In 1987 I joined a relatively small cadre of mid-career hires at JP Morgan. I and my new colleagues were needed because we had experience in putting up large high tech buildings and Morgan had just begun their headquarters project at 60 Wall Street. In those days the employees of the bank numbered between 12-14,000 and virtually all of them had come up through the internal training program. Understanding how the firm worked for a new arrival in those days was difficult. There seemed to be interminable rites of passage until you were deemed trustworthy. Once that happened, things became more fluid.
In the early 90’s there was a massive culture shock. Meetings were held and everyone was informed that they no longer had “a job for life”. We would remain employed only if there was a fit between the needs of the organization and the skills we had to offer. Lunch was no longer free – literally, although it still remained cheaper than going outside to the local deli. We all understood, many for the first time, that we were employed at will.
What happened over the next nearly two decades is a well known story. Jobs that didn’t provide strategic advantage were outsourced. Jobs were shed at the slightest sign of economic troubles and firms convinced themselves that they had become more nimble. Certainly, here in the United States it was infinitely easier to get rid of employees than in France. Even the UK provided some protection for workers. We looked down our noses at the Europeans.
But something else happened at the same time. People began to see their present jobs as an opportunity to enhance their resumes. While it was easier for companies to get rid of the less productive people it became increasingly difficult to hang on to the folks at the other end of the spectrum. The alignment of personal goals with corporate goals became the result of happenstance rather than mutual agreement. Internal theft soared. In an appeal involving a case in Illinois, the US Chamber of Commerce stated that $60 – 120 billion is lost each year to internal theft and it is the primary cause of 1/3 of all business failures. On a retail level, 70% of the theft is internal – which begs the question of the utility of all those plastic tags and security guards.
This was the unintended consequences of a sea change in the relationship between employees and employers and it didn’t take very much time at all. I am reminded that when I went to work at Manhattan State Hospital in 1969 there were several people who walked the grounds with tin foil hats on their heads. They insisted that they had had experiences with extraterrestrials and depending on their malady the hats were to either enhance or prevent further communication. Now we have global conventions devoted to sharing ET information and recently the Vatican lent credulity to these efforts.
The value embodied by derivatives is a matter of faith. You have to believe that you will be paid a certain amount when the value of the underlying asset changes in one direction or the other. The value of that underlying asset is determined by another act of faith – you have to believe that the value represented by a fiat currency has value. It’s a lot to ask, especially when there doesn’t seem to be any concrete utility attached to these financial instruments. Only a very small fraction is actually hedging a position where the parties are engaged in a transaction involving a real “thing”. All the rest is speculation.
Sometimes belief systems fade, sometimes they collapse. Certainly the credibility of ET sightings has taken a while to change and not everyone who insists that they have seen one is necessarily sane. There are also many people who have lost their jobs during the current economic crisis regardless of their skill level. But these two examples demonstrate to us that unintended consequences of grand schemes and even the boundaries of sanity can move much faster than we would anticipate.
The first mortgage backed security was issued by Ginne Mae in 1970. This level of abstraction in our financial system is only 40 years old. Since then we have created a world-wide belief system that has a fairly unique attribute – no one really understands it. What is apparent is that the expressed value of these financial instruments is larger than anyone can imagine and represents far more money than could ever be spent or invested. Non-financial people are beginning to wonder out loud what its utility is. Those who attempt to get their arms around what is going on suggest that the next crisis will involve commercial real estate and unfold over the next several years but we would all be wise to keep an open mind. What we believe and how the movement of the boundaries of what is considered sane is a very difficult thing to predict.
Wednesday, November 18, 2009
Saturday, November 7, 2009
Money
We live in a world where the means of exchange (money) has become vastly more important than what we exchange (goods and services). We have moved from a time when money or profit was one of several metrics by which a company could be judged to the only metric and more recently in many cases, to becoming the product of a company – buy our stock because we make money. How did we get here?
The history of money apparently has its origins in China around 1200 BCE where cowry shells were used as a means of exchange. If we fast forward to the Middle Ages in Europe we can find the origins of the modern banking system when people took their gold and silver coins and deposited them with the local goldsmith. The goldsmith found that only 10% of his deposits were ever withdrawn at any one time and he began what become known as fractional reserve lending (keep a fraction in reserve and lend the rest).
There are some fundamentals of that old system that are still in play today. We have a debt based monetary system. Banking and the creation of money is a private business. Someday NY Times columnists like Tom Friedman will understand that the loans from the Federal Reserve to IAG were not taxpayer bailouts. There is no way for dollars paid in taxes to get into the Federal Reserve unless they are used to pay interest on the money created by the Fed and loaned to the US government. Taxpayer dollars are not at risk in the AIG transaction; all the dollars are at risk. But I digress.
For centuries human beings have debased themselves in one way or another to accumulate money. Money was and is power. With it you could not only provide yourself with the basics, but have some toys as well – like big armies or iPods. Over the past fifty years we have elevated the accumulation of toys to an art form in the United States. So much so that over 60% of our economy is based on people buying things. Most of us believe that acquisition is the purpose of money.
A recent Wiki article (http://en.wikipedia.org/wiki/Stock_market ) states that as of October of 2008 the total value of all stocks in the world was $36.6 trillion and the total face value of all derivatives in the world was $791 trillion. Given that these numbers reflect the values shortly after the financial crash I’m sure that they have moved around a bit since then. But the ratio is likely the same – roughly 22:1. Derivatives are contracts to pay based on the performance of something else. It’s pretty clear that more than one contract has been written for each underlying asset. When things go south it’s no wonder that these contracts can’t be paid and it’s no wonder that there have major efforts to save the financial system; a system that is so abstract that no one really understands it.
Another number that is useful to think about is global GDP which is roughly $65 trillion – that’s the value of all the goods and services produced in the world.
So it is fairly easy to see that wealth or money has been decoupled from its ability to buy goods and services. There simply isn’t enough available to buy given all the wealth in the system. Economists will tell you that derivatives only have nominal value; that the vast number of derivatives cancel each other out because they are “bets” on whether something will happen – or not.
But let’s leave that discussion to the economists (they seem to be the only ones who want to talk about financial systems as though they are separate from the human experience and have a life of their own) and get back to thinking about money. If money is not a means of exchange, if it is not something that we can use to make our lives better or someone else’s life better – what is it? The more I look at the numbers the more I have come to conclude that I don’t know what it is any more. The only thing that seems clear is that we are tenuously hanging on to the idea that somehow all allegedly sophisticated financial instruments have value – an idea that is under constant daily attack.
The story of what is said to be the world’s first large economic bubble may provide some clues as to where we go from here. In 1593 tulip bulbs were brought from Turkey to the Netherlands. Initially these flowers were prized for their relative rarity but then a non-fatal virus caused the bulbs to produce very unusual flowers – they appeared to have “flames” of different colors and their value increased exponentially. Many citizens mortgaged their homes and businesses to invest. The resulting crash seems obvious in retrospect. One can imagine how the collective unconscious tapped the Dutch on the shoulder one day and said, “Dude, it’s just a tulip bulb.” Seems like a quaint story until we remember all the websites that had no product, service or functionality that were so valuable ten years ago.
I would suggest that we consider the following:
Debts are not going to get paid back. Not the personal debts that are close to $2.5 trillion that Americans owe or the mortgages on properties that are not worth the loans or the national debt – in our country or in others. Some of this will take the form of tax payer revolts and some will take the form of people going on YouTube and challenging the banks but mostly it will occur by people simply no longer paying the loans.
The endgame for all the derivative assets and worthless loans on the books of financial institutions is nearer than we think. What is worth nothing will be acknowledged as being worth nothing.
Alternative ideas about money will begin to appear. There have been systems in the past were the value of money declined the longer it was held. There are systems now that derive value from time – time banks. What seem like wacky ideas will begin to seem sane as the wacky ideas that have passed for sanity are revealed as wacky.
So have I traded in my risk management bona fides to become a fortune teller? I’m not psychic and I don’t see dead people. All three of these events are occurring now. The tulip moment is upon us.
The history of money apparently has its origins in China around 1200 BCE where cowry shells were used as a means of exchange. If we fast forward to the Middle Ages in Europe we can find the origins of the modern banking system when people took their gold and silver coins and deposited them with the local goldsmith. The goldsmith found that only 10% of his deposits were ever withdrawn at any one time and he began what become known as fractional reserve lending (keep a fraction in reserve and lend the rest).
There are some fundamentals of that old system that are still in play today. We have a debt based monetary system. Banking and the creation of money is a private business. Someday NY Times columnists like Tom Friedman will understand that the loans from the Federal Reserve to IAG were not taxpayer bailouts. There is no way for dollars paid in taxes to get into the Federal Reserve unless they are used to pay interest on the money created by the Fed and loaned to the US government. Taxpayer dollars are not at risk in the AIG transaction; all the dollars are at risk. But I digress.
For centuries human beings have debased themselves in one way or another to accumulate money. Money was and is power. With it you could not only provide yourself with the basics, but have some toys as well – like big armies or iPods. Over the past fifty years we have elevated the accumulation of toys to an art form in the United States. So much so that over 60% of our economy is based on people buying things. Most of us believe that acquisition is the purpose of money.
A recent Wiki article (http://en.wikipedia.org/wiki/Stock_market ) states that as of October of 2008 the total value of all stocks in the world was $36.6 trillion and the total face value of all derivatives in the world was $791 trillion. Given that these numbers reflect the values shortly after the financial crash I’m sure that they have moved around a bit since then. But the ratio is likely the same – roughly 22:1. Derivatives are contracts to pay based on the performance of something else. It’s pretty clear that more than one contract has been written for each underlying asset. When things go south it’s no wonder that these contracts can’t be paid and it’s no wonder that there have major efforts to save the financial system; a system that is so abstract that no one really understands it.
Another number that is useful to think about is global GDP which is roughly $65 trillion – that’s the value of all the goods and services produced in the world.
So it is fairly easy to see that wealth or money has been decoupled from its ability to buy goods and services. There simply isn’t enough available to buy given all the wealth in the system. Economists will tell you that derivatives only have nominal value; that the vast number of derivatives cancel each other out because they are “bets” on whether something will happen – or not.
But let’s leave that discussion to the economists (they seem to be the only ones who want to talk about financial systems as though they are separate from the human experience and have a life of their own) and get back to thinking about money. If money is not a means of exchange, if it is not something that we can use to make our lives better or someone else’s life better – what is it? The more I look at the numbers the more I have come to conclude that I don’t know what it is any more. The only thing that seems clear is that we are tenuously hanging on to the idea that somehow all allegedly sophisticated financial instruments have value – an idea that is under constant daily attack.
The story of what is said to be the world’s first large economic bubble may provide some clues as to where we go from here. In 1593 tulip bulbs were brought from Turkey to the Netherlands. Initially these flowers were prized for their relative rarity but then a non-fatal virus caused the bulbs to produce very unusual flowers – they appeared to have “flames” of different colors and their value increased exponentially. Many citizens mortgaged their homes and businesses to invest. The resulting crash seems obvious in retrospect. One can imagine how the collective unconscious tapped the Dutch on the shoulder one day and said, “Dude, it’s just a tulip bulb.” Seems like a quaint story until we remember all the websites that had no product, service or functionality that were so valuable ten years ago.
I would suggest that we consider the following:
Debts are not going to get paid back. Not the personal debts that are close to $2.5 trillion that Americans owe or the mortgages on properties that are not worth the loans or the national debt – in our country or in others. Some of this will take the form of tax payer revolts and some will take the form of people going on YouTube and challenging the banks but mostly it will occur by people simply no longer paying the loans.
The endgame for all the derivative assets and worthless loans on the books of financial institutions is nearer than we think. What is worth nothing will be acknowledged as being worth nothing.
Alternative ideas about money will begin to appear. There have been systems in the past were the value of money declined the longer it was held. There are systems now that derive value from time – time banks. What seem like wacky ideas will begin to seem sane as the wacky ideas that have passed for sanity are revealed as wacky.
So have I traded in my risk management bona fides to become a fortune teller? I’m not psychic and I don’t see dead people. All three of these events are occurring now. The tulip moment is upon us.
Monday, August 17, 2009
Microfinance and Risk
There has been a drumbeat of increasing volume in the corridors of western businesses over the past thirty years about the nature of risk. Risk is bad; it needs to be mitigated, managed into submission or laid off on 3rd parties. Massive resources have been put into “loss databases” in an effort to create an actuarial database that would allow organizations to insure themselves against any and all negative occurrences. And yet, despite all this effort and cost we are in the midst of the greatest financial collapse the world has ever seen. None of the methodologies, none of the models and most certainly, none of the experts saw it coming. Yet, despite all this it is safe to say that the perception of risk has not changed in these companies. They still spend the same and in some cases, more resources in trying to anticipate all the negative events that could occur as though just a little more preparation would make them immune from the vagaries of life. They still focus on all the things that could go wrong.
Microfinance, on the other hand, approaches risk from a completely different perspective. In granting a loan at the local level it looks at risk from the point of view of “what needs to go right”. Loans are granted in the context of what would thrive rather than judging various projects from the standpoint of their likelihood of failure. Risk is embraced and managed as a central element of a successful venture.
The truth is that there is a great duality in most large corporations. Risk management groups work away at trying to identify hazards and uncertainties and the rest of the organization essentially ignores their efforts and engages in activities designed to increase profits rather than perfect products and services. Risk is embraced in the service of enhancing the stock price or the quarterly earnings. The means of exchange (money) becomes more important that what we exchange (products and services).
In the microfinance world, this model is turned on its head. Investments are made to support the improvement of products and services. Money is understood as a means of exchange that serves what it is that is exchanged. It would seem that there is a great deal to be learned (or more accurately, remembered) from the success of microfinance.
Microfinance, on the other hand, approaches risk from a completely different perspective. In granting a loan at the local level it looks at risk from the point of view of “what needs to go right”. Loans are granted in the context of what would thrive rather than judging various projects from the standpoint of their likelihood of failure. Risk is embraced and managed as a central element of a successful venture.
The truth is that there is a great duality in most large corporations. Risk management groups work away at trying to identify hazards and uncertainties and the rest of the organization essentially ignores their efforts and engages in activities designed to increase profits rather than perfect products and services. Risk is embraced in the service of enhancing the stock price or the quarterly earnings. The means of exchange (money) becomes more important that what we exchange (products and services).
In the microfinance world, this model is turned on its head. Investments are made to support the improvement of products and services. Money is understood as a means of exchange that serves what it is that is exchanged. It would seem that there is a great deal to be learned (or more accurately, remembered) from the success of microfinance.
Tuesday, March 17, 2009
The Decline and Fall of the New York Times
Last week everyone with an Internet connection had the opportunity to see John Stewart incinerate CNBC’s Jim Cramer on the Daily Show. During that program Mr. Stewart showed clips of Mr. Kramer talking about his famous “pump and dump” strategy with a young reporter – saying things that he said that he would never say on television. The show was full of those moments that rarely occur on television; an accurate and well researched analysis of the gap between what people know to be true and what they are willing (or paid) to talk about publically. Mr. Stewart comes by his reputation as a fearless satirist and, in this case, reporter honestly. He took on Tucker Carlson and Paul Begala on CNN several years ago on their show when he chastised them for not only not reporting the news but also obscuring it.
It is no wonder that people increasingly look to the Daily Show and Internet sites for information about what is going on in the world. This is not a new story, it is a story of a decline in the news media that has been going on for some time and shows no signs of abating. It is as though we are watching a meltdown similar to what we have been experiencing in the financial sector. Our mainstream press, whether it is network news, cable news or our major daily newspapers, continue to obscure information that is vital to understanding what is going on in the world and, as a consequence, making it more difficult to fashion solutions.
Today’s editorial in the New York Times about the AIG bonuses compounds a problem that all of their reporters and particularly one of their columnists, Tom Friedman have created. The editorial continues to promote the myth that “taxpayers” are somehow funding the AIG bailout. They are not. The $170 billion that has gone to AIG is the result of a series of loans from the Federal Reserve. Essentially the Fed used the device of the loans to channel money to their stockholders (the banks) so they wouldn’t default. Whether this is good or bad can’t really be understood because it is not reported. There is no taxpayer money in the Federal Reserve.
Let me digress for a moment to address what some economists may insist makes that last statement not true. The Federal Reserve does receive interest payments on the money that it loans to the US government and those interest payments are funded by tax revenues. But to insist that these are still taxpayer dollars is like saying that somehow there is an extension of ownership of any money that is paid in interest. It would mean that the interest that you pay to the bank for your credit card purchases is somehow still your money. It’s a specious argument.
Americans are not taught how their financial system works in school. I have done a brief survey of the high school curriculums of some public and private high schools in New York City and discovered that there does not seem to be any information on the subject. There is some reference to President Andrew Jackson’s railing about central banks but it is relegated to a brief mention with no connection to the organization of our monetary system and the creation of money.
That said, it is possible to find a great deal of information on the Internet. To be sure, a good deal of it is written in bold capital letters and comes in the form of conspiracy theories about the Illuminati and the eleven families who control everything in the world. But a good portion of it is very straightforward. Americans are educating themselves about the Federal Reserve, its status as a private corporation owned by the banks and its responsibility to manage the monetary system and create the very currency that we use as a means of exchange. Increasingly this information is making its way onto public television stations (albeit very slowly). My sense is that we are very close to a tipping point.
In the moment the news media and the political class are making hay by attacking the people who received the bonus money at AIG and Merrill Lynch. That’s fine. It makes no sense to give out bonuses when the company is losing money no matter where it comes from. The excuse that it is necessary to retain all the top talent that either actively engineered the current mess or stood by and watched it happen has a very hollow ring. Where exactly is all this top talent going to go? So, by all means let’s get Andrew Cuomo (New York State Attorney General) and others to grab these folks by the scruff of the neck and give them a good shake. Put some in prison as well. But even if that happens it will not change one iota of the system that created the problem and it will not move us on a path to recovery.
The only way we are going to get that is to understand how our system works and the news media seems to be working overtime to ensure that that doesn’t happen. It is a fool’s errand. They are appealing to the same instincts that cause people to watch Jerry Springer and Dr. Phil. The Roman Circus concept works when people didn’t have access to accurate information. That’s no longer the case.
It is hard to imagine that we may not have a New York Times in the future but newspapers are folding at a rapid rate. They are losing advertisers because people aren’t buying them and people aren’t buying them because they increasingly understand that they don’t contain much news.
It is no wonder that people increasingly look to the Daily Show and Internet sites for information about what is going on in the world. This is not a new story, it is a story of a decline in the news media that has been going on for some time and shows no signs of abating. It is as though we are watching a meltdown similar to what we have been experiencing in the financial sector. Our mainstream press, whether it is network news, cable news or our major daily newspapers, continue to obscure information that is vital to understanding what is going on in the world and, as a consequence, making it more difficult to fashion solutions.
Today’s editorial in the New York Times about the AIG bonuses compounds a problem that all of their reporters and particularly one of their columnists, Tom Friedman have created. The editorial continues to promote the myth that “taxpayers” are somehow funding the AIG bailout. They are not. The $170 billion that has gone to AIG is the result of a series of loans from the Federal Reserve. Essentially the Fed used the device of the loans to channel money to their stockholders (the banks) so they wouldn’t default. Whether this is good or bad can’t really be understood because it is not reported. There is no taxpayer money in the Federal Reserve.
Let me digress for a moment to address what some economists may insist makes that last statement not true. The Federal Reserve does receive interest payments on the money that it loans to the US government and those interest payments are funded by tax revenues. But to insist that these are still taxpayer dollars is like saying that somehow there is an extension of ownership of any money that is paid in interest. It would mean that the interest that you pay to the bank for your credit card purchases is somehow still your money. It’s a specious argument.
Americans are not taught how their financial system works in school. I have done a brief survey of the high school curriculums of some public and private high schools in New York City and discovered that there does not seem to be any information on the subject. There is some reference to President Andrew Jackson’s railing about central banks but it is relegated to a brief mention with no connection to the organization of our monetary system and the creation of money.
That said, it is possible to find a great deal of information on the Internet. To be sure, a good deal of it is written in bold capital letters and comes in the form of conspiracy theories about the Illuminati and the eleven families who control everything in the world. But a good portion of it is very straightforward. Americans are educating themselves about the Federal Reserve, its status as a private corporation owned by the banks and its responsibility to manage the monetary system and create the very currency that we use as a means of exchange. Increasingly this information is making its way onto public television stations (albeit very slowly). My sense is that we are very close to a tipping point.
In the moment the news media and the political class are making hay by attacking the people who received the bonus money at AIG and Merrill Lynch. That’s fine. It makes no sense to give out bonuses when the company is losing money no matter where it comes from. The excuse that it is necessary to retain all the top talent that either actively engineered the current mess or stood by and watched it happen has a very hollow ring. Where exactly is all this top talent going to go? So, by all means let’s get Andrew Cuomo (New York State Attorney General) and others to grab these folks by the scruff of the neck and give them a good shake. Put some in prison as well. But even if that happens it will not change one iota of the system that created the problem and it will not move us on a path to recovery.
The only way we are going to get that is to understand how our system works and the news media seems to be working overtime to ensure that that doesn’t happen. It is a fool’s errand. They are appealing to the same instincts that cause people to watch Jerry Springer and Dr. Phil. The Roman Circus concept works when people didn’t have access to accurate information. That’s no longer the case.
It is hard to imagine that we may not have a New York Times in the future but newspapers are folding at a rapid rate. They are losing advertisers because people aren’t buying them and people aren’t buying them because they increasingly understand that they don’t contain much news.
Tuesday, March 10, 2009
The Longest War
Several weeks ago the New York Times published and article on the number of states that were actively engaged in repealing the death penalty. Apparently it is very expensive to kill someone (some estimates range as high as nearly $2 million) and cash strapped states are discovering lawmakers would rather fill potholes than exercise righteousness in the service of the ultimate penalty. And then there is also the increasing number of false convictions; of the 232 convictions overturned by the Innocence Project, 17 spent time on death row. The advance of technology has resulted in many states reconsidering the irrevocable choice of putting someone to death.
In adding to the discussion of the balance between cost and punishment, the leader in The Economist this week addressed the failure of the War on Drugs. While the terminology of war in this “war on…” was created during the Nixon administration (some say in response to Lyndon Johnson’s War on Poverty), The Economist dates the assault on illegal drugs and their users to have begun during an international conference in Shanghai in 1909. In the United States the passage of the Harrison Act in 1914, making the use of cocaine illegal, is usually seen as this nation’s official date for the movement to make a certain class of drugs illegal. In any event, the effort to criminalize drugs has a long, costly and mostly ineffective history. Now it seems that the financial crisis is causing some to reconsider whether or not all the money that we spend is worth the result.
There has always been an element of hypocrisy in our drug laws. While we make cocaine, heroin, marijuana and other drugs illegal we allow the smoking of tobacco and, with the exception of 13 years in the 1920’s and early 30’s, the consumption of alcohol. The effect of these two legalized drugs on their users, their families and, in the case of tobacco, the victims of second hand smoke has been catastrophic. Both damage the health of the people who use them and people who are impaired by alcohol do physical damage to others, either with their fists or with automobiles. Add to that the increasing abuse of prescription drugs and the pretzel logic of what is and is not an acceptable drug becomes less and less obvious. Explaining to a young teenager the rationale of why some behavior is sanctioned and others not is a challenge.
But now we are entering a time when decisions are being driven more by economic realities than political ideologies. Some would say that applying this newfound pragmatism to the prosecution of drug offenses is cynical. Is it that we have decided that we can’t afford the maintenance of societal standards? Or perhaps we have moved into a different context; one in which we need to take a second look at our conflicted moral code about substances that alter the sober mind.
We come from a Calvinist heritage in the United States. Although some of the first Europeans to arrive on these shores were fleeing religious persecution they were more than happy to inflict their own brand of morally-based restrictions on each other and ultimately the culture at large. We have lived through restrictions on who can marry, who can have sex (including meticulous detail on the acceptable and not acceptable acts), who can vote and who can ride on a bus. These restrictions have been based on race, gender and sexual orientation and many of them no longer exist in the form of legislative prohibitions. It would seem reasonable that we are on the verge of moving toward a more permissive attitude towards drugs.
Should this happen, should we actually legalize drugs, monitor and mange their growth, distribution and sale (along with the revenue from taxing them like alcohol and cigarettes) we would take a radical step in reducing the incarceration rates in the United States. The criminal enterprises that have been a plague on the world’s developing nations would be robbed of a source of income vital to their existence. So many resources that are currently committed to this endless struggle would be freed up for other pressing needs.
But what would the legalization of drugs do to our social fabric. It is reasonable to assume that more people would take drugs. It may also be reasonable to assume that there would be an increase in the number of people who suffer from addiction and whose lives would take a turn for the worse. That has always been the dilemma of legalizing drugs; how many more would be harmed than helped in the service of removing the taboo and the criminal penalties?
The context of the economic crisis is causing all of us to rethink our values and our behavior. The economics of our country and the world will reflect the decisions of people about the ways in which they spend their money. Policy makers who are valiantly trying to re-inflate the debt bubble would be wise to take that into account. There are fundamental changes afoot that have nothing to do with toxic assets, derivatives and the nationalization of banks.
It could be that we are about to embark on the construction of a society that has as one of its basic tenants the idea of individual responsibility. The nature or content of that responsibility will be increasingly be defined by the individual rather than some ideology. It is not based on a moralistic set of rules but rather an ethical framework in which people choose to do the right thing at the right time in the context of their own experience.
That’s a dangerous idea for a bureaucracy. That’s a dangerous idea for a morality that is based on rules developed by a small cadre and inflicted on the larger group. But increasingly we are discovering that people make their own decisions regardless of someone else’s idea of what they should do. Perhaps we are at a point in time where the choice to alter one’s mental and emotional process should be in the hands of the individual. That doesn’t mean that people are allowed to be less responsible; quite the contrary.
In any event, the bottom line on this longest of all wars is that it has not been won. The casualties are in the millions and the cost is in the hundreds of billions. This is not a war that we can afford to fight with police, guns, judges and jails. This is more a struggle for the human soul and that is an effort that every individual must take on themselves.
In adding to the discussion of the balance between cost and punishment, the leader in The Economist this week addressed the failure of the War on Drugs. While the terminology of war in this “war on…” was created during the Nixon administration (some say in response to Lyndon Johnson’s War on Poverty), The Economist dates the assault on illegal drugs and their users to have begun during an international conference in Shanghai in 1909. In the United States the passage of the Harrison Act in 1914, making the use of cocaine illegal, is usually seen as this nation’s official date for the movement to make a certain class of drugs illegal. In any event, the effort to criminalize drugs has a long, costly and mostly ineffective history. Now it seems that the financial crisis is causing some to reconsider whether or not all the money that we spend is worth the result.
There has always been an element of hypocrisy in our drug laws. While we make cocaine, heroin, marijuana and other drugs illegal we allow the smoking of tobacco and, with the exception of 13 years in the 1920’s and early 30’s, the consumption of alcohol. The effect of these two legalized drugs on their users, their families and, in the case of tobacco, the victims of second hand smoke has been catastrophic. Both damage the health of the people who use them and people who are impaired by alcohol do physical damage to others, either with their fists or with automobiles. Add to that the increasing abuse of prescription drugs and the pretzel logic of what is and is not an acceptable drug becomes less and less obvious. Explaining to a young teenager the rationale of why some behavior is sanctioned and others not is a challenge.
But now we are entering a time when decisions are being driven more by economic realities than political ideologies. Some would say that applying this newfound pragmatism to the prosecution of drug offenses is cynical. Is it that we have decided that we can’t afford the maintenance of societal standards? Or perhaps we have moved into a different context; one in which we need to take a second look at our conflicted moral code about substances that alter the sober mind.
We come from a Calvinist heritage in the United States. Although some of the first Europeans to arrive on these shores were fleeing religious persecution they were more than happy to inflict their own brand of morally-based restrictions on each other and ultimately the culture at large. We have lived through restrictions on who can marry, who can have sex (including meticulous detail on the acceptable and not acceptable acts), who can vote and who can ride on a bus. These restrictions have been based on race, gender and sexual orientation and many of them no longer exist in the form of legislative prohibitions. It would seem reasonable that we are on the verge of moving toward a more permissive attitude towards drugs.
Should this happen, should we actually legalize drugs, monitor and mange their growth, distribution and sale (along with the revenue from taxing them like alcohol and cigarettes) we would take a radical step in reducing the incarceration rates in the United States. The criminal enterprises that have been a plague on the world’s developing nations would be robbed of a source of income vital to their existence. So many resources that are currently committed to this endless struggle would be freed up for other pressing needs.
But what would the legalization of drugs do to our social fabric. It is reasonable to assume that more people would take drugs. It may also be reasonable to assume that there would be an increase in the number of people who suffer from addiction and whose lives would take a turn for the worse. That has always been the dilemma of legalizing drugs; how many more would be harmed than helped in the service of removing the taboo and the criminal penalties?
The context of the economic crisis is causing all of us to rethink our values and our behavior. The economics of our country and the world will reflect the decisions of people about the ways in which they spend their money. Policy makers who are valiantly trying to re-inflate the debt bubble would be wise to take that into account. There are fundamental changes afoot that have nothing to do with toxic assets, derivatives and the nationalization of banks.
It could be that we are about to embark on the construction of a society that has as one of its basic tenants the idea of individual responsibility. The nature or content of that responsibility will be increasingly be defined by the individual rather than some ideology. It is not based on a moralistic set of rules but rather an ethical framework in which people choose to do the right thing at the right time in the context of their own experience.
That’s a dangerous idea for a bureaucracy. That’s a dangerous idea for a morality that is based on rules developed by a small cadre and inflicted on the larger group. But increasingly we are discovering that people make their own decisions regardless of someone else’s idea of what they should do. Perhaps we are at a point in time where the choice to alter one’s mental and emotional process should be in the hands of the individual. That doesn’t mean that people are allowed to be less responsible; quite the contrary.
In any event, the bottom line on this longest of all wars is that it has not been won. The casualties are in the millions and the cost is in the hundreds of billions. This is not a war that we can afford to fight with police, guns, judges and jails. This is more a struggle for the human soul and that is an effort that every individual must take on themselves.
Thursday, March 5, 2009
Defining Insanity
Many years ago when I was beginning my first career in the mental health field and taking as many courses in special education and psychology as I could manage, I began to consider the definition of insanity. It seemed to me that the line between those considered sane and those considered not moved back and forth quite a bit through history. I recall reading Arthur Miller’s The Crucible in which he used the Salem witch trials and the approved murder of people determined to be evil as an analogy for the mass hysteria of the McCarthy era. I saw one of the first stage adaptations of Kesey’s One Flew Over the Cuckoo’s Nest in which insanity seemed to be defined as both rebelling and conforming with the only sane option being observing and creating one’s own reality. Some time later, in the middle of a heated discussion in which I was arguing against the drastic increase in kidney damaging psychotropic drugs for one of my patients I was told by the Deputy Director of the hospital that the Department of Mental Hygiene was an agency of social control and if I didn’t like it I should get out. And so I did.
The subject of the societal definition of insanity seems to be one that we should consider again now. Almost every day we are confronted with another piece of news about the collapse of the financial system and a new explanation about how it has occurred. Eastern Europe is demonstrating behavior equivalent to those who took out sub-prime mortgages. Switzerland may be on the brink. There was a story in the UK’s Daily Telegraph last week about a secret EC document that estimates that “impaired assets” may make up 44% of EU bank balance sheets. We have all been told to brace for a second wave of residential mortgage defaults and that commercial property will be the next asset to deflate.
Each time we hear one of these stories the mind struggles to put it in context. It’s getting more difficult. We seem to be in some strange holding pattern where everyone knows that things are going to get worse, some of our government leaders are telling us things are going to get worse but no one wants to take the steps that would move the process into greater pain than is being experienced now – even though we all know it is coming and unavoidable.
Let’s consider the Obama administration’s effort to deal with the financial system and the housing crisis. We really only know the number for the financial system program – somewhere in the neighborhood of $2.5 trillion. If AIG is any measure of what will be done, banks will be given more money (through a variety of loans and/or equity investments) to provide them with the reserves necessary for them to stay solvent. These reserve requirements are being raised as the result of defaults on loans and/or collateral requirements that result from requirements in derivative contracts. So we are keeping the patient alive through transfusions but we haven’t yet dealt with the multiple bullet wounds that keep bleeding.
For homeowners, if they can meet the requirements and if their lender voluntarily wants to negotiate they can get their 20 year loans turned into 30 and 40 year loans that will lower their monthly payments and potentially their interest rates. But they will still be paying the full amount of their mortgages; an amount that their houses are no longer worth. In essence, this is another way of pumping money into the financial system without requiring the banks to write down the mortgage loans to the diminished value of the houses.
We are still pretending that things are worth what we know they are not worth. For all the talk of good bank/bad bank (a scenario in which the band bank would take all the “toxic assets”) no one really wants to move on that front because valuing the “toxic assets” would likely result in a calamitous collapse. A recent PBS sponsored analysis revealed that a middle of the pack mortgage backed security was worth 1 to 1 ½ cents on the dollar. Other reports have suggested that $500 trillion in derivatives in the global market are worth about $.20 on the dollar – that a $400 trillion write-down.
Timing is everything. Confronting a fragile patient with harsh realities could lead to a psychotic break. On the other hand, prolonging the agony by medicating the patient into a somnambulant state just delays the inevitable and can prolong recovery. The fundamental problem is that we can’t get on with rebuilding what we don’t recognize as being broken. The new definition of sanity that has to emerge begins with acknowledging the lunacy that we have collectively participated in and accepting the consequences. We need to move a little faster and get on with it.
The subject of the societal definition of insanity seems to be one that we should consider again now. Almost every day we are confronted with another piece of news about the collapse of the financial system and a new explanation about how it has occurred. Eastern Europe is demonstrating behavior equivalent to those who took out sub-prime mortgages. Switzerland may be on the brink. There was a story in the UK’s Daily Telegraph last week about a secret EC document that estimates that “impaired assets” may make up 44% of EU bank balance sheets. We have all been told to brace for a second wave of residential mortgage defaults and that commercial property will be the next asset to deflate.
Each time we hear one of these stories the mind struggles to put it in context. It’s getting more difficult. We seem to be in some strange holding pattern where everyone knows that things are going to get worse, some of our government leaders are telling us things are going to get worse but no one wants to take the steps that would move the process into greater pain than is being experienced now – even though we all know it is coming and unavoidable.
Let’s consider the Obama administration’s effort to deal with the financial system and the housing crisis. We really only know the number for the financial system program – somewhere in the neighborhood of $2.5 trillion. If AIG is any measure of what will be done, banks will be given more money (through a variety of loans and/or equity investments) to provide them with the reserves necessary for them to stay solvent. These reserve requirements are being raised as the result of defaults on loans and/or collateral requirements that result from requirements in derivative contracts. So we are keeping the patient alive through transfusions but we haven’t yet dealt with the multiple bullet wounds that keep bleeding.
For homeowners, if they can meet the requirements and if their lender voluntarily wants to negotiate they can get their 20 year loans turned into 30 and 40 year loans that will lower their monthly payments and potentially their interest rates. But they will still be paying the full amount of their mortgages; an amount that their houses are no longer worth. In essence, this is another way of pumping money into the financial system without requiring the banks to write down the mortgage loans to the diminished value of the houses.
We are still pretending that things are worth what we know they are not worth. For all the talk of good bank/bad bank (a scenario in which the band bank would take all the “toxic assets”) no one really wants to move on that front because valuing the “toxic assets” would likely result in a calamitous collapse. A recent PBS sponsored analysis revealed that a middle of the pack mortgage backed security was worth 1 to 1 ½ cents on the dollar. Other reports have suggested that $500 trillion in derivatives in the global market are worth about $.20 on the dollar – that a $400 trillion write-down.
Timing is everything. Confronting a fragile patient with harsh realities could lead to a psychotic break. On the other hand, prolonging the agony by medicating the patient into a somnambulant state just delays the inevitable and can prolong recovery. The fundamental problem is that we can’t get on with rebuilding what we don’t recognize as being broken. The new definition of sanity that has to emerge begins with acknowledging the lunacy that we have collectively participated in and accepting the consequences. We need to move a little faster and get on with it.
Sunday, March 1, 2009
The Risk of Demagogues
The new CIA Director, Leon Panetta, has a new item in his daily briefing to the President. It is a list of actual and potential locations of civil unrest resulting from the economic crisis. It is a list that is growing and shows no signs of getting shorter any time soon. The summer of 2008 saw food riots in Africa and Asia. Later in the year China began to experience what the government calls “mass incidents” resulting from factory closings and the ensuing financial hardships. The images of six days of violent protest in Greece were seen around the world and reports of demonstrations in France, Ireland, Iceland, Italy, Latvia, Bulgaria and Russia in Europe were complimented with similar events in Haiti and Bolivia in the Americas.
The weather will start to get warmer in the northern hemisphere in the next several months and it would be foolish to think that we won’t experience more demonstrations and breakdowns in civil society as we move through the summer. Even the most optimistic economic pundits acknowledge that 2009 is a year when things will get worse. People who have grown up with an expectation of continued economic expansion and the lifestyle that accompanies it are going through a period of intense shock. The awareness that comes with understanding how our monetary system actually works will be sporadically punctuated with intense rage. It is the channeling of this rage that presents the greatest challenge to our civil societies.
There are those who believe that they have figured out what went wrong and have identified the culprits. Increasingly these villains are deemed to be those who took out mortgages that they could not afford. Even the President of the United States has separated them from others who, although they can’t pay their mortgages either, somehow will manage to qualify for government help – assuming that they don’t loose their jobs between now and when the programs to save them are put into effect.
Certainly there are hapless souls who didn’t know what they were getting into. Certainly there are others who knew exactly what they were getting into and didn’t care. The vast majority of these new homeowners, I would suggest, believed what the supposedly smartest people were telling them; housing prices would continue to go up and they could refinance their way into continued homeownership forever. We like to forget the context for how these loans were marketed and the delusional system that virtually everyone bought into.
But the danger that we all face comes from the new cadre of “smart people” who want to replace the old set of “smart people”. These new folks would have us believe that if we blame the right group and demand that they are made to suffer without the rest of us having to pay, somehow this will represent justice and all will be right in the world as a result. In the short term these new purveyors of the truth do more damage to the people who line up next to them and wag their fingers in unison than they do to the people who they blame. After all, if you have lost your home and your family is in despair, how much more can be done to you? But if you are casting about for a reason that your bank account and future prosperity have been damaged beyond repair, finding a villain only serves the purpose of ceasing to understand the dynamics of what is really happening.
We are all living through the unraveling of an economic system. In a debt based monetary system there is always a tension between the ability of an economy to grow fast enough to generate enough money to pay the interest on the debt. Since economies grow in a linear fashion and interest compounds, growth can never accommodate the cost of this so-called capital. Throughout history we have had bubbles. A few hundred years ago people in Holland decided that tulip bulbs had extraordinary value. A decade ago we all decided that websites with no discernable product or service were worth their weight in gold. Bubbles are how we have dealt with the disparity between economic growth and the burden of interest.
This time, however, we have outdone ourselves. Instead of inflating an asset like a tulip bulb or a website we have inflated the value of securities that have no underlying value (derivatives) and created a complexity of interdependent relationships that we can only discern as they begin to fall apart and fail. And we have extended it from a component of a national economy to the fundamentals of the global economy.
The responses to the events of the past six months have been fairly predictable. The system is trying to save itself. We are trying to bring more debt to a system that is collapsing because of the burden of debt. We are trying to re-inflate the bubble. For all our efforts we are really doing nothing more than giving morphine to a cancer patient. For all the discussion about Keynes’s and Friedman’s approach to the economics of capitalism it must be becoming apparent that the kind of system that we will end up with when the chaos begins to subside will not resemble anything like what we have experienced over the past 100 years.
What’s essential, it seem to me, is that we all continue to educate ourselves about our monetary system in as dispassionate manner as possible. We all want an answer, an end to the pain and suffering – if not for the other guy at least for ourselves. I would suggest that we won’t get there without walking down some blind alleys and without learning more than we may want to know about our own folly. Those who give up their contribution to a better understanding in the service of a demagogue who provides someone to blame simply distract from an inevitable process. There is no magic bullet. There is no new economic “ism” already formed out there hidden from view that will miraculously appear and solve all our problems.
That I would suggest is the good news. We are on the precipice of a remarkable point in human civilization. We must not give up and take the intellectually and emotionally dishonest route of a solution based on blame.
As Walt Kelly once wrote “We are confronted with insurmountable opportunities”.
The weather will start to get warmer in the northern hemisphere in the next several months and it would be foolish to think that we won’t experience more demonstrations and breakdowns in civil society as we move through the summer. Even the most optimistic economic pundits acknowledge that 2009 is a year when things will get worse. People who have grown up with an expectation of continued economic expansion and the lifestyle that accompanies it are going through a period of intense shock. The awareness that comes with understanding how our monetary system actually works will be sporadically punctuated with intense rage. It is the channeling of this rage that presents the greatest challenge to our civil societies.
There are those who believe that they have figured out what went wrong and have identified the culprits. Increasingly these villains are deemed to be those who took out mortgages that they could not afford. Even the President of the United States has separated them from others who, although they can’t pay their mortgages either, somehow will manage to qualify for government help – assuming that they don’t loose their jobs between now and when the programs to save them are put into effect.
Certainly there are hapless souls who didn’t know what they were getting into. Certainly there are others who knew exactly what they were getting into and didn’t care. The vast majority of these new homeowners, I would suggest, believed what the supposedly smartest people were telling them; housing prices would continue to go up and they could refinance their way into continued homeownership forever. We like to forget the context for how these loans were marketed and the delusional system that virtually everyone bought into.
But the danger that we all face comes from the new cadre of “smart people” who want to replace the old set of “smart people”. These new folks would have us believe that if we blame the right group and demand that they are made to suffer without the rest of us having to pay, somehow this will represent justice and all will be right in the world as a result. In the short term these new purveyors of the truth do more damage to the people who line up next to them and wag their fingers in unison than they do to the people who they blame. After all, if you have lost your home and your family is in despair, how much more can be done to you? But if you are casting about for a reason that your bank account and future prosperity have been damaged beyond repair, finding a villain only serves the purpose of ceasing to understand the dynamics of what is really happening.
We are all living through the unraveling of an economic system. In a debt based monetary system there is always a tension between the ability of an economy to grow fast enough to generate enough money to pay the interest on the debt. Since economies grow in a linear fashion and interest compounds, growth can never accommodate the cost of this so-called capital. Throughout history we have had bubbles. A few hundred years ago people in Holland decided that tulip bulbs had extraordinary value. A decade ago we all decided that websites with no discernable product or service were worth their weight in gold. Bubbles are how we have dealt with the disparity between economic growth and the burden of interest.
This time, however, we have outdone ourselves. Instead of inflating an asset like a tulip bulb or a website we have inflated the value of securities that have no underlying value (derivatives) and created a complexity of interdependent relationships that we can only discern as they begin to fall apart and fail. And we have extended it from a component of a national economy to the fundamentals of the global economy.
The responses to the events of the past six months have been fairly predictable. The system is trying to save itself. We are trying to bring more debt to a system that is collapsing because of the burden of debt. We are trying to re-inflate the bubble. For all our efforts we are really doing nothing more than giving morphine to a cancer patient. For all the discussion about Keynes’s and Friedman’s approach to the economics of capitalism it must be becoming apparent that the kind of system that we will end up with when the chaos begins to subside will not resemble anything like what we have experienced over the past 100 years.
What’s essential, it seem to me, is that we all continue to educate ourselves about our monetary system in as dispassionate manner as possible. We all want an answer, an end to the pain and suffering – if not for the other guy at least for ourselves. I would suggest that we won’t get there without walking down some blind alleys and without learning more than we may want to know about our own folly. Those who give up their contribution to a better understanding in the service of a demagogue who provides someone to blame simply distract from an inevitable process. There is no magic bullet. There is no new economic “ism” already formed out there hidden from view that will miraculously appear and solve all our problems.
That I would suggest is the good news. We are on the precipice of a remarkable point in human civilization. We must not give up and take the intellectually and emotionally dishonest route of a solution based on blame.
As Walt Kelly once wrote “We are confronted with insurmountable opportunities”.
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