As promised, here's part one of a three-part series on the economy. Tonight I write about what I believe is one of the key underlying contributors to the economic troubles we're experiencing today -- low productivity growth, a weaker dollar, high gas prices, failing banks and mortgage companies, national debt, etc...
Debby was correct with one of her comments on a previous post, saying that the root of economic crisis is often greed and entitlement. While that may be true, I'm not even remotely hopeful in ever changing that part of the human condition. What I'd rather do is channel that reality of greed into a more constructive, contributing workforce. First, though, a small aside to set the stage:
Aside #1 -- The Shell Game
Have you ever seen a guy doing the shell game on a sidwalk somewhere, maybe in New York City or Las Vegas. They're shuffling three shells around on a table or boxtop, and underneath one of the shells is a little rubber ball? They move slowly for a while, letting you feel confident you can follow the ball, but once money is being bet they always, always win. They do this one of two ways:
1) They move so fast during a game when an actual bet is placed, you have to make a pure guess about which shell the ball is under. So you only have a 33% chance of guessing the correct shell.
2) Well, you would have a 33% chance... if the ball was actually under any of the shells. Most gamemasters do a lightning-fast trick at the beginning of the game and hide the ball in the hand or up their sleeve, so the ball isn't actually in play at all. They'll sneak the ball back under a different shell (one you didn't pick) at the end of the game for the "reveal".
Here's a video to show you -- and this completes the aside:
Back to the topic at hand.
The foundational strength of an economy is in its ability to make consistent gains in productivity. That's it. To keep making more products, more services, more new jobs, and to do it faster and cheaper than the previous year. This is how the standard of living goes up.
Yes, these gains can be compromised and sometimes even erased by other factors (tax policies, government spending), but you have to at least start with solid gains in productivity. No policy in the world can help an economy that isn't using innovation and hard work to grow.
McCain and Obama have repeatedly stated that the US has many of the best and brightest people on the planet. As a US citizen I'm very biased but generally I agree. We've got tons of sharp people in America today.
But what types of jobs are our best and brightest choosing today? Do they become doctors and lawyers, extending our lives and defending our rights? Yes, some do. Do the most innovative and brilliant go into management and build businesses that create new jobs? Yes, some do, thankfully. These are all things that contribute strongly to growth in productivity.
But for a couple of decades we've been sending more and more of our brightest into financial jobs -- namely investment banking and brokerage. In other words, instead of building new things, extending life or creating jobs, our best and brightest are merely trading stocks of other companies that do that stuff.
Aside #2 -- My own experience
I got my MBA about 10 years ago, and it was a very intense program with lots of super-brilliant people. I was the youngest student so I was never going to be the superstar of the class -- my career experience was too lacking (read: non-existent).
But many other students had solid business experience even before the MBA. And by the time we approached graduation, they were both highly-trained and highly-experienced. They were the superstars. And what jobs did they pick? All four of the top students went to Enron, because at the time they were offering the most money. The students became energy traders, essentially "moving" kilowatts around the country to take advantage of price differentials. It was a shell game. They weren't actually creating anything of value -- it was a mirage covered by lots of fast motion and activity, but in the end only the gamemasters (Enron executives) were the winners. The students' talents were being wasted. Everyone else in the economy lost out while the best and brightest chased the money.
Aside over.
Am I saying that investment bankers and brokers are only playing shell games and don't provide any value to the economy? No, of course not. In my opinion, they provide a few very important services:
1) General financial advice and education to us non-expert people
2) Corporate research that gives us more transparency into which companies are solid and which are not, and as a result, which stocks might be good buys
3) Market trading programs and systems that help more investments happen faster, cheaper and more accurately
Note that one thing I didn't put in the list is how these guys create managed mutual funds for us to buy. It's a controversial topic, to be sure, but an analysis of history hasn't been kind to mutual fund performance. In general they don't do well compared to index funds which merely follow the market as a whole. Yet the management of mutual funds is where the industry makes its huge, huge money. Even though the vast majority of fund managers don't even beat the market. That part is a shell game, becuase the fund manager is guaranteed to win with big salaries and sometimes big bonuses, even if their own fund loses money. And if their fund actually makes money? Then the bonuses enter into "ridiculous" territory.
Investment bankers and brokers do deliver a service, in the three items I just listed above. But are the benefits of that list big enough and important enough to take up the efforts of our country's best and brightest? Who will design the next breakthroughs in consumer technology? Who will help find smart, profitable and sustainable uses of alternative energy? Who will get involved in public service and help this government solve the complicated mess of healthcare and social security?
There are so many big, pressing, tough issues facing us over the next decade. Just like every decade. And we need our best and brightest working on those problems, not on how to leverage a hedge fund.
I'll close with a final aside, then I'm done for today.
Aside #3 -- Does following the money really work?
More of my experience from the MBA program. I didn't go to Harvard but we used many of their case studies in our curriculum. One of their most fascinating stories was about themselves.
You see, for over 35 years Harvard has been polling its alumni on what their dreams are for their career. They've also been polling to see how many people actually followed their dreams after getting their MBA, and how many graduates just took big money and "settled" for a safe, secure job.
What they've found is that long-term, over an entire career, the people who followed the money actually made less of it than their dream-following peers.
Lesson: Follow your dream. Use your talents. It will inherently tend to do the most good for the most people, lifting all of us up. That's how an economy, and a culture, grows. Oh, and by the way, you'll make more money too. So if you want to help people, follow your dream. And if you're just greedy and want to make money? Follow your dream.
Sunday, October 12, 2008
Saturday, October 11, 2008
More on economy coming
Sorry it's been over a week since I've posted -- the financial crisis has kept me plenty busy. I've been spending a lot of time over the past 10 days reading and researching more about what we're facing, both in terms of what has caused it and what kinds of things we can do about it now.
Almost nothing has changed from what I wrote here 10 days ago. It's one of those times when I hate being right.
When I haven't been reading/researching, I've been talking to banking executives (it's my job -- I'm a consultant/sales manager to bankers). In particular I've had a couple of very good, deep conversations with bank CEOs about how the next six to twelve months are looking for them. It ain't pretty and there's no quick/fast road back, no matter what our current President says. Rule of the harvest, remember?
My buddy James has implored me to write more about the economy, so that's exactly what I'll do. Over the next three days, I'll write on these three topics:
1) The real root of the problem (and the solution) that nobody is talking about
2) Tracing the life of a mortgage, in layman's terms
3) Who's to blame (everybody) and who in Washington has the fix (nobody)
Sounds cheery, huh? Don't worry, I'm not a fearmonger. I just try to be a realist.
Example: In this weeks' presidential debate, Tom Brokaw asked the candidates, "Is it going to get worse before it gets better??"
Obama and McCain both chickened out and gave long answers that meant nothing.
My answer would be "Yes. But it will get better."
Almost nothing has changed from what I wrote here 10 days ago. It's one of those times when I hate being right.
When I haven't been reading/researching, I've been talking to banking executives (it's my job -- I'm a consultant/sales manager to bankers). In particular I've had a couple of very good, deep conversations with bank CEOs about how the next six to twelve months are looking for them. It ain't pretty and there's no quick/fast road back, no matter what our current President says. Rule of the harvest, remember?
My buddy James has implored me to write more about the economy, so that's exactly what I'll do. Over the next three days, I'll write on these three topics:
1) The real root of the problem (and the solution) that nobody is talking about
2) Tracing the life of a mortgage, in layman's terms
3) Who's to blame (everybody) and who in Washington has the fix (nobody)
Sounds cheery, huh? Don't worry, I'm not a fearmonger. I just try to be a realist.
Example: In this weeks' presidential debate, Tom Brokaw asked the candidates, "Is it going to get worse before it gets better??"
Obama and McCain both chickened out and gave long answers that meant nothing.
My answer would be "Yes. But it will get better."
Wednesday, October 01, 2008
Rambling thoughts on...
Storm Lessons
-- Electricity is a very, very good thing. I've heard rumors that people actually lived in Houston before the days of air conditioning, but surely those aren't true. Or those people were insane.
-- There are a few catalysts in life for making people's true colors shine through. Things that help you see right to the core of a person. One is stress. Another is when a stoplight blows away and a major intersection becomes a four-way stop. I used to think our city was metropolitan and "with it". Now I've seen the true colors and realize that we have millions of idiot savants who can somehow have the profession to afford a nice car, yet can't figure out when it's their turn to go through an intersection.
-- When the heat is on and food/ice are scarse, life gets real simple. Put another way, the mind doesn't ponder the deeper mysteries of existentialism when it's busy finding a way to make sure the body continues to exist.
-- Whomever thinks that the hurricane put Houston back in 1940s-era lifestyle is forgetting about cellphones.
-- Most people are good. We saw lots of helping hands and selfless acts, and very few angry line-breakers.
Economic Theories
Some people have asked me what I think about the current market volatility, bank failures and federal bailout plans. I practically had a double-major with economics and International Business in college, and my MBA had a lot of training in economics as well, so I know at least a little about what's going on. But I'm by no means an expert. Not that it matters, because not even the experts can predict something as complex and multi-faceted as our economy. And I'm not objective either and I'm perfectly willing to admit that.
Most of my education and training was in the "Chicago style" of economics, the free-market spirit of Milton Friedman. In other words, when it comes to the economy I was trained by fiscal libertarians, people who think the market almost always works better, faster and cheaper than any government entity we might try to use to accomplish things. For the most part I still agree with that. So now you know my bias.
I look at our current situation and think of the rule of the harvest. We reap what we sow. The seasons are the seasons -- we can't change them and must work within them. And if we don't plant our crops in the spring, there won't be any food in the winter. No shortcuts or well-wishing can change it. You can't grow a crop in a week. The rule of the harvest.
I look at our country's economy and see that the inflation-adjusted income of 95% of Americans has fallen consistently for over a decade. Yet the average size of homes continues to increase. So we keep making less yet buying bigger houses. Our national savings rate is negative, and has been for some time. Add up all our citizens and we spend more than we make, at a personal level.
No surprise that the same is true at the government level. Our national debt is over $4.5 Trillion to outside countries/investors, and we owe another $5 Trillion to ourselves in future expenses that are coming, mostly in Social Security and Medicare. So that's almost $10Trillion in the hole. To put that in perspective:
-- The entire Gross Domestic Product of our country is around $15 Trillion. That's the value of all goods and services all of our citizens produce in a year. So if no American eats or buys anything and sends every penny of income to pay for Uncle Sam's debts staring January 1, 2009, we can finally pay things off and have our first meal nine months later.
-- There has never in American history been a period of such high government spending with such low tax revenues. The past several years are unprecedented. We've added another $500 billion to our debt each and every year for the past few years. The government's spending money it doesn't have. And how do they react? In February of this year they gave us all a big tax rebate and asked us to spend it to wake up the economy! They increased the deficit even further at the national level, and encouraged low savings at the personal level!
-- To cheer you up more, analysts estimate that the Iraq war is costing us almost $15 billion a month. 50 bucks per month per man, woman and child in the country, and it adds up pretty quick. In the end we'll probably have spent at least $3 trillion on the war.
The rule of the harvest says that at some point this will end, and it will be very, very painful. Eventually the balance will shift and we will be forced to reach equillibrium. It's called contraction, recession, even depression... whatever, our economic growth over the past decade has been largely illusional and driven by money we don't actually have. So we have to pay for today's growth with tomorrow's money. And with the news coming in lately, tomorrow might have arrived.
What's it mean in real terms? Our taxes will go up. Period. Doesn't matter which party wins the election, taxes have to go up, because we just can't cut a lot of the government expenses. Yes, I know the candidates talk about "pork barrel spending bills" and how they'll cut them, but the fact is that over 50% of federal spending is categorized as "mandatory", and that percentage continues to grow rapidly. In other words it's locked in and we can't touch it. Thirty years ago less than 30% of the federal budget was locked in. So we're more inflexible than ever. Think of Uncle Sam as a household -- his mortgage is getting bigger and bigger while his income is dropping. He can cut the kids' clothing expenses and maybe buy cheaper food, but the biggest expense, the house payment, is fixed.
So 53% of the budget is alreadly locked in. Oh yeah, and 9% this year went to pay interest on all that national debt I mentioned earlier. So less than 40% of our federal budget goes to all the "discretionary" activities. Things like education, transportation, the justice system, environmental research and veterans' benefits. Which ones do you want to cut? Now you see why the candidates keep dodging this question in the debates. The rule of the harvest. We bought things with money we didn't have, and now it's time to pay. With interest. It's going to hurt, but there's no sense complaining or finger-pointing. Let's just knuckle down and admit that it's going to hurt.
The economic crisis is not a surprise -- Henry Paulson (Treasury Secretary) said last week that the bailout plan is something they've been working on for months. I'm sure they were hoping for it to pop after the election, but not even they can control the market timing that well.
Which brings me back to the beginning, and the role of government intervention in the economy. I've been trained to believe that the market is smarter than the government, and I still believe it. So Mr. Paulson can keep his bailout plans -- I don't like them. If a business took on too much risk and might fail, let it fail. Let the price be paid by them, not the taxpayer. If there is value to be had in these banks on the brink, then a private buyer will show up. The market is smart. Warren Buffet just invested $5 billion in Goldman Sachs -- that's infinitely better than a government bailout. If a bank is in trouble but has inherent value, a buyer will show up and see the opportunity. If a bank is in trouble but has no inherent value, it needs to crash and burn. A government bailout is too expensive both monetarily ($700 billion?) and ethically (hey, go ahead and run a bad business and we'll step in to save you).
Rule of the harvest. If you didn't sow good seeds, then the reaping will suck. Sorry. No shortcuts.
How's that for a ramble?
In my next post I'll write about the true root of our economic problems. Hint: it's not the government. Or banks.
-- Electricity is a very, very good thing. I've heard rumors that people actually lived in Houston before the days of air conditioning, but surely those aren't true. Or those people were insane.
-- There are a few catalysts in life for making people's true colors shine through. Things that help you see right to the core of a person. One is stress. Another is when a stoplight blows away and a major intersection becomes a four-way stop. I used to think our city was metropolitan and "with it". Now I've seen the true colors and realize that we have millions of idiot savants who can somehow have the profession to afford a nice car, yet can't figure out when it's their turn to go through an intersection.
-- When the heat is on and food/ice are scarse, life gets real simple. Put another way, the mind doesn't ponder the deeper mysteries of existentialism when it's busy finding a way to make sure the body continues to exist.
-- Whomever thinks that the hurricane put Houston back in 1940s-era lifestyle is forgetting about cellphones.
-- Most people are good. We saw lots of helping hands and selfless acts, and very few angry line-breakers.
Economic Theories
Some people have asked me what I think about the current market volatility, bank failures and federal bailout plans. I practically had a double-major with economics and International Business in college, and my MBA had a lot of training in economics as well, so I know at least a little about what's going on. But I'm by no means an expert. Not that it matters, because not even the experts can predict something as complex and multi-faceted as our economy. And I'm not objective either and I'm perfectly willing to admit that.
Most of my education and training was in the "Chicago style" of economics, the free-market spirit of Milton Friedman. In other words, when it comes to the economy I was trained by fiscal libertarians, people who think the market almost always works better, faster and cheaper than any government entity we might try to use to accomplish things. For the most part I still agree with that. So now you know my bias.
I look at our current situation and think of the rule of the harvest. We reap what we sow. The seasons are the seasons -- we can't change them and must work within them. And if we don't plant our crops in the spring, there won't be any food in the winter. No shortcuts or well-wishing can change it. You can't grow a crop in a week. The rule of the harvest.
I look at our country's economy and see that the inflation-adjusted income of 95% of Americans has fallen consistently for over a decade. Yet the average size of homes continues to increase. So we keep making less yet buying bigger houses. Our national savings rate is negative, and has been for some time. Add up all our citizens and we spend more than we make, at a personal level.
No surprise that the same is true at the government level. Our national debt is over $4.5 Trillion to outside countries/investors, and we owe another $5 Trillion to ourselves in future expenses that are coming, mostly in Social Security and Medicare. So that's almost $10Trillion in the hole. To put that in perspective:
-- The entire Gross Domestic Product of our country is around $15 Trillion. That's the value of all goods and services all of our citizens produce in a year. So if no American eats or buys anything and sends every penny of income to pay for Uncle Sam's debts staring January 1, 2009, we can finally pay things off and have our first meal nine months later.
-- There has never in American history been a period of such high government spending with such low tax revenues. The past several years are unprecedented. We've added another $500 billion to our debt each and every year for the past few years. The government's spending money it doesn't have. And how do they react? In February of this year they gave us all a big tax rebate and asked us to spend it to wake up the economy! They increased the deficit even further at the national level, and encouraged low savings at the personal level!
-- To cheer you up more, analysts estimate that the Iraq war is costing us almost $15 billion a month. 50 bucks per month per man, woman and child in the country, and it adds up pretty quick. In the end we'll probably have spent at least $3 trillion on the war.
The rule of the harvest says that at some point this will end, and it will be very, very painful. Eventually the balance will shift and we will be forced to reach equillibrium. It's called contraction, recession, even depression... whatever, our economic growth over the past decade has been largely illusional and driven by money we don't actually have. So we have to pay for today's growth with tomorrow's money. And with the news coming in lately, tomorrow might have arrived.
What's it mean in real terms? Our taxes will go up. Period. Doesn't matter which party wins the election, taxes have to go up, because we just can't cut a lot of the government expenses. Yes, I know the candidates talk about "pork barrel spending bills" and how they'll cut them, but the fact is that over 50% of federal spending is categorized as "mandatory", and that percentage continues to grow rapidly. In other words it's locked in and we can't touch it. Thirty years ago less than 30% of the federal budget was locked in. So we're more inflexible than ever. Think of Uncle Sam as a household -- his mortgage is getting bigger and bigger while his income is dropping. He can cut the kids' clothing expenses and maybe buy cheaper food, but the biggest expense, the house payment, is fixed.
So 53% of the budget is alreadly locked in. Oh yeah, and 9% this year went to pay interest on all that national debt I mentioned earlier. So less than 40% of our federal budget goes to all the "discretionary" activities. Things like education, transportation, the justice system, environmental research and veterans' benefits. Which ones do you want to cut? Now you see why the candidates keep dodging this question in the debates. The rule of the harvest. We bought things with money we didn't have, and now it's time to pay. With interest. It's going to hurt, but there's no sense complaining or finger-pointing. Let's just knuckle down and admit that it's going to hurt.
The economic crisis is not a surprise -- Henry Paulson (Treasury Secretary) said last week that the bailout plan is something they've been working on for months. I'm sure they were hoping for it to pop after the election, but not even they can control the market timing that well.
Which brings me back to the beginning, and the role of government intervention in the economy. I've been trained to believe that the market is smarter than the government, and I still believe it. So Mr. Paulson can keep his bailout plans -- I don't like them. If a business took on too much risk and might fail, let it fail. Let the price be paid by them, not the taxpayer. If there is value to be had in these banks on the brink, then a private buyer will show up. The market is smart. Warren Buffet just invested $5 billion in Goldman Sachs -- that's infinitely better than a government bailout. If a bank is in trouble but has inherent value, a buyer will show up and see the opportunity. If a bank is in trouble but has no inherent value, it needs to crash and burn. A government bailout is too expensive both monetarily ($700 billion?) and ethically (hey, go ahead and run a bad business and we'll step in to save you).
Rule of the harvest. If you didn't sow good seeds, then the reaping will suck. Sorry. No shortcuts.
How's that for a ramble?
In my next post I'll write about the true root of our economic problems. Hint: it's not the government. Or banks.
Sunday, September 28, 2008
Kansas trip -- recap in pictures
We've been back at home for a week now, but life has been crazy and things are still far from normal in Houston. Plenty of places still don't have power. Plenty of stoplights are still not working, which makes traffic even worse than usual. My office building was damaged and out of power until late last week, so tomorrow will finally be my first day back at work. Samantha's school was out of power as well, and she starts back tomorrow too.
First things first, though. I'd like to share photos of our week in Kansas with my parents. It was a beautiful week -- an unexpected hiatus with family.
We packed so quickly for the trip (to get out of Houston before sundown/curfew, at which point the police would have probably turned us around and sent us home) that we forgot a few items. Things like Samantha's shoes and Jack's pajamas. So during our first day in Kansas we went to Target to get some things. Jack got Superman PJ's and put them on immediately. We played outside non-stop until bedtime -- a perfect midwest autumn evening:
First Day Pictures
Mo had a great time with the Kansas terriers -- Opie and Andy.
Mo
Andy
On Tuesday morning we went to a nearby playground, where 3yo Jack showed only a tiny bit of fear, and plenty of coordination, while descending the fire pole:
Playground
Later in the week Jamie took the kids to a farm/petting zoo while I helped Mom with some chores.
Farm pictures
On Thursday night we met up with local friends and went to dinner and bowling. Samantha bowled over 90 in both games and hardly ever used the bumpers! My buddies and I had a good time making up funny names for ourselves, and in the final pic I circled my choking performance that sunk what could have been a great game.
Dinner/Bowling
On our last day the kids played football and then we went to my dad's annual company party. Although there were fun activities there for kids, I think their favorite was when their PawPaw gave them rides on the dolly. We also got a family caricature portrait done. So completeth the update!
Last Day
First things first, though. I'd like to share photos of our week in Kansas with my parents. It was a beautiful week -- an unexpected hiatus with family.
We packed so quickly for the trip (to get out of Houston before sundown/curfew, at which point the police would have probably turned us around and sent us home) that we forgot a few items. Things like Samantha's shoes and Jack's pajamas. So during our first day in Kansas we went to Target to get some things. Jack got Superman PJ's and put them on immediately. We played outside non-stop until bedtime -- a perfect midwest autumn evening:
First Day Pictures
Mo had a great time with the Kansas terriers -- Opie and Andy.
Mo
Andy
On Tuesday morning we went to a nearby playground, where 3yo Jack showed only a tiny bit of fear, and plenty of coordination, while descending the fire pole:
Playground
Later in the week Jamie took the kids to a farm/petting zoo while I helped Mom with some chores.
Farm pictures
On Thursday night we met up with local friends and went to dinner and bowling. Samantha bowled over 90 in both games and hardly ever used the bumpers! My buddies and I had a good time making up funny names for ourselves, and in the final pic I circled my choking performance that sunk what could have been a great game.
Dinner/Bowling
On our last day the kids played football and then we went to my dad's annual company party. Although there were fun activities there for kids, I think their favorite was when their PawPaw gave them rides on the dolly. We also got a family caricature portrait done. So completeth the update!
Last Day
Sunday, September 14, 2008
Made it!
We're here in Kansas, happy and exhausted. Here's a rundown on the past three nights:
Thursday: measuring, cutting and mounting plywood on the windows until midnight
Friday: huddling in the bedroom and listening to the incredible 100+ mph winds all night
Saturday: leaving our house at 5:30 pm and driving non-stop to Kansas City (via Waco... not a direct path but it avoided flooded areas), arriving just after 7am
Time to sleep tonight! We are very blessed. We are comfortable, laughing, and who knew that Mo the schnauzer would be instant best friends with the terriers Opie and Andy? I don't think Mo's gonna go willingly with us to return home whenever it's time.
Speaking of that, we don't have a clue when it will be time to go back to Houston. But we'd prefer to wait until things like power and water are functional again. We're still thinking about the millions staying there and we hope they make the best of it and continuing looking out for their neighbors.
I continue to be impressed and proud of our city. Yesterday morning the streets around our house were all impassable because of downed trees. By afternoon the streets were clear, and it wasn't because of official city crews. No offense to the crews, I'm sure they would have done an excellent job, but the citizens got there first!
Thursday: measuring, cutting and mounting plywood on the windows until midnight
Friday: huddling in the bedroom and listening to the incredible 100+ mph winds all night
Saturday: leaving our house at 5:30 pm and driving non-stop to Kansas City (via Waco... not a direct path but it avoided flooded areas), arriving just after 7am
Time to sleep tonight! We are very blessed. We are comfortable, laughing, and who knew that Mo the schnauzer would be instant best friends with the terriers Opie and Andy? I don't think Mo's gonna go willingly with us to return home whenever it's time.
Speaking of that, we don't have a clue when it will be time to go back to Houston. But we'd prefer to wait until things like power and water are functional again. We're still thinking about the millions staying there and we hope they make the best of it and continuing looking out for their neighbors.
I continue to be impressed and proud of our city. Yesterday morning the streets around our house were all impassable because of downed trees. By afternoon the streets were clear, and it wasn't because of official city crews. No offense to the crews, I'm sure they would have done an excellent job, but the citizens got there first!
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