto: White House Targets Pension Funds in Protection of ESG

It seems that we are surrounded by initials and acronyms or surrounded by letters, and many of them just come to us headline after headline, and they have to be explained. For example, some explanation is necessary in order to understand the first veto exercise by the current President of the United States, Joe Biden. The headlines tended to say that Biden exercised his first veto in order to stop an ESG measure. Now that sounds uninteresting. I assure you, you should see it as interesting. It’s not a small thing by the way that the president issued a veto, but it tells you something. If you look at the first two years of his administration, no veto. This is in the third year, so what happened?

Well, what happened was the midterm elections, and what happened was that you gained Republican majority in the house that puts the house under Republican leadership, but you also had a changed environment in the Senate where a great deal has to do, not so much just with the math, how many democratic senators are there, how many Republican senators, but how many are in the room? And furthermore, who’s up for reelection?

And when it comes to certain measures, you’re going to see some Democrats who are likely to face very stiff Republican competition moving to the right that is moving into a more conservative pattern. Senators Jon Tester of Montana and Joe Manchin of West Virginia very much in that category, they voted with Republicans in the Senate and that’s why the legislation reached the president’s desk and he vetoed it. The veto is a constitutional provision whereby the nation’s chief executive may refuse to sign legislation or actually issue a veto of legislation that throws the situation back to the congress where a new super majority must pass the legislation in order to override a president’s veto.

That’s not going to happen in this case, but nonetheless, this is a very important measure. The fact that this is President Biden’s first veto tells us a great deal about where things stand in the United States. So let’s look at that headline again. Biden’s first veto stops Congress’s ESG measure. Well, number one, what in the world is ESG and what would an ESG measure be?

ESG is one of the two sets of shorthand that are most important right now as you look at the headlines. One is ESG, one is DEI. They’re not the same thing, but they are very closely related. DEI is diversity, equity, and inclusion that has more to do with employment and with academic life in the United States and more on that in days ahead on The Briefing. ESG is environmental, social, and governance, and those three words are being put together as part of a progressivist agenda to try to reshape economic life in this country and in particular the operation of the economy when it comes to investments.

Now, how does that come into play? Well, it comes into play because during the time of the Trump administration, the Secretary of Labor, Eugene Scalia, by the way, the son of the late Supreme Court Justice, Antonin Scalia, Secretary Scalia had put in place regulations that were very clear that pension funds, that’s why the Department of Labor was involved, pension funds for American workers were not to take ESG factors into consideration. But instead merely to operate by the rule that the important role of the investors, the managers of the investments is to maximize the gain for the workers whose pensions were at stake.

The old rule, which is known as ERISA, that old rule made very clear that the singular responsibility of those who are managing pension funds, that’s a vast amount of money in the United States, talking about trillions of dollars. Their sole duty was to maximize the value of the funds and to manage the investments for the good of the retirees who would be receiving the pensions.

No external considerations. And that meant that if you’re a pension fund manager and you bring in external considerations, well then those who have the investments can sue you and bring charge against you, and the federal government may actually take action against you for not acting solely in terms of the benefit to the shareholders or to the pensioners or the retired employees. Now, for decades, many on the progressive left have been trying to get ESG issues or that’s the terminology used now, there were previous attempts at terminology, environmental, social, governance issues begged into the cake in terms of investment decisions.

Now, why would they do that? Well, because as you’re looking at investments in the United States of America, you’re looking at the operation of the economy. Well, here’s something that most Americans don’t think about. There is an enormous proportion of the total invested funds held by any source in the United States of America that are actually held on behalf of retirees through retirement and pension funds. Period.

There is huge, huge money there. If you want to change the economy, if you want to transform the culture, well, one way to do it would be to gain control one way or the other of those pension funds. So the progressive left have been changing the criteria by which the managers of those funds were to be evaluated.

Now, let’s just remind ourselves of something. Here’s what’s crucial. Under ERISA, the congressional mandate was that the managers of those funds, the investors of those funds, they were to be judged solely on the basis of whether or not their actions led to relative growth in those investments and the protection of the value that was in those funds and on behalf of workers, retired workers, and those who would be retiring as workers. The pension funds were considered absolutely hands off for other agendas, but the left is driven by those agendas, and it wanted all those trillions of dollars in those pension funds.

And so it went after them. And it was during the Trump administration, again, it was Secretary Eugene Scalia that issued a rule on behalf of the Department of Labor that said, once again, ESG is not really to be considered. There’s a very important issue for us to recognize here because this is how the economy often actually works. It’s not that the Department of Labor said you can’t take ESG into consideration. It is to say that the Department of Labor said if you do so and the fund does not perform well, you may be sued by those who have their wealth or retirement or their future in those funds because you have been acting in something other than their economic self-interest.

So in other words, there is a legal vulnerability that you’re taking on if under the Biden administration’s preference, you’re going to factor in those ESG issues and the Biden administration taking over from the Trump administration through the Biden administration’s Department of Labor basically undid what Secretary Scalia had done during the Trump administration, put a ESG back in the mix, or in other words, protecting the managers of these funds from any kind of legal action against them if the funds underperformed because they could say, look, ESG considerations are legitimate in terms of the fund managers making investment decisions.

But let’s mix in another little dirty secret here, which is the fact that in so many cases, those who are investing these funds, they’re very much a part of the progressivist agenda themselves. They would like to be pouring trillions and of course at least billions of dollars into all kinds of alternative energy sources, you go down the list. They want to use the criteria of environmental social governance that is ESG in order to accomplish larger social purposes. But the whole point of ERISA as federal legislation was to say, you can do that with your own money, you can’t do that with the pension funds of American workers.

But I just want to remind you that a lot of this is legally defensive. It is the fact that the Biden administration changed the rule so that pension fund managers can’t be sued for using ESG in investment decisions that might be injurious to the actual in investments which underwrite these pensions.

So in this case, the progressive left wants ESG left in, you have conservatives who want ESG out. You had congress pass legislation saying ESG is out as a protected category in terms of investment managers, and you had the Biden administration, president Biden himself veto the legislation, the first veto of his entire tenure in office. In a message to the house explaining his veto, the president said this, “Retirement plan fiduciaries,” that means those who bear the responsibility for the investment and management of those funds, “should be able to consider any factor that maximizes financial returns for retirees across the country. The president said that is not controversial. That is common sense.”

Well, if it’s common sense, if it’s non-controversial, why are we talking about it as a matter of controversy, but we’re talking about it because the president of the United States just confused the entire issue and he didn’t do so in this case accidentally.

He did so intentionally. When he says that retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country, he implies that the Scalia rule would’ve prevented using ESG. It doesn’t. Those investment managers can use any criterion they so choose. It just better work out in terms of the financial performance for the retirees. What the president’s actually done is allowed these fiduciaries to use ESG ideology, and if it doesn’t go so well to be protected from action by those who are the beneficiaries and the account holders in those retirement funds, the president vetoed a congressional action, but his action is described in the press as vowing to protect an obscure investing principle known as ESG. By the way, it’s only obscure if your head has been in the sand for the last several years.

Shorthand, she writes, for prioritizing environmental, social and governance factors, “It had been a widely accepted norm in financial circles for almost 20 years until Republicans recently started assailing it as woke capitalism that injected democratic and liberal values into financial decisions. More than 18 trillion dollars we are told is held in investment funds that follow ESG principles.” Well, one of the reasons why Republicans of late to put a lot more energy into this is because it has become more apparent over time that the ESG issue is often to the detriment of the investors and those who are depending upon those pensions for the rest of their lives and allowing ESG factors to be taken into consideration.

And by the way, let’s just mention there’s no end to that and using that as a shield to say you can’t sue me because the performance was subpar, because after all ESG is allowable as an investment criterion, it just violates the entire theory of ERISA that was put in place in order to protect American workers from having people in the cultural elite say, “I know it’s their money for their pensions, but I think we can use it for our progressivist causes.”

Another principle of American politics, by the way, is that you need to watch presidential vetoes because they often reveal a great deal more than presidential signing ceremonies. That’s certainly the case when you look at President Biden’s first veto, but that takes us back to some other issues that are swirling about in terms of economic controversy.

Part II

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Banking and the Centrality of Trust: Recent Bank Downfalls Highlight the Necessity of Trust for a Healthy, Functioning Society

But I want us to look at a Christian worldview perspective, and what I want us to notice is the centrality of trust to an entire civilization, the centrality of trust to the operation of your family, to the operation of your church, to the health of your neighborhood, because a failure in an economic system or a failure in more recent headlines, banking often points to a more fundamental failure of trust, and it’s interesting to see how that arises.

One of the big headlines along these lines doesn’t have to do with a bank in the United States, but a bank in Switzerland that is in big trouble and has to be bailed out a far larger bank, by the way, than the Silicon Valley Bank that failed in the United States.

Credit Suisse is a massive financial operation, and of course, that raises a host of issues such as answering the historical question, for example, of why Switzerland became such a center of world banking. Well, it had to do with the Swiss figuring out well over two centuries ago that the banking business might be in their national interest and thus declaring themselves to be rather permanently neutral and adopting rather extensive privacy laws.

Basically, what happened in Switzerland would stay in Switzerland and the money and the gold would stay there and they would be safe. Credit Suisse, as I say, is a massive operation and it’s been in big trouble for years, but I want you to note that The Wall Street Journal, that of course would be running point on this kind of coverage, raises the moral issue, the worldview issue in the headline, “Credit Suisse sparks new type of crisis.” Credit Suisse means Swiss credit. That bank crisis sparks a new type of crisis.

Here’s the subhead, “Solid ratios were no defense against rapid loss of confidence at the Swiss lender.” Okay, really interesting. The issue here is the words rapid loss of confidence. So that was very much a part of what happened at Silicon Valley Bank. The fundamentals of the bank were problematic, but the big problem for the bank was a run on the bank because people heard their money might not be safe, so too many people tried to take too much money out at the same time. Crash. Well, what happened in Credit Suisse was something a little bit slower than that, and the bank actually had, as the headline says, fairly solid ratios. That means to say it wasn’t facing an incipient crisis, but what it was facing was a greater crisis, and that crisis was a crisis of confidence, “The rapid loss of confidence toward the Swiss bank.”

One footnote in this story, by the way, is the fact that when Switzerland became such a center of world banking, world banking took a long time to take place. It might be by horseback, it might be by train, it might be by telegram, but in today’s digital age, a crisis of confidence can become an explosive apocalyptic crisis almost immediately. Here’s what The Wall Street Journal said, “Those outflows, meaning from the bank, point to one common thread on both sides of the Atlantic. Digital banking makes it much easier for customers to pull their money out, and digital communication can magnify the damage.”

But again, the bigger issue we’re looking at is the fact that the crisis in banking right now is really, it’s emitted here is a crisis in confidence. It’s a crisis in trust. If you do not trust a bank, you’re going to take your money out.

If you don’t trust an entire sector of the economy, you’re going to avoid that sector. If you don’t trust the economy to work, if you don’t trust that you can enter into a business relationship with your neighbor, well, everything begins to break down in society, and here’s something the Christian worldview understands full well. Trust is a very precious achievement and it is a priceless commodity, and when you lose it, you can lose it fast, regaining it, regaining it takes time, and sometimes the time isn’t enough.

This issue of trust simultaneously came up, and by the way, it was related particularly to Silicon Valley Bank. It came up with the issue of cryptocurrencies. David Yaffe-Bellany and Erin Griffith writing for The New York Times talk about the trust issue when it comes to cryptocurrency. Here’s the subhead in their article, “After a dire 2022, industry players are looking to scrub digital currencies stigma and regain the public’s trust.”

Again, they’re saying Trust is an issue with cryptocurrency. Here you have a supposedly digital currency. Well, are you going to put your trust in that currency? This headline simply reflects the fact that among many people, there’s a crisis in that trust. Later in the article, we read this, “At surviving firms, top executives are looking for new ways to market products that many consumers now distrust and to distance themselves from former colleagues and mentors who could face years in prison.”

Now, I’ll just say that’s one of those rather spectacular reporting paragraphs that just underlines the problem of trying to regain trust while your colleagues or former colleagues are in prison. The inside headline used the word trust explicitly. “Cryptocurrency seeks fresh start after a dire 2022 erased consumers trust in an industry.” Now, on The Briefing, we try to center in on the big worldview issues, and here’s a glaring one.

We just need to remind ourselves that trust is absolutely essential and that once trust is destroyed, it is very difficult to build back. That’s not just true for those who are in the cryptocurrency business. It’s not just true in terms of potential run on banks. It’s not just true when it comes to the economy and banking and investments. It’s true in every dimension of life. We spend an awful lot of our lifetimes trying to build trust.

That’s one of our major human responsibilities, and trust is so much a part of the entire human equation. Even as God established the institution of marriage, marriage is based upon trust, vows made by a man to a woman and a woman to a man in the bonds of holy matrimony, and those covenant vows are based in and require trust. When that trust breaks down, well, then you weaken marriage, not just a marriage. You weaken marriage. When you look at a family, you look at parents with children. One of the most basic issues for the security of a child is the child knowing by context, by experience, by love, by parental care and parental constancy that that child can trust his or her parents always.

Writ large the issue of trust is absolutely necessary. You can’t have a neighborhood without trust. No one’s going to let their children ride a bicycle out on the sidewalk. You can’t have a business without trust, and you certainly can’t have banks without trust.

Banks might be perhaps our most glaring example of the necessity of trust in this case, and let’s just say that you have an economic good. Let’s just say that it’s a block of gold. Okay, that block of gold you can hold in your hands. The problem is it’s impractical to carry your gold around at all times, everywhere, guarding it with your life.

That is not a very successful economic management, currency, or investment plan. Furthermore, someone can come and accost you, rob you, and take your gold, and that leaves you with empty hands. Your gold is gone. The idea of banking is actually based in a very ancient understanding of the fact that if you put your money in a safer place, then your money may actually also be put to good use. It may grow in terms of interest. It may appreciate in terms of investments, but the original purpose of banking was actually twofold to protect money and to allow the exchange of money. Commercial banking actually arose from the idea that you could also make money while doing this, but then you think about what you put in your bank, and I’m just going to say it’s probably been a long time. If ever since you drove up in your car and took out your pail of gold and took it into your bank, no, it’s not gold, it’s currency.

But wait just a minute, how much it’s currency worth? Well, these days, not too much. It’s a piece of paper or it’s metallic coin, and by the way, that metal’s probably not very authentic either. We’re looking at the reality that currency is simply a matter of trust. You trust that someone standing behind that $10 bill with $10 of value, you trust that a business is going to take that $10 bill, and if it’s a $9 purchase, we’ll give you a dollar back and you count on the $10 given to the seller as value and the $1 given back in change to the customer as value, everything crashes if there’s no value to the dollar. The Great Depression early in the 20th century is based upon real economic factors, but it was even perhaps more acutely based in a panic and a crisis of trust. The Christian insight from all of this is that trust is a very precious commodity.

It’s our business to build trust and to be trustworthy, to be worthy of the trust that is placed in us. We count on those with whom we do business being trustworthy. We count on our pastors, our elders, our fellow church members being trustworthy, otherwise we can’t have a church. And it also reminds us that no matter how much someone says, “Trust me,” if their behavior is not trustworthy, well as the scripture would also make clear, don’t trust them.

Part III

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The Problem with the Theory of Regulation: Why More Regulation Won’t Solve Banking Problems

One final issue here that is just too important to leave out in this edition of The Briefing, there’s so many people in the aftermath of the fall of several banks, most importantly the Silicon Valley Bank, just a matter of a couple weeks ago. Predictably, there are all kinds of calls for increased regulation.

Now, actually in a bipartisan basis, there’s going to be some agreement on some increased regulation, or you might say at least redefined and refocused regulation that it’s going to be necessary, but you do have a huge political divide in this country between those like Senator Elizabeth Warren, Democrat of Massachusetts, who sees regulation, more regulation, endless regulation as the answer to everything, and frankly, there are some more libertarian folks in the Congress who want minimal regulation, but even they admit that when it comes to say, confidence in banks, you need some regulation.

The question is, when does some become too much? When do you have enough? But the point I want to make based upon those previous considerations, again, based in the Christian worldview is this, the Christian worldview just reminds us that the problem with the theory of regulation is that it’s not just those regulated who might make mistakes, it’s also the regulators. And so when it comes to Silicon Valley Bank, the immediate response was, this is a failure of regulation, not enough regulation. The regulators should have been given more regulations that were binding on these banks to prevent this from happening. The answer is more regulation.

But rather predictably, there have been some subsequent headlines that haven’t gotten so much attention, such as this one, New York Times, “Fed caught wind, a bank’s issues before collapse risky practice is seen. Silicon Valley Bank got six citations in 2021 and a full review by regulators in 2022.” What does that tell you? It tells you the regulators knew there was a problem.

They knew there was a problem, but either they failed to evaluate the problem adequately or to understand the scale of the problem because they didn’t take the action. In other words, more regulation might not have helped at all because the regulators with existing regulations already knew there was a problem. But of course, those who were depositing their money in the Silicon Valley Bank, well, they didn’t know. The regulators knew. What did they do? Basically nothing. The inside headline in the same newspaper, “Fed,” that is the Federal Reserve Bank, “saw signs of trouble well before bank failed.” That’s the Silicon Valley Bank. Why did everyone act they were shocked when it turns out the regulators already had huge questions and already saw a crisis coming?

By the way, this article has a little statistic embedded in it. You might not have heard, how much by percentage of the deposits in Silicon Valley Bank weren’t covered by the federal government’s FDIC program. What percentage? You might say 20%, 30%? No, 97%. This bank was operating with 97% of the funds held uncovered by the insurance program. Later in the article we read this, “The picture that is emerging is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems.” The next words are crucial, “Even as they were raised by Fed supervisors.” So again, no surprise. So why was everyone surprised?

One final word here. One way to try to appear heroic, at least as a government official in the aftermath of this kind of crisis, is to say that you are writing in to fix what’s broken. But I appreciate Andy Kessler of The Wall Street Journal pointing out the irony of the fact that many of the people rushing in to say they want to fix the problem, they’re going to fix the problem.

They’re arriving on the scene to fix this problem. They’re the people who actually caused the problem. He just asked the obvious question, why are people being celebrated for taking on the same problems they help to create? Well, that’s where Christians answered that question by saying we think we understand in biblical terms how human nature works, and what you see throughout these headlines is human nature fallen as it is at work.