Game is up for health insurers
"For most working people under 65, we're Germany or France or Japan," Reid writes. "For Native Americans, military personnel and veterans, we're Britain, or Cuba ... For those over 65, we're Canada ... For the 45 million uninsured Americans, we're Cambodia, or Burkina Faso or rural India."
Reid notes that on average, U.S. health insurance companies pay out in claims only about 80 percent of what they collect in premiums. The rest goes for marketing, underwriting and administration, with what's left, for profit.
==============================
Thu Oct 29, 2009 11:41am EDT
-- John M. Berry is a guest columnist who has covered the economy for four decades for the Washington Post and other publications. The views expressed are his own. --
By John M. Berry
WASHINGTON (Reuters) - Health insurance companies are aggressively raising premiums at the same time they are fighting to stop the creation of public non-profit funds that would give them serious competition.
This foolish effort to pad profits before any healthcare overhaul gets passed ought to backfire. The so-called public option was already gathering support despite claims by conservatives that it would lead to a government takeover of health care.
Small businesses face an average premium increase of 15 percent for 2010, according to The New York Times. Separately, the Centers for Medicare & Medicaid Services, which run Medicare, said that premiums for Medicare Advantage plans -- those are private plans for people also enrolled in regular Medicare -- are going up 25 percent.
With costs rising like this, it is remarkable how many supporters the insurers have in Congress. Even the best of the companies are a pain to deal with.
The for-profit insurance companies are a unique feature of the U.S. health care system. No other developed country has them, and their existence is a key reason Americans spend a much higher share of their national income on health care -- while leaving many people uninsured.
T.R. Reid, a long-time Washington Post correspondent, lays out those details in a fascinating new book, "The Healing of America." Reid worked in Post bureaus in London and Tokyo, and he and his family had received health care under the British and Japanese systems. During his research, he traveled to many other countries seeking treatment for a bum shoulder he had seriously injured years earlier while in the Navy.
The result is a tale that highlights the positive and negative aspects of other systems. By almost every measure, the healthcare outcomes are better in other developed countries than in the United States, while the costs are lower.
None is perfect. They all face the problem of rising costs. But all other developed countries essentially provide care for everyone.
"For most working people under 65, we're Germany or France or Japan," Reid writes. "For Native Americans, military personnel and veterans, we're Britain, or Cuba ... For those over 65, we're Canada ... For the 45 million uninsured Americans, we're Cambodia, or Burkina Faso or rural India."
People in the latter group get care if they can pay the bill out of pocket. The United States, however, is like no other country because it "maintains so many separate systems for separate classes of people, and because it relies so heavily on for-profit private insurance plans to pay the bills," Reid says.
Some opponents of healthcare reform complain that the focus is on extending coverage to the uninsured, which will be expensive, rather than on ways to control costs. There's some truth to that, but extending coverage is the far more critical step. Other changes to control costs can come in turn.
Reid notes that on average, U.S. health insurance companies pay out in claims only about 80 percent of what they collect in premiums. The rest goes for marketing, underwriting and administration, with what's left, for profit.
In France, Reid explains, everyone has a carte vitale, a green plastic card with a small memory chip. The card carries the full health history of each person, who treated him for what and what he was charged. Every time a doctor treats someone, the details are entered on the card and the update is sent to the national non-profit insurance fund which pays the doctor's bill, generally within a week, without any additional claim being filed.
The insurance fund's administrative costs are about one-fourth those of U.S. insurers.
Whatever the exact dimensions of healthcare reform will turn out to be aren't clear. But one thing seems certain: Insurance companies are going to have to cover anyone who applies. They're not going to be able to exclude anyone because of their health history.
That likely will raise the cost of their claims. But think how much they'll be able to save on underwriting expenses.
Friday, October 30, 2009
Tuesday, October 20, 2009
Happiness - the bottom line : Not in reaching a goal, or in having possessions it is in living in the moment and in total acceptance
Very simply stated: Focus on moments, more than goals, plans or dreams and Accept what you find.
To take these two elements even deeper: Together, they represent two very powerful principles of the universe that I would translate as:
* Live in the present (Be Here Now), and
* Learn to accept and cooperate with what is.
To take these two elements even deeper: Together, they represent two very powerful principles of the universe that I would translate as:
* Live in the present (Be Here Now), and
* Learn to accept and cooperate with what is.
Monday, September 14, 2009
New Gilded Age for Wall Street - 10 largest Us financial institutions now hold 50% share of all Assets!
Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent
Wall Street’s New Gilded Age
A year after the crash, a few financial giants are back to making millions, while average Americans face foreclosure and unemployment. What's wrong with this picture?
By Niall Ferguson | NEWSWEEK
Published Sep 11, 2009
From the magazine issue dated Sep 21, 2009
Since its birth, the United States has grappled with the problem of an over-mighty financial sector. With the exception of Alexander Hamilton, the Founders' vision was of a republic of self-reliant farmers and small-town tradesmen. The last thing they wanted was for New York to become the London of the New World—a mammon-worshiping metropolis in which financial capital and political capital were rolled into one. That was why there was such resistance to creating a central bank, and why—despite two attempts—we have no Bank of the United States to match the Bank of England. That was why populists railed against the adoption of the gold standard after the crash of 1873. That was why there was so much suspicion when the Federal Reserve System was created in 1913. That was why government regulation of Wall Street was so strict from the Depression until the 1970s.
But now, barely a year after one of the worst crises in all financial history, we seem to have returned to the Gilded Age of the late 19th century—the last time bankers came close to ruling America. A few Wall Street giants, led by none other than -JPMorgan, are back to making serious money and paying million-dollar bonuses. Meanwhile, every month, hundreds of thousands of ordinary Americans face foreclosure or unemployment because of a crisis caused by … a few Wall Street giants. And what makes the losers in this crisis really mad is the fact that there's now one law for the small debtors and another for big ones. If you lose your job and fall behind on your $1,500 monthly mortgage payment, no one's going to bail you out. But Citigroup can lose $27.7 billion (as it did last year) and count on the federal government to hand it $45 billion.
A hundred years ago, people angrily compared the House of Rothschild to a giant octopus with its tentacles wrapped around the U.S. economy. Today it's the turn of Goldman Sachs to be likened to a "great vampire squid." To understand why, you need to go back 12 months.
With the bankruptcy of Lehman Brothers Holdings Inc. last September, 9/15 supplanted 9/11 as the costliest day in the history of New York City. It was also the most cataclysmic American bank failure since 1931.
The Lehman bankruptcy was in fact only one of seven events that, in the space of just 19 days, signaled the end of an epoch. On Sept. 7, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) were nationalized. On Sept. 14, Merrill Lynch was bought by Bank of America. On the same day that Lehman failed, the money-market fund Reserve Primary "broke the buck" because of losses on unsecured commercial paper it had bought from Lehman. The next day—to avoid a lethal chain reaction in the market for credit default swaps—the insurance giant AIG was given an $85 billion bailout by the Federal Reserve. On Sept. 22, the investment bank went extinct as a species when Goldman Sachs and Morgan Stanley converted themselves into bank holding companies. Finally, on Sept. 25, Washington Mutual was placed into the receivership of the Federal Deposit Insurance Corp. (FDIC).
Not everything that has gone wrong in the world economy since 2007 can be blamed on these seven events, much less on the Lehman bankruptcy alone. At most, about a fifth of the total 50 percent decline in the U.S. stock market between the peak of October 2007 and the low of March 2009 could be attributed to what happened in September of last year. (October 2008 was an even worse month for stocks.) But other indicators better reveal the scale of the financial trauma. In the 24 hours after Lehman failed, the London Interbank Offered Rate (LIBOR, for short)—the rate that financial institutions charge each other for unsecured borrowing—soared 3.33 percentage points, to 6.44 percent. The commercial-paper market froze. The resulting credit crunch set off a chain reaction. Firms canceled orders and started laying off workers. International trade collapsed.
Equally dramatic—and more long-lasting—has been the effect of the crisis on government policy. Prior to 9/15, it seemed unlikely that Congress would approve a large-scale bailout for Wall Street. Treasury Secretary Henry Paulson had told potential buyers of Lehman Brothers there would be "no government money" to sweeten any takeover deal. Even after the Lehman failure, it still took two attempts to secure passage of the $700 billion Troubled Asset Relief Program through Congress. Since then we've witnessed the fiscal equivalent of a dam bursting. We're now looking at $9 trillion of new federal debt in the decade ahead.
Prior to 9/15, the Federal Reserve Board argued that the Fed could not buy "shaky assets" from Lehman, but could only lend against "good collateral." In the week that followed, the Fed's balance sheet leapt upward by 21 percent after the institution announced it would accept equities as collateral for the first time in its history. Other new measures included the FDIC's guarantee of all bank debt—a remarkable undertaking given the quantity of bonds issued by U.S. banks.
Six months earlier the Treasury and Fed had saved Bear Stearns from bankruptcy by brokering its sale to JPMorgan Chase. Though shareholders and bondholders had lost money, they had not been wiped out completely. By treating Lehman differently, the authorities shattered the illusion that some major financial institutions were "too big to fail." But starting with the bailout of AIG just a day later, they quickly began the expensive process of trying to restore that illusion. Now it's no longer an illusion. It's become a very dangerous reality.
In April this officially became the longest recession since World War II. The International Monetary Fund expects the U.S. economy to shrink by 2.6 percent this year. The unemployment rate is heading for 10 percent. With numbers like that, you'd think some radical reform was in order. But no. Despite much talk on both sides of the Atlantic of new financial regulation, the likelihood is that the most important flaw in our financial system will not be addressed. On the contrary, the emergency measures taken a year ago have made it significantly worse. That flaw can be summed up in a single phrase: banks that are "too big to fail." Let's call them the TBTFs.
Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street's "bulge bracket," the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.
Last year's crisis made this problem worse in two ways. First, it wiped out three of the Big 15: goodbye Bear, Merrill, and Lehman. Second, because the failure of Lehman was so economically disastrous, it established what had previously only been suspected—that the survivors were TBTF, effectively guaranteed by the full faith and credit of the United States. Yes, folks, now it's official: heads, they win; tails, we the taxpayers lose. And in return, we get … a $30 charge if we inadvertently run up a $1 overdraft with our debit card. Meanwhile, JPMorgan and Goldman Sachs executives get million-dollar bonuses. What's not to dislike?
None of the regulatory reforms proposed so far do anything to address the central problem of the TBTFs. What did Treasury Secretary Timothy Geithner propose over the summer?
• The Fed should become the "system risk regulator" with power over any "systemically important" institutions, a.k.a. TBTFs. But wasn't it that already?
• The originators of securitized products should be required to retain "skin in the game" (5 percent of the securities they sell). What, like Bear and Lehman did?
• There should be a new Consumer Financial Protection Agency. So what were the other regulatory agencies doing? Oh, yes, protecting the TBTFs.
• There should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
• And "federal regulators should issue stand-ards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value." I can't wait to hear what those will be.
At the recent G20 finance ministers' meeting the only significant difference was a call for the TBTFs to raise more capital and become less leveraged "once recovery is assured." Even that has elicited protests from the bankers. Before the ink was dry on the G20 communiqué, JPMorgan published a report warning that proposed regulatory changes would reduce the profitability of the investment-banking operations of Deutsche Bank, Goldman, and Barclays by as much as a third.
The compensation issue, by the way, is a red herring. Politicians like to focus on bankers' bonuses, because everyone can be shocked by the fact that Lloyd Blankfein, the Goldman CEO, gets paid 2,000 times what Joe the Plumber gets. But that's a symptom, not a cause, of the deep-rooted problem. The TBTFs are able to pay crazy money because they reap all the rewards of risk-taking without the cost: the risk of going bust. Ask yourself, how did Goldman make those handsome second--quarter profits of $3.4 billion? Yes, by leveraging up and taking on more risk.
Right now we don't need a charade in which politicians claim they are going to regulate the big banks more tightly. (These are the same politicians who were supposed to be regulating Fannie and Freddie, remember.) What's needed is a serious application of antitrust law to the financial-services sector and a speedy end to institutions that are "too big to fail." In particular, the government needs to clarify that federal insurance applies only to bank deposits and that bank bondholders will no longer protected, as they have been in this crisis. In other words, when a bank goes bankrupt, the creditors should take the hit, not the taxpayers.
Do I think we'll get either of these things? For now I don't. The political will is ebbing fast, health-care reform is looming too large, and guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs. Yet if the status quo persists, the danger of a populist backlash against both Wall Street and Washington will only grow. Such a backlash has more than one precedent in U.S. history.
The second Bank of the United States, established in 1816, became the focus of a powerful political campaign against "money power." Though it survived a legal challenge by the state of Maryland, the Philadelphia-based bank fell victim to President Andrew Jackson, who recognized the electoral advantages of an attack on the "monster." When the bank's president, Nicholas Biddle, applied to have its charter renewed in 1832, Jackson vetoed it, vowing: "The Bank is trying to kill me, but I will kill it." Despite Biddle's effort to precipitate a financial panic in retaliation, "Old Hickory" carried the day, and in 1836 the bank lost its public status. Without government backing, it did not last long. In October 1839 the bank suspended payments, and in 1841 it disappeared.
TBTFs, be warned. But Old Hickory, where are you when we need you?
Ferguson is a NEWSWEEK contributor. His latest book, The Ascent of Money: A Financial History of the World, will soon be available in paperback from Penguin Press.
Find this article at
http://www.newsweek.com/id/215178
Wall Street’s New Gilded Age
A year after the crash, a few financial giants are back to making millions, while average Americans face foreclosure and unemployment. What's wrong with this picture?
By Niall Ferguson | NEWSWEEK
Published Sep 11, 2009
From the magazine issue dated Sep 21, 2009
Since its birth, the United States has grappled with the problem of an over-mighty financial sector. With the exception of Alexander Hamilton, the Founders' vision was of a republic of self-reliant farmers and small-town tradesmen. The last thing they wanted was for New York to become the London of the New World—a mammon-worshiping metropolis in which financial capital and political capital were rolled into one. That was why there was such resistance to creating a central bank, and why—despite two attempts—we have no Bank of the United States to match the Bank of England. That was why populists railed against the adoption of the gold standard after the crash of 1873. That was why there was so much suspicion when the Federal Reserve System was created in 1913. That was why government regulation of Wall Street was so strict from the Depression until the 1970s.
But now, barely a year after one of the worst crises in all financial history, we seem to have returned to the Gilded Age of the late 19th century—the last time bankers came close to ruling America. A few Wall Street giants, led by none other than -JPMorgan, are back to making serious money and paying million-dollar bonuses. Meanwhile, every month, hundreds of thousands of ordinary Americans face foreclosure or unemployment because of a crisis caused by … a few Wall Street giants. And what makes the losers in this crisis really mad is the fact that there's now one law for the small debtors and another for big ones. If you lose your job and fall behind on your $1,500 monthly mortgage payment, no one's going to bail you out. But Citigroup can lose $27.7 billion (as it did last year) and count on the federal government to hand it $45 billion.
A hundred years ago, people angrily compared the House of Rothschild to a giant octopus with its tentacles wrapped around the U.S. economy. Today it's the turn of Goldman Sachs to be likened to a "great vampire squid." To understand why, you need to go back 12 months.
With the bankruptcy of Lehman Brothers Holdings Inc. last September, 9/15 supplanted 9/11 as the costliest day in the history of New York City. It was also the most cataclysmic American bank failure since 1931.
The Lehman bankruptcy was in fact only one of seven events that, in the space of just 19 days, signaled the end of an epoch. On Sept. 7, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) were nationalized. On Sept. 14, Merrill Lynch was bought by Bank of America. On the same day that Lehman failed, the money-market fund Reserve Primary "broke the buck" because of losses on unsecured commercial paper it had bought from Lehman. The next day—to avoid a lethal chain reaction in the market for credit default swaps—the insurance giant AIG was given an $85 billion bailout by the Federal Reserve. On Sept. 22, the investment bank went extinct as a species when Goldman Sachs and Morgan Stanley converted themselves into bank holding companies. Finally, on Sept. 25, Washington Mutual was placed into the receivership of the Federal Deposit Insurance Corp. (FDIC).
Not everything that has gone wrong in the world economy since 2007 can be blamed on these seven events, much less on the Lehman bankruptcy alone. At most, about a fifth of the total 50 percent decline in the U.S. stock market between the peak of October 2007 and the low of March 2009 could be attributed to what happened in September of last year. (October 2008 was an even worse month for stocks.) But other indicators better reveal the scale of the financial trauma. In the 24 hours after Lehman failed, the London Interbank Offered Rate (LIBOR, for short)—the rate that financial institutions charge each other for unsecured borrowing—soared 3.33 percentage points, to 6.44 percent. The commercial-paper market froze. The resulting credit crunch set off a chain reaction. Firms canceled orders and started laying off workers. International trade collapsed.
Equally dramatic—and more long-lasting—has been the effect of the crisis on government policy. Prior to 9/15, it seemed unlikely that Congress would approve a large-scale bailout for Wall Street. Treasury Secretary Henry Paulson had told potential buyers of Lehman Brothers there would be "no government money" to sweeten any takeover deal. Even after the Lehman failure, it still took two attempts to secure passage of the $700 billion Troubled Asset Relief Program through Congress. Since then we've witnessed the fiscal equivalent of a dam bursting. We're now looking at $9 trillion of new federal debt in the decade ahead.
Prior to 9/15, the Federal Reserve Board argued that the Fed could not buy "shaky assets" from Lehman, but could only lend against "good collateral." In the week that followed, the Fed's balance sheet leapt upward by 21 percent after the institution announced it would accept equities as collateral for the first time in its history. Other new measures included the FDIC's guarantee of all bank debt—a remarkable undertaking given the quantity of bonds issued by U.S. banks.
Six months earlier the Treasury and Fed had saved Bear Stearns from bankruptcy by brokering its sale to JPMorgan Chase. Though shareholders and bondholders had lost money, they had not been wiped out completely. By treating Lehman differently, the authorities shattered the illusion that some major financial institutions were "too big to fail." But starting with the bailout of AIG just a day later, they quickly began the expensive process of trying to restore that illusion. Now it's no longer an illusion. It's become a very dangerous reality.
In April this officially became the longest recession since World War II. The International Monetary Fund expects the U.S. economy to shrink by 2.6 percent this year. The unemployment rate is heading for 10 percent. With numbers like that, you'd think some radical reform was in order. But no. Despite much talk on both sides of the Atlantic of new financial regulation, the likelihood is that the most important flaw in our financial system will not be addressed. On the contrary, the emergency measures taken a year ago have made it significantly worse. That flaw can be summed up in a single phrase: banks that are "too big to fail." Let's call them the TBTFs.
Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street's "bulge bracket," the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.
Last year's crisis made this problem worse in two ways. First, it wiped out three of the Big 15: goodbye Bear, Merrill, and Lehman. Second, because the failure of Lehman was so economically disastrous, it established what had previously only been suspected—that the survivors were TBTF, effectively guaranteed by the full faith and credit of the United States. Yes, folks, now it's official: heads, they win; tails, we the taxpayers lose. And in return, we get … a $30 charge if we inadvertently run up a $1 overdraft with our debit card. Meanwhile, JPMorgan and Goldman Sachs executives get million-dollar bonuses. What's not to dislike?
None of the regulatory reforms proposed so far do anything to address the central problem of the TBTFs. What did Treasury Secretary Timothy Geithner propose over the summer?
• The Fed should become the "system risk regulator" with power over any "systemically important" institutions, a.k.a. TBTFs. But wasn't it that already?
• The originators of securitized products should be required to retain "skin in the game" (5 percent of the securities they sell). What, like Bear and Lehman did?
• There should be a new Consumer Financial Protection Agency. So what were the other regulatory agencies doing? Oh, yes, protecting the TBTFs.
• There should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
• And "federal regulators should issue stand-ards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value." I can't wait to hear what those will be.
At the recent G20 finance ministers' meeting the only significant difference was a call for the TBTFs to raise more capital and become less leveraged "once recovery is assured." Even that has elicited protests from the bankers. Before the ink was dry on the G20 communiqué, JPMorgan published a report warning that proposed regulatory changes would reduce the profitability of the investment-banking operations of Deutsche Bank, Goldman, and Barclays by as much as a third.
The compensation issue, by the way, is a red herring. Politicians like to focus on bankers' bonuses, because everyone can be shocked by the fact that Lloyd Blankfein, the Goldman CEO, gets paid 2,000 times what Joe the Plumber gets. But that's a symptom, not a cause, of the deep-rooted problem. The TBTFs are able to pay crazy money because they reap all the rewards of risk-taking without the cost: the risk of going bust. Ask yourself, how did Goldman make those handsome second--quarter profits of $3.4 billion? Yes, by leveraging up and taking on more risk.
Right now we don't need a charade in which politicians claim they are going to regulate the big banks more tightly. (These are the same politicians who were supposed to be regulating Fannie and Freddie, remember.) What's needed is a serious application of antitrust law to the financial-services sector and a speedy end to institutions that are "too big to fail." In particular, the government needs to clarify that federal insurance applies only to bank deposits and that bank bondholders will no longer protected, as they have been in this crisis. In other words, when a bank goes bankrupt, the creditors should take the hit, not the taxpayers.
Do I think we'll get either of these things? For now I don't. The political will is ebbing fast, health-care reform is looming too large, and guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs. Yet if the status quo persists, the danger of a populist backlash against both Wall Street and Washington will only grow. Such a backlash has more than one precedent in U.S. history.
The second Bank of the United States, established in 1816, became the focus of a powerful political campaign against "money power." Though it survived a legal challenge by the state of Maryland, the Philadelphia-based bank fell victim to President Andrew Jackson, who recognized the electoral advantages of an attack on the "monster." When the bank's president, Nicholas Biddle, applied to have its charter renewed in 1832, Jackson vetoed it, vowing: "The Bank is trying to kill me, but I will kill it." Despite Biddle's effort to precipitate a financial panic in retaliation, "Old Hickory" carried the day, and in 1836 the bank lost its public status. Without government backing, it did not last long. In October 1839 the bank suspended payments, and in 1841 it disappeared.
TBTFs, be warned. But Old Hickory, where are you when we need you?
Ferguson is a NEWSWEEK contributor. His latest book, The Ascent of Money: A Financial History of the World, will soon be available in paperback from Penguin Press.
Find this article at
http://www.newsweek.com/id/215178
Tuesday, September 1, 2009
We are All Meant to Shine
Quote from Nelson Mandella:
"Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness, that most frightens us. Your playing small does not serve the world.
There is nothing enlightened about shrinking so that other people won't feel insecure around you. We are all meant to shine as children do. It's not just in some of us; it is in everyone. And as we let our own lights shine, we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others. "
"Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness, that most frightens us. Your playing small does not serve the world.
There is nothing enlightened about shrinking so that other people won't feel insecure around you. We are all meant to shine as children do. It's not just in some of us; it is in everyone. And as we let our own lights shine, we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others. "
Wednesday, August 5, 2009
Happiness... don't overrate the differences among choices...
TURGID TRUTH
"The great source of both the miseries and disorders of human life, seem to arise from over-rating the difference between one permanent situation and another...Some of those situations may, no doubt, deserve to be preferred to others but none of them can deserve to be pursued with that passionate ardour which drives us to violate the rules either of prudence or of justice, or to corrupt the future tranquility of our minds, either by shame from the remembrance of our own folly or by the remorse from the horror of our own injustice"
Adam Smith, "The Theory of Moral Sentiments 1759"
in layman's terms: "Yes some thing are better than others, we should have preferences that lead us into one future over the other, but when those preferences drive us too hard and too fast because we have overrated the differences between these two futures, we put ourselves at risk.
When our ambition is bounded it leads us to work joyfully, when our ambition is unbounded it lead us to lie, to cheat, to steal, to hurt others and to sacrafice things of real value.
When our fears are bounded we're prudent, we're cautions and we're thoughtful, when our fears are unbounded we're and overblown we're reckless and we're cowardly.
Our longings and our worries are both to some degree overblown because we have within us the capacity to manufacture the very commodity we are constantly chasing we chose Experiences."
-Dan Gilbert
"The great source of both the miseries and disorders of human life, seem to arise from over-rating the difference between one permanent situation and another...Some of those situations may, no doubt, deserve to be preferred to others but none of them can deserve to be pursued with that passionate ardour which drives us to violate the rules either of prudence or of justice, or to corrupt the future tranquility of our minds, either by shame from the remembrance of our own folly or by the remorse from the horror of our own injustice"
Adam Smith, "The Theory of Moral Sentiments 1759"
in layman's terms: "Yes some thing are better than others, we should have preferences that lead us into one future over the other, but when those preferences drive us too hard and too fast because we have overrated the differences between these two futures, we put ourselves at risk.
When our ambition is bounded it leads us to work joyfully, when our ambition is unbounded it lead us to lie, to cheat, to steal, to hurt others and to sacrafice things of real value.
When our fears are bounded we're prudent, we're cautions and we're thoughtful, when our fears are unbounded we're and overblown we're reckless and we're cowardly.
Our longings and our worries are both to some degree overblown because we have within us the capacity to manufacture the very commodity we are constantly chasing we chose Experiences."
-Dan Gilbert
Thursday, May 14, 2009
It's about time - regulating derivatives - there are 600 TRILLION dollars of them out there now!
Treasury asks for control of derivatives market
By ANNE FLAHERTY, Associated Press Writer Anne Flaherty, Associated Press Writer
Wed May 13, 6:40 pm ET
WASHINGTON – The Obama administration is asking Congress to extend its oversight of the financial system to include the shadowy market of derivatives, the kind of complex financial instruments that helped bring down the giant insurer AIG.
In a two-page letter sent Wednesday to congressional leaders, Treasury Secretary Timothy Geithner said he wants to create a central electronic-based system that would track the buying and selling of derivatives. He also wants to ensure that financial firms selling the instruments have enough capital on hand in case they default and subject them to stringent standards of conduct and new reporting requirements.
The legislative proposal is the administration's first major step in overhauling the nation's financial regulatory system.
"All (over-the-counter) derivatives dealers and all other firms whose activities in those markets create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation," Geithner wrote in his letter.
"Key elements of that robust regulatory regime must include conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins on counterparty credit exposures," he adds.
New rules would deter financial firms from taking undue risk, prevent fraud and ensure they are marketed appropriately, according to the letter.
Current law largely excludes regulation of the instruments, which are referred to as "over-the-counter" derivatives because they are traded privately rather than through commodity exchanges now regulated by the Commodity Futures Trading Commission.
It was unclear how the rules would affect hedge funds, which are large, mostly unregulated entities that use complex trading tactics to earn big returns for high-dollar investors. Many hedge funds use derivatives contracts to offset risk on other transactions.
The proposal is strikingly similar to legislation proposed by a small group of major Wall Street banks. Critics of that proposal say the regime would give the same banks that contributed to the financial meltdown exclusive control over a larger part of the derivatives market.
The plan was received warmly by House Democrats who share oversight of the issue.
Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee, and Rep. Colin Peterson, D-Minn., chairman of the Agriculture Committee, said in a joint statement that they agree there should be "strong, comprehensive and consistent regulation" of the derivatives market and promised to work toward that end.
The value of over-the-counter derivatives hinges on an underlying figure or commodity — ranging from currency rate "swaps" to oil futures and inflation bets. The derivative reduces the risk of loss from the underlying asset. The global business world holds a staggering $600 trillion of these contracts.
One of the most infamous examples of the derivatives were credit-default swaps sold by American International Group Inc. AIG sold the swaps to investors as a kind of insurance to protect against defaults on mortgage-backed securities. But the company had to accept a hefty federal bailout after it became unable to support the contracts.
Under Treasury's new plan, companies like AIG would have to prove they have enough reserve capital to support the sale of derivatives.
Geithner said in congressional testimony in March that his plan would force the system to be more transparent.
"Let me be clear: The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end," he said.
Under the plan, the CFTC would establish an "audit trail" for the derivatives and have "clear unimpeded authority to police fraud, market manipulation and other market abuses" involving the derivatives. The Securities and Exchange Commission would be given comparable authority, including tools to prevent insider trading.
The new system should enable the regulators to "detect and deter all such market abuses," Geithner stated in his letter.
Investors are betting that exchanges like CME Group Inc., the parent company of the Chicago Board of Trade and the Chicago Mercantile Exchange, would benefit under the new regulation.
Shares of CME soared more than 6 percent Wednesday even as most other stocks fell.
___
By ANNE FLAHERTY, Associated Press Writer Anne Flaherty, Associated Press Writer
Wed May 13, 6:40 pm ET
WASHINGTON – The Obama administration is asking Congress to extend its oversight of the financial system to include the shadowy market of derivatives, the kind of complex financial instruments that helped bring down the giant insurer AIG.
In a two-page letter sent Wednesday to congressional leaders, Treasury Secretary Timothy Geithner said he wants to create a central electronic-based system that would track the buying and selling of derivatives. He also wants to ensure that financial firms selling the instruments have enough capital on hand in case they default and subject them to stringent standards of conduct and new reporting requirements.
The legislative proposal is the administration's first major step in overhauling the nation's financial regulatory system.
"All (over-the-counter) derivatives dealers and all other firms whose activities in those markets create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation," Geithner wrote in his letter.
"Key elements of that robust regulatory regime must include conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins on counterparty credit exposures," he adds.
New rules would deter financial firms from taking undue risk, prevent fraud and ensure they are marketed appropriately, according to the letter.
Current law largely excludes regulation of the instruments, which are referred to as "over-the-counter" derivatives because they are traded privately rather than through commodity exchanges now regulated by the Commodity Futures Trading Commission.
It was unclear how the rules would affect hedge funds, which are large, mostly unregulated entities that use complex trading tactics to earn big returns for high-dollar investors. Many hedge funds use derivatives contracts to offset risk on other transactions.
The proposal is strikingly similar to legislation proposed by a small group of major Wall Street banks. Critics of that proposal say the regime would give the same banks that contributed to the financial meltdown exclusive control over a larger part of the derivatives market.
The plan was received warmly by House Democrats who share oversight of the issue.
Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee, and Rep. Colin Peterson, D-Minn., chairman of the Agriculture Committee, said in a joint statement that they agree there should be "strong, comprehensive and consistent regulation" of the derivatives market and promised to work toward that end.
The value of over-the-counter derivatives hinges on an underlying figure or commodity — ranging from currency rate "swaps" to oil futures and inflation bets. The derivative reduces the risk of loss from the underlying asset. The global business world holds a staggering $600 trillion of these contracts.
One of the most infamous examples of the derivatives were credit-default swaps sold by American International Group Inc. AIG sold the swaps to investors as a kind of insurance to protect against defaults on mortgage-backed securities. But the company had to accept a hefty federal bailout after it became unable to support the contracts.
Under Treasury's new plan, companies like AIG would have to prove they have enough reserve capital to support the sale of derivatives.
Geithner said in congressional testimony in March that his plan would force the system to be more transparent.
"Let me be clear: The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end," he said.
Under the plan, the CFTC would establish an "audit trail" for the derivatives and have "clear unimpeded authority to police fraud, market manipulation and other market abuses" involving the derivatives. The Securities and Exchange Commission would be given comparable authority, including tools to prevent insider trading.
The new system should enable the regulators to "detect and deter all such market abuses," Geithner stated in his letter.
Investors are betting that exchanges like CME Group Inc., the parent company of the Chicago Board of Trade and the Chicago Mercantile Exchange, would benefit under the new regulation.
Shares of CME soared more than 6 percent Wednesday even as most other stocks fell.
___
Wednesday, March 11, 2009
Why the Current Economic Mess? Summary Explanation
The core of the issue started with the government's desire to broaden the home ownership in this country. The belief was that certain minorities were at an unfair advantage and the playing field needed to be leveled.
This was done at multiple levels by both parties. The Fed also fed into this housing bubble by keeping interest rates too low, too long.
The banking industry really didn't like these new loans and found ways to get rid of them, they sold them in whole or in part and also looked to insure them. As the housing bubble continued, greed no doubt took over. There was money to be made. Entire companies were made and prospered selling essentially junk paper all of it was 'backed' by the government.
They banks were greedy and the banks were stupid but they didn't break any rules, no amount of oversight (which there was and is still plenty) would have affected things because the government goal of increasing home ownership was being met.
The basic rule of banking is to have a certain amount of assets backing what you are lending, those rules have been lessened (by the government) but we still within reasonable limits, if and ONLY if you assumed those assets were stable like cash. The fact that much of the asset base was based on home values which were at the top of a huge bubble was a system destined to crash and crash hard.
Words of warning did start going out in 2005 and 2006, the Bush administation itself tried to enact more regulation and oversight as it started to see (better late than never) the problems brewing. They were shut down, because of the false belief that were just trying to keep the poor folk from owning homes.
The administration should have yelled louder, Congress should have listened in the first place, big banks should have been so stupid and greedy and individuals should have been more cautious and not gotten into something they couldn't afford.
When the entire system breaks down, it is impossible to lay the blame on one thing, one man or one party. This was a problem in the making for over 20 years.
This was done at multiple levels by both parties. The Fed also fed into this housing bubble by keeping interest rates too low, too long.
The banking industry really didn't like these new loans and found ways to get rid of them, they sold them in whole or in part and also looked to insure them. As the housing bubble continued, greed no doubt took over. There was money to be made. Entire companies were made and prospered selling essentially junk paper all of it was 'backed' by the government.
They banks were greedy and the banks were stupid but they didn't break any rules, no amount of oversight (which there was and is still plenty) would have affected things because the government goal of increasing home ownership was being met.
The basic rule of banking is to have a certain amount of assets backing what you are lending, those rules have been lessened (by the government) but we still within reasonable limits, if and ONLY if you assumed those assets were stable like cash. The fact that much of the asset base was based on home values which were at the top of a huge bubble was a system destined to crash and crash hard.
Words of warning did start going out in 2005 and 2006, the Bush administation itself tried to enact more regulation and oversight as it started to see (better late than never) the problems brewing. They were shut down, because of the false belief that were just trying to keep the poor folk from owning homes.
The administration should have yelled louder, Congress should have listened in the first place, big banks should have been so stupid and greedy and individuals should have been more cautious and not gotten into something they couldn't afford.
When the entire system breaks down, it is impossible to lay the blame on one thing, one man or one party. This was a problem in the making for over 20 years.
Friday, February 6, 2009
oh and you need a forth - kindness
“It is passion, admiration and respect,” he told her. “If you have two, you have enough. If you have three, you don’t have to die to go to heaven.”
and you need a forth kindness
and you need a forth kindness
What is love? one man's quote ...
“It is passion, admiration and respect,” he told her. “If you have two, you have enough. If you have three, you don’t have to die to go to heaven.”
Restraining orders out of control - misused
from newamerican.com
Restraining Orders Out of Control
In America today, restraining orders are not only overused, but abused in such a way as to threaten the concept of justice.
One day in December of 2005, Colleen Nestler came to Santa Fe County District Court in New Mexico with a bizarre seven-page typed statement and requested a domestic-abuse restraining order against late-night TV host David Letterman.
She stated, under oath, that Letterman seriously abused her by causing her bankruptcy, mental cruelty, and sleep deprivation since 1994. Nestler also alleged that he sent her secret signals “in code words” through his television program for many years and that he “responded to my thoughts of love” by expressing that he wanted to marry her.
Judge Daniel Sanchez issued a restraining order against Letterman based on those allegations. By doing so, it put Letterman on a national list of domestic abusers, gave him a criminal record, took away several of his constitutionally protected rights, and subjected him to criminal prosecution if he contacted Nestler directly or indirectly, or possessed a firearm.
Letterman had never met Colleen Nestler, and this all happened without his knowledge. Nonetheless, she requested that the order include an injunction requiring him not to “think of me, and release me from his mental harassment and hammering.” Asked to explain why he had issued a restraining order on the basis of such an unusual complaint, Judge Sanchez answered that Nestler had filled out the restraining-order request form correctly. After much national ridicule, the judge finally dismissed the order against Letterman. Those who don’t have a TV program and deep pockets are rarely so fortunate.
Is This American Justice?
Letterman’s experience is replicated in state courts around the country thousands of times daily. Consider what happened to Todd, whose estranged wife went to court secretly and obtained a
restraining order against him. She swore that three men dressed in purple Fathers for Justice camouflage uniforms broke into her apartment, pushed her violently onto her couch, choked her severely, and threatened her, telling her that she better not go back to court. She complained that these were agents of the husband, as he belonged to that group. She did not call the police, but decided to go to work. Later she collapsed near the entrance of a hospital emergency room in a dramatic flourish.
As Todd’s lawyer, I provided evidence that her story was as phony as the one about David Letterman. The wife lived in a large apartment building on a main road with a busy lobby and a nosy superintendent across the hall from her. However, no one saw or heard the three strangely dressed intruders enter or leave during rush hour. The hospital records showed no bruises or evidence of physical assault. The court vacated the order against Todd.
Courts are easily manipulated by those pretending to seek protection from abuse because the political climate reinforces that men are abusers, and there is no penalty for false claims. Thus, they embolden applicants to use them for ulterior motives, such as to gain an advantage in divorce, to get custody of children easily without a family court hearing, or as a quick eviction process. Sometimes the motive is revenge or worse. For example, an order was issued against Brendan, father of two daughters, because he brought flowers to his child’s home for her 10th birthday right after he sought enforcement of a custody order that the mother was routinely violating. Brendan was literally accused of “sneaking” into the yard to deliver flowers, nothing more, yet a restraining order was filed against him. This order was later vacated by a court.
An applicant can get a domestic-abuse restraining order for just about any reason. A report from an organization called Respecting Accuracy in Domestic Abuse Reporting (RADAR) suggests that it is as easy to obtain a restraining order as a hunting or fishing license. You fill out the forms and tell the judge you are afraid, and you get an order almost automatically. RADAR states: “The law defines almost any interpersonal maladjustment as ‘domestic violence,’ the courts then establish procedures to expedite the issuance of these orders.”
The restraining-order laws of the several states are remarkably similar in their wording, as though an invisible hand were guiding them. They allow a woman to come to court secretly and claim that she feels fearful of “abuse” from a family member or person she lives with. The accused person is not there, and there is no requirement to notify him. There are no traditional rules of evidence, no opportunity for cross examination, no burden of proof beyond a reasonable doubt, no jury, nor even a necessity to have a story that makes sense.
The definition of “abuse” set forth in these state laws is always subjective, rather than requiring an injury or genuine threat. They all include a clause that expands abuse to include “fear of harm,” often including even “emotional harm.” Courts routinely issue orders on sworn statements like, “I just don’t know what he may do,” or, “he has a long history of verbal and emotional abuse.”
A week after the initial secret hearing, a “return” hearing is held, where the defendant gets to tell his side of the story. He is usually allowed to present evidence and testimony, but it is often difficult to assemble needed documents and witnesses in that short period. Most of the temporary orders are extended for a year, regardless of the evidence, alibi, or witnesses offered.
To some judges, evidence is irrelevant; they just issue orders. Professor Stephen Baskerville, in his book Taken Into Custody, quotes Judge Richard Russell of Ocean City, New Jersey, at a restraining-order training seminar:
Throw him out on the street, give him the clothes on his back and tell him, “See ya around.”... The woman needs this protection because the statute granted her that protection.... They have declared domestic violence to be an evil in our society. So we don’t have to worry about the rights. Grant every order. That is the safest thing to do.
My client Mr. L’s experience is a perfect example of this. I filed a motion to vacate the restraining order his ex-wife had against him, and she filed one to extend it, so the judge held a hearing to consider both motions — sort of. Here is the pertinent part of the actual transcript of the hearing to vacate the order:
Mr. Hession: Can you please state your name and your address for the record? [The Court argues with counsel as to whether Mr. L can testify.]
The Court: I don’t believe I need to hear any evidence from your client. I’m going to deny your request to vacate the restraining order.
The hearing on whether to extend the order was no better:
The Court: Mrs. L_____, do you remain fearful of your husband?
Mrs. L_____: Yes. [Weeping]
The Court: Thank you.
The judge then extended the restraining order for a year, without Mr. L uttering his name on the witness stand, and with one generalized question to the wife about “fear.” Judges who conduct hearings like this violate their oath to apply the law impartially and encourage the filing a false complaints — which is an enormous problem.
According to professor of accountancy Benjamin P. Foster, Ph.D, CPA, CMA, of the 4,796 emergency protective-order petitions issued in West Virginia in 2006, an estimated 80.6 percent “are false or unnecessary.” Foster acknowledges the duplicitous nature of many of the complaints: “In divorce and child custody cases, a party generally obtains favorable treatment when the other party has engaged in domestic violence.” In West Virginia, one incident of domestic violence, “which includes ‘reasonable apprehension of physical harm’ and ‘creating fear of physical harm by harassment, psychological abuse,’... could impact the Parenting plan approved by the Family Court.” On the other hand, a “parent must have repeatedly made fraudulent reports of domestic violence or child abuse” to lose favor with a court. (Emphasis added.) Just the “identifiable costs” — the cost for the state, not the victims — for these false reports was in excess of $18,200,000 in 2006.
Drastic Punishment
Falsely issued restraining orders are of great concern because the punishment that is meted out to defendants is so drastic. After an initial secret restraining order is issued, the clerk faxes it to the local police, who then serve it on the defendant. Since most orders contain a “no contact” provision, the first thing the police do is remove the man from his home, with little more than the shirt on his back, just as Judge Richard Russell urged in his judicial training. Utterly taken by surprise, the man usually has no idea that the hearing took place, that the order was granted, or what he may have done to deserve it. The police are rarely sympathetic.
Most restraining orders require that the defendant may not contact the plaintiff directly or indirectly or get within some distance, usually 100 yards, of the alleged “victim.” Often, wives place the children as “co-victims” on these orders, so the defendant cannot contact his children either. “No contact” means no phone calls, cards, letters, or even incidentally running into the person.
No reconciliation is possible once an order is issued because any contact is a crime and subjects the violator to immediate arrest and jail. Even indirect contact is a crime, such as asking a relative to help work things out. Many men have sent flowers to a spouse or a birthday card to a child, only to end up in prison. Once an order is in place, the state becomes the father in the family, pushing out the real one.
Most district attorneys, prompted by feminist political pressure, have a “no-drop” policy on prosecuting all violations of restraining orders, no matter how minor. Joseph found that out the hard way. His wife obtained a restraining order after telling the judge he had kicked a plastic cooler and slammed the door while leaving his house. She omitted the part about telling him she had found another man.
No abuse or threat had occurred, but an order was issued against Joseph anyway. While it was in place, the wife made 14 false criminal complaints about violations of the order, which resulted in some arrests. I had to go to court with Joseph again and again, and we somehow managed to beat every case. Only a dysfunctional system allows a complainant to continue to make such false allegations without any accountability whatsoever.
Restraining orders also interfere with Second Amendment rights. Each state’s laws require that a defendant surrender all guns and ammunition, and violation of this provision is not only a state crime, but a federal one, under the Violence Against Women Act of 1994.
“Mike” was an Air Force officer in charge of a military police unit on base. When his ex-wife got a restraining order against him, he lost his right to carry a weapon and had to take a desk job. He had custody of their child, which the mother resented. She came to a child’s doctor appointment and attempted to create an incident, but was unsuccessful. However, the mother went to the local police to help her get an order. She told the police that there was no abuse and no history of abuse, so they wouldn’t get involved. She then went to the court in the adjoining state where she lived and claimed that there was abuse, and obtained a restraining order. Then, to cover her tracks, she went back to the police in the husband’s state and requested that they change her statement about no abuse. Eventually, he was able to remove the order, after hiring an expensive lawyer in the wife’s state.
Many police officers and military personnel who carry firearms are not so lucky, and have had careers permanently ruined by false allegations on restraining orders. In many places, once an order issues, even if it is eventually vacated, it is often impossible to get a gun license back.
Restraining orders especially impact the children. These orders are frequently used as a quick and dirty custody hearing, without the trouble of going to family court. In one minute, the father can lose the right to see his children for a year or longer. Children often get used as pawns in these situations, without any rebuke from a judge. While judges certainly know that falsely obtained orders are pervasive, they care little for the well-being of the children who are harmed by losing their father for long periods. The children often have no understanding of why they are being kept from their father because the father cannot even speak to them.
If dad works from home, as more people are now doing, additional problems arise. Under any order, he will be summarily evicted, and thus lose access to phones, business records, and equipment, without recourse. As a RADAR report puts it: “The man, now homeless and distraught, has only a few days to find a lawyer and prepare a defense.” When a home business is involved, he now cannot earn income, although he may be ordered to pay child support, needs alternate living quarters, and may have had his bank account emptied by his wife.
The case of Bob, who worked from home, shows the misuse of orders against self-employed persons. His wife got a restraining order against him, based on “a long history of verbal and emotional abuse,” which is not a legal basis for an order. After it was issued, Bob had to leave the home he owned prior to his marriage, in which he had his home-based business. Eventually, he was allowed to do business in one half of the home, while his wife and children lived in the other half. Despite her alleged “fear,” the wife came within a few feet of Bob on a regular basis. Meanwhile, the disruption of his business, the stress involved, and support payments destroyed him financially. He could not pay the huge child and spousal support assessments ordered by the court, which totaled triple his net income, and he was jailed twice. His business suffered, and he has still not recovered from the experience.
Skewed View of Abuse
The domestic-abuse industry has become a multi-billion dollar business during the last three decades, fueled by large influxes of government money and bolstered by media hysteria about abuse. Retired Massachusetts Judge Milton Raphaelson has stated, however, that there is not an epidemic of domestic violence, but rather an epidemic of hysteria about domestic violence.
State restraining-order laws suddenly sprang up in every state during the 1970s, at the insistence of radical feminist groups who had gained political ascendency. Family abuse was indeed a problem. However, the feminists identified the problem wrongly and proposed a solution that made it worse.
Building on the sensationalism of certain well-publicized cases, feminists built an “identity politics” view of abuse. It is true that some men still ascribed to the chauvinist notion that women were chattel and could be maltreated with impunity, but the feminists exploited that fact and got laws that harmed, not just men, but families. They declared that men were abusers and women were victims. Abused women were shown off at legislative hearings to manipulate the mostly male legislators into passing restraining-order laws.
For the first time, we now have laws that penalize people before they are proven to be criminals, for something they only might do. The laws are paradigms of pragmatism over principle, as they jettison centuries of highly developed legal theory and substitute a subjective and weak new legal framework which allows baseless allegations, while making it very difficult to defend against them. They allow a woman to claim “fear” of abuse, even if none has happened, leading to a classic “he said, she said,” where she holds all the cards.
While many persons involved in passing these laws may have been well-meaning, thinking they were going to help stop abuse, the unintended (or perhaps intended) consequences have been to change the very fabric of the legal system, and to decimate millions of families. In my experience, little abuse has been prevented by these laws. Stats back this up. For example, in West Virginia between 1981 and 1992, “domestic violence claims increased 466% from 1,065 to 6,029” and in Puerto Rico after a comprehensive domestic violence law was instituted in 1989, violence claims “did not decline or level off,” according to Professor Foster.
Answer to Domestic Violence?
Domestic-abuse restraining orders came about because a certain number of abusers really do assault and batter their partners. Scores of studies have attempted to understand the problem and find practical solutions, but domestic-abuse restraining orders are a flawed solution that has made the problem worse.
First, they have identified the wrong culprit. Women commit abuse more than men do. The U.S. Centers for Disease Control and Prevention reports, “In nonreciprocally violent relationships, women were the perpetrators in more than 70 percent of the cases. Reciprocity was associated with more frequent violence among women, but not men.” Psychologist John Archer reviewed hundreds of studies and concluded, “Women were slightly more likely than men to use one or more acts of physical aggression and to use such acts more frequently.” While men are more often the victims of abuse, women are injured more often and more severely than men. Moreover, about two-thirds of the reported cases are minor, such as throwing a pillow.
Has anyone vilified Hillary Clinton for throwing household objects at Bill, or singer Amy Winehouse for using her husband as a “punch bag”? We are desensitized to violence against men. In domestic arrest situations, it is almost always the man who is arrested, even if he is the only one injured. None of this is to justify abuse by anyone, only to show the fallacy of focusing solely on the abuse of women. Such unequal application of the law has likely led to more trauma and abuse than it purports to prevent, as well as destroyed respect for the system among fair-minded persons.
Whenever lawmakers respond to political pressure, a bad law is the usual result. Law has the properly limited purpose of insuring restitution to victims of those who intrude on the person or property of others. It has never been preventative, as domestic-abuse restraining-order laws seek to be, nor should it be. If true abuse does occur — a relative or non-relative threatens to batter or kill you or actually does physically attack — you are already able to make a criminal complaint for assault (which is defined as a threat to batter) and battery. And a criminal restraining order will likely be set in place. These new restraining-order laws seek to prevent crime by identifying persons who may commit one, and stop it before it happens. However, this is entirely speculative, and cannot identify perpetrators with any reliability.
In our imperfect world, we settle for an imperfect system that uses fear of punishment, rather than preemption, as its primary deterrent, but look at the alternative. With unjust restraining-order laws, we are creating a legal system that victimizes large groups of innocent people. We need to develop a better system, before we completely lose control of the present one. Thomas Reed, Speaker of the House of Representatives in the late 19th century, said, “One of the greatest delusions in the world is the hope that the evils in this world are to be cured by legislation.” Domestic-abuse
Restraining Orders Out of Control
In America today, restraining orders are not only overused, but abused in such a way as to threaten the concept of justice.
One day in December of 2005, Colleen Nestler came to Santa Fe County District Court in New Mexico with a bizarre seven-page typed statement and requested a domestic-abuse restraining order against late-night TV host David Letterman.
She stated, under oath, that Letterman seriously abused her by causing her bankruptcy, mental cruelty, and sleep deprivation since 1994. Nestler also alleged that he sent her secret signals “in code words” through his television program for many years and that he “responded to my thoughts of love” by expressing that he wanted to marry her.
Judge Daniel Sanchez issued a restraining order against Letterman based on those allegations. By doing so, it put Letterman on a national list of domestic abusers, gave him a criminal record, took away several of his constitutionally protected rights, and subjected him to criminal prosecution if he contacted Nestler directly or indirectly, or possessed a firearm.
Letterman had never met Colleen Nestler, and this all happened without his knowledge. Nonetheless, she requested that the order include an injunction requiring him not to “think of me, and release me from his mental harassment and hammering.” Asked to explain why he had issued a restraining order on the basis of such an unusual complaint, Judge Sanchez answered that Nestler had filled out the restraining-order request form correctly. After much national ridicule, the judge finally dismissed the order against Letterman. Those who don’t have a TV program and deep pockets are rarely so fortunate.
Is This American Justice?
Letterman’s experience is replicated in state courts around the country thousands of times daily. Consider what happened to Todd, whose estranged wife went to court secretly and obtained a
restraining order against him. She swore that three men dressed in purple Fathers for Justice camouflage uniforms broke into her apartment, pushed her violently onto her couch, choked her severely, and threatened her, telling her that she better not go back to court. She complained that these were agents of the husband, as he belonged to that group. She did not call the police, but decided to go to work. Later she collapsed near the entrance of a hospital emergency room in a dramatic flourish.
As Todd’s lawyer, I provided evidence that her story was as phony as the one about David Letterman. The wife lived in a large apartment building on a main road with a busy lobby and a nosy superintendent across the hall from her. However, no one saw or heard the three strangely dressed intruders enter or leave during rush hour. The hospital records showed no bruises or evidence of physical assault. The court vacated the order against Todd.
Courts are easily manipulated by those pretending to seek protection from abuse because the political climate reinforces that men are abusers, and there is no penalty for false claims. Thus, they embolden applicants to use them for ulterior motives, such as to gain an advantage in divorce, to get custody of children easily without a family court hearing, or as a quick eviction process. Sometimes the motive is revenge or worse. For example, an order was issued against Brendan, father of two daughters, because he brought flowers to his child’s home for her 10th birthday right after he sought enforcement of a custody order that the mother was routinely violating. Brendan was literally accused of “sneaking” into the yard to deliver flowers, nothing more, yet a restraining order was filed against him. This order was later vacated by a court.
An applicant can get a domestic-abuse restraining order for just about any reason. A report from an organization called Respecting Accuracy in Domestic Abuse Reporting (RADAR) suggests that it is as easy to obtain a restraining order as a hunting or fishing license. You fill out the forms and tell the judge you are afraid, and you get an order almost automatically. RADAR states: “The law defines almost any interpersonal maladjustment as ‘domestic violence,’ the courts then establish procedures to expedite the issuance of these orders.”
The restraining-order laws of the several states are remarkably similar in their wording, as though an invisible hand were guiding them. They allow a woman to come to court secretly and claim that she feels fearful of “abuse” from a family member or person she lives with. The accused person is not there, and there is no requirement to notify him. There are no traditional rules of evidence, no opportunity for cross examination, no burden of proof beyond a reasonable doubt, no jury, nor even a necessity to have a story that makes sense.
The definition of “abuse” set forth in these state laws is always subjective, rather than requiring an injury or genuine threat. They all include a clause that expands abuse to include “fear of harm,” often including even “emotional harm.” Courts routinely issue orders on sworn statements like, “I just don’t know what he may do,” or, “he has a long history of verbal and emotional abuse.”
A week after the initial secret hearing, a “return” hearing is held, where the defendant gets to tell his side of the story. He is usually allowed to present evidence and testimony, but it is often difficult to assemble needed documents and witnesses in that short period. Most of the temporary orders are extended for a year, regardless of the evidence, alibi, or witnesses offered.
To some judges, evidence is irrelevant; they just issue orders. Professor Stephen Baskerville, in his book Taken Into Custody, quotes Judge Richard Russell of Ocean City, New Jersey, at a restraining-order training seminar:
Throw him out on the street, give him the clothes on his back and tell him, “See ya around.”... The woman needs this protection because the statute granted her that protection.... They have declared domestic violence to be an evil in our society. So we don’t have to worry about the rights. Grant every order. That is the safest thing to do.
My client Mr. L’s experience is a perfect example of this. I filed a motion to vacate the restraining order his ex-wife had against him, and she filed one to extend it, so the judge held a hearing to consider both motions — sort of. Here is the pertinent part of the actual transcript of the hearing to vacate the order:
Mr. Hession: Can you please state your name and your address for the record? [The Court argues with counsel as to whether Mr. L can testify.]
The Court: I don’t believe I need to hear any evidence from your client. I’m going to deny your request to vacate the restraining order.
The hearing on whether to extend the order was no better:
The Court: Mrs. L_____, do you remain fearful of your husband?
Mrs. L_____: Yes. [Weeping]
The Court: Thank you.
The judge then extended the restraining order for a year, without Mr. L uttering his name on the witness stand, and with one generalized question to the wife about “fear.” Judges who conduct hearings like this violate their oath to apply the law impartially and encourage the filing a false complaints — which is an enormous problem.
According to professor of accountancy Benjamin P. Foster, Ph.D, CPA, CMA, of the 4,796 emergency protective-order petitions issued in West Virginia in 2006, an estimated 80.6 percent “are false or unnecessary.” Foster acknowledges the duplicitous nature of many of the complaints: “In divorce and child custody cases, a party generally obtains favorable treatment when the other party has engaged in domestic violence.” In West Virginia, one incident of domestic violence, “which includes ‘reasonable apprehension of physical harm’ and ‘creating fear of physical harm by harassment, psychological abuse,’... could impact the Parenting plan approved by the Family Court.” On the other hand, a “parent must have repeatedly made fraudulent reports of domestic violence or child abuse” to lose favor with a court. (Emphasis added.) Just the “identifiable costs” — the cost for the state, not the victims — for these false reports was in excess of $18,200,000 in 2006.
Drastic Punishment
Falsely issued restraining orders are of great concern because the punishment that is meted out to defendants is so drastic. After an initial secret restraining order is issued, the clerk faxes it to the local police, who then serve it on the defendant. Since most orders contain a “no contact” provision, the first thing the police do is remove the man from his home, with little more than the shirt on his back, just as Judge Richard Russell urged in his judicial training. Utterly taken by surprise, the man usually has no idea that the hearing took place, that the order was granted, or what he may have done to deserve it. The police are rarely sympathetic.
Most restraining orders require that the defendant may not contact the plaintiff directly or indirectly or get within some distance, usually 100 yards, of the alleged “victim.” Often, wives place the children as “co-victims” on these orders, so the defendant cannot contact his children either. “No contact” means no phone calls, cards, letters, or even incidentally running into the person.
No reconciliation is possible once an order is issued because any contact is a crime and subjects the violator to immediate arrest and jail. Even indirect contact is a crime, such as asking a relative to help work things out. Many men have sent flowers to a spouse or a birthday card to a child, only to end up in prison. Once an order is in place, the state becomes the father in the family, pushing out the real one.
Most district attorneys, prompted by feminist political pressure, have a “no-drop” policy on prosecuting all violations of restraining orders, no matter how minor. Joseph found that out the hard way. His wife obtained a restraining order after telling the judge he had kicked a plastic cooler and slammed the door while leaving his house. She omitted the part about telling him she had found another man.
No abuse or threat had occurred, but an order was issued against Joseph anyway. While it was in place, the wife made 14 false criminal complaints about violations of the order, which resulted in some arrests. I had to go to court with Joseph again and again, and we somehow managed to beat every case. Only a dysfunctional system allows a complainant to continue to make such false allegations without any accountability whatsoever.
Restraining orders also interfere with Second Amendment rights. Each state’s laws require that a defendant surrender all guns and ammunition, and violation of this provision is not only a state crime, but a federal one, under the Violence Against Women Act of 1994.
“Mike” was an Air Force officer in charge of a military police unit on base. When his ex-wife got a restraining order against him, he lost his right to carry a weapon and had to take a desk job. He had custody of their child, which the mother resented. She came to a child’s doctor appointment and attempted to create an incident, but was unsuccessful. However, the mother went to the local police to help her get an order. She told the police that there was no abuse and no history of abuse, so they wouldn’t get involved. She then went to the court in the adjoining state where she lived and claimed that there was abuse, and obtained a restraining order. Then, to cover her tracks, she went back to the police in the husband’s state and requested that they change her statement about no abuse. Eventually, he was able to remove the order, after hiring an expensive lawyer in the wife’s state.
Many police officers and military personnel who carry firearms are not so lucky, and have had careers permanently ruined by false allegations on restraining orders. In many places, once an order issues, even if it is eventually vacated, it is often impossible to get a gun license back.
Restraining orders especially impact the children. These orders are frequently used as a quick and dirty custody hearing, without the trouble of going to family court. In one minute, the father can lose the right to see his children for a year or longer. Children often get used as pawns in these situations, without any rebuke from a judge. While judges certainly know that falsely obtained orders are pervasive, they care little for the well-being of the children who are harmed by losing their father for long periods. The children often have no understanding of why they are being kept from their father because the father cannot even speak to them.
If dad works from home, as more people are now doing, additional problems arise. Under any order, he will be summarily evicted, and thus lose access to phones, business records, and equipment, without recourse. As a RADAR report puts it: “The man, now homeless and distraught, has only a few days to find a lawyer and prepare a defense.” When a home business is involved, he now cannot earn income, although he may be ordered to pay child support, needs alternate living quarters, and may have had his bank account emptied by his wife.
The case of Bob, who worked from home, shows the misuse of orders against self-employed persons. His wife got a restraining order against him, based on “a long history of verbal and emotional abuse,” which is not a legal basis for an order. After it was issued, Bob had to leave the home he owned prior to his marriage, in which he had his home-based business. Eventually, he was allowed to do business in one half of the home, while his wife and children lived in the other half. Despite her alleged “fear,” the wife came within a few feet of Bob on a regular basis. Meanwhile, the disruption of his business, the stress involved, and support payments destroyed him financially. He could not pay the huge child and spousal support assessments ordered by the court, which totaled triple his net income, and he was jailed twice. His business suffered, and he has still not recovered from the experience.
Skewed View of Abuse
The domestic-abuse industry has become a multi-billion dollar business during the last three decades, fueled by large influxes of government money and bolstered by media hysteria about abuse. Retired Massachusetts Judge Milton Raphaelson has stated, however, that there is not an epidemic of domestic violence, but rather an epidemic of hysteria about domestic violence.
State restraining-order laws suddenly sprang up in every state during the 1970s, at the insistence of radical feminist groups who had gained political ascendency. Family abuse was indeed a problem. However, the feminists identified the problem wrongly and proposed a solution that made it worse.
Building on the sensationalism of certain well-publicized cases, feminists built an “identity politics” view of abuse. It is true that some men still ascribed to the chauvinist notion that women were chattel and could be maltreated with impunity, but the feminists exploited that fact and got laws that harmed, not just men, but families. They declared that men were abusers and women were victims. Abused women were shown off at legislative hearings to manipulate the mostly male legislators into passing restraining-order laws.
For the first time, we now have laws that penalize people before they are proven to be criminals, for something they only might do. The laws are paradigms of pragmatism over principle, as they jettison centuries of highly developed legal theory and substitute a subjective and weak new legal framework which allows baseless allegations, while making it very difficult to defend against them. They allow a woman to claim “fear” of abuse, even if none has happened, leading to a classic “he said, she said,” where she holds all the cards.
While many persons involved in passing these laws may have been well-meaning, thinking they were going to help stop abuse, the unintended (or perhaps intended) consequences have been to change the very fabric of the legal system, and to decimate millions of families. In my experience, little abuse has been prevented by these laws. Stats back this up. For example, in West Virginia between 1981 and 1992, “domestic violence claims increased 466% from 1,065 to 6,029” and in Puerto Rico after a comprehensive domestic violence law was instituted in 1989, violence claims “did not decline or level off,” according to Professor Foster.
Answer to Domestic Violence?
Domestic-abuse restraining orders came about because a certain number of abusers really do assault and batter their partners. Scores of studies have attempted to understand the problem and find practical solutions, but domestic-abuse restraining orders are a flawed solution that has made the problem worse.
First, they have identified the wrong culprit. Women commit abuse more than men do. The U.S. Centers for Disease Control and Prevention reports, “In nonreciprocally violent relationships, women were the perpetrators in more than 70 percent of the cases. Reciprocity was associated with more frequent violence among women, but not men.” Psychologist John Archer reviewed hundreds of studies and concluded, “Women were slightly more likely than men to use one or more acts of physical aggression and to use such acts more frequently.” While men are more often the victims of abuse, women are injured more often and more severely than men. Moreover, about two-thirds of the reported cases are minor, such as throwing a pillow.
Has anyone vilified Hillary Clinton for throwing household objects at Bill, or singer Amy Winehouse for using her husband as a “punch bag”? We are desensitized to violence against men. In domestic arrest situations, it is almost always the man who is arrested, even if he is the only one injured. None of this is to justify abuse by anyone, only to show the fallacy of focusing solely on the abuse of women. Such unequal application of the law has likely led to more trauma and abuse than it purports to prevent, as well as destroyed respect for the system among fair-minded persons.
Whenever lawmakers respond to political pressure, a bad law is the usual result. Law has the properly limited purpose of insuring restitution to victims of those who intrude on the person or property of others. It has never been preventative, as domestic-abuse restraining-order laws seek to be, nor should it be. If true abuse does occur — a relative or non-relative threatens to batter or kill you or actually does physically attack — you are already able to make a criminal complaint for assault (which is defined as a threat to batter) and battery. And a criminal restraining order will likely be set in place. These new restraining-order laws seek to prevent crime by identifying persons who may commit one, and stop it before it happens. However, this is entirely speculative, and cannot identify perpetrators with any reliability.
In our imperfect world, we settle for an imperfect system that uses fear of punishment, rather than preemption, as its primary deterrent, but look at the alternative. With unjust restraining-order laws, we are creating a legal system that victimizes large groups of innocent people. We need to develop a better system, before we completely lose control of the present one. Thomas Reed, Speaker of the House of Representatives in the late 19th century, said, “One of the greatest delusions in the world is the hope that the evils in this world are to be cured by legislation.” Domestic-abuse
Friday, January 30, 2009
The Paradox of Our Times
The paradox of our time in history is that we have taller buildings but shorter tempers, wider Freeways, but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness. We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much, and pray too seldom.
We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often. We've learned how to make a living, but not a life. We've added years to life not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We've done larger things, but not better things. We've cleaned up the air, but polluted the soul.
We've conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We've learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.
These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill.
It is a time when there is much in the showroom window and nothing in the stockroom. A time when technology can bring this letter to you. Remember to spend some time with your loved ones because they are not going to be around forever! Remember, say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side. Remember, to give a warm hug to the one next to you, because that is the only treasure you can give with your heart and it doesn't cost a cent.
Remember, to say, 'I love you' to your partner and your loved ones, but most of all mean it. A kiss and an embrace will mend hurt when it comes from deep inside of you. Remember to hold hands and cherish the moment for someday that person will not be there again. Give time to love, give time to speak! And give time to share the precious thoughts in your mind. And always remember: Life is not measured by the number of breaths we take, but by the moments that take our breath away.
We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often. We've learned how to make a living, but not a life. We've added years to life not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We've done larger things, but not better things. We've cleaned up the air, but polluted the soul.
We've conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We've learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.
These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill.
It is a time when there is much in the showroom window and nothing in the stockroom. A time when technology can bring this letter to you. Remember to spend some time with your loved ones because they are not going to be around forever! Remember, say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side. Remember, to give a warm hug to the one next to you, because that is the only treasure you can give with your heart and it doesn't cost a cent.
Remember, to say, 'I love you' to your partner and your loved ones, but most of all mean it. A kiss and an embrace will mend hurt when it comes from deep inside of you. Remember to hold hands and cherish the moment for someday that person will not be there again. Give time to love, give time to speak! And give time to share the precious thoughts in your mind. And always remember: Life is not measured by the number of breaths we take, but by the moments that take our breath away.
Friday, January 23, 2009
Effects of deregulation and unenforced regulation => current crisis
Taking Stock: Government largesse drives capitalism
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By MALCOLM BERKO
Creators Syndicate
Posted Dec 27, 2008 @ 04:48 PM
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BOCA RATON, Fla. — Dear Mr. Berko: I find it hard to believe that the government is tossing money around like ticker tape at a parade. At some point we or our children will have to pay for the big mess created by Wall Street greed. Ordinary people like us have no choice in the matter and are forced to go with the flow. We get nothing out of this $750 billion giveaway and are forced to lump it or like it. It seems that most Americans are paying for this Wall Street greed twice. We lost our homes, independent retirement accounts, pension funds and our jobs. Now, we have to pay for the losses caused by the hedge funds and big New York Stock Exchange brokerage firms. Meanwhile, they got bailed out with money from our pockets while we get kicked out of our homes, our businesses and are forced to declare bankruptcy. Merrill Lynch, Lehman Brothers, AIG, Citigroup, and Bear Stearns and others stole hundreds of billions from workers like my friends and me and now we have to pay them back. This makes millions of Americans angry. But we can’t do a thing about it. It’s like we are serfs and they are the masters. We have been victims of Wall Street greed for the last eight years, while the suits on Wall Street pay themselves hundreds of billions of dollars in salaries and bonuses. I know many people who think like this, and we are bitter. Does this make sense to you, or do you think all of us are out in left field? — D.P., Columbus, Ohio
Dear D.P.: You’re right as rainbows, daffodils and sunshine. The last few years have witnessed the stink and rank perfidy of unfettered capitalism. Even former Federal Reserve Board Chairman Alan “The Mumbler” Greenspan admits he misjudged Wall Street’s intent to self-regulate. Wouldn’t it be nice to see the executives at AIG, Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and their hedge-fund affiliates take a perp walk with their alma maters prominently displayed on the front and back of their orange prison coveralls. Harvard, Yale, Stanford, Duke, Wharton, etc. would be so proud.
The following was written several years ago and is relevant today. It clearly explains how Wall Street favors the wealthy and snickers at the poor. Its compelling explanation is derived from a 2005 discussion group in which I participated.
Business activity cannot be sustained unless the rich get richer. And the best way for this to happen is to give more money to the poor! This is where Uncle Sam becomes a modern day Robin Hood and it works like this:
Uncle Sam borrows money from the rich so it can be given to the poor so the poor can continue losing it to the rich. This is the reason why there will always be a budget deficit and an increasing national debt.
To illustrate, let’s assume that there are two classes of people: rich and poor. Rich folks are those with above-medium incomes and poor folks are everyone below. The simple reason the rich must get richer is that they must make an after-tax profit if they wish to continue employing the poor to produce goods and services.
The rich cannot profit from traditional trading among themselves. For example, if there are 10 rich people in a closed room and they have a total of $10 million in cash, they can wheel and deal and trade among themselves to their heart’s content. But at year’s end they still only have $10 million. The value of their real estate or stocks might rise or fall, but that $10 million dollars won’t increase unless another group loses money to them.
Think about it. Capitalism is like a game of poker. The strong players win from the weak, or the rich win from the poor. However, the poor have a finite amount of money to lose, which means our poker game would come to a halt unless a designated patsy can be found. And that designated patsy is the U.S. government. I know it sounds farfetched but listen up and watch the bouncing ball.
Economists who follow money transfers note that in 2006, for example, the poor paid approximately $780 billion more to the rich for rent, food, cars, health care, tools, beer, etc. than they received for their labors at McDonald’s, Wal-Mart, doing yard work, washing dishes or cleaning hotel rooms. So, in order to keep the poor from going completely broke, the government, through taxes, took $320 billion from the rich and returned it to the poor via welfare, Social Security programs and other subsidies. Then, to return the additional $460 billion to the poor so their purchasing power remains intact, the government borrows $460 billion from the rich by issuing new Treasury bonds.
So, after taxes and transfer payments were complete in 2006, the rich made $460 billion, the government lost $460 billion, which was the deficit, and the poor broke even. In effect, the budget deficit equals what the rich keep after taxes. So, if the budget is balanced, the rich can’t make any more money. And if the rich can’t make more money, their incentive to produce will falter, unemployment will skyrocket and the economy will collapse.
I wish I could claim this was my idea, because I think this premise is worth a Noble Prize in economics.
Address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit www.creators.com.
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LANCE DICKIE: FAITH CRISIS FOR TRUE BELIEVERS IN MARKET
Comments (3) Recommend (0)
BY LANCE DICKIE
Seattle Times
There are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stockbrokers not answering prayers or returning calls.
For decades, their prophets have preached that economic markets function best when left to themselves, unfettered by government regulation or oversight.
Businesses, investors and traditional market forces would self-regulate, self-correct and self-enforce. Oops.
The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.
To hear the humbled apostles for markets free of disclosure and rules begin to mumble about the need for government regulation is extraordinary. Chief among the apostates is former Federal Reserve Chairman Alan Greenspan, who humbly confessed his wonderment at mortgage-lending practices to a congressional committee:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
He was reminded he had the authority to prevent the lending practices behind the subprime mortgage crisis -- was advised to do so -- and refused to act. Greenspan is contrite. Millions more are in foreclosure.
Three years ago, a handful of regulators were waving red flags about hedge funds and credit derivatives. Lightly regulated exemptions from most rules, they placed enormous bets -- literally -- around the planet. Dense and esoteric, these trillion-dollar segments of the markets seemed pretty remote until ordinary mutual funds -- yours and mine -- began investing in them.
The effects of deregulation and unenforced regulation were cumulative. In 1994, the Financial Accounting Standards Board changed its rule that stock options must be treated as a company expense.
A year later, Congress limited the rights of investors to sue, let accounting firms off the hook in fraud cases and fudged reporting practices. In 1999, the repeal of lessons-learned regulations from the Depression fuzzed the lines between retail banking and investment banks.
Every opportunity to push the limit was taken, as allowed or ignored by law. Industry lobbyists on Washington's K Street had their back.
My favorite bit of apostasy revealed itself ever so quietly in a New York Times column by Ben Stein, a lawyer, writer, actor and economist. And cheerleader. For Stein, the resilient economy was always peachy keen.
Last month, reality set in for Stein. Near the end of a column about fear and foolishness, he slipped in a hope that President-elect Barack Obama will put meaningful regulation in place -- maybe even repeal the private securities law against suing companies. Oh, and maybe inspire a more vigilant Federal Reserve.
Dare I say, there has been an epiphany. People who understand the complexities and see the connections acknowledge how precarious economic conditions truly are.
Lance Dickie is a columnist for the Seattle Times.
--------------------------------------------------------------------------------
By MALCOLM BERKO
Creators Syndicate
Posted Dec 27, 2008 @ 04:48 PM
--------------------------------------------------------------------------------
BOCA RATON, Fla. — Dear Mr. Berko: I find it hard to believe that the government is tossing money around like ticker tape at a parade. At some point we or our children will have to pay for the big mess created by Wall Street greed. Ordinary people like us have no choice in the matter and are forced to go with the flow. We get nothing out of this $750 billion giveaway and are forced to lump it or like it. It seems that most Americans are paying for this Wall Street greed twice. We lost our homes, independent retirement accounts, pension funds and our jobs. Now, we have to pay for the losses caused by the hedge funds and big New York Stock Exchange brokerage firms. Meanwhile, they got bailed out with money from our pockets while we get kicked out of our homes, our businesses and are forced to declare bankruptcy. Merrill Lynch, Lehman Brothers, AIG, Citigroup, and Bear Stearns and others stole hundreds of billions from workers like my friends and me and now we have to pay them back. This makes millions of Americans angry. But we can’t do a thing about it. It’s like we are serfs and they are the masters. We have been victims of Wall Street greed for the last eight years, while the suits on Wall Street pay themselves hundreds of billions of dollars in salaries and bonuses. I know many people who think like this, and we are bitter. Does this make sense to you, or do you think all of us are out in left field? — D.P., Columbus, Ohio
Dear D.P.: You’re right as rainbows, daffodils and sunshine. The last few years have witnessed the stink and rank perfidy of unfettered capitalism. Even former Federal Reserve Board Chairman Alan “The Mumbler” Greenspan admits he misjudged Wall Street’s intent to self-regulate. Wouldn’t it be nice to see the executives at AIG, Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs and their hedge-fund affiliates take a perp walk with their alma maters prominently displayed on the front and back of their orange prison coveralls. Harvard, Yale, Stanford, Duke, Wharton, etc. would be so proud.
The following was written several years ago and is relevant today. It clearly explains how Wall Street favors the wealthy and snickers at the poor. Its compelling explanation is derived from a 2005 discussion group in which I participated.
Business activity cannot be sustained unless the rich get richer. And the best way for this to happen is to give more money to the poor! This is where Uncle Sam becomes a modern day Robin Hood and it works like this:
Uncle Sam borrows money from the rich so it can be given to the poor so the poor can continue losing it to the rich. This is the reason why there will always be a budget deficit and an increasing national debt.
To illustrate, let’s assume that there are two classes of people: rich and poor. Rich folks are those with above-medium incomes and poor folks are everyone below. The simple reason the rich must get richer is that they must make an after-tax profit if they wish to continue employing the poor to produce goods and services.
The rich cannot profit from traditional trading among themselves. For example, if there are 10 rich people in a closed room and they have a total of $10 million in cash, they can wheel and deal and trade among themselves to their heart’s content. But at year’s end they still only have $10 million. The value of their real estate or stocks might rise or fall, but that $10 million dollars won’t increase unless another group loses money to them.
Think about it. Capitalism is like a game of poker. The strong players win from the weak, or the rich win from the poor. However, the poor have a finite amount of money to lose, which means our poker game would come to a halt unless a designated patsy can be found. And that designated patsy is the U.S. government. I know it sounds farfetched but listen up and watch the bouncing ball.
Economists who follow money transfers note that in 2006, for example, the poor paid approximately $780 billion more to the rich for rent, food, cars, health care, tools, beer, etc. than they received for their labors at McDonald’s, Wal-Mart, doing yard work, washing dishes or cleaning hotel rooms. So, in order to keep the poor from going completely broke, the government, through taxes, took $320 billion from the rich and returned it to the poor via welfare, Social Security programs and other subsidies. Then, to return the additional $460 billion to the poor so their purchasing power remains intact, the government borrows $460 billion from the rich by issuing new Treasury bonds.
So, after taxes and transfer payments were complete in 2006, the rich made $460 billion, the government lost $460 billion, which was the deficit, and the poor broke even. In effect, the budget deficit equals what the rich keep after taxes. So, if the budget is balanced, the rich can’t make any more money. And if the rich can’t make more money, their incentive to produce will falter, unemployment will skyrocket and the economy will collapse.
I wish I could claim this was my idea, because I think this premise is worth a Noble Prize in economics.
Address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit www.creators.com.
==========================
==================================================
LANCE DICKIE: FAITH CRISIS FOR TRUE BELIEVERS IN MARKET
Comments (3) Recommend (0)
BY LANCE DICKIE
Seattle Times
There are true believers suffering a real crisis of faith. They have been worshipping at the Church of the Free Market, and their doubts run deeper than stockbrokers not answering prayers or returning calls.
For decades, their prophets have preached that economic markets function best when left to themselves, unfettered by government regulation or oversight.
Businesses, investors and traditional market forces would self-regulate, self-correct and self-enforce. Oops.
The collapse of the housing and stock markets trace their way back to decisions and choices made at the highest levels of government and commerce. The rest of us get swept along for the ride, both up and down, and suffer the consequences of hubris, incompetence and criminality.
To hear the humbled apostles for markets free of disclosure and rules begin to mumble about the need for government regulation is extraordinary. Chief among the apostates is former Federal Reserve Chairman Alan Greenspan, who humbly confessed his wonderment at mortgage-lending practices to a congressional committee:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
He was reminded he had the authority to prevent the lending practices behind the subprime mortgage crisis -- was advised to do so -- and refused to act. Greenspan is contrite. Millions more are in foreclosure.
Three years ago, a handful of regulators were waving red flags about hedge funds and credit derivatives. Lightly regulated exemptions from most rules, they placed enormous bets -- literally -- around the planet. Dense and esoteric, these trillion-dollar segments of the markets seemed pretty remote until ordinary mutual funds -- yours and mine -- began investing in them.
The effects of deregulation and unenforced regulation were cumulative. In 1994, the Financial Accounting Standards Board changed its rule that stock options must be treated as a company expense.
A year later, Congress limited the rights of investors to sue, let accounting firms off the hook in fraud cases and fudged reporting practices. In 1999, the repeal of lessons-learned regulations from the Depression fuzzed the lines between retail banking and investment banks.
Every opportunity to push the limit was taken, as allowed or ignored by law. Industry lobbyists on Washington's K Street had their back.
My favorite bit of apostasy revealed itself ever so quietly in a New York Times column by Ben Stein, a lawyer, writer, actor and economist. And cheerleader. For Stein, the resilient economy was always peachy keen.
Last month, reality set in for Stein. Near the end of a column about fear and foolishness, he slipped in a hope that President-elect Barack Obama will put meaningful regulation in place -- maybe even repeal the private securities law against suing companies. Oh, and maybe inspire a more vigilant Federal Reserve.
Dare I say, there has been an epiphany. People who understand the complexities and see the connections acknowledge how precarious economic conditions truly are.
Lance Dickie is a columnist for the Seattle Times.
Wednesday, January 21, 2009
Advice on getting money for business from 401k
Dear Mr. Berko: I have a great idea (please don't share it with your readers) that I believe can be turned into a very successful business. Here's my problem: In June, my bank really liked my idea and was willing to lend me all the money I needed. Well, things have changed, and I'm short about $115,000. As you know, I have invested all the money I have, quit my job, and now I'm at an impasse. But my attorney came to my rescue. I have $383,000 in my 401(k). My attorney suggested I take $191,000 out. It has to be $191,000 because I have to pay a 10 percent early takeout penalty plus ordinary income taxes of 30 percent to net $115,000. That's $76,000 of taxes, which really kills me because this account was worth more $600,000 a year ago. I've enclosed my 401(k). Would you please tell me which of these 12 mutual funds you think I should sell to raise the money I need.
-- R.S., Cincinnati
Dear R.S.: I think your idea is sensational and should provide you and your family with good financial comfort for the future. However, you are 57 years old, and it took you 31 working years to accumulate that 401(k) money. Before you liquidate some of your 401(k), you might ask your wife if she's comfortable with this new decision. She has a right to voice an opinion.
And please tell your attorney to kiss a fish, stick to legal matters and, if he gives you any more financial advice, tell him you'll sue him! This puttering jackass is $76,000 dangerous to your financial health. Please tell him I said so.
I'm not going to tell you which mutual funds to sell because there's an easy way to withdraw that money without paying a pfennig, peso or penny in taxes. Visit your certified public accountant, and I hope he has more brains then the fool you have for a lawyer. Tell your CPA that you need to form a corporation and you want to call it RS Enterprises. Tell your CPA that RS Enterprises must have a 401(k) plan. Then tell your CPA to complete all the papers to transfer the 401(k) plan from your previous employer to the new plan with RS Enterprises, who is your new employer.
Now, under 401(k) rules, your new plan can sell $115,000 in mutual funds without incurring a tax obligation. Then, as easy as one, two and three, your 401(k) can buy $115,000 worth of shares of RS Enterprises. That $115,000 can be used by RS Enterprises to purchase inventory, pay salaries, rent, utilities and other business expenses. So, by reinvesting this money in RS Enterprises stock, rather than taking a cash withdrawal, you eliminate the 10 percent early withdrawal penalty plus ordinary income taxes on the amount you withdrew.
If you follow this advice, you won't have to withdraw $191,000, and you won't have to pay $76,000 in federal taxes. You just liquidate $115,000 of market value mutual funds, buy $115,000 in RS Enterprise stock and put the proceeds into your business checking account. When you have completed the paperwork, send me an e-mail, and I'll recommend how many shares of each of your dozen funds to sell to raise $115,000.
-- R.S., Cincinnati
Dear R.S.: I think your idea is sensational and should provide you and your family with good financial comfort for the future. However, you are 57 years old, and it took you 31 working years to accumulate that 401(k) money. Before you liquidate some of your 401(k), you might ask your wife if she's comfortable with this new decision. She has a right to voice an opinion.
And please tell your attorney to kiss a fish, stick to legal matters and, if he gives you any more financial advice, tell him you'll sue him! This puttering jackass is $76,000 dangerous to your financial health. Please tell him I said so.
I'm not going to tell you which mutual funds to sell because there's an easy way to withdraw that money without paying a pfennig, peso or penny in taxes. Visit your certified public accountant, and I hope he has more brains then the fool you have for a lawyer. Tell your CPA that you need to form a corporation and you want to call it RS Enterprises. Tell your CPA that RS Enterprises must have a 401(k) plan. Then tell your CPA to complete all the papers to transfer the 401(k) plan from your previous employer to the new plan with RS Enterprises, who is your new employer.
Now, under 401(k) rules, your new plan can sell $115,000 in mutual funds without incurring a tax obligation. Then, as easy as one, two and three, your 401(k) can buy $115,000 worth of shares of RS Enterprises. That $115,000 can be used by RS Enterprises to purchase inventory, pay salaries, rent, utilities and other business expenses. So, by reinvesting this money in RS Enterprises stock, rather than taking a cash withdrawal, you eliminate the 10 percent early withdrawal penalty plus ordinary income taxes on the amount you withdrew.
If you follow this advice, you won't have to withdraw $191,000, and you won't have to pay $76,000 in federal taxes. You just liquidate $115,000 of market value mutual funds, buy $115,000 in RS Enterprise stock and put the proceeds into your business checking account. When you have completed the paperwork, send me an e-mail, and I'll recommend how many shares of each of your dozen funds to sell to raise $115,000.
Ratings Firms provide a "santa claus" story; commercial real estate next to collapse
Dear Mr. Berko: Our investment club has three questions: First, how is it that Standard & Poor's can give Fannie Mae an A rating, and four weeks later it declares bankruptcy? Second, what is the next big concern in the stock market? Could it be a possible rise in the cost of oil, a huge federal deficit, or higher taxes? What do you anticipate? Third, all of us are older than 74, and all of us take a required withdrawal from our independent retirement accounts. In my case, I must withdraw $9,700 this year. But I have huge losses in DuPont, Bank of America and closed-end funds too numerous to mention. One of our members said moving shares to another account could do it, and he thinks his brother did it in 2007. Can you explain this to us, because many of us would like to know how that works. It doesn't make sense to sell so many good stocks that we paid higher prices for years ago when they are so low today. We think that is criminal. We all look forward to hearing from you.
-- S.R., Columbus, Ohio
Dear S.R.: Several months ago, I asked an old college semi-chum, who retired six years ago as a low-level big shot executive at one of the world's influential rating agencies the following question: "How can Standard & Poor's, Moody's or Fitch assign an A or AA rating to a bond or preferred stock and a month later watch it go bankrupt? Are you the guys on the take?"
My retired semi-chum told me that Standard & Poor's, Moody's and other rating services are paid huge, handsome fees by the companies they rate. If they fail to give a paying customer a good rating, the likelihood is that the company will solicit a competitor. I quote: "We are in a very competitive business, and on occasion, when it's necessary, we can inflate a company's rating, just like our school system inflates student grades or appraisers inflate the value of a home."
These rating companies are in business to make money and perform a service for investors. Hopefully, they should be able to do both so the investor prospers, too. However, if it's a choice between making money or performing a good service to investors -- think about today's politicians and corporate officers -- I think they'd chose the former, and make the buck! Some psychologists suggest that lying to hundreds of millions of children every year about Santa Claus to achieve a favorable behavior outcome is a good training ground for children to learn to lie to the public 30 or 40 years later.
==
The next stock market concern is the near certain collapse of the commercial real estate bubble. Huge companies like Sears Holdings Corp., Office Depot Inc., Starbucks Corp, The Home Depot Inc., Circuit City Stores Inc., Sprint Nextel Corp., and Chicago Title are vacating their leases and branch banks are closing their windows. Small, neighborhood strip centers are losing tenants and vacancy signs are sprouting like weeds. Commercial vacancy rates in New York City are expected to exceed 18 percent in 2009, Dallas expects 22 percent, Metropolitan Chicago 18 percent, Atlanta expects 20 percent, and Phoenix expects commercial vacancy rates to exceed 21 percent. Foreclosures last year were up 30 percent from 2007, and that number is expected to move higher this year. Huge, debt-laden shopping mall developers like General Growth Properties can't meet their loan obligations and many smaller, well-known developers like Florida's Sembler & Co. are holding a fraying rope.
Many of the large commercial real estate investment trusts are foundering, and others could founder. Banks are reluctant to extend loan agreements because property values are significantly lower than loan amounts. Cash flows cannot meet mortgage payments. The only solution is twofold: The lenders must take equity interests in the properties in lieu of some payments, or borrowers must enter Chapter 11 bankruptcy proceedings.
======================================================
The system, which is flawed, hurt you, and there's no recourse. I remember what the late Sen. Daniel Patrick Moynihan, D-N.Y., once told me: "Most members of Congress, most lawyers and most big shots on Wall Street are crooks and liars until proven otherwise."
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
-- S.R., Columbus, Ohio
Dear S.R.: Several months ago, I asked an old college semi-chum, who retired six years ago as a low-level big shot executive at one of the world's influential rating agencies the following question: "How can Standard & Poor's, Moody's or Fitch assign an A or AA rating to a bond or preferred stock and a month later watch it go bankrupt? Are you the guys on the take?"
My retired semi-chum told me that Standard & Poor's, Moody's and other rating services are paid huge, handsome fees by the companies they rate. If they fail to give a paying customer a good rating, the likelihood is that the company will solicit a competitor. I quote: "We are in a very competitive business, and on occasion, when it's necessary, we can inflate a company's rating, just like our school system inflates student grades or appraisers inflate the value of a home."
These rating companies are in business to make money and perform a service for investors. Hopefully, they should be able to do both so the investor prospers, too. However, if it's a choice between making money or performing a good service to investors -- think about today's politicians and corporate officers -- I think they'd chose the former, and make the buck! Some psychologists suggest that lying to hundreds of millions of children every year about Santa Claus to achieve a favorable behavior outcome is a good training ground for children to learn to lie to the public 30 or 40 years later.
==
The next stock market concern is the near certain collapse of the commercial real estate bubble. Huge companies like Sears Holdings Corp., Office Depot Inc., Starbucks Corp, The Home Depot Inc., Circuit City Stores Inc., Sprint Nextel Corp., and Chicago Title are vacating their leases and branch banks are closing their windows. Small, neighborhood strip centers are losing tenants and vacancy signs are sprouting like weeds. Commercial vacancy rates in New York City are expected to exceed 18 percent in 2009, Dallas expects 22 percent, Metropolitan Chicago 18 percent, Atlanta expects 20 percent, and Phoenix expects commercial vacancy rates to exceed 21 percent. Foreclosures last year were up 30 percent from 2007, and that number is expected to move higher this year. Huge, debt-laden shopping mall developers like General Growth Properties can't meet their loan obligations and many smaller, well-known developers like Florida's Sembler & Co. are holding a fraying rope.
Many of the large commercial real estate investment trusts are foundering, and others could founder. Banks are reluctant to extend loan agreements because property values are significantly lower than loan amounts. Cash flows cannot meet mortgage payments. The only solution is twofold: The lenders must take equity interests in the properties in lieu of some payments, or borrowers must enter Chapter 11 bankruptcy proceedings.
======================================================
The system, which is flawed, hurt you, and there's no recourse. I remember what the late Sen. Daniel Patrick Moynihan, D-N.Y., once told me: "Most members of Congress, most lawyers and most big shots on Wall Street are crooks and liars until proven otherwise."
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.
Investment Idea: Why I like MVIS Microvision PicoProjector
Newsletter Recommendation: MVIS 20-Jan-09 02:12 pm This message is an update on the recommendation to buy Microvision, issued last week. If you did not receive
To summarize the opportunity, Microvision has devoted the last 12 years to developing the world’s smallest, full-color laser projector. The device is small enough and power-efficient enough to be embedded in cell phones, not to mention a wide variety of other consumer electronics devices, including iPods, laptops, video cameras, game devices and much more.
To give you an idea of the potential for these devices, consider that cell phones alone represent an available market of one billion units per annually.
To the right, you can see the company’s latest projector engine compared to a penny. It might not seem like much, but this highly advanced device can project an image with DVD quality resolution up to 100 inches across in a dark room. In a dimly lit room, the image is brilliant at around five feet diagonal. And under normal to bright indoor lighting you can produce a crisp, colorful image about 20 inches diagonal – larger than the monitor on most laptops.
And all of this coming from a device the size of your cell phone.
The Dues Have Been Paid… Now It’s Time to Collect
Microvision’s technological achievements are phenomenal. And the high-volume markets the company will serve could provide life-changing returns for today’s investors. Even so, the earliest investors in Microvision – those who have been waiting more than a decade for the company’s disruptive technology to become commercial-ready – are likely a bit weary and impatient by now.
But the good news is that you don’t have to wait like they did. All the major development milestones, hundreds of millions of dollars in investment, and years of miniaturization efforts and design improvements have already been made. The company is just months away from launching high-volume production of their ultra-miniature projection engine.
And you can buy shares today with less execution risk and at a lower cost than ever before.
At the recent Consumer Electronics Show in Las Vegas and Macworld show in Los Angeles, Microvision confirmed that they will begin shipping limited quantities of their standalone accessory projector by the second quarter, with high volume production to follow shortly after.
Next Milestone: Purchase Orders from World-Leading OEMs
While the company may also launch the product under their own brand name, the goal is to license the technology to original equipment manufacturers (OEMs) to market under their own brands and configure within their own products and designs.
Already, Microvision has several partnerships with high profile companies, including Corning, Motorola and a manufacturing relationship with Asia Optical (one of the world’s largest manufacturers of digital cameras and cell phone cameras, whose products are sold under numerous household consumer electronics brand names).
As well, the company has a number of contractual relationships with world-leading companies whose names are still confidential (consumer electronics is a secretive and highly competitive business). I expect initial purchase orders and named partnerships to continue to be announced in the next few months. These announcements should provide a significant boost to the stock price.
Add a name like Apple, Sony or Nokia to the press release and I expect the stock to trade several multiples above where it is today. I fully expect Microvision technology will be integrated into devices made by these companies (and many more).
Part II
The Market for Pico Projectors is HUGE
Do you think there are people out there who might want to project images, video clips, music videos, movies, television shows, websites and games from their iPhones and iPods, smart phones, digital cameras and portable computers? I believe so. And so do many of the world’s largest technology and consumer electronics companies. In fact, they’re betting on it.
Pico Projectors will start out as accessory supplements to mobile devices. Then in a growth path similar to cameras in cell phones, they will ultimately become ubiquitous.
In an article titled, The Pico Projector Gold Rush for the trade publication, Information Display, Chris Chinnock highlights a scenario where a combined 85 million standalone and embedded pico projectors could be sold in 2012 (still a slower introduction than cameras in cell phones).
I hope the following will give you an idea what the potential market opportunity is for Microvision…
These Two Corporate Giants are Betting Big
There are only a handful of companies in the world that have the capability to produce extremely small, fast-switching, efficient green lasers. Green lasers of this type were only invented just a few years ago. Corning and Osram are two of these companies. Both are multi-billion dollar operations. They are scientific and technological leaders that have each been around for more than 100 years.
Corning and Osram are both suppliers to Microvision and have made significant research, development and manufacturing commitments to align themselves with the growth of the company. That is because they see Microvision’s disruptive technology as the platform to get their product (in this case green lasers) into millions, and then billions of consumer electronics devices.
Every year, Corning makes a decision to push just a handful of technologies to the forefront of their efforts. Some of these technologies in the past have included LCD glass and fiber optic cable, where the company is the world leader. To even be considered, the new technology must have “jackpot potential”. For a company the size of Corning that would constitute revenues in the hundreds of millions, if not billions.
On numerous occasions (and most recently just two weeks ago in an Associated Press article), Corning has confirmed the highest commitment to green lasers. Here are a couple of passages from that article:
“While ensuring an unusually high 10 percent of revenue is allocated to research, Corning's management imposed a rigorous, company-wide system for nurturing the best ideas step by step. Out of hundreds of projects a year, it keeps pursuing just a handful seen as likely to hit a jackpot.
“Among the latest high-wager hopefuls, in addition to mercury filters for coal plants: green lasers to equip cell phones with projectors, micro-reactors to enhance chemical processing and silicon bonded to glass to extend battery life for handheld electronics.”
But why don’t you take it directly from the source...
The following is a brief clip of Corning’s Chief Technology Officer, Joseph A. Miller, who oversees more than 1,800 engineers, scientists and technicians. In this two minute clip, he outlines Corning’s firm commitment to producing green lasers for Microvision and highlights Microvision’s inherent advantage over the competition:
http://www.youtube.com/watch?v=cbqUylYUcws
If green lasers (one small component within Microvision’s display engine) have enough revenue potential to make a significant impact on the bottom line of Corning AND Osram, what does that say for Microvision, with a market cap under $125 million?
What it says to me is that this is a prudent speculation worth making.
Part III
A Few Words about the Competition
As of the Consumer Electronics Show in January 2009, there are three Pico Projectors on the market. These products utilize technology developed either by Texas Instruments or 3M.
While I do not underestimate the ability of these companies to innovate, and I do salute them for rushing their products to market first, from a performance standpoint, these products lag what Microvision has produced by a wide margin.
Being the first company in a brand new market rarely guarantees dominance. The iPod wasn’t the first “portable MP3 player” by a long shot. But it is the device by which all others are measured today. The term “portable MP3 player” is hardly even used.
Based on performance characteristics, there is a good chance that Microvision will dominate the pico projector space. If that holds true, then this will be one of the greatest investment opportunities of your lifetime.
But the company doesn’t have to dominate the market for this to be a phenomenal opportunity. Nokia is not the only handset maker. Dell is not the only computer maker. And Intel is not the only chip maker. The market for pico projectors will be huge and there will be room for many players. Even if Microvision captures just 5% of the worldwide market, today’s investors will be looking at a home run.
I won’t go into the technology again in this update. All the details are in the full report and last week’s recommendation letter. But I would like to point out why Microvision is in a superior position.
The Advantages that Set Microvision Apart
The device that Microvision showed off last week at the CES and Macworld is the highest performing display in its class. It comes in the smallest and thinnest package (thinness is a big issue when it comes to embedding a device in a cell phone or iPod).
It also has:
The highest display resolution
The widest color gamut
The highest brightness
And the lowest power draw
But there is a HUGE advantage to Microvision’s technology that might be easy to overlook on paper. The image is always in focus, at any distance, on any surface (even curved or angled surfaces). And it doesn’t need a projection lens or focus adjustment to accomplish this (meaning less cost and complexity and a smaller package size).
With the devices offered by Texas Instruments and 3M you would need to refocus the image every time you moved your hand. This is not only inconvenient, it detracts from performance. Microvision has none of those limitations.
Over the years, the military has invested significantly in Microvision’s development efforts, including two military related contracts in the past month alone. Given a choice, do you think the military would choose a device that must constantly be focused, when a better option exists? Can you imagine: “Hold on a minute. I know they’re shooting at us, but I can’t get this map to stay in focus.”
But rather than take it from me, here just are a few recent snippets from articles following the Consumer Electronics and Macworld Shows last week, illustrating Microvision’s key attributes.
Part IV
From Techworld:
“The concept of ultraportable, pocket projectors isn't new: Mitsubishi and Samsung both have models they refer to as "pocket" size. By comparison with Microvision's new prototype projector, those models are boulder-sized rocks.”
“The PicoP uses red, green, and blue lasers to project a WVGA (848 x 480) 16:9 widescreen image with 10 lumens of brightness and a contrast ratio of better than 5,000 to 1. It was adequately bright under ambient show floor lightning, and substantially brighter than any of the other micro projectors we’ve seen this week. In a dark room it projects an image up to a staggering 100 inches, but the best part is that since it uses lasers, it’s always inherently in focus. This is an important feature, since the whole point of a microprojector is that you can whip it out and use it anywhere.”
From the Houston Chronicle:
“My favorite product at the show was Microvision’s way-cool SHOW WX Pico Projector. Smaller than an iPhone, it’s a tiny video projector that uses laser light rather than lamps or LEDs to project an image from 6 inches to 100 inches and is always in focus on any surface. It looks incredible and should be available later this year for under $500.”
Hearst Electronic Products Magazine:
“Some devices already in the market are challenged to provide bright projected displays. Then too, they seem to require careful focusing. A MEMS-based device called the PicoP engine from Microvision (www.microvision.com) being demonstrated at CES this year overcomes these drawbacks, and is scheduled to hit shelves sometime in 2009.”
Before I conclude, I should point out that in addition to the two recent shows and the company’s announcement that they will begin shipping product in just months, Microvision also recently announced to military related development contracts totaling $1.5 million.
In the grand scheme of things, that is not a lot of money, but the deliverables for both contracts involve high definition pico projectors and see-through eyewear displays. This is truly a game changer. Compared to the competition, Microvision already has a brighter and much smaller engine with almost double the resolution.
And the company has already mapped out a path and has contracted for the development THIS YEAR of devices that will take the display resolution to high definition format. The future is looking VERY bright for Microvision.
The original recommendation to buy Microvision went out about 10 days ago, when the stock was trading at $2.05. I mentioned in that report that the price could be volatile, and that after the 100% run from $1.11 to $2.20 it could be due for a pullback after the excitement of the Consumer Electronics Show.
That is why I only advised buying one quarter of a full position.
However, you might ask why I would have recommended it if I expected the stock to pull back. The reason is simple. There is a small downside risk in this stock right now… but there is an even greater risk of being out of the stock for a major move up.
Part V
Numerous household name OEMs are currently concluding their evaluation of Microvision’s technology. The device has already passed third party drop tests with flying colors. There is a real possibility that you will wake up one morning to a press release stating that Nokia… or Apple… or Sony… or RIM has issued a purchase order for pico projector engines with “Microvision Inside.”
You do not want to be on the sidelines when that day comes. If you have not already taken a position, buy one quarter of a full position. If are holding the company already, consider adding to your position incrementally over the next several weeks or months.
Remember, the price will be volatile in the near term. But we could care less about “price”. We’re concerned with value. The value is there. This technology is likely to be “the next big thing” in consumer electronics. And Microvision is the only pure play.
If you missed buying the other “Micro” based in Redmond, Washington when it was trading under $2 a share, don’t miss this one. I daresay it could be just as profitable.
To summarize the opportunity, Microvision has devoted the last 12 years to developing the world’s smallest, full-color laser projector. The device is small enough and power-efficient enough to be embedded in cell phones, not to mention a wide variety of other consumer electronics devices, including iPods, laptops, video cameras, game devices and much more.
To give you an idea of the potential for these devices, consider that cell phones alone represent an available market of one billion units per annually.
To the right, you can see the company’s latest projector engine compared to a penny. It might not seem like much, but this highly advanced device can project an image with DVD quality resolution up to 100 inches across in a dark room. In a dimly lit room, the image is brilliant at around five feet diagonal. And under normal to bright indoor lighting you can produce a crisp, colorful image about 20 inches diagonal – larger than the monitor on most laptops.
And all of this coming from a device the size of your cell phone.
The Dues Have Been Paid… Now It’s Time to Collect
Microvision’s technological achievements are phenomenal. And the high-volume markets the company will serve could provide life-changing returns for today’s investors. Even so, the earliest investors in Microvision – those who have been waiting more than a decade for the company’s disruptive technology to become commercial-ready – are likely a bit weary and impatient by now.
But the good news is that you don’t have to wait like they did. All the major development milestones, hundreds of millions of dollars in investment, and years of miniaturization efforts and design improvements have already been made. The company is just months away from launching high-volume production of their ultra-miniature projection engine.
And you can buy shares today with less execution risk and at a lower cost than ever before.
At the recent Consumer Electronics Show in Las Vegas and Macworld show in Los Angeles, Microvision confirmed that they will begin shipping limited quantities of their standalone accessory projector by the second quarter, with high volume production to follow shortly after.
Next Milestone: Purchase Orders from World-Leading OEMs
While the company may also launch the product under their own brand name, the goal is to license the technology to original equipment manufacturers (OEMs) to market under their own brands and configure within their own products and designs.
Already, Microvision has several partnerships with high profile companies, including Corning, Motorola and a manufacturing relationship with Asia Optical (one of the world’s largest manufacturers of digital cameras and cell phone cameras, whose products are sold under numerous household consumer electronics brand names).
As well, the company has a number of contractual relationships with world-leading companies whose names are still confidential (consumer electronics is a secretive and highly competitive business). I expect initial purchase orders and named partnerships to continue to be announced in the next few months. These announcements should provide a significant boost to the stock price.
Add a name like Apple, Sony or Nokia to the press release and I expect the stock to trade several multiples above where it is today. I fully expect Microvision technology will be integrated into devices made by these companies (and many more).
Part II
The Market for Pico Projectors is HUGE
Do you think there are people out there who might want to project images, video clips, music videos, movies, television shows, websites and games from their iPhones and iPods, smart phones, digital cameras and portable computers? I believe so. And so do many of the world’s largest technology and consumer electronics companies. In fact, they’re betting on it.
Pico Projectors will start out as accessory supplements to mobile devices. Then in a growth path similar to cameras in cell phones, they will ultimately become ubiquitous.
In an article titled, The Pico Projector Gold Rush for the trade publication, Information Display, Chris Chinnock highlights a scenario where a combined 85 million standalone and embedded pico projectors could be sold in 2012 (still a slower introduction than cameras in cell phones).
I hope the following will give you an idea what the potential market opportunity is for Microvision…
These Two Corporate Giants are Betting Big
There are only a handful of companies in the world that have the capability to produce extremely small, fast-switching, efficient green lasers. Green lasers of this type were only invented just a few years ago. Corning and Osram are two of these companies. Both are multi-billion dollar operations. They are scientific and technological leaders that have each been around for more than 100 years.
Corning and Osram are both suppliers to Microvision and have made significant research, development and manufacturing commitments to align themselves with the growth of the company. That is because they see Microvision’s disruptive technology as the platform to get their product (in this case green lasers) into millions, and then billions of consumer electronics devices.
Every year, Corning makes a decision to push just a handful of technologies to the forefront of their efforts. Some of these technologies in the past have included LCD glass and fiber optic cable, where the company is the world leader. To even be considered, the new technology must have “jackpot potential”. For a company the size of Corning that would constitute revenues in the hundreds of millions, if not billions.
On numerous occasions (and most recently just two weeks ago in an Associated Press article), Corning has confirmed the highest commitment to green lasers. Here are a couple of passages from that article:
“While ensuring an unusually high 10 percent of revenue is allocated to research, Corning's management imposed a rigorous, company-wide system for nurturing the best ideas step by step. Out of hundreds of projects a year, it keeps pursuing just a handful seen as likely to hit a jackpot.
“Among the latest high-wager hopefuls, in addition to mercury filters for coal plants: green lasers to equip cell phones with projectors, micro-reactors to enhance chemical processing and silicon bonded to glass to extend battery life for handheld electronics.”
But why don’t you take it directly from the source...
The following is a brief clip of Corning’s Chief Technology Officer, Joseph A. Miller, who oversees more than 1,800 engineers, scientists and technicians. In this two minute clip, he outlines Corning’s firm commitment to producing green lasers for Microvision and highlights Microvision’s inherent advantage over the competition:
http://www.youtube.com/watch?v=cbqUylYUcws
If green lasers (one small component within Microvision’s display engine) have enough revenue potential to make a significant impact on the bottom line of Corning AND Osram, what does that say for Microvision, with a market cap under $125 million?
What it says to me is that this is a prudent speculation worth making.
Part III
A Few Words about the Competition
As of the Consumer Electronics Show in January 2009, there are three Pico Projectors on the market. These products utilize technology developed either by Texas Instruments or 3M.
While I do not underestimate the ability of these companies to innovate, and I do salute them for rushing their products to market first, from a performance standpoint, these products lag what Microvision has produced by a wide margin.
Being the first company in a brand new market rarely guarantees dominance. The iPod wasn’t the first “portable MP3 player” by a long shot. But it is the device by which all others are measured today. The term “portable MP3 player” is hardly even used.
Based on performance characteristics, there is a good chance that Microvision will dominate the pico projector space. If that holds true, then this will be one of the greatest investment opportunities of your lifetime.
But the company doesn’t have to dominate the market for this to be a phenomenal opportunity. Nokia is not the only handset maker. Dell is not the only computer maker. And Intel is not the only chip maker. The market for pico projectors will be huge and there will be room for many players. Even if Microvision captures just 5% of the worldwide market, today’s investors will be looking at a home run.
I won’t go into the technology again in this update. All the details are in the full report and last week’s recommendation letter. But I would like to point out why Microvision is in a superior position.
The Advantages that Set Microvision Apart
The device that Microvision showed off last week at the CES and Macworld is the highest performing display in its class. It comes in the smallest and thinnest package (thinness is a big issue when it comes to embedding a device in a cell phone or iPod).
It also has:
The highest display resolution
The widest color gamut
The highest brightness
And the lowest power draw
But there is a HUGE advantage to Microvision’s technology that might be easy to overlook on paper. The image is always in focus, at any distance, on any surface (even curved or angled surfaces). And it doesn’t need a projection lens or focus adjustment to accomplish this (meaning less cost and complexity and a smaller package size).
With the devices offered by Texas Instruments and 3M you would need to refocus the image every time you moved your hand. This is not only inconvenient, it detracts from performance. Microvision has none of those limitations.
Over the years, the military has invested significantly in Microvision’s development efforts, including two military related contracts in the past month alone. Given a choice, do you think the military would choose a device that must constantly be focused, when a better option exists? Can you imagine: “Hold on a minute. I know they’re shooting at us, but I can’t get this map to stay in focus.”
But rather than take it from me, here just are a few recent snippets from articles following the Consumer Electronics and Macworld Shows last week, illustrating Microvision’s key attributes.
Part IV
From Techworld:
“The concept of ultraportable, pocket projectors isn't new: Mitsubishi and Samsung both have models they refer to as "pocket" size. By comparison with Microvision's new prototype projector, those models are boulder-sized rocks.”
“The PicoP uses red, green, and blue lasers to project a WVGA (848 x 480) 16:9 widescreen image with 10 lumens of brightness and a contrast ratio of better than 5,000 to 1. It was adequately bright under ambient show floor lightning, and substantially brighter than any of the other micro projectors we’ve seen this week. In a dark room it projects an image up to a staggering 100 inches, but the best part is that since it uses lasers, it’s always inherently in focus. This is an important feature, since the whole point of a microprojector is that you can whip it out and use it anywhere.”
From the Houston Chronicle:
“My favorite product at the show was Microvision’s way-cool SHOW WX Pico Projector. Smaller than an iPhone, it’s a tiny video projector that uses laser light rather than lamps or LEDs to project an image from 6 inches to 100 inches and is always in focus on any surface. It looks incredible and should be available later this year for under $500.”
Hearst Electronic Products Magazine:
“Some devices already in the market are challenged to provide bright projected displays. Then too, they seem to require careful focusing. A MEMS-based device called the PicoP engine from Microvision (www.microvision.com) being demonstrated at CES this year overcomes these drawbacks, and is scheduled to hit shelves sometime in 2009.”
Before I conclude, I should point out that in addition to the two recent shows and the company’s announcement that they will begin shipping product in just months, Microvision also recently announced to military related development contracts totaling $1.5 million.
In the grand scheme of things, that is not a lot of money, but the deliverables for both contracts involve high definition pico projectors and see-through eyewear displays. This is truly a game changer. Compared to the competition, Microvision already has a brighter and much smaller engine with almost double the resolution.
And the company has already mapped out a path and has contracted for the development THIS YEAR of devices that will take the display resolution to high definition format. The future is looking VERY bright for Microvision.
The original recommendation to buy Microvision went out about 10 days ago, when the stock was trading at $2.05. I mentioned in that report that the price could be volatile, and that after the 100% run from $1.11 to $2.20 it could be due for a pullback after the excitement of the Consumer Electronics Show.
That is why I only advised buying one quarter of a full position.
However, you might ask why I would have recommended it if I expected the stock to pull back. The reason is simple. There is a small downside risk in this stock right now… but there is an even greater risk of being out of the stock for a major move up.
Part V
Numerous household name OEMs are currently concluding their evaluation of Microvision’s technology. The device has already passed third party drop tests with flying colors. There is a real possibility that you will wake up one morning to a press release stating that Nokia… or Apple… or Sony… or RIM has issued a purchase order for pico projector engines with “Microvision Inside.”
You do not want to be on the sidelines when that day comes. If you have not already taken a position, buy one quarter of a full position. If are holding the company already, consider adding to your position incrementally over the next several weeks or months.
Remember, the price will be volatile in the near term. But we could care less about “price”. We’re concerned with value. The value is there. This technology is likely to be “the next big thing” in consumer electronics. And Microvision is the only pure play.
If you missed buying the other “Micro” based in Redmond, Washington when it was trading under $2 a share, don’t miss this one. I daresay it could be just as profitable.
Tuesday, January 13, 2009
WSJ Says it's Atlas Shrugged Coming to Pass/ Critique has got it straight however There is no such thing as a human that is motivated by Rationality!
Atlas Shrugged: From Fiction to Fact in 52 years
By STEPHEN MOORE
Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?
These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."
In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.
The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:
Galt: "You want me to be Economic Dictator?"
Mr. Thompson: "Yes!"
"And you'll obey any order I give?"
"Implicitly!"
"Then start by abolishing all income taxes."
"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"
"Fire your government employees."
"Oh, no!"
Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.
David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
================================
And more (and better!!) intelligence from the critique of Ayn Rand http://www.aynrandcontrahumannature.blogspot.com/
Schumpeter’s challenge. The economist Joseph Schumpeter created quite a stir in the forties when he warned that “the capitalist order tends to destroy itself.” Schumpeter issued this warning despite his belief in what he described as “the impressive economic and the still more impressive cultural achievement of the capitalist order and at the immense promise held out by both.” Capitalism would destroy itself because it would undermine its own “protecting strata” and “institutional framework.” One of the reasons he gave for this pessimistic assessment seems rather prescient in relation to the current economic crisis:
Capitalist activity, being essentially “rational,” tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are nevertheless essential for the efficient working of the institutionalized leadership of the producing plant: no social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends.
In one sentence Schumpeter has put his finger on the greatest flaw of capitalist order. Contrary to what Rand and her followers believe, “rational” self-interest is not an entirely benign psychological force. Rand’s faith in self-interest (and it is only a faith) is not warranted by the facts. In the first place, it is absurd to regard human desires and sentiments as rational. A desire or sentiment can only be criticized in reference to an opposing desire or sentiment.
As Spinoza famously put it: “an emotion cannot be destroyed nor controlled except by a contrary and stronger emotion.”
Consequently, rationality, as an ideal, can only apply to the means by which desires and sentiments are satisfied. Yet this is not all. Even if there were (per impossible) such a thing as a “rational end,” it is very doubtful that very many human beings would be interested in pursuing it.
If we make history and experience our guide in such matters—and whatever guide could possibly lead us to the truth besides history and experience?—then we are forced to conclude that the majority of human beings are largely non-rational in their conduct and are probably not even capable of being rational about any issue in the least complex (as rational methods of analysis tend to break down when applied to complex situations). W
hen Schumpeter talks about “rational” habits of mind, he is not writing in the Randian sense of the word. He means something more along the lines of rationalism—i.e., the belief that no doctrine is true unless it can be proved “verbally,” through clever patter and other exercises of blatant sophistry. As a consequence of this sort of perfervid rationalism, individuals no longer believe in “higher” values or “lofty” moral ideas. Short-term self-interest and “immediate gratification” become the main desideratum, with sophistry being brought in to give the whole thing a window dressing of moral justification.
We see this played out in the financial sector. The birth of complex financial instruments based on computer generated formulas has allowed finance capitalism to mask what ultimately amounts to a vast ponzi scheme which yields huge profits in the short-run but ends in bankruptcy and dishonor. This sort of finance capitalism fits into what is known as the “Minsky cycle”:
Firms participating in the early stages of the cycle typically are not leveraged; Minsky called them hedged firms because their cash receipts cover their cash outlays. The success of the first movers draws in additional players. Speculative firms then engage in leverage to the point where they must borrow to meet some of their interest payments—usually borrowing in short-term markets to finance higher-yielding long-term positions. None of this is irrational behavior; market players are chasing short-term gains, and some of them are getting very rich.
The final stages of the Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt burden continuously increases. At some point, a disruptive event occurs, … and markets abruptly reprice—the further along in the cycle, the more violent the repricing. [Charles Morris, The Trillion Dollar Meltdown, p. 133-4]
In other words, what we find in the world of high finance is a system which, by giving individuals the hope of huge rewards in the short-run, encourages them to behave in a ways that are destructive in the long-run. It takes strength of character to resist such huge short-run gains.
Unfortunately, the very success of capitalism tends to create a prosperous society that weakens the moral fibre of individuals. Add to this situation the tendency of individuals—particularly intelligent individuals—to cloak their real motives under a thick shroud of ingenious rationalizations (e.g., “portfolio theory,” the “efficient market hypothesis,” “laissez-faire” ideology, etc.), and we have all the elements required to create market failure leading to widespread and socially harmful externalities, as can be readily corroborated by examining the 2008-2009 financial crisis.
By STEPHEN MOORE
Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.
Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.
Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.
For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.
In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?
These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.
The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."
When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."
In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.
The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."
Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.
One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:
Galt: "You want me to be Economic Dictator?"
Mr. Thompson: "Yes!"
"And you'll obey any order I give?"
"Implicitly!"
"Then start by abolishing all income taxes."
"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"
"Fire your government employees."
"Oh, no!"
Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.
David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."
Mr. Moore is senior economics writer for The Wall Street Journal editorial page.
================================
And more (and better!!) intelligence from the critique of Ayn Rand http://www.aynrandcontrahumannature.blogspot.com/
Schumpeter’s challenge. The economist Joseph Schumpeter created quite a stir in the forties when he warned that “the capitalist order tends to destroy itself.” Schumpeter issued this warning despite his belief in what he described as “the impressive economic and the still more impressive cultural achievement of the capitalist order and at the immense promise held out by both.” Capitalism would destroy itself because it would undermine its own “protecting strata” and “institutional framework.” One of the reasons he gave for this pessimistic assessment seems rather prescient in relation to the current economic crisis:
Capitalist activity, being essentially “rational,” tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are nevertheless essential for the efficient working of the institutionalized leadership of the producing plant: no social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends.
In one sentence Schumpeter has put his finger on the greatest flaw of capitalist order. Contrary to what Rand and her followers believe, “rational” self-interest is not an entirely benign psychological force. Rand’s faith in self-interest (and it is only a faith) is not warranted by the facts. In the first place, it is absurd to regard human desires and sentiments as rational. A desire or sentiment can only be criticized in reference to an opposing desire or sentiment.
As Spinoza famously put it: “an emotion cannot be destroyed nor controlled except by a contrary and stronger emotion.”
Consequently, rationality, as an ideal, can only apply to the means by which desires and sentiments are satisfied. Yet this is not all. Even if there were (per impossible) such a thing as a “rational end,” it is very doubtful that very many human beings would be interested in pursuing it.
If we make history and experience our guide in such matters—and whatever guide could possibly lead us to the truth besides history and experience?—then we are forced to conclude that the majority of human beings are largely non-rational in their conduct and are probably not even capable of being rational about any issue in the least complex (as rational methods of analysis tend to break down when applied to complex situations). W
hen Schumpeter talks about “rational” habits of mind, he is not writing in the Randian sense of the word. He means something more along the lines of rationalism—i.e., the belief that no doctrine is true unless it can be proved “verbally,” through clever patter and other exercises of blatant sophistry. As a consequence of this sort of perfervid rationalism, individuals no longer believe in “higher” values or “lofty” moral ideas. Short-term self-interest and “immediate gratification” become the main desideratum, with sophistry being brought in to give the whole thing a window dressing of moral justification.
We see this played out in the financial sector. The birth of complex financial instruments based on computer generated formulas has allowed finance capitalism to mask what ultimately amounts to a vast ponzi scheme which yields huge profits in the short-run but ends in bankruptcy and dishonor. This sort of finance capitalism fits into what is known as the “Minsky cycle”:
Firms participating in the early stages of the cycle typically are not leveraged; Minsky called them hedged firms because their cash receipts cover their cash outlays. The success of the first movers draws in additional players. Speculative firms then engage in leverage to the point where they must borrow to meet some of their interest payments—usually borrowing in short-term markets to finance higher-yielding long-term positions. None of this is irrational behavior; market players are chasing short-term gains, and some of them are getting very rich.
The final stages of the Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt burden continuously increases. At some point, a disruptive event occurs, … and markets abruptly reprice—the further along in the cycle, the more violent the repricing. [Charles Morris, The Trillion Dollar Meltdown, p. 133-4]
In other words, what we find in the world of high finance is a system which, by giving individuals the hope of huge rewards in the short-run, encourages them to behave in a ways that are destructive in the long-run. It takes strength of character to resist such huge short-run gains.
Unfortunately, the very success of capitalism tends to create a prosperous society that weakens the moral fibre of individuals. Add to this situation the tendency of individuals—particularly intelligent individuals—to cloak their real motives under a thick shroud of ingenious rationalizations (e.g., “portfolio theory,” the “efficient market hypothesis,” “laissez-faire” ideology, etc.), and we have all the elements required to create market failure leading to widespread and socially harmful externalities, as can be readily corroborated by examining the 2008-2009 financial crisis.
Monday, January 5, 2009
Banks became loan originators not loan holders and Credit Default Swaps grew from $631 billion in 2001 to $54.6 trillion in 2008
Risk and the capitulation of capital
Commentary: The simple solution to the crisis is hard to execute
By Hernán T. Narea
Last update: 5:38 a.m. EST Dec. 31, 2008Comments: 13NEW YORK (MarketWatch) -- I was at yet another, sparser-than-usual reception of bankers in Manhattan the other day. Foregoing some sad looking canapés, I embarked on an informal survey. The mood? Decidedly resigned to the prospect of more failures to come.
Anyone whose business card had a valid email, held it like gold bullion, judiciously traded only with others who had the same ingots, in case they were next on the chopping block.
And the blame for our economic ills, running the gamut from eviscerated 401-Ks to sports car fire-sales in Palm Beach? Without exception, everyone wanted to throw a Ferragamo lace up or Blahnik heel at the likes of Bernard Madoff, sub-prime mortgages and the entire regulatory universe. But I think they're all getting a bum rap. They aren't the real culprits.
The underlying problem is risk; more exactly, the disguising of it. Too many people (let's call them herds), convinced themselves that the era of volatility was fading fast in the rearview mirror and that the super-highway of capital markets we all traveled on had crossed the border into a promised land of zero-risk. However, the only thing crossed was the way real risk was being dressed up to look like a sure bet. Think of it as financial transvestism, except in this show, John Travolta in a dress was no competition for the securitizers of our collective wealth dreams.
Earlier this year, Emilio Botín, chairman of Spain's Santander Group, was quoted giving extremely sound advice as it related to the mortgage crisis, "If you don't understand an instrument, don't buy it. If you wouldn't buy a product for yourself, don't try to sell it. If you don't know your customers well, don't lend them money." Unfortunately, his own bankers didn't heed these warnings, as Santander (STD:banco) revealed this month they had placed up to $3.1 billion of investments on behalf of private banking clients with Mr. Madoff. Where many thought there was no risk, there was indeed quite a lot of it.
Disguised risk, and the poor management of it, is at the core of our sleepless nights. In his 1996 bestseller, "Against the Gods," Peter Bernstein aptly described the mastery of risk as "the notion that the future is more than the whim of the gods". The news continues to remind us that we've been at the mercy of unruly risk gods and we're all pretty desperate to get them to behave again, no one more so than Secretary Paulson.
The lasting solution is fairly simple in approach, but much harder to execute. Look risk square in the eye, measure it, understand it, mitigate it as best you can and come to terms with it. You should either live with risk or just walk away. We need to stop obsessing with the output of predictive models and instead focus intellectual energy on the assumptions we stick in them. Hiding risk under some creamy, rating agency sauce won't work either. Also, your vision shouldn't be clouded by pitch-books touting financial products with over-engineered structures and cute acronyms. Clarity and transparency should be everyone's new obsession. Disguised risk can affect all asset classes, but one place to look at how these trends started is lending -- remember those mortgages.
I used to work for one of those mega-galactic banks managing a portfolio of corporate loans. Loans. Not bonds, not equity. Just good ole loans; a borrower on one end and the lender on the other with principal and interest repayment in between. About a decade ago, my boss started throwing around terms usually reserved for the different animal of securities, like 'mark-to-market', 'yields' and 'ratings'. He also developed a knee-jerk reaction to risk that has now been broadly diagnosed as 'credit default swap-itis'; at the mere mention of risk, he rang up the swaps desk plying them for a quote. He shouldn't feel bad, he wasn't the only one. According to the International Swaps & Derivatives Association, the CDS market grew from $631 billion in 2001 to $54.6 trillion this year, an impressive 9,000% growth.
On top of that, my boss required me to sell 90 cents of every dollar we lent. I can't fault him for wanting to ride the wave of financial deregulation and innovation to higher levels of trading fee income, and, ahem, bonuses. But in so doing, we were trying to trick those risk gods by altering the centuries-old structure of loans; one party with excess capital judging the credit-worthiness of another party in need of capital, and importantly, asking those tough questions, until final maturity do them part.
As my boss proved, the minute you whisper 'secondary market' in a lender's ear, you open a Pandora's Box of "Originate-to-Sell." The lender inevitably succumbs to selling his loans and taking that tempting bite of immediate fee income, rather than sticking around to see if that borrower actually pays. After that nibble, he's ready to originate more and more loans for the sole purpose of selling them to third parties. My boss wasn't the only one. Reuters Loan Pricing Corporation tracks the U.S. secondary loan market as growing from a mere $8 billion in 1991 to a healthy $342 billion last year.
With loans off their books, lenders are challenged to maintain the same credit due diligence when it's someone else's capital at risk. You only need to look at the growth of rating agencies' business in corporate loans to understand who was given the task of due diligence; it was the paid evaluators of risk who had no capital skin in the game. By Standard & Poor's count, in 1998, only 20% of U.S. syndicated loans were rated but after only six years, that number approached 80%.
If you lend your own precious capital to a borrower, you will hopefully ask every possible question beforehand, to make sure you're going to get it back. But what if you work in Düsseldorf and the mortgage loan you just bought from your trusted Wall Street counterparty, financed someone's home in Sandusky, Ohio? Well then it's going to be harder to inquire how those house payments are going, or be aware of massive lay-offs in town which will result in a whole slew of mortgages going sour in the next payment cycle. And this isn't just a negative for that Düsseldorf investor. The next wave of pain comes when the Sandusky homeowner finds it difficult to re-negotiate his mortgage with the impatient debt holders on the other end, who turn out to be vast anonymous pools of capital sitting on the banks of the Rhine instead of Lake Erie.
Unquestionably, the innovations of CDS, secondary loan trading and rated loans allowed the loan market to become more efficient and expand by bringing new classes of investors to the party. But unfortunately, it was taken to extremes as these new investors became too reliant on what others were saying, and originators continuously moved on to the next slice of the fee income pie.
Moderating any extreme human behavior isn't easy. Many have called for a stricter financial regulatory environment. Will that help? Yes, of course, but in the long run, not as much as taking stock of our fundamental relationship with risk. A far more lasting, positive impact will be felt if the originators and buyers of risk stop trying to convince each other that it can be eradicated like a disease.
Instead, investors should begin to rely on their own judgment calls, and originators should own a larger risk share on their books to justify keeping their eyes on the ball, call it an 'Originate-to-Partially Sell' strategy.
Is it time for rating agencies to be paid by the buyers, versus the sellers, of risk? Can regulators or market-governing bodies find ways to make sellers' minimum hold positions more transparent to buyers? These are questions that will be bantered over the next months as markets seek normalcy. At the core however, the issue of risk remains. We either embrace it, or you just walk away. The long history of financial panics and manias prove that those pesky risk gods will raise their ugly heads again, each time, when and where we least expect it. There are always Ponzis-in-waiting -- or should we now be calling them Madoffs-in-waiting?
Comments: 13
Apt analysis. The real problem has stemmed from selling risk, as the author states, without transparent linkages to the source of risk. He/she who originates the risk should own more than 10% of it.
- svkris
Commentary: The simple solution to the crisis is hard to execute
By Hernán T. Narea
Last update: 5:38 a.m. EST Dec. 31, 2008Comments: 13NEW YORK (MarketWatch) -- I was at yet another, sparser-than-usual reception of bankers in Manhattan the other day. Foregoing some sad looking canapés, I embarked on an informal survey. The mood? Decidedly resigned to the prospect of more failures to come.
Anyone whose business card had a valid email, held it like gold bullion, judiciously traded only with others who had the same ingots, in case they were next on the chopping block.
And the blame for our economic ills, running the gamut from eviscerated 401-Ks to sports car fire-sales in Palm Beach? Without exception, everyone wanted to throw a Ferragamo lace up or Blahnik heel at the likes of Bernard Madoff, sub-prime mortgages and the entire regulatory universe. But I think they're all getting a bum rap. They aren't the real culprits.
The underlying problem is risk; more exactly, the disguising of it. Too many people (let's call them herds), convinced themselves that the era of volatility was fading fast in the rearview mirror and that the super-highway of capital markets we all traveled on had crossed the border into a promised land of zero-risk. However, the only thing crossed was the way real risk was being dressed up to look like a sure bet. Think of it as financial transvestism, except in this show, John Travolta in a dress was no competition for the securitizers of our collective wealth dreams.
Earlier this year, Emilio Botín, chairman of Spain's Santander Group, was quoted giving extremely sound advice as it related to the mortgage crisis, "If you don't understand an instrument, don't buy it. If you wouldn't buy a product for yourself, don't try to sell it. If you don't know your customers well, don't lend them money." Unfortunately, his own bankers didn't heed these warnings, as Santander (STD:banco) revealed this month they had placed up to $3.1 billion of investments on behalf of private banking clients with Mr. Madoff. Where many thought there was no risk, there was indeed quite a lot of it.
Disguised risk, and the poor management of it, is at the core of our sleepless nights. In his 1996 bestseller, "Against the Gods," Peter Bernstein aptly described the mastery of risk as "the notion that the future is more than the whim of the gods". The news continues to remind us that we've been at the mercy of unruly risk gods and we're all pretty desperate to get them to behave again, no one more so than Secretary Paulson.
The lasting solution is fairly simple in approach, but much harder to execute. Look risk square in the eye, measure it, understand it, mitigate it as best you can and come to terms with it. You should either live with risk or just walk away. We need to stop obsessing with the output of predictive models and instead focus intellectual energy on the assumptions we stick in them. Hiding risk under some creamy, rating agency sauce won't work either. Also, your vision shouldn't be clouded by pitch-books touting financial products with over-engineered structures and cute acronyms. Clarity and transparency should be everyone's new obsession. Disguised risk can affect all asset classes, but one place to look at how these trends started is lending -- remember those mortgages.
I used to work for one of those mega-galactic banks managing a portfolio of corporate loans. Loans. Not bonds, not equity. Just good ole loans; a borrower on one end and the lender on the other with principal and interest repayment in between. About a decade ago, my boss started throwing around terms usually reserved for the different animal of securities, like 'mark-to-market', 'yields' and 'ratings'. He also developed a knee-jerk reaction to risk that has now been broadly diagnosed as 'credit default swap-itis'; at the mere mention of risk, he rang up the swaps desk plying them for a quote. He shouldn't feel bad, he wasn't the only one. According to the International Swaps & Derivatives Association, the CDS market grew from $631 billion in 2001 to $54.6 trillion this year, an impressive 9,000% growth.
On top of that, my boss required me to sell 90 cents of every dollar we lent. I can't fault him for wanting to ride the wave of financial deregulation and innovation to higher levels of trading fee income, and, ahem, bonuses. But in so doing, we were trying to trick those risk gods by altering the centuries-old structure of loans; one party with excess capital judging the credit-worthiness of another party in need of capital, and importantly, asking those tough questions, until final maturity do them part.
As my boss proved, the minute you whisper 'secondary market' in a lender's ear, you open a Pandora's Box of "Originate-to-Sell." The lender inevitably succumbs to selling his loans and taking that tempting bite of immediate fee income, rather than sticking around to see if that borrower actually pays. After that nibble, he's ready to originate more and more loans for the sole purpose of selling them to third parties. My boss wasn't the only one. Reuters Loan Pricing Corporation tracks the U.S. secondary loan market as growing from a mere $8 billion in 1991 to a healthy $342 billion last year.
With loans off their books, lenders are challenged to maintain the same credit due diligence when it's someone else's capital at risk. You only need to look at the growth of rating agencies' business in corporate loans to understand who was given the task of due diligence; it was the paid evaluators of risk who had no capital skin in the game. By Standard & Poor's count, in 1998, only 20% of U.S. syndicated loans were rated but after only six years, that number approached 80%.
If you lend your own precious capital to a borrower, you will hopefully ask every possible question beforehand, to make sure you're going to get it back. But what if you work in Düsseldorf and the mortgage loan you just bought from your trusted Wall Street counterparty, financed someone's home in Sandusky, Ohio? Well then it's going to be harder to inquire how those house payments are going, or be aware of massive lay-offs in town which will result in a whole slew of mortgages going sour in the next payment cycle. And this isn't just a negative for that Düsseldorf investor. The next wave of pain comes when the Sandusky homeowner finds it difficult to re-negotiate his mortgage with the impatient debt holders on the other end, who turn out to be vast anonymous pools of capital sitting on the banks of the Rhine instead of Lake Erie.
Unquestionably, the innovations of CDS, secondary loan trading and rated loans allowed the loan market to become more efficient and expand by bringing new classes of investors to the party. But unfortunately, it was taken to extremes as these new investors became too reliant on what others were saying, and originators continuously moved on to the next slice of the fee income pie.
Moderating any extreme human behavior isn't easy. Many have called for a stricter financial regulatory environment. Will that help? Yes, of course, but in the long run, not as much as taking stock of our fundamental relationship with risk. A far more lasting, positive impact will be felt if the originators and buyers of risk stop trying to convince each other that it can be eradicated like a disease.
Instead, investors should begin to rely on their own judgment calls, and originators should own a larger risk share on their books to justify keeping their eyes on the ball, call it an 'Originate-to-Partially Sell' strategy.
Is it time for rating agencies to be paid by the buyers, versus the sellers, of risk? Can regulators or market-governing bodies find ways to make sellers' minimum hold positions more transparent to buyers? These are questions that will be bantered over the next months as markets seek normalcy. At the core however, the issue of risk remains. We either embrace it, or you just walk away. The long history of financial panics and manias prove that those pesky risk gods will raise their ugly heads again, each time, when and where we least expect it. There are always Ponzis-in-waiting -- or should we now be calling them Madoffs-in-waiting?
Comments: 13
Apt analysis. The real problem has stemmed from selling risk, as the author states, without transparent linkages to the source of risk. He/she who originates the risk should own more than 10% of it.
- svkris
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