Yahoo and Google: Democratic Responsibilities of Corporations

Overview:

China is renowned for keeping its citizens in the dark. They censor their television shows and ads. Now time travel, homosexuality, and luxurious lifestyle programs are banned from Chinese television (Time.com). They sensor Internet chat rooms to deter the conversations from issues like politics “towards [issues] such as which celebrities make the best role models.” The government even goes so far as to set up fake websites designed at luring in “would-be dissidents” for their “apprehension” (Dann and Haddow, p. 220).

The first question that needs answering is as follows: is the free flow of information a human right? Back before the Internet, how much access to information we had depended on both our monetary wealth and status in society. If we truly want a liquid society, where serfs can become kings, free flow of information should be of the utmost importance. Information is power.

By definition, markets cannot be efficient if information becomes scarce or censored. Those in power can use information to further sway those under their control; even in a democracy, controlling the information can make the electorate vote in a way that seems in their best interest but really they’re being influenced by the censored distribution of information. Without the freedom to distribute information, a democracy by name cannot be a democracy in practice.

The censorship in China is done by government entities to exert “paternalistic influence” over the population politically. Chinese economic freedom has evolved massively since the days of strict Communist rule (Dann and Haddow, p. 220). This economic freedom has allowed companies like Yahoo and Google to establish a presence in the formerly closed state. In order to do business within the Communist nation, however, foreign companies must comply with Chinese law. When law conflicts with a firm’s moral compass, which should have precedence?

Google:

Google complies with Chinese law and omits certain things from search results inquired within China. Before the establishment of Google.cn, every search inquiry had to pass through the “’the Great Firewall of China’” (Dann and Haddow, p. 221). This caused searches to take longer, thus less use of Google’s platform. Google set up a search database within China that already had politically undesirable items removed. This made the search engine faster and more accessible for many.

Hypothetically assume Google refuses service within China. Tech firms that are willing to swallow their moral obligation to society in favor of profit will step in and fill the void. A Chinese competitor, Baidu, soared from “2.5% market share in 2003 to 43% in 2005” (Dann and Haddow, p. 225). Google won’t solve anything by refusing service, except perhaps to exacerbate the problem. The search database will shrink, allowing less free flow of information.

Dann and Haddow argue Google produced a list of blocked items on its own, without “receiving direct orders from Beijing” (p. 226). By Dann and Haddow’s calculation, Google censored information without being directly ordered. Google was losing market share, and thus needed to revise their strategy. Dann and Haddow call this process an “outsource of censorship” by the Chinese government (p.226).

Yahoo!:

Yahoo!, an internet search engine and news site, allows its content to be censored in China as well. In Dann and Haddow’s research paper Yahoo is cited for aiding in the arrest of a citizen who “was sentenced to eight years in prison for posting comments that criticized government officials of corruption” (p. 229). Yahoo, like Google, asserted it had little to no choice in the matter, as it had to play by the rules in order to play the game.

Should Yahoo have sacrificed its Chinese branch in order to maintain its values? When does morality trump profitability in the business world? The answer can be easy when answering for the self, but harder when those affected have no skin in the game. American investors in Yahoo wish to see the company grow more profitable, period. Perhaps by sacrificing their Chinese branches, they can improve public image and gain market share… but perhaps not.

Yahoo can also assert that it was the responsibility of the individual involved to protect himself (or herself). If the individual hadn’t dissented against the government, there would be no wrongdoing and the individual would still be free today. Yahoo is merely providing the platform for conversation; they didn’t guide or start the discussion. Had Yahoo been actively endorsing the actions of the individual, they would be liable by Chinese law. Is it Yahoo’s responsibility to protect the users of its platform? If a controversial note was posted on a firm’s notice board, should the person who installed the corkboard be faulted or the individual who posted the note?

This turns the discussion to one of free speech rather than free flow of information. “It is the ability to exchange information that is valuable, not necessarily the worth of the information itself” (Dann and Haddow, p. 222). They argue it is the installer of the corkboard (from my example above) who is responsible for preserving the integrity of the information posted. Free flow of information is imperative to a democratic society. Uninhibited, unbiased news and information needs to be present in a truly free society.

Conclusion:

Google and Yahoo’s responsibly to Chinese citizens can be argued from both points of view. On one hand, Yahoo and Google must follow the rules to play the game. If they want to utilize and operate in one of the fastest growing economies in the world, they need to follow Chinese law.

On the other hand, they are actively participating in inhibiting the democratic process. The United States’ military has fought against the spread of Communism in several wars and hundreds of thousands had died to spread democratic ideals. Meanwhile, Google and Yahoo are assisting in the process of politically influencing entire generations of Chinese citizens.

Thanks for reading.

-tommander-in-chief

 

Sources:

  1. Dann, G.E. and Haddow, N., Journal of Business Ethics (2008). Retrieved: Sept. 2016
  2. http://time.com/4247432/china-tv-television-media-censorship/
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Who’s got the power?

 

When interest rates go up, and they will, the 50% increase across the board will topple markets, namely bond markets.

Today’s interest rates are unprecedented. The lowest possible bound for an interest rate USED to be 0%. In finance terms, we call it the ZLB or the zero lower bound. Today bond yields in Germany and Denmark (among others) are NEGATIVE! What does this mean for me, the common investor?

Examples of Interest Rates  in History, for relativity:

I’ll admit, I’m not finished with the 700+ page novel written by Sidney Homer first published in 1963. The preface is packed with insightful information such as:

1.) In ancient India, the going rate of interest on livestock was 100%. Then: You can borrow my cow for one year, if after the year is over you’ll pay be back with two cows. Today: I’ll let you use my house for a year, but after that, I’m gunna need that house back, plus a whole extra house.

2.) In early 20th century Indo-China, loans on rice were given at a rate of 50% annually commonly.

3.) In British Columbia, a phenomenon called “potlatch” was first documented. The Kwakiutl, an Candaian Indian tribe, used thin white blankets currency, roughly valued at $0.50 per item. The citizens of this tribe would give the blankets as ‘forced loans’ to one another, with the expectation of receiving what they gave plus interest. “Wealthy Indians vied with each other to see who could give away the most blankets, all with the understanding that even more would be given back—usually double.” – (p. 23, Homer) Kind of wonky huh? They gave because they were greedy.

4.) In Northern Siberia, domesticated reindeer, horses, and sheep were used to collateralize loans. They exchanged the animals like currency, usually charged at an annual rate of 100%.

All in all, lending is not new, but this new environment of negative interest rates is new. You have never  had to PAY someone so they can use your money, that just seems backwards. Remember quantitative easing (QE*)? The Europeans are doing the exact same thing. However, the European Central Bank (ECB) are buying up these negative interest charging bonds because the ECB is attempting to inject liquidity into markets. The ECB is allowing banks to use their cash and they’re paying the banks interest… hmm…

The goal of QE* is to inject liquidity into markets to avoid disastrous outcomes. The program is designed to allow debt to be more readily available for the average consumer. Lowering interest rates and loading up commercial banks with cash will help settle investors’ concerns surrounding a global financial meltdown without a doubt. This being said, if times are bad (economically), the average consumer will become risk averse, and will stay as far from debt as possible until things get better. When consumers get a pay raise or a new job, they might think about taking out a loan to build a new deck or get a new car. Demand drives supply and the policy makers who control interest rates and QE can only control supply. No matter how hard they try to get us to take out debt, we just won’t do it unless market conditions are appropriate. The final result of QE in the United States was a massive increase in the amount of cash that banks hold in reserves.

The graph below shows the level of reserves banks have on their balance sheet from 1984 to 2008. In 1999, banks jacked up their reserves because of Y2K scares; if the whole system imploded at the turn of the century, they wanted to have enough cash on hand to prevent a catastrophic collapse of our financial system. Notice how the level was just shy of $70 billion.

Screen Shot 2016-08-02 at 5.44.39 PM

This graph below shows what has happened to reserves since the beginning of quantitative easing. In 1999, (from above) the level of reserves his $70 billion, here $70 billion isn’t even on the scale. This is where all the bailout money went, onto the balance sheets of big banks.

Screen Shot 2016-08-02 at 5.45.07 PM

Holding reserves used to be an implicit tax for banks, because the more cash they held, the more return they were missing out on (opportunity cost, for you econ buffs). The banks could have put the currency to work in stocks or bonds to achieve a higher return. However, the less cash a bank has on hand, the more risky the institution is. The Fed instituted a return on cash of 50 basis points (0.5%) in order to incentivize holding cash reserves (both required* and excess). The banks can hold all of it in cash and make a half a percent annually or they can buy negative yielding bonds. It’s a positive, riskless yield. Why wouldn’t banks take advantage?

*Note: by law, the required reserve ratio in the US is 10% for big banks.

QE works as a mechanism to prevent economic collapse, but demand drives supply; thus, you cannot force people to buy things they don’t want (except maybe in Communist Russia where they don’t actually tell you what you’re taking until you’re disqualified for the Olympics) QE cannot create prosperity because no matter how available you make debt, it is the preferences of the consumers that ultimately drives demand for loanable funds.

The Federal Reserve of the United States holds way, way more power than Donald Trump and Hilary Clinton, yet when they make a statement in the press, it usually doesn’t even make the front page. The Fed has the power to control interest rates. They also have the power to create money, as in printing currency (yup, money growing on trees). They control what you pay on your mortgage and they control how much interest your money makes (in markets and in savings accounts). This affects how soon you will be able to retire, how much your house is worth, how much your pension has in cash (i.e. how much risk your pension can take), how much your kid’s college fund will make… you name it, the Fed controls it. The best part is, you didn’t get to elect these officials. The US government deemed it too risky to put big financial decisions in the hands of under-informed citizens (*cough* Brexit *cough*).

Thanks for reading.

– tommander-in-chief.

Note: For more on pensions taking on too much risk check out this economist article, http://tinyurl.com/hg4rbjl

Sources:

  1. http://www.forbes.com/sites/marcprosser/2013/04/07/beyond-the-10-year-treasury-yield-how-to-follow-the-bond-market-with-etfs/#7c753437523d
  2. http://www.wiley.com/WileyCDA/WileyTitle/productCd-0471732834.html
  3. https://fred.stlouisfed.org/series/WRESBAL/

 

Side note on bond prices –

Bond prices are inversely related to bond yields. That is, when the rate on a bond rises, it’s price will drop. Because today’s rates are so low, the effect that a rise in interest rates will have will be massive. For a little relativity, interest rates (the fed funds rate) in 1999 was around 5%. A 50% increase in this rate would raise the rate to 7.5%, which is a massive jump. Now, we are debating a 25 basis point* increase in rates, which brings them from 25-50 bps to 50-75 bps. This may seem trivial, but that represents the same 50% increase in the fed funds rate!

*Note: a basis point is a ten thousandth of a percent; 1 basis point = 0.01%