I confess. I'm a Matchbox Twenty kinda guy. You know the type - not real macho, but someone who likes a neat little hook, some guitar and inspiring lyrics. Thus the reason for the blog this week.
This past weekend I found myself in Washington, D.C. with the family and some friends. We did the whole sight-seeing thing (on our own since I used to live there and am not intimidated by the traffic, the trains, etc.)
Somewhere between the Lincoln Memorial, The Capitol Building and the Vietnam War Memorial I couldn't help but begin singing the words to "How Far We've Come" by Rob Thomas and the boys. If you aren't familiar with the lyrics, the chorus is pretty simple:
"let's see how far we've come, let's see how far we've come.... " The verses basically talk about wondering if things will get better, blah blah blah.
You get the point.
But standing in the elbow of the Vietnam War Memorial (the 'V' portion) and looking at the Washington Monument, The Capitol and Honest Abe, I really need to ask: Have we come far at all?
The Wall is amazingly simple, elegant and breathtaking. Total silence comforts strangers walking along the worn path as they examine row after row of names - all of whom died fighting the war. Flowers are left near names, a report card from a grandchild rests below the section containing a grandparent who never made it home and countless unopened letters line the walkway. It's humbling.
Somewhere we got lost.
Today we're a nation going backwards with no direction. Worse, I am going to argue that we have no leadership able to find our direction. In short, we are divided and I don't see anyone capable of stepping up to the plate who can motivate, inspire and act in the best interest of the majority any longer. That's called leading.
So I have to answer Matchbox Twenty's question "let's see how far we've come" by the only response I know:
We need to look in the rearview mirror often for guidance, even if we are attempting to lead forward. Otherwise, lessons will be forgotten and mean nothing. We haven't come far at all. In fact, we've drifted slowly backwards into somewhere I don't want to be now...or ever, for that matter.
Monday, November 23, 2009
Tuesday, November 3, 2009
Tax is a dirty word
Well it's official - the state of Pennsylvania LOVES to tax its residents. One type of resident, however, seems to pay more than others. That resident is one who participates in 'sins,' like drinking (Allegheny County has a special drink tax to fund public transportation) smoking (currently about $2.45 per pack in PA) and gambling. MAdditional legislation is being proposed in Pittsburgh to tax gambling profits more so that the city can balance the books.
One sin flies under the radar, however, and it's actually worth examining - pornography.
It certainly makes one stop and ask why, doesn't it? After all, we're more than happy to tax smokers until they are literally blue in the face, and taxing adult beverages hasn't hurt profits or the number of drinks ordered. Doesn't it stand to reason that our society's appetite for pornography would remain consistent even with additional taxes?
Come to think of it, doesn't it make sense that the adult entertainers might actually be required to pay a portion of their hourly rate and claim 'tip' income, similar to my favorite waitress at Susie Q's?
While I'm no proponent of paying taxes, this industry has gotten a free pass too long and instead of burdening industries that are already paying more than their fair share, like bars and restaurants, shouldn't another industry shoulder some responsibility? Particularly when that industry likely serves alcohol and allows smoking?
So why don't our legislators touch this proposal with a ten foot pole (pun intended?) Only Senator Jane Orie, a Republican from McCandless, has attempted to tackle the debate so far, and she is getting no traction whatsoever.
As a free market thinker, it seems to me that our legislators are sending a clear signal that rather than stimulate the economy with tax paying businesses like restaurants, casinos, service companies, etc., they are suggesting it makes better business sense to get into the pornography industry. After all, it's basically a tax free business that has proven to be recession-proof. What kind of message is this? The industry is likely responsible for as many marital conflicts as drinking problems, gambling problems, etc., so if that's the hurdle to be classified a 'sin,' pornography definitely fits the bill.
It's got to be more than that. Perhaps our legislators have friends that run in these circles and contribute to not only their personal campaigns, but their personal entertainment as well. Who knows.
In any case, this is actually one tax I'd support completely, as it would actually legitimize the business, its participants and those who enter the darkened-doors.
One sin flies under the radar, however, and it's actually worth examining - pornography.
It certainly makes one stop and ask why, doesn't it? After all, we're more than happy to tax smokers until they are literally blue in the face, and taxing adult beverages hasn't hurt profits or the number of drinks ordered. Doesn't it stand to reason that our society's appetite for pornography would remain consistent even with additional taxes?
Come to think of it, doesn't it make sense that the adult entertainers might actually be required to pay a portion of their hourly rate and claim 'tip' income, similar to my favorite waitress at Susie Q's?
While I'm no proponent of paying taxes, this industry has gotten a free pass too long and instead of burdening industries that are already paying more than their fair share, like bars and restaurants, shouldn't another industry shoulder some responsibility? Particularly when that industry likely serves alcohol and allows smoking?
So why don't our legislators touch this proposal with a ten foot pole (pun intended?) Only Senator Jane Orie, a Republican from McCandless, has attempted to tackle the debate so far, and she is getting no traction whatsoever.
As a free market thinker, it seems to me that our legislators are sending a clear signal that rather than stimulate the economy with tax paying businesses like restaurants, casinos, service companies, etc., they are suggesting it makes better business sense to get into the pornography industry. After all, it's basically a tax free business that has proven to be recession-proof. What kind of message is this? The industry is likely responsible for as many marital conflicts as drinking problems, gambling problems, etc., so if that's the hurdle to be classified a 'sin,' pornography definitely fits the bill.
It's got to be more than that. Perhaps our legislators have friends that run in these circles and contribute to not only their personal campaigns, but their personal entertainment as well. Who knows.
In any case, this is actually one tax I'd support completely, as it would actually legitimize the business, its participants and those who enter the darkened-doors.
Tuesday, October 27, 2009
Oh behave!
Good news coming out of Washington! Apparently there is no inflation and things aren't costing more.
What? Does anyone in Washington purchase their own food, gasoline or healthcare? I forgot - those expenses are covered by lobbyists.
On a serious note, the CPI is down about 1.3% compared to a year ago, meaning that goods or services that cost you $10 a year ago now cost about $9.87. So what's the real story?
Behavior finance and economics suggests that most consumers feel pain more vividly than they feel joy. Basically, we like to avoid losing money more than we like making the same amount of money, even though 'old school' economics teaches us that consumers seek to maximize their pleasure, or 'utility.'
Former Wimbledon champion and tennis great Ivan Lendl perhaps said it best when he was quoted saying "I hate losing more than I like winning." Remember, this is coming from a guy who used to win all the time.
We drive around searching for gas that is $2.72 per gallon instead of $2.75, but won't cross the street for cheaper gas that's $2.08 instead of $2.11. Why? It's a better bargain in the second scenario, after all.
The applications for the economy are far-reaching. We see gas prices going up, but forget that they are down 30% from a year ago. That doesn't offset the 29% increase in prices of fuel over the past six months. We have short term memory, and the figures seem to support behavioral theory. Consider the following (yes, I'm keeping the math simple because it's early and my brain isn't working too well yet)
Assume that gas a year ago cost $3.00 per gallon. A 30% drop in fuel would mean that gas costs $2.10. WOW! That's signficiant. Oops. Now gas goes up 29%, resulting in a new cost of $2.71. Yikes! That hurts, even though it's still less than the original starting point of $3.00.
The same calculations can be applied to the stock market. Assume your retirement plan had $50,000 a year ago and the market lost 25%. You'd be down to $37,500. It takes a 35% gain this year to get back to square one. Sadly, this is what's been going on with investments the past two years, creating opposition to something called the wealth-effect. In short, if consumers feel wealthy (good returns on their 401k, appreciating values on their homes, lower unemployment figures, etc.) they are more likely to spend. There hasn't been much good news or even 'paper returns' to allow consumers to feel wealthy - even a nice return in the market the past six months.
To further support this 'behavioral stuff,' as my wife calls it, consider an even-money bet. Let's say I flip a coin and we bet $1. If it comes up heads, I win $1 from you. If it comes up tails, you win $1 from me. Easy enough? We know that most people would take the bet. What if I won two straight times? Three times in a row? How about four or five?
What if I make the bet $10 per flip, or even $50? At what point do you jump off and act out of 'fear' rather than rationality? We allow the dollar amount to skew our ability to judge. Don't worry, I'm guilty of this too. Studies have shown that when the bet goes to $100 per flip, most folks would demand payment of $160 if they win. I'm not about to take the other side of that bet anytime soon, by the way.
See what I mean? We're easily tricked by math and to be frank, it stinks. I fall for it all the time and I study this junk!
So sit back, relax and take consolation in the fact that you are paying less for things today than you were a year ago while you're driving around looking for the cheapest gas station around.
What? Does anyone in Washington purchase their own food, gasoline or healthcare? I forgot - those expenses are covered by lobbyists.
On a serious note, the CPI is down about 1.3% compared to a year ago, meaning that goods or services that cost you $10 a year ago now cost about $9.87. So what's the real story?
Behavior finance and economics suggests that most consumers feel pain more vividly than they feel joy. Basically, we like to avoid losing money more than we like making the same amount of money, even though 'old school' economics teaches us that consumers seek to maximize their pleasure, or 'utility.'
Former Wimbledon champion and tennis great Ivan Lendl perhaps said it best when he was quoted saying "I hate losing more than I like winning." Remember, this is coming from a guy who used to win all the time.
We drive around searching for gas that is $2.72 per gallon instead of $2.75, but won't cross the street for cheaper gas that's $2.08 instead of $2.11. Why? It's a better bargain in the second scenario, after all.
The applications for the economy are far-reaching. We see gas prices going up, but forget that they are down 30% from a year ago. That doesn't offset the 29% increase in prices of fuel over the past six months. We have short term memory, and the figures seem to support behavioral theory. Consider the following (yes, I'm keeping the math simple because it's early and my brain isn't working too well yet)
Assume that gas a year ago cost $3.00 per gallon. A 30% drop in fuel would mean that gas costs $2.10. WOW! That's signficiant. Oops. Now gas goes up 29%, resulting in a new cost of $2.71. Yikes! That hurts, even though it's still less than the original starting point of $3.00.
The same calculations can be applied to the stock market. Assume your retirement plan had $50,000 a year ago and the market lost 25%. You'd be down to $37,500. It takes a 35% gain this year to get back to square one. Sadly, this is what's been going on with investments the past two years, creating opposition to something called the wealth-effect. In short, if consumers feel wealthy (good returns on their 401k, appreciating values on their homes, lower unemployment figures, etc.) they are more likely to spend. There hasn't been much good news or even 'paper returns' to allow consumers to feel wealthy - even a nice return in the market the past six months.
To further support this 'behavioral stuff,' as my wife calls it, consider an even-money bet. Let's say I flip a coin and we bet $1. If it comes up heads, I win $1 from you. If it comes up tails, you win $1 from me. Easy enough? We know that most people would take the bet. What if I won two straight times? Three times in a row? How about four or five?
What if I make the bet $10 per flip, or even $50? At what point do you jump off and act out of 'fear' rather than rationality? We allow the dollar amount to skew our ability to judge. Don't worry, I'm guilty of this too. Studies have shown that when the bet goes to $100 per flip, most folks would demand payment of $160 if they win. I'm not about to take the other side of that bet anytime soon, by the way.
See what I mean? We're easily tricked by math and to be frank, it stinks. I fall for it all the time and I study this junk!
So sit back, relax and take consolation in the fact that you are paying less for things today than you were a year ago while you're driving around looking for the cheapest gas station around.
Thursday, October 15, 2009
Lining the litterbox with Time
I promised my doctor that I would keep my blood pressure in check, yet Time Magazine continues to get those numbers well above the 120 over 80 requirement.
In the most recent edition, Time suggests it's time to eliminate the 401(k) plan and instead, re-institute pension funds from corporations. The writer is Stephen Gandel, who apparently is not certain what direction to go. Please let me explain.
While Time is entitled to their opinion and Mr. Gandel entitled to his own, it seems to me that once your opinion is formulated and you've spent, oh, I don't know, twenty years or so writing about financial issues, you should have a pretty clear idea of where you stand.
Apparently Mr. Gandel has difficulty in that arena.
You see, he writes in the most recent article that the 401(k) has been a debacle, serving no one and simply creating fatter paychecks for executives. He attempts to site a simulation run by T. Rowe Price as an example of searching for an optimum portfolio, but doesn't give any clear indication of the results other than a fancy "most of the time the market goes up slightly. But some years - KAPOW - stocks and bonds do spectacularly poorly." Big word there, Mr. Gandel.
Especially coming from a guy that only three years ago suggested that 401(k) contributions were the smartest thing an individual consumer could make. That's right. Our beloved Gandel wrote that it would be wise to "contribute as much to your 401(k) that the employer will match." In short, he summarized a 401(k) contribution as a smart thing to do in an interview with http://www.first30days.com/
If you'd like to read his jibberish or need proof, please click here:
http://www.first30days.com/smart-investing/articles/stephen-gandel-on-smart-investing.html
Please also note that he thinks sometimes we need to "trick people into investing." Lucky for us he's writing for Time, eh?
No, Mr. Gandel. The answer is the same as it's always been. Small, regular contributions to a self-directed retirement account, with most of the contributions going toward stocks and growth while one is young, and then gently moving toward bonds and money markets as one gets closer to retirement is the best bet. Always. Prove otherwise if you don't agree.
A simple rule of thumb to follow is put your age into bonds (as a perecentage.) For example, I am 40 in December (ouch) and should have 40% of my retirement contribution going toward bonds funds and others 'safe' investments. No more than 10% of my portfolio should have my company's stock in it, by the way.
I ask each of you to call Time (their email is down) and ask them to begin behaving like a real magazine rather than allowing some journalistic hack like Stephen Gandel change his spots "Time and Time" again. Pun intended.
In the most recent edition, Time suggests it's time to eliminate the 401(k) plan and instead, re-institute pension funds from corporations. The writer is Stephen Gandel, who apparently is not certain what direction to go. Please let me explain.
While Time is entitled to their opinion and Mr. Gandel entitled to his own, it seems to me that once your opinion is formulated and you've spent, oh, I don't know, twenty years or so writing about financial issues, you should have a pretty clear idea of where you stand.
Apparently Mr. Gandel has difficulty in that arena.
You see, he writes in the most recent article that the 401(k) has been a debacle, serving no one and simply creating fatter paychecks for executives. He attempts to site a simulation run by T. Rowe Price as an example of searching for an optimum portfolio, but doesn't give any clear indication of the results other than a fancy "most of the time the market goes up slightly. But some years - KAPOW - stocks and bonds do spectacularly poorly." Big word there, Mr. Gandel.
Especially coming from a guy that only three years ago suggested that 401(k) contributions were the smartest thing an individual consumer could make. That's right. Our beloved Gandel wrote that it would be wise to "contribute as much to your 401(k) that the employer will match." In short, he summarized a 401(k) contribution as a smart thing to do in an interview with http://www.first30days.com/
If you'd like to read his jibberish or need proof, please click here:
http://www.first30days.com/smart-investing/articles/stephen-gandel-on-smart-investing.html
Please also note that he thinks sometimes we need to "trick people into investing." Lucky for us he's writing for Time, eh?
No, Mr. Gandel. The answer is the same as it's always been. Small, regular contributions to a self-directed retirement account, with most of the contributions going toward stocks and growth while one is young, and then gently moving toward bonds and money markets as one gets closer to retirement is the best bet. Always. Prove otherwise if you don't agree.
A simple rule of thumb to follow is put your age into bonds (as a perecentage.) For example, I am 40 in December (ouch) and should have 40% of my retirement contribution going toward bonds funds and others 'safe' investments. No more than 10% of my portfolio should have my company's stock in it, by the way.
I ask each of you to call Time (their email is down) and ask them to begin behaving like a real magazine rather than allowing some journalistic hack like Stephen Gandel change his spots "Time and Time" again. Pun intended.
Saturday, September 26, 2009
Answer truthfully.
Who can you name first, the Federal Reserve Chairman or Brad Pitt's wife?
That's what I thought. And while you're at it, why don't you take some time to explain to me the inner-working of the Federal Reserve system, like the number of branches it has, who the board of governors are and the primary role of the Federal Reserve. Psst. By the way, it is NOT the job of the Federal Reserve to insure your money at the bank. That's the FDIC, who we will mention later.
Not many Americans get beyond answering Angelina Jolie, by the way. Which is deliberate in design in my opinion.
After all, if you ran an organization that was created by Congress but wasn't responsible for opening its' books for audit, would you be in a hurry to make the organization well-known? That's exactly what are friends at the Federal Reserve are suggesting, by the way, when they appeared earlier this week in front of the House Financial Services Committee. The committee is suggesting the Federal Reserve open the books for an audit conducted by the GAO (General Accounting Office.) After all, it is our money and we would like to see exactly how it's being spent from time to time. And yes, I agree with Barney Frank on this one. Representative Frank is proposing this legislation.
The prevailing mentality seems to question what the Fed is hiding and why they don't want to open the books up for review by the very body that created their existence. Our friends at the Fed maintain the position that theirs "is a politically neutral position" and any dabbling in the books would have an adverse impact on the economy.
Psst. Excuse me, Mr. Bernake? Take a look around. The economy already is in shambles and by the way, I pay your salary and am your boss. Remember that Obama guy who re-appointed you? Yeah, well Joe Taxpayer voted him in and it's his job to make sure you're doing things right.
My thoughts? It's deeper than that. And at the risk of getting too technical, I'm going to tie-in previously mentioned FDIC (Federal Deposit Insurance Corporation) and our friend Shiela Bair. You're going to be hearing a lot from Sheila in the coming months, so I'd get used to hearing her name. She runs the FDIC, which is an insurance company in place that allows us to feel safe and secure knowing our money will be paid back to us if our bank should fail. The banks fund the insurance policy through their membership, and the organization was created in response to the great depression rush on the banks. Naturally the thought process was to avoid another run on banks when depositors felt unsure about their bank's stability.
Guess what, folks? They are running out of money at the FDIC. Sheila and her group had a balance of just over $45 billion in June of 2008 according to Fortune Magazine. As of close of business June of this year, the balance clung to about $10 billion. Gulp.
And with more banks set to fail (to date the FDIC has allowed 94 banks to fail this year and 25 last year) the FDIC is getting precariously close to the edge of needing it's own bailout. By the way, the FDIC has a list of over 400 troubled banks that could go under at any minute.
Shazam! Flash back to our friend Ben and his merry men at the Federal Reserve Board. The Fed has extended an open line of credit for up to $100 billion to the FDIC in case of emergency (think of it like a Visa card for you and a credit line of $1 million.) Additionally, new legislation passed this year allows the FDIC to hit that line for up to $500 billion in an extreme emergency. This is the same Fed that gave bailout funds, er, I mean TARP funds to banks like PNC so that they could buyout ailing banks at a 5% rate. Banks like National City, who otherwise would have already imploded and further hit the FDIC wallet, further reducing that $10 billion balance. Odds are good there's another bank of significance on the brink (Cough Cough... Citi....)
So back to our beginning question and resulting debate: Why is the Federal Reserve really afraid of opening up its' books and allowing the General Accounting Office to take a peek under the hood? Could it really be to avoid political bias, or could it be more a reason of fear. Fear that there is no oil in the engine, the battery is dead, the brake lines have been cut, the transmission is leaking and oh yeah, by the way, it's out of windshield wiper fluid too. I propose the latter.
One final note to ponder, and then I'll let you go this fine morning. The Federal Reserve raises funds through auctions of Treasury Bills and notes, also known as DEBT. You issue debt when you don't have enough money to meet short-term expenses. Joe Taxpayer is footing the bill for this.
Let the banks implode. Get rid of the Federal Reserve and let the FDIC figure it's own way out of this one. Enough of the fiscal parenting for lousy monetary policies. Let's get back to basics and provide budgets that are real and attainable and a government that is there to merely implement the will of the people.
I can't believe I actually agree with Barney Frank!
Who can you name first, the Federal Reserve Chairman or Brad Pitt's wife?
That's what I thought. And while you're at it, why don't you take some time to explain to me the inner-working of the Federal Reserve system, like the number of branches it has, who the board of governors are and the primary role of the Federal Reserve. Psst. By the way, it is NOT the job of the Federal Reserve to insure your money at the bank. That's the FDIC, who we will mention later.
Not many Americans get beyond answering Angelina Jolie, by the way. Which is deliberate in design in my opinion.
After all, if you ran an organization that was created by Congress but wasn't responsible for opening its' books for audit, would you be in a hurry to make the organization well-known? That's exactly what are friends at the Federal Reserve are suggesting, by the way, when they appeared earlier this week in front of the House Financial Services Committee. The committee is suggesting the Federal Reserve open the books for an audit conducted by the GAO (General Accounting Office.) After all, it is our money and we would like to see exactly how it's being spent from time to time. And yes, I agree with Barney Frank on this one. Representative Frank is proposing this legislation.
The prevailing mentality seems to question what the Fed is hiding and why they don't want to open the books up for review by the very body that created their existence. Our friends at the Fed maintain the position that theirs "is a politically neutral position" and any dabbling in the books would have an adverse impact on the economy.
Psst. Excuse me, Mr. Bernake? Take a look around. The economy already is in shambles and by the way, I pay your salary and am your boss. Remember that Obama guy who re-appointed you? Yeah, well Joe Taxpayer voted him in and it's his job to make sure you're doing things right.
My thoughts? It's deeper than that. And at the risk of getting too technical, I'm going to tie-in previously mentioned FDIC (Federal Deposit Insurance Corporation) and our friend Shiela Bair. You're going to be hearing a lot from Sheila in the coming months, so I'd get used to hearing her name. She runs the FDIC, which is an insurance company in place that allows us to feel safe and secure knowing our money will be paid back to us if our bank should fail. The banks fund the insurance policy through their membership, and the organization was created in response to the great depression rush on the banks. Naturally the thought process was to avoid another run on banks when depositors felt unsure about their bank's stability.
Guess what, folks? They are running out of money at the FDIC. Sheila and her group had a balance of just over $45 billion in June of 2008 according to Fortune Magazine. As of close of business June of this year, the balance clung to about $10 billion. Gulp.
And with more banks set to fail (to date the FDIC has allowed 94 banks to fail this year and 25 last year) the FDIC is getting precariously close to the edge of needing it's own bailout. By the way, the FDIC has a list of over 400 troubled banks that could go under at any minute.
Shazam! Flash back to our friend Ben and his merry men at the Federal Reserve Board. The Fed has extended an open line of credit for up to $100 billion to the FDIC in case of emergency (think of it like a Visa card for you and a credit line of $1 million.) Additionally, new legislation passed this year allows the FDIC to hit that line for up to $500 billion in an extreme emergency. This is the same Fed that gave bailout funds, er, I mean TARP funds to banks like PNC so that they could buyout ailing banks at a 5% rate. Banks like National City, who otherwise would have already imploded and further hit the FDIC wallet, further reducing that $10 billion balance. Odds are good there's another bank of significance on the brink (Cough Cough... Citi....)
So back to our beginning question and resulting debate: Why is the Federal Reserve really afraid of opening up its' books and allowing the General Accounting Office to take a peek under the hood? Could it really be to avoid political bias, or could it be more a reason of fear. Fear that there is no oil in the engine, the battery is dead, the brake lines have been cut, the transmission is leaking and oh yeah, by the way, it's out of windshield wiper fluid too. I propose the latter.
One final note to ponder, and then I'll let you go this fine morning. The Federal Reserve raises funds through auctions of Treasury Bills and notes, also known as DEBT. You issue debt when you don't have enough money to meet short-term expenses. Joe Taxpayer is footing the bill for this.
Let the banks implode. Get rid of the Federal Reserve and let the FDIC figure it's own way out of this one. Enough of the fiscal parenting for lousy monetary policies. Let's get back to basics and provide budgets that are real and attainable and a government that is there to merely implement the will of the people.
I can't believe I actually agree with Barney Frank!
Saturday, September 19, 2009
Banking on our uncertainty
In an story that caught about a ten second blurb this week on Friday morning, the Federal Reserve is working on a plan to not only monitor pay compensation but also one that will allow the Fed to adjust or change the pay practices at Wall Street financial firms. Not just firms that accepted bailout funds, but any financial firm that the Fed deems necessary based upon the firm's excessive risk-taking practices. Also note that the language does not simply limit the pay for executives at the firm. It has the right to limit the pay to anyone that works at the firm according to a Wall Street Journal report.
Excuse me, comrade?
Where does one begin in an attempt to shoot holes in this idea?
Perhaps the easiest target is the Federal Reserve itself. You know the group, right? The same group that sets interest rates in order to manipulate the economy, avoiding recessions, inflation, speculative practices, steering the U.S. to continued economic prosperity and ensure that banks continue to lend to businesses and indivuals that deserve a loan. How's that working so far, Mr. Bernake?
Maybe it's better to look at the Fed based upon the past. The same history that gave former Treasury Secretary Hank Paulson a blank check to bailout Wall Street firms (of which I was critical, I might add.) The same history that kept interest rates artificially low for too long in order to allow the gluttonous behavior to continue. The same history that took budget surpluses at the end of the 1990's to a whopping $11 trillion debt. Again I ask, how's that working?
Consider the impact of keeping overnight rates at 0% (not a typo) since December of last year and no sign that they are going up anytime soon, and then asking a banker to not take some risk with 'free' money. Oh yeah, while you're at, throw in the fact that the Fed is asking banks to make loans to get the economy rolling.
Oh, maybe I'm being too harsh.
Surely there's some good, right?
Ah yes, the same Federal Reserve that has partnered with ACORN since 1977 to enforce bank compliance with the Community Reinvestment Act. In mortgage land, CRA loans (as they are called) are also known as 'subprime' mortgage loans to folks that generally would not qualify for a home based upon credit or ability to repay. How's that working?
To be fair, I hate the banks. Ask any of my students, and they will tell you the adjectives I use to describe most bankers are "lazy, fat and boring. And lazy. Did I mention lazy?"
But to be true to my roots, I also believe in capitalism, entrepreneurial spirit and the corporate structure. If a publicly traded bank like, oh I dunno, Bank of America, wants to make loans it thinks will perform and reward shareholders, shouldn't they be allowed to do that? After all, it's their job to maximize shareholder wealth - not anyone else's wealth. SHAREHOLDER wealth. If the shareholders think the CEO and board are doing a lousy job by taking too much risk with too little potential return, they can (and often will) fire the CEO and replace the board.
Similarly, if the U.S. government wants to get into the banking business, they have two ready-made platforms to execute that plan while remaining outside the circle of overseeing pay for private firms. Maybe the names Fannie Mae and Freddie Mac ring a bell in your head. If the Fed wants to be in banking, turn Fannie and her brother Freddie into large national banks that are required to adhere to strict compensation, risk and corporate management guidelines. Make them play by the same liquidity rules as the other banks and let all of the banks duke it out. Guess who will win, comrades? Yep. You, me and cousin Vinny due to increased competition and a level playing field.
What's next? Will the Fed determine it's their job to monitor and adjust the pay for professional athletes? Does Big Ben really deserve $110 million to throw a football? After all, he's taking a LOT of risk going out there against 330 pound men eager to rip him to shreds. Maybe they will think that doctors should only earn "X" per year regardless of their specialty, or that accountants cannot earn more than "Y." The system is already in place around the country in the form of government pay scales and in many instances labor-contracts, which primarily exist between governments and their employees, the exceptions being large unions like the auto-workers, mine workers, steel workers, etc.
Farfetched? We already have a minimum wage. Doesn't it stand to reason there could be a maximum wage? And while we are accustom to having a minimum wage to assist those with few valuable skills and protect workers from abuse, how does it feel knowing the shoe could be on the other foot, limiting your skills and placing a maximum value on what you have to offer? It's not as crazy as it sounds, folks. And it's happening and a rapid pace.
I'm not in the predicting business, but here's one for ya.
There are going to be three very large national banks in the next three to five years that are entirely government run. Their names are Bank of American, Chase and Citigroup. They will be merged and monitored by Fannie Mae and Freddie Mac, who will report directly to the Federal Reserve Board. The Federal Reserve Board is going to become a fourth branch of government.
Hold onto your wallet and get out your voter card to make sure it's still either Republican, Democrat, Independent and not Socialist or Communist.
Excuse me, comrade?
Where does one begin in an attempt to shoot holes in this idea?
Perhaps the easiest target is the Federal Reserve itself. You know the group, right? The same group that sets interest rates in order to manipulate the economy, avoiding recessions, inflation, speculative practices, steering the U.S. to continued economic prosperity and ensure that banks continue to lend to businesses and indivuals that deserve a loan. How's that working so far, Mr. Bernake?
Maybe it's better to look at the Fed based upon the past. The same history that gave former Treasury Secretary Hank Paulson a blank check to bailout Wall Street firms (of which I was critical, I might add.) The same history that kept interest rates artificially low for too long in order to allow the gluttonous behavior to continue. The same history that took budget surpluses at the end of the 1990's to a whopping $11 trillion debt. Again I ask, how's that working?
Consider the impact of keeping overnight rates at 0% (not a typo) since December of last year and no sign that they are going up anytime soon, and then asking a banker to not take some risk with 'free' money. Oh yeah, while you're at, throw in the fact that the Fed is asking banks to make loans to get the economy rolling.
Oh, maybe I'm being too harsh.
Surely there's some good, right?
Ah yes, the same Federal Reserve that has partnered with ACORN since 1977 to enforce bank compliance with the Community Reinvestment Act. In mortgage land, CRA loans (as they are called) are also known as 'subprime' mortgage loans to folks that generally would not qualify for a home based upon credit or ability to repay. How's that working?
To be fair, I hate the banks. Ask any of my students, and they will tell you the adjectives I use to describe most bankers are "lazy, fat and boring. And lazy. Did I mention lazy?"
But to be true to my roots, I also believe in capitalism, entrepreneurial spirit and the corporate structure. If a publicly traded bank like, oh I dunno, Bank of America, wants to make loans it thinks will perform and reward shareholders, shouldn't they be allowed to do that? After all, it's their job to maximize shareholder wealth - not anyone else's wealth. SHAREHOLDER wealth. If the shareholders think the CEO and board are doing a lousy job by taking too much risk with too little potential return, they can (and often will) fire the CEO and replace the board.
Similarly, if the U.S. government wants to get into the banking business, they have two ready-made platforms to execute that plan while remaining outside the circle of overseeing pay for private firms. Maybe the names Fannie Mae and Freddie Mac ring a bell in your head. If the Fed wants to be in banking, turn Fannie and her brother Freddie into large national banks that are required to adhere to strict compensation, risk and corporate management guidelines. Make them play by the same liquidity rules as the other banks and let all of the banks duke it out. Guess who will win, comrades? Yep. You, me and cousin Vinny due to increased competition and a level playing field.
What's next? Will the Fed determine it's their job to monitor and adjust the pay for professional athletes? Does Big Ben really deserve $110 million to throw a football? After all, he's taking a LOT of risk going out there against 330 pound men eager to rip him to shreds. Maybe they will think that doctors should only earn "X" per year regardless of their specialty, or that accountants cannot earn more than "Y." The system is already in place around the country in the form of government pay scales and in many instances labor-contracts, which primarily exist between governments and their employees, the exceptions being large unions like the auto-workers, mine workers, steel workers, etc.
Farfetched? We already have a minimum wage. Doesn't it stand to reason there could be a maximum wage? And while we are accustom to having a minimum wage to assist those with few valuable skills and protect workers from abuse, how does it feel knowing the shoe could be on the other foot, limiting your skills and placing a maximum value on what you have to offer? It's not as crazy as it sounds, folks. And it's happening and a rapid pace.
I'm not in the predicting business, but here's one for ya.
There are going to be three very large national banks in the next three to five years that are entirely government run. Their names are Bank of American, Chase and Citigroup. They will be merged and monitored by Fannie Mae and Freddie Mac, who will report directly to the Federal Reserve Board. The Federal Reserve Board is going to become a fourth branch of government.
Hold onto your wallet and get out your voter card to make sure it's still either Republican, Democrat, Independent and not Socialist or Communist.
Saturday, September 12, 2009
Takin' care of business
Have you hit the skids yet? After all, the kids are back at school, school buses are clogging up the highways and nights are getting longer. Sometimes just for kicks my wife and I will hang out on the porch when it gets dark early and pretend that it's still summer. It's not, of course, but pretending is fun.
Pretending is not fun, however, when a business is at risk of making game-changing mistakes.
A business owner recently called me and asked for my evaluation of their current cashflows so I rolled up my sleeves and dug into some antiquated spreadsheets about customers, an unaudited profit and loss statement and an unaudited balance sheet. If those three things sound sorta, you know, casual, it's because they are. In short, it's like keeping your checkbook balance on a paper napkin or a grocery receipt.
Regardless, I did my best and came to the conclusion that only about 30% of the business promised to him by his customers actually resulted in a sale, yet the staff had to go through about 80% of the promised business. They were spending a ton of time working on potential sales that would never transpire, as history showed that the customer-base failed to deliver most of the time. Of course, there were a few notable exceptions, which I pointed out in my moderately formal report back to the client. The staff was frustrated because they felt like they were working too hard and too long. And they were correct. Unfortunately the company was not profiting from their efforts.
Upon delivering the report, I followed-up with a phone call and a lengthy discussion in order to point out some significant cost saving measures. The culmination of the call came when I suggested something radical - eliminating over half of his customers and focusing on the remaining customers that could deliver promised sales on a fairly regular basis. A final suggestion was to perhaps remove one or more of the positions that served the customers since there would be far fewer potential sales to screen in order to get to an actual sale.
To say I was pleased with my findings, both quantitative and qualitative, would be an understatement.
"Christian, I see your point but I'm thinking of adding staff so that we can hit the break-even point," was his response.
(Crickets chirping here, please.)
"Chris, are you there?"
It's as if my hard data and suggestions weren't even heard or acknowledged, and in fact, I was living in opposite world. I had suggested firing clients and staff, focusing on the core business and streamlining things - not taking on additional payroll, headaches and a bigger nut to crack.
Pretending is not a good option if you are a business owner. In fact, it's not a good option for anyone (unless you are a girl pretending to be a fairy princess or a kid that wants to throw the winning touchdown pass in the Super Bowl.)
But we all pretend, don't we? We pretend that a relationship that has been horrible for twenty years is going to change, or that a job we hate will change once the economy turns around or perhaps a child/loved one that has been a hell-raiser will finally come around.
In relationships we call this 'vested,' or in poker we call it 'pot-committed.' In short it means that emotionally it's too hard to remove ourselves and it seems the only logical thing to to is see it through the (already known)outcome.
As a business owner, it's imperative to never become enamored with an idea that stops working or your 'baby.' Focus on the bottom line and once it goes to red, get out immediately.
GM, Chrysler, National Record Mart, Asbestos, Polaroid One Shots, typewriters and carbon copies were all great ideas too. Now they are all either firmly planted along the landing strip of business progress or approaching quickly. Sometimes (most times) technology impedes our ability to keep doing the same thing and make the same profits. The runway is covered with failed landing attempts.
Recognize when the business changes and prepare to make drastic changes to meet the challenge, or prepare to close shop. Those are the only alternatives in business, and in life, actually.
I have a friend that says "if I have to kiss a frog, I kiss the frog and move on."
I urge each of you to find the frogs remaining in your life, kiss them goodbye and move on. Only princesses get to kiss frogs and have them turn into a Prince.
Pretending is not fun, however, when a business is at risk of making game-changing mistakes.
A business owner recently called me and asked for my evaluation of their current cashflows so I rolled up my sleeves and dug into some antiquated spreadsheets about customers, an unaudited profit and loss statement and an unaudited balance sheet. If those three things sound sorta, you know, casual, it's because they are. In short, it's like keeping your checkbook balance on a paper napkin or a grocery receipt.
Regardless, I did my best and came to the conclusion that only about 30% of the business promised to him by his customers actually resulted in a sale, yet the staff had to go through about 80% of the promised business. They were spending a ton of time working on potential sales that would never transpire, as history showed that the customer-base failed to deliver most of the time. Of course, there were a few notable exceptions, which I pointed out in my moderately formal report back to the client. The staff was frustrated because they felt like they were working too hard and too long. And they were correct. Unfortunately the company was not profiting from their efforts.
Upon delivering the report, I followed-up with a phone call and a lengthy discussion in order to point out some significant cost saving measures. The culmination of the call came when I suggested something radical - eliminating over half of his customers and focusing on the remaining customers that could deliver promised sales on a fairly regular basis. A final suggestion was to perhaps remove one or more of the positions that served the customers since there would be far fewer potential sales to screen in order to get to an actual sale.
To say I was pleased with my findings, both quantitative and qualitative, would be an understatement.
"Christian, I see your point but I'm thinking of adding staff so that we can hit the break-even point," was his response.
(Crickets chirping here, please.)
"Chris, are you there?"
It's as if my hard data and suggestions weren't even heard or acknowledged, and in fact, I was living in opposite world. I had suggested firing clients and staff, focusing on the core business and streamlining things - not taking on additional payroll, headaches and a bigger nut to crack.
Pretending is not a good option if you are a business owner. In fact, it's not a good option for anyone (unless you are a girl pretending to be a fairy princess or a kid that wants to throw the winning touchdown pass in the Super Bowl.)
But we all pretend, don't we? We pretend that a relationship that has been horrible for twenty years is going to change, or that a job we hate will change once the economy turns around or perhaps a child/loved one that has been a hell-raiser will finally come around.
In relationships we call this 'vested,' or in poker we call it 'pot-committed.' In short it means that emotionally it's too hard to remove ourselves and it seems the only logical thing to to is see it through the (already known)outcome.
As a business owner, it's imperative to never become enamored with an idea that stops working or your 'baby.' Focus on the bottom line and once it goes to red, get out immediately.
GM, Chrysler, National Record Mart, Asbestos, Polaroid One Shots, typewriters and carbon copies were all great ideas too. Now they are all either firmly planted along the landing strip of business progress or approaching quickly. Sometimes (most times) technology impedes our ability to keep doing the same thing and make the same profits. The runway is covered with failed landing attempts.
Recognize when the business changes and prepare to make drastic changes to meet the challenge, or prepare to close shop. Those are the only alternatives in business, and in life, actually.
I have a friend that says "if I have to kiss a frog, I kiss the frog and move on."
I urge each of you to find the frogs remaining in your life, kiss them goodbye and move on. Only princesses get to kiss frogs and have them turn into a Prince.
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