Much has been made of WikiLeaks’ recent release of previously confidential diplomatic cables. The world was shocked—just shocked—to learn that there is tension between Sunni and Shia in the Middle East and that North Korea’s dictator for life Kim Jung Il is widely considered slightly nuts. Shocked, just shocked.
Lost amidst the political revelations was another packet of secret cables. Wikileaks had intended to post them to their website but accidentally faxed them to Syntrinsic instead. Fortunately, we had plenty of toner on hand. It seems that Wikileaks somehow came upon communications between high ranking officers and officials at major investment firms, regulatory agencies, and other sensitive financial posts.
Following the lead of many great news organizations, we feel we have a moral obligation to post excerpts from these cables here so that the world may be safe for democracy and freedom, etcetera, etcetera. Nonetheless, in a concession to our Chief Compliance Officer and to human decency, we have elected to delete the names of the specific authors, preferring rather to cite their professional roles.
Memo from Regulatory Investigators to Congressional Staffers:
“…and tomorrow we will be announcing a series of investigations into hedge fund insider trading. This announcement is likely to have an adverse affect on the US stock markets; therefore, we recommend that you sell your equity positions at market open tomorrow. Please bear in mind that only members of congress and their staffers are legally able to trade on inside information such as we are providing here, so please keep this memo private.”
Tweet from overwrought Congressional Staffer working on the Dodd-Frank Financial Reform Bill:
“We had promised Fiduciary Standard. Nice dinner last night with lobbyists from You Know Who. Breaking promise. Feeling remorse. LOL.”
Treasury Department Job Posting for CEO Position at Major Bank
“Wanted: Former CEO of failed financial institution with experience alienating shareholders, destroying shareholder value, and demoralizing (or downsizing) employees. Must be willing to accept large signing bonus and considerable stock options that only vest when government bailout secures future of firm. Must be willing to relocate within mid-town Manhattan. Requires a firm commitment of at least nine months, nothing less. Please contact Head of Treasury Department directly. At home. Sunday night.”
Dictation from Federal Reserve Brainstorming session
“Let’s create a US sovereign wealth fund, you know, like Norway, China, or Singapore.”
“Yeah, we could use it to buy US distressed assets. Then sell them back to the private sector later.”
“So where do we get capital?!”
“Let’s print it!”
“No borrow!”
“Is that sovereign?”
“Is that wealth?”
“Hey, delete those last two comments, now!”
Lecture Notes from Professor of Finance at Prominent School of Business
“Look, we teach Modern Portfolio Theory because it is easy to teach, not because it reflects reality. The real world is far more complex, far less predictable than MPT promises. But look, we’ve got tests to give, books to write, ratios to name, and software to sell. Now, enough of this. Please draw a normal curve…”
Speech from Senior White House Official (with staffer edits as indicated)
“Americans should invest in annuities (because insurance companies have contributed heavily to my campaign - REMOVE) and because it is important to plan for your futures. We were going to hold insurance companies to a fiduciary standard but (decided that doing so would likely make it harder to justify their sale in many cases and - REMOVE) did not want to stifle the profitability of the insurance companies when the economy is already weak. Annuities are a great compliment to social security (which many of you will find less robust or reliable than you had hoped - REMOVE).”
Friendly brief from White House Budget Office to Department of Education
“We understand that you wish to develop and require a curriculum around personal finance and we agree that in time, such an effort has merit. In the meantime, we are concerned that your effort to educate young people on matters related to credit card usage, investment, personal debt, and taxes, may demoralize citizens and even discourage their contributions to consumer spending at a crucial time. We ask that any such efforts be pursued when the economy is healthier. To underscore our point, we find that Education Department funding is already difficult to sustain and hope that your cooperation on this matter will enable to fully fund the budget you have requested.”
National Sales Manager response to FINRA panel on investment sales practices
“We are firmly convinced that there is no benefit to investors in disclosing clearly the various expenses associated with investment. Such expenses are minor, are of little concern to investors, and do not influence the behavior of our investment professionals. Even though the supervisory personnel at our firm are compensated based on revenues generated from the sale of investment products, we are 100% convinced that they ensure that all sales practices are in the best interest of the investor. Do you really think someone would sell an investment product just because it pays them better than another product?[Pause]. I didn’t think so.”
Note from Japanese Central Bank official to American counterpart regarding bank supports and interest rates
“Been there. Done that. Didn’t work.”
We realize that the excerpts above are seismic in their impact, revealing the cynical underbelly of global finance. We also recognize that we may be forced into hiding for exposing these dangerous communications. Indeed, the whole economy might grind to a halt, but such is the price of…well, you know.
We like this “secrets” business. You take widely known, common sense information, dress it up a bit, and make it seem mysterious and exclusive. Then—only after you have transformed it from general knowledge into a restricted insight—you dramatically announce it to the world. Sort of like the marketing materials from most investment firms.
Hmmmm, maybe we’re on to something…
Friday, December 17, 2010
Sunday, December 5, 2010
The New Philanthropic Normal
One of life’s mysteries is how and why donors give money. In the eyes of many, philanthropists and foundations remain elusive givers or deniers of financial sustenance. As these donors go, so go our social service agencies, environmental causes, faith based initiatives, and countless essential elements of our civil society.
The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.
What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.
We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.
In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.
I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.
II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.
III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.
IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?
V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.
We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”
That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.
The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.
What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.
We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.
In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.
I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.
II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.
III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.
IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?
V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.
We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”
That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.
Friday, November 19, 2010
Letters from the Future
Imagine receiving the following letter from the Internal Revenue Service:
**********************************************************
To: The _________________ Family
From: The United States Internal Revenue Service
Date: November 18, 2060
This letter serves as official notice of your family’s obligation under the 2060 Federal Reclamation of Earnings Act (FREACT). This Act was recently passed unanimously by the United States House and Senate, approved by the President on November 1, 2060, and formally validated by the Associated Western Financial Union League governing body. As such, this Act is officially binding.
Section 8 of the FREACT reads as follows:
“(A) All families that were documented citizens of the United States or otherwise received benefits commensurate with such citizenship as of January 1, 2010, shall hereby be held liable for their portion of the Federal Debt as of October 31, 2010. This liability shall consist of three factors:
1. Your individual proportionate share of the Federal Debt principal value as of October 31, 2010.
2. Interest on the proportional share of Debt compounded at 8% per year. Interest takes into account estimated interest costs as well as the estimated impact of inflation.
3. An average currency depreciation factor of .5 to account for the continued weakening dollar due in part to the Federal Debt for which your family is responsible.
4. The size of your family. FREACT deems adults responsible for the liabilities of the children living in their household as of January 1, 2010.”
(see: FREACT, 11.18.60, Section 8.A)
To assist you in understanding your family’s specific obligation, the IRS has provided the following example:
Individual Share of Federal Debt - $13.7 Trillion / 301 million individuals = $43,854
Interest Accrued at 8% per year for 50 years = $2,056,815 (gold bullion)
0.50 factor applied for all payments made in $US Dollars = $4,113,630 (current $US)
All adults and children living in your household (e.g. f=5) = $20,568,149
FREACT was crafted and passed to address the highly destructive use of debt that only became more ingrained in the functioning of American society in subsequent years. While the Federal government of 2060 considered collecting by going back to the citizenry of 1945 when an expansive Federal government became most notable, it was decided that receiving letters from the future would be truly disconcerting and may even cause permanent psychological damage. As well, that generation had already endured World War I, The Great Depression, and World War II. By 2010, our records indicate that most Americans were sufficiently sophisticated and jaded that such a letter would be bothersome but cause no cruel or unusual punishment.
For those of you who may wonder at the ability of IRS to forward this letter to your attention, let us assure you that our actions are fully authorized by the Comprehensive Federal Jurisdiction Act of 2056, which empowered the IRS and other government agencies to seek a redress of grievances from citizens, past present and future. As you can imagine, given that most citizens’ personal data is available in a variety of media and forums, it is well within future technological competence to ensure that you have reached this letter. Also, be assured that we know you have opened and read the contents of this letter. Protestations to the contrary will not be permitted.
Per Section 9 of the FREACT, you may forward your payments via two methods.
1. If paying in currency (2010) $US Dollars, you may pay by credit card to the future US Treasury via the Web Portal on the back of this letter. As you may have guessed, by 2060 it is possible to make currency transactions across time periods and currency regimes. FREACT mandates that payments may NOT be made to the current US Treasury due to concerns that such funds will not be reserved for future use as intended. Recall that payments in $US Dollars require a .50 depreciation factor, effectively doubling your payment.
2. If paying in gold bullion, please indicate as such via the same Web Portal. A courier will be sent from 2060 to collect all bullion payments during the last week of December. Bear in mind that payments in gold bullion do NOT require the .50 discount. Payments by shares of gold related exchange traded funds, mutual funds, hedge funds, or other securitized vehicles will not be accepted, nor will shares in gold producing companies.
If you have any questions, please call your congressional representatives as they represent the current and future. Bear in mind that your current representatives also are just receiving this information and may have similar questions. Also, remember that in some instances, your future representatives may not yet be born and certainly are not aware that FREACT will be passed in 2060. Their lack of ability to respond to your questions at this time does not in any way absolve you of your obligation, financial or otherwise, to your future fellow citizens.
You may not contact the future to lodge complaints. The citizens of 2060 had no say on the debt you issued on our behalf; you have no say on how those citizens elect to pay for it. As you may have guessed, nonpayment is not an option. We can assure you that the means for securing payment in 2060 are far more advanced than they were in 2010. While FREACT authorizes the use of iBrain technology (version 3.0) in managing your behavior, voluntary cooperation is desired.
We here at the Internal Revenue Service appreciate your prompt compliance with FREACT and know that you recognize its critical role in reestablishing America as a solvent, even vibrant economic power in the future. We are sure that you have at times wished that your predecessors could have adopted different policies and practices; thus, we are confident that you will respect our desire to do so now that the technological capabilities have made doing so possible.
Thank you in advance for your support.
Sincerely,
The Internal Revenue Service
**********************************************************
Science fiction? Perhaps, though, it might be interesting if the US Treasury was required to forward a simple annual report every year to each citizen outlining in plain English the size and nature of our Federal debt. Of course, a similar overview of the spending would be nice as well. In the meantime, we’ll just get busy growing the economy and keeping an eye out for letters from the future.
**********************************************************
To: The _________________ Family
From: The United States Internal Revenue Service
Date: November 18, 2060
This letter serves as official notice of your family’s obligation under the 2060 Federal Reclamation of Earnings Act (FREACT). This Act was recently passed unanimously by the United States House and Senate, approved by the President on November 1, 2060, and formally validated by the Associated Western Financial Union League governing body. As such, this Act is officially binding.
Section 8 of the FREACT reads as follows:
“(A) All families that were documented citizens of the United States or otherwise received benefits commensurate with such citizenship as of January 1, 2010, shall hereby be held liable for their portion of the Federal Debt as of October 31, 2010. This liability shall consist of three factors:
1. Your individual proportionate share of the Federal Debt principal value as of October 31, 2010.
2. Interest on the proportional share of Debt compounded at 8% per year. Interest takes into account estimated interest costs as well as the estimated impact of inflation.
3. An average currency depreciation factor of .5 to account for the continued weakening dollar due in part to the Federal Debt for which your family is responsible.
4. The size of your family. FREACT deems adults responsible for the liabilities of the children living in their household as of January 1, 2010.”
(see: FREACT, 11.18.60, Section 8.A)
To assist you in understanding your family’s specific obligation, the IRS has provided the following example:
Individual Share of Federal Debt - $13.7 Trillion / 301 million individuals = $43,854
Interest Accrued at 8% per year for 50 years = $2,056,815 (gold bullion)
0.50 factor applied for all payments made in $US Dollars = $4,113,630 (current $US)
All adults and children living in your household (e.g. f=5) = $20,568,149
FREACT was crafted and passed to address the highly destructive use of debt that only became more ingrained in the functioning of American society in subsequent years. While the Federal government of 2060 considered collecting by going back to the citizenry of 1945 when an expansive Federal government became most notable, it was decided that receiving letters from the future would be truly disconcerting and may even cause permanent psychological damage. As well, that generation had already endured World War I, The Great Depression, and World War II. By 2010, our records indicate that most Americans were sufficiently sophisticated and jaded that such a letter would be bothersome but cause no cruel or unusual punishment.
For those of you who may wonder at the ability of IRS to forward this letter to your attention, let us assure you that our actions are fully authorized by the Comprehensive Federal Jurisdiction Act of 2056, which empowered the IRS and other government agencies to seek a redress of grievances from citizens, past present and future. As you can imagine, given that most citizens’ personal data is available in a variety of media and forums, it is well within future technological competence to ensure that you have reached this letter. Also, be assured that we know you have opened and read the contents of this letter. Protestations to the contrary will not be permitted.
Per Section 9 of the FREACT, you may forward your payments via two methods.
1. If paying in currency (2010) $US Dollars, you may pay by credit card to the future US Treasury via the Web Portal on the back of this letter. As you may have guessed, by 2060 it is possible to make currency transactions across time periods and currency regimes. FREACT mandates that payments may NOT be made to the current US Treasury due to concerns that such funds will not be reserved for future use as intended. Recall that payments in $US Dollars require a .50 depreciation factor, effectively doubling your payment.
2. If paying in gold bullion, please indicate as such via the same Web Portal. A courier will be sent from 2060 to collect all bullion payments during the last week of December. Bear in mind that payments in gold bullion do NOT require the .50 discount. Payments by shares of gold related exchange traded funds, mutual funds, hedge funds, or other securitized vehicles will not be accepted, nor will shares in gold producing companies.
If you have any questions, please call your congressional representatives as they represent the current and future. Bear in mind that your current representatives also are just receiving this information and may have similar questions. Also, remember that in some instances, your future representatives may not yet be born and certainly are not aware that FREACT will be passed in 2060. Their lack of ability to respond to your questions at this time does not in any way absolve you of your obligation, financial or otherwise, to your future fellow citizens.
You may not contact the future to lodge complaints. The citizens of 2060 had no say on the debt you issued on our behalf; you have no say on how those citizens elect to pay for it. As you may have guessed, nonpayment is not an option. We can assure you that the means for securing payment in 2060 are far more advanced than they were in 2010. While FREACT authorizes the use of iBrain technology (version 3.0) in managing your behavior, voluntary cooperation is desired.
We here at the Internal Revenue Service appreciate your prompt compliance with FREACT and know that you recognize its critical role in reestablishing America as a solvent, even vibrant economic power in the future. We are sure that you have at times wished that your predecessors could have adopted different policies and practices; thus, we are confident that you will respect our desire to do so now that the technological capabilities have made doing so possible.
Thank you in advance for your support.
Sincerely,
The Internal Revenue Service
**********************************************************
Science fiction? Perhaps, though, it might be interesting if the US Treasury was required to forward a simple annual report every year to each citizen outlining in plain English the size and nature of our Federal debt. Of course, a similar overview of the spending would be nice as well. In the meantime, we’ll just get busy growing the economy and keeping an eye out for letters from the future.
Wednesday, November 10, 2010
Underwhelming Forces
This week, Syntrinsic has invited guest columnist, E. Pluribus Unum, to comment on the global credit crisis. When it comes to currency, few possess Unum’s heads-up insight or universal appeal.
US Dollars Underwhelm Opposing Forces
(Berlin, Tokyo, Washington DC)—E.P. Unum
While most Americans have been caught up in the drama of the mid-term elections, a real battle has been waging that touches every American household. Reports from the frontlines indicate that the United States is clashing with former WWII adversaries Japan and Germany, cold war antagonist Russia, and emerging economies from Asia to Latin America. Casualties are mounting and the main victim thus far is America’s standing in the world.
This is not simply a battle over territory or natural resources, nor one of faith or ideology or pride. On the other hand, it is a battle for all of these elements, for the conflict is one of economic strength not political power; the primary armaments are currencies, not bullets; and the battlefield is not some forest or hilltop but the sacred ground of the global capital markets.
Like so many geopolitical conflicts, there has been a long escalation of the underlying tension, so much so that there is no one event, person, or date that marks the Beginning of the crisis. Globalization has opened markets and election polls, technology has democratized most information in most of the world, and consumer appetites have steadily grown, changing the definition of middle class and its cost. Throughout this intensification, the developed world has relentlessly grown its leverage.
If the other factors have been kindling, then leverage has been the gasoline poured atop the wood pile. All that was missing was a match. The US housing market became that primary catalyst, with help from housing markets in Western Europe, financial engineers in New York and London, and other minor players. And the currency race to the bottom was on.
Sure, on the surface, American diplomats have been discussing stimulating jobs, reassuring consumers, and keeping people in their homes. But in times such as these, it is critical to look past the posturing. While the diplomats have been holding press conferences, America’s top financial generals have been on a heavy recruitment drive, boosting enlistment from all quarters so that they can flood the domestic and foreign markets with green troops and thus overwhelm our economic competitors. They have scrounged in all corners for recruits, lowered standards, and even gone so far as to assign the same soldiers to multiple missions at the same time. Despite early claims that they would not do so, they have reassigned dollars that had been propping up mortgage backed bonds to now prop up Treasury Bonds instead of sending them home as promised.
Just this past week, the Federal Reserve (not the Pentagon, but a Federal agency similarly tight lipped about its long-term strategy) committed to throwing another 600 billion soldiers into the fight against—well, you know. Each month, waves of 75 billion troops are expected to march out of their headquarters in Washington DC and off to the brutal capital markets where they will confront Yen and Euros and any other currency that dares to be weak.
Out on the battlefield, their mission is simple: drive down the cost of American exports. Make it cheaper to do business with America and concurrently, more expensive to do business with everyone else. This conflict is not based on skill or intrigue; rather, it is a simple confrontation that will be won by numbers and sheer chutzpah. Who’s willing to do what the others will not or cannot do?
“I don’t care how hard they try to keep their currencies stable, when the battle is over, we will be the weakest currency out there,” claimed an anonymous Treasury Sergeant, “or we aren’t American dollars.”
“That’s right,” said an unnamed member of the banking special forces. “Look, our way of life is at stake. You gotta do what you gotta do. If the Japanese try to keep the Yen from strengthening, then we’ll just out-print them. They’ve kept their interest rates near 0% for 20+ years. It’s our turn. We’ve saved the banks. Paying nothing on their deposits will help banks become profitable again. Who can argue with that?”
Another commentator noted that, “If the EU thinks that we’ll just roll over and let our currency appreciate, then they don’t know modern America. Sure we’ve got special relationships, but we’ve got a lifestyle to maintain here.”
In past confrontations such as World War II, the US relied upon a vibrant, growing population, superior natural resources, and robust manufacturing and capital markets to outmatch its opponents. Today, it is America’s superior printing presses and the unabashed confidence to use them that has put our global competitors on the run.
Look at the casualties so far: Versus the US dollar, the Yen has appreciated by 13% since May, while the Euro has increased by 17% since June. Even the Polish Zloty has gained 19% during the same period. In short, it’s a rout. No one is really even close. It’s an American triumph. Start the ticker tape (parade).
American success is sparking angry reactions around the globe. Brazil’s President-elect, Dilma Rousseff accused America of recreating the competitive currency devaluation environment that led up to WWII. And according to the Wall Street Journal, German Finance Minister Wolfgang Schlauble claimed that the Federal Reserve is “undermining the credibility of U.S. financial policy. It just doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.” But one would expect America’s competitors to complain; they are losing the devaluation battle and they know it.
The battle is still in its early stages, but America’s financial generals have made clear their commitment to keeping the US dollar weak and they aren’t going to change course just because it upsets our European allies and global trading partners.
Of course, not everyone is upset. In a moment of candor, one unnamed strategist from a certain middle kingdom commented, “Oh, we complain on the surface, but it is just an act. Imagine if your greatest adversary kept weakening himself on purpose, every day, giving away more control, more power, more influence. Really, you could not dream up such a situation. When the dollar has become too weak, people around the world will look for another currency. And we’ll be waiting. It may be our children, or even our grandchildren, but we’ll be waiting. They may win today’s battle, but we will win the war.”
US Dollars Underwhelm Opposing Forces
(Berlin, Tokyo, Washington DC)—E.P. Unum
While most Americans have been caught up in the drama of the mid-term elections, a real battle has been waging that touches every American household. Reports from the frontlines indicate that the United States is clashing with former WWII adversaries Japan and Germany, cold war antagonist Russia, and emerging economies from Asia to Latin America. Casualties are mounting and the main victim thus far is America’s standing in the world.
This is not simply a battle over territory or natural resources, nor one of faith or ideology or pride. On the other hand, it is a battle for all of these elements, for the conflict is one of economic strength not political power; the primary armaments are currencies, not bullets; and the battlefield is not some forest or hilltop but the sacred ground of the global capital markets.
Like so many geopolitical conflicts, there has been a long escalation of the underlying tension, so much so that there is no one event, person, or date that marks the Beginning of the crisis. Globalization has opened markets and election polls, technology has democratized most information in most of the world, and consumer appetites have steadily grown, changing the definition of middle class and its cost. Throughout this intensification, the developed world has relentlessly grown its leverage.
If the other factors have been kindling, then leverage has been the gasoline poured atop the wood pile. All that was missing was a match. The US housing market became that primary catalyst, with help from housing markets in Western Europe, financial engineers in New York and London, and other minor players. And the currency race to the bottom was on.
Sure, on the surface, American diplomats have been discussing stimulating jobs, reassuring consumers, and keeping people in their homes. But in times such as these, it is critical to look past the posturing. While the diplomats have been holding press conferences, America’s top financial generals have been on a heavy recruitment drive, boosting enlistment from all quarters so that they can flood the domestic and foreign markets with green troops and thus overwhelm our economic competitors. They have scrounged in all corners for recruits, lowered standards, and even gone so far as to assign the same soldiers to multiple missions at the same time. Despite early claims that they would not do so, they have reassigned dollars that had been propping up mortgage backed bonds to now prop up Treasury Bonds instead of sending them home as promised.
Just this past week, the Federal Reserve (not the Pentagon, but a Federal agency similarly tight lipped about its long-term strategy) committed to throwing another 600 billion soldiers into the fight against—well, you know. Each month, waves of 75 billion troops are expected to march out of their headquarters in Washington DC and off to the brutal capital markets where they will confront Yen and Euros and any other currency that dares to be weak.
Out on the battlefield, their mission is simple: drive down the cost of American exports. Make it cheaper to do business with America and concurrently, more expensive to do business with everyone else. This conflict is not based on skill or intrigue; rather, it is a simple confrontation that will be won by numbers and sheer chutzpah. Who’s willing to do what the others will not or cannot do?
“I don’t care how hard they try to keep their currencies stable, when the battle is over, we will be the weakest currency out there,” claimed an anonymous Treasury Sergeant, “or we aren’t American dollars.”
“That’s right,” said an unnamed member of the banking special forces. “Look, our way of life is at stake. You gotta do what you gotta do. If the Japanese try to keep the Yen from strengthening, then we’ll just out-print them. They’ve kept their interest rates near 0% for 20+ years. It’s our turn. We’ve saved the banks. Paying nothing on their deposits will help banks become profitable again. Who can argue with that?”
Another commentator noted that, “If the EU thinks that we’ll just roll over and let our currency appreciate, then they don’t know modern America. Sure we’ve got special relationships, but we’ve got a lifestyle to maintain here.”
In past confrontations such as World War II, the US relied upon a vibrant, growing population, superior natural resources, and robust manufacturing and capital markets to outmatch its opponents. Today, it is America’s superior printing presses and the unabashed confidence to use them that has put our global competitors on the run.
Look at the casualties so far: Versus the US dollar, the Yen has appreciated by 13% since May, while the Euro has increased by 17% since June. Even the Polish Zloty has gained 19% during the same period. In short, it’s a rout. No one is really even close. It’s an American triumph. Start the ticker tape (parade).
American success is sparking angry reactions around the globe. Brazil’s President-elect, Dilma Rousseff accused America of recreating the competitive currency devaluation environment that led up to WWII. And according to the Wall Street Journal, German Finance Minister Wolfgang Schlauble claimed that the Federal Reserve is “undermining the credibility of U.S. financial policy. It just doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.” But one would expect America’s competitors to complain; they are losing the devaluation battle and they know it.
The battle is still in its early stages, but America’s financial generals have made clear their commitment to keeping the US dollar weak and they aren’t going to change course just because it upsets our European allies and global trading partners.
Of course, not everyone is upset. In a moment of candor, one unnamed strategist from a certain middle kingdom commented, “Oh, we complain on the surface, but it is just an act. Imagine if your greatest adversary kept weakening himself on purpose, every day, giving away more control, more power, more influence. Really, you could not dream up such a situation. When the dollar has become too weak, people around the world will look for another currency. And we’ll be waiting. It may be our children, or even our grandchildren, but we’ll be waiting. They may win today’s battle, but we will win the war.”
Friday, November 5, 2010
Next Door
Two years ago, a homeowner from the former Motor City described watering and mowing the lawn of an abandoned home next door. She hoped to keep out potential trespassers, preserve the value of her home, and maintain some semblance of normalcy in a once-thriving neighborhood. It seemed at the time to be a tale from a distant land, a desperate, broken corner of America where unemployment hovers between 30-50%. An exception.
A few weeks ago, in Denver (unemployment: 8%) a homeowner in one of the city’s newest, most vibrant neighborhoods found himself in a similar situation. Wells Fargo Mortgage had (reluctantly) become the new neighbor after the previous resident left, taking not just the family, but also most of the appliances and fixtures. The abandoned lawn had reached knee-height and the bushes had grown out over the sidewalk. The police had been called at least once regarding suspicious activity. Detroit had arrived next door.
So you mow your neighbor’s yard and trim back their bushes because it must be done and you tell your friends about the phenomenal deal, a house selling for just 60% of its 2006 purchase price. You cringe when the appraisers tell you what they guess your house might be worth and you make peace with realizing that your reliable American mobility is neither. And it’s not all bad, because Denver is not such a bad city in which to be stuck; it’s just strange accepting such a concept.
That’s the easy part.
The hard part comes when you open the paper to find that many Americans have been living rent-free for many months (“The Stealth Stimulus of Defaulters Living for Free,” Wall Street Journal , November 1, 2010). According to LPS Analytics, the average borrower whose home is in the foreclosure process has not made a payment in 16 months. That’s 1.33 years. These borrowers are still living in their homes but not paying to do so. Nationwide, the WSJ estimates that the situation equates to about $2.6 billion per month in rent-free housing. That’s a lot of revenue not being paid by borrowers or received by lenders, many of whom have recently been kept afloat by taxpayers. The situation drives a complex set of new social conditions that raise innumerable questions.
I. Rent-Free Residents
Some find good news in the situation, arguing that perhaps some of that money is enabling people to buy food and other necessaries during a difficult time, or to sock savings away for when they are finally compelled to move out. In truth, no one knows how that money is being spent, but ideally it is indeed buying people some time on meeting basic needs.
· Assuming that several million American families are currently living rent free, what happens when they can no longer do so? Where will they go?
· If the banks are currently subsidizing the living arrangements of these millions, then who will subsidize them going forward when they no longer are allowed to live in the homes? Nonprofit organizations such as Rescue Missions and the Salvation Army that already face capacity and funding constraints? Municipalities already overwhelmed by financial obligations? Friends and relatives already under strain? No one?
II. Banks as Homeowners
Banks now own 1 million homes in the US. Another 5.2 million homes are either in the foreclosure process or at least a few months late on mortgage payments.
· What happens as banks own an ever increasing part of the residential real estate market?
· How might this change their relationship to the communities they serve around the country?
· Assuming that many banks are striving to get these properties off their books as quickly as possible, how does their fire-sale pricing impair the broader housing market?
· Since banks remain a primary source of mortgage financing, what does it mean that they are potentially lending to buyers who seek to buy homes from the bank’s own inventory?
· If there are about 75 million owner occupied homes in the US (US Census, 3Q2010) and somewhere north of 5 million are under severe financial stress so far, then aren’t we farther from the end of this crisis than the beginning?
III. The Paperwork Fiasco
Bank of America now services over 14 million loans, 1.3 million of which are at least 60 days late on mortgage payments (“BofA Tries to Untangle Files,” WSJ, 11/1/10). Regulators and some state Attorneys General, however, have ordered Bank of America and other lenders to review the paperwork on hundreds of thousands of foreclosures already in process, alleging that some paperwork may not be 100% complete due to sloppy record-keeping during the height of the mortgage boom, especially at firms like Countrywide which the Treasury Department “strongly encouraged” Bank of America to acquire at the height of the crisis.
· How will slowing down the foreclosure process delay the healing of the residential real estate market?
· What happens if regulators forbid banks from pursuing a material number of foreclosures and yet residents do not fulfill their mortgage payments? Who litigates that situation? Can the bank still sell the home to recoup its loan?
· What obligation does the resident bear if the resident has no intention of becoming the rightful homeowner?
· Given that homeownership would be in limbo, who pays the municipal taxes? If no one does, how does this compound woes already faced by many municipalities? What recourse do the municipalities have, if any? Whose authority trumps whose—the AG’s office, banking regulators, county court, arbitrators…?
All three of these themes reflect a rapidly and dramatically changing culture of homeownership in America. As a society we are fundamentally altering the relationship between regulators and lenders, lenders and borrowers, and homeowners and their neighbors. No one party is explicitly driving this process; thus no one party can be blamed or held accountable, nor can any one party lead us out of this morass. As is the case with most pandemics, there are many actors involved, each confronted by a set of seemingly insurmountable challenges, and there are many intangibles that defy modeling or regulating.
In every neighborhood, there are good people struggling through these difficult circumstances, people who may not have told their closest friends that they are on the brink of losing their homes. It’s a sobering time.
We agree that there are many critical issues in Washington and in state houses around the country that require addressing, but we would argue that a far more concentrated and concerted effort on the housing crisis from courageous political and banking leaders could do more to turn the mood of Americans than almost anything else. For when a people are unstable in their homes, the rest of their lives are tossed into tumult. Workplaces, schools, neighborhoods, houses of worship—all suffer when people do not have a place. There have always been those amongst us without a home, but the number of those who are no longer secure in their home is higher than it has been in decades.
Printing money will not change the fundamental structural shifts in America’s relationship with our homes, nor restore confidence in an essential element of the American Dream. We need more. We need brave leadership. We need a Midway, an Inchon. We need Washington to cross the Delaware in the dead of winter against all odds to take Trenton. We need a win and we need it to be at home. Or at least next door.
A few weeks ago, in Denver (unemployment: 8%) a homeowner in one of the city’s newest, most vibrant neighborhoods found himself in a similar situation. Wells Fargo Mortgage had (reluctantly) become the new neighbor after the previous resident left, taking not just the family, but also most of the appliances and fixtures. The abandoned lawn had reached knee-height and the bushes had grown out over the sidewalk. The police had been called at least once regarding suspicious activity. Detroit had arrived next door.
So you mow your neighbor’s yard and trim back their bushes because it must be done and you tell your friends about the phenomenal deal, a house selling for just 60% of its 2006 purchase price. You cringe when the appraisers tell you what they guess your house might be worth and you make peace with realizing that your reliable American mobility is neither. And it’s not all bad, because Denver is not such a bad city in which to be stuck; it’s just strange accepting such a concept.
That’s the easy part.
The hard part comes when you open the paper to find that many Americans have been living rent-free for many months (“The Stealth Stimulus of Defaulters Living for Free,” Wall Street Journal , November 1, 2010). According to LPS Analytics, the average borrower whose home is in the foreclosure process has not made a payment in 16 months. That’s 1.33 years. These borrowers are still living in their homes but not paying to do so. Nationwide, the WSJ estimates that the situation equates to about $2.6 billion per month in rent-free housing. That’s a lot of revenue not being paid by borrowers or received by lenders, many of whom have recently been kept afloat by taxpayers. The situation drives a complex set of new social conditions that raise innumerable questions.
I. Rent-Free Residents
Some find good news in the situation, arguing that perhaps some of that money is enabling people to buy food and other necessaries during a difficult time, or to sock savings away for when they are finally compelled to move out. In truth, no one knows how that money is being spent, but ideally it is indeed buying people some time on meeting basic needs.
· Assuming that several million American families are currently living rent free, what happens when they can no longer do so? Where will they go?
· If the banks are currently subsidizing the living arrangements of these millions, then who will subsidize them going forward when they no longer are allowed to live in the homes? Nonprofit organizations such as Rescue Missions and the Salvation Army that already face capacity and funding constraints? Municipalities already overwhelmed by financial obligations? Friends and relatives already under strain? No one?
II. Banks as Homeowners
Banks now own 1 million homes in the US. Another 5.2 million homes are either in the foreclosure process or at least a few months late on mortgage payments.
· What happens as banks own an ever increasing part of the residential real estate market?
· How might this change their relationship to the communities they serve around the country?
· Assuming that many banks are striving to get these properties off their books as quickly as possible, how does their fire-sale pricing impair the broader housing market?
· Since banks remain a primary source of mortgage financing, what does it mean that they are potentially lending to buyers who seek to buy homes from the bank’s own inventory?
· If there are about 75 million owner occupied homes in the US (US Census, 3Q2010) and somewhere north of 5 million are under severe financial stress so far, then aren’t we farther from the end of this crisis than the beginning?
III. The Paperwork Fiasco
Bank of America now services over 14 million loans, 1.3 million of which are at least 60 days late on mortgage payments (“BofA Tries to Untangle Files,” WSJ, 11/1/10). Regulators and some state Attorneys General, however, have ordered Bank of America and other lenders to review the paperwork on hundreds of thousands of foreclosures already in process, alleging that some paperwork may not be 100% complete due to sloppy record-keeping during the height of the mortgage boom, especially at firms like Countrywide which the Treasury Department “strongly encouraged” Bank of America to acquire at the height of the crisis.
· How will slowing down the foreclosure process delay the healing of the residential real estate market?
· What happens if regulators forbid banks from pursuing a material number of foreclosures and yet residents do not fulfill their mortgage payments? Who litigates that situation? Can the bank still sell the home to recoup its loan?
· What obligation does the resident bear if the resident has no intention of becoming the rightful homeowner?
· Given that homeownership would be in limbo, who pays the municipal taxes? If no one does, how does this compound woes already faced by many municipalities? What recourse do the municipalities have, if any? Whose authority trumps whose—the AG’s office, banking regulators, county court, arbitrators…?
All three of these themes reflect a rapidly and dramatically changing culture of homeownership in America. As a society we are fundamentally altering the relationship between regulators and lenders, lenders and borrowers, and homeowners and their neighbors. No one party is explicitly driving this process; thus no one party can be blamed or held accountable, nor can any one party lead us out of this morass. As is the case with most pandemics, there are many actors involved, each confronted by a set of seemingly insurmountable challenges, and there are many intangibles that defy modeling or regulating.
In every neighborhood, there are good people struggling through these difficult circumstances, people who may not have told their closest friends that they are on the brink of losing their homes. It’s a sobering time.
We agree that there are many critical issues in Washington and in state houses around the country that require addressing, but we would argue that a far more concentrated and concerted effort on the housing crisis from courageous political and banking leaders could do more to turn the mood of Americans than almost anything else. For when a people are unstable in their homes, the rest of their lives are tossed into tumult. Workplaces, schools, neighborhoods, houses of worship—all suffer when people do not have a place. There have always been those amongst us without a home, but the number of those who are no longer secure in their home is higher than it has been in decades.
Printing money will not change the fundamental structural shifts in America’s relationship with our homes, nor restore confidence in an essential element of the American Dream. We need more. We need brave leadership. We need a Midway, an Inchon. We need Washington to cross the Delaware in the dead of winter against all odds to take Trenton. We need a win and we need it to be at home. Or at least next door.
Thursday, October 28, 2010
No Better Place, No Better Time
Last week, a letter in the Wall Street Journal claimed that Americans would be foolish to start a business today because the government has been destroying the incentive to build a successful company. We have heard this refrain in casual conversation and in the context of electioneering.
How odd. We are at a loss to think of a time and place in human history in which there was greater freedom or a better time to start a business, almost any business.
It is important to clarify what is needed to start and grow a business and to be clear where government has the ability to interfere.
Ideas
Entrepreneurs must identify a service or product that is new or distinctive or is to be delivered in a new or distinctive way. Thanks to globalization and the internet, American’s can think and invent across sectors, industries, regions, and delivery modalities in ways that our parents and grandparents could not, regardless of their intelligence. In America, the government cannot and does not limit one’s ideas, though we can do it to ourselves pretty easily.
Work Ethic
To start and build a company requires tremendous determination, the ability to move through adversity, the willingness to invest time and energy and then more of both. Ownership requires a sense of ownership. No government policy can give one a strong work ethic. The hardest working people we know are driven more by intrinsic than extrinsic motivation. (Yes, that recognition represents a key part of the origins of “Syntrinsic.” If we embraced external motivation, our name would be quite different.)
Knowledge
In order to implement one’s idea, it often is necessary to acquire new knowledge about technical or management aspects of the business. America’s education system gets a lot of criticism and much of it deserved; however, at least America as a country does not prevent people from learning what they want or need to know. Someone passively waiting to be given knowledge may struggle, but those who actively seek to learn can take advantage of a social system full of free and low-cost educational opportunities. For generations, the best way to acquire knowledge was through apprenticeship, not in school; that ability to glean on-the-job training from experienced mentors is as robust as ever if one is appropriately motivated.
Good Colleagues
No business succeeds in a vacuum. Partners, employees, vendors, customers, strategic partners, and other stakeholders share in the work via creativity, insight, or simple sweat equity. In America, entrepreneurs can seek out and find the people they need from around the globe, and in America people can take the risk of joining something new or innovative or both. We are not constrained by government in who we can hire nor are those who seek work constrained by government in seeking employment. America does not force children to choose professions in early adolescence as many developed countries do. We have the opportunity to invent and reinvent ourselves many times over.
Rule of Law
Volumes have been written about the critical role that that the rule of law plays in creating a healthy climate for constructive capitalism (see: The Mystery of Capital, Hernando De Soto, Basic Books, 2000). While we do not all agree on specific laws or even how many laws there should be, we do live in a country governed by law and with largely disinterested courts and other intermediaries to help officiate the application of law.
Access to Capital
While it has been difficult to borrow money from traditional banks over the past 2+ years, there remain many individuals and organizations that possess capital and are willing to invest in those with compelling business plans. Government may not go out of its way to make it easy for an entrepreneur to secure funds for an idea, but nor does government step in the way to prevent access. If you want to borrow against your credit card or home you can, provided the lender on the other side is interested. If you want to borrow from private or institutional investors the government will not prevent you from doing so. That may seem simple but it means the world.
Many other factors contribute to entrepreneurial opportunity, including civil society, transportation infrastructure, accessible telecommunications, absence of corruption, and healthy demographic trends. No combinations of factors ensure success of an individual entrepreneur, but taken together, they do create a climate where society-wide entrepreneurial success is highly likely.
The challenge of course, is that these factors must be protected vigilantly. Success can easily breed complacency. Just because America has been a richly innovative society since before its founding does not mean that it must remain so.
At a policy level, government can take many steps that simply make it harder to start a business:
· Diminish some of the incentive for working hard by making the work too onerous (e.g. regulatory overkill) or reducing the potential rewards of success (e.g. onerous tax policy).
· Make it scary or difficult to hire people by: mandating salary and benefits (including employment taxes) that are beyond what employers are able/willing to pay; mandating whom one can hire by gender, nationality, race, or other socio-political factors; making it easy not to work; or by making it difficult to remove people from employment.
· Demonize businesspeople.
· Threaten the Rule of Law by creating uncertainty about the application of laws already on the books. Recent examples include displacement of secured bond holders (Chrysler), interference with foreclosures, and protection of certain failed institutions (while allowing others in the same industry to crash). When one earns a reputation for changing the rules in the middle of the game, one makes it harder to get people to play again.
· Mandate allocations of capital. All capital controlled by the government was private capital first. Thus, any time that the government requires that a government agency allocate capital in a way that does not make economic sense or any time that the government mandates private corporations or individuals to allocate capital in a certain way, the risk is run that capital will not be available for otherwise meritorious ideas
That said, we do not think that government is the main problem today. That’s a highly unpopular thing to say in this political environment, but stay with us for a moment.
Ultimately, American government reflects American culture, and we’re more concerned with the latter than the former. We are not so sure American culture understands or is excited about entrepreneurship in the manner necessary to go forward effectively. The factors most necessary to start a business today—great ideas, work ethic, innovation, courage, leadership, collaboration—these are not controlled or materially limited by the government. These factors are our responsibility as individuals, as citizens.
It is easy to bash government from all sides of the aisles, and there is a place for it perhaps. More importantly however, our economy will only thrive—and our society prosper—so long as there are people with good ideas who possess the work ethic, skill, and tenacity to bring those ideas to life.
There’s been no finer place to start a business than America. If not now, when?
How odd. We are at a loss to think of a time and place in human history in which there was greater freedom or a better time to start a business, almost any business.
It is important to clarify what is needed to start and grow a business and to be clear where government has the ability to interfere.
Ideas
Entrepreneurs must identify a service or product that is new or distinctive or is to be delivered in a new or distinctive way. Thanks to globalization and the internet, American’s can think and invent across sectors, industries, regions, and delivery modalities in ways that our parents and grandparents could not, regardless of their intelligence. In America, the government cannot and does not limit one’s ideas, though we can do it to ourselves pretty easily.
Work Ethic
To start and build a company requires tremendous determination, the ability to move through adversity, the willingness to invest time and energy and then more of both. Ownership requires a sense of ownership. No government policy can give one a strong work ethic. The hardest working people we know are driven more by intrinsic than extrinsic motivation. (Yes, that recognition represents a key part of the origins of “Syntrinsic.” If we embraced external motivation, our name would be quite different.)
Knowledge
In order to implement one’s idea, it often is necessary to acquire new knowledge about technical or management aspects of the business. America’s education system gets a lot of criticism and much of it deserved; however, at least America as a country does not prevent people from learning what they want or need to know. Someone passively waiting to be given knowledge may struggle, but those who actively seek to learn can take advantage of a social system full of free and low-cost educational opportunities. For generations, the best way to acquire knowledge was through apprenticeship, not in school; that ability to glean on-the-job training from experienced mentors is as robust as ever if one is appropriately motivated.
Good Colleagues
No business succeeds in a vacuum. Partners, employees, vendors, customers, strategic partners, and other stakeholders share in the work via creativity, insight, or simple sweat equity. In America, entrepreneurs can seek out and find the people they need from around the globe, and in America people can take the risk of joining something new or innovative or both. We are not constrained by government in who we can hire nor are those who seek work constrained by government in seeking employment. America does not force children to choose professions in early adolescence as many developed countries do. We have the opportunity to invent and reinvent ourselves many times over.
Rule of Law
Volumes have been written about the critical role that that the rule of law plays in creating a healthy climate for constructive capitalism (see: The Mystery of Capital, Hernando De Soto, Basic Books, 2000). While we do not all agree on specific laws or even how many laws there should be, we do live in a country governed by law and with largely disinterested courts and other intermediaries to help officiate the application of law.
Access to Capital
While it has been difficult to borrow money from traditional banks over the past 2+ years, there remain many individuals and organizations that possess capital and are willing to invest in those with compelling business plans. Government may not go out of its way to make it easy for an entrepreneur to secure funds for an idea, but nor does government step in the way to prevent access. If you want to borrow against your credit card or home you can, provided the lender on the other side is interested. If you want to borrow from private or institutional investors the government will not prevent you from doing so. That may seem simple but it means the world.
Many other factors contribute to entrepreneurial opportunity, including civil society, transportation infrastructure, accessible telecommunications, absence of corruption, and healthy demographic trends. No combinations of factors ensure success of an individual entrepreneur, but taken together, they do create a climate where society-wide entrepreneurial success is highly likely.
The challenge of course, is that these factors must be protected vigilantly. Success can easily breed complacency. Just because America has been a richly innovative society since before its founding does not mean that it must remain so.
At a policy level, government can take many steps that simply make it harder to start a business:
· Diminish some of the incentive for working hard by making the work too onerous (e.g. regulatory overkill) or reducing the potential rewards of success (e.g. onerous tax policy).
· Make it scary or difficult to hire people by: mandating salary and benefits (including employment taxes) that are beyond what employers are able/willing to pay; mandating whom one can hire by gender, nationality, race, or other socio-political factors; making it easy not to work; or by making it difficult to remove people from employment.
· Demonize businesspeople.
· Threaten the Rule of Law by creating uncertainty about the application of laws already on the books. Recent examples include displacement of secured bond holders (Chrysler), interference with foreclosures, and protection of certain failed institutions (while allowing others in the same industry to crash). When one earns a reputation for changing the rules in the middle of the game, one makes it harder to get people to play again.
· Mandate allocations of capital. All capital controlled by the government was private capital first. Thus, any time that the government requires that a government agency allocate capital in a way that does not make economic sense or any time that the government mandates private corporations or individuals to allocate capital in a certain way, the risk is run that capital will not be available for otherwise meritorious ideas
That said, we do not think that government is the main problem today. That’s a highly unpopular thing to say in this political environment, but stay with us for a moment.
Ultimately, American government reflects American culture, and we’re more concerned with the latter than the former. We are not so sure American culture understands or is excited about entrepreneurship in the manner necessary to go forward effectively. The factors most necessary to start a business today—great ideas, work ethic, innovation, courage, leadership, collaboration—these are not controlled or materially limited by the government. These factors are our responsibility as individuals, as citizens.
It is easy to bash government from all sides of the aisles, and there is a place for it perhaps. More importantly however, our economy will only thrive—and our society prosper—so long as there are people with good ideas who possess the work ethic, skill, and tenacity to bring those ideas to life.
There’s been no finer place to start a business than America. If not now, when?
Friday, October 15, 2010
American Parent
We often wonder what it might be like to be a parent in different locations or points in time. Take Gaza for example. Set aside any political or religious differences as best you can. Imagine for a moment being a mother or father (or other caregiver) trying to raise a family in Gaza City, striving to be thoughtful, dutiful, and loving. Imagine trying to get access to a home in a safe neighborhood. Imagine trying to secure a job where you can do something meaningful that enables you to support your family. Imagine your daughter heading out in the evening in search of clean water. Imagine your son negotiating the life or death choices between Fatah and Hamas.
Now step away from Gaza. Imagine being a parent in Darfur or Congo where roving gangs can destroy everything precious in a few random moments. How about raising a family in the slums of Mumbai or Nairobi, where a type of poverty thrives of which it is difficult for modern Americans to even conceive? What steps would you take if you lived in Iran or North Korea and wanted to create a better future for your friends, neighbors and descendants? Would you protest and thus risk a grisly prison term or midnight execution? Would you keep your head down and stay out of trouble? Picture yourself in Guatemala or Oaxaca, knowing that there is no way you can feed your family through subsistence farming and no way to change that except by leaving.
As American children begin to learn of abject poverty and injustice around the world, they reasonably ask, “Why don’t they just move?” as if that response was so obvious. When an adult American steps into the shoes of a person struggling against deeply engrained economic despair, political abuse, or cultural and religious intolerance, it is natural in many cases to think of how we might fight back; yet, in so many situations the best response for a reasonable person would be to leave and seek a better life elsewhere.
Those whose ancestors came to America by choice came here in search of better conditions, whether they came from the potato farms of Ireland, the shtetls of the Ukraine, or the rice paddies of Cambodia. Political, economic, and religious freedom have driven people to our shores since long before we crafted a Constitution or used it to justify the creation of the US Bureau of Citizenship and Immigration.
That sense of mobility also has driven Americans internally ever since Roger Williams left Massachusetts Colony for the relative religious freedom of Rhode Island and Providence Plantations. Gold-seekers and fur trappers pressed the boundaries of America westward. Okies streamed west in droves from their repossessed and soil-depleted Dust Bowl farms, fleeing one way of life and creating another. Black Americans who were free but disenfranchised streamed north to Chicago, Detroit, Philadelphia; more recently, many have moved back south to Charlotte, Atlanta, Houston and points in between.
While the pressures on families in America and around the world remain intense, human mobility is complicated by two trends that often arise in times dominated by fear and uncertainty.
1. Immigration
The developed world—which on a relative basis remains far wealthier and healthier per capita than developing or undeveloped societies—has increased its aversion to those seeking opportunity in their countries. Sure, some desired changes in immigration policy and its enforcement are based on a firm belief in law enforcement for its own sake, but one has to wonder if that is truly the motive across the board. Roma being kicked out of France, North Africans refused entry into Italy, Zimbabweans rounded up in South Africa, and potential immigrants from Mexico and places south being told that they are no longer welcome here because their immigrant culture undermines what makes America America, a common refrain used in other times of economic crisis to keep out the Scots, Irish, French, Italians, Poles, Jews, Cubans, Haitians, Russians, Iraqis and Afghanis, as well as many other families from around the globe.
2. Housing
It has become much harder for Americans to move internally to seek a better life. With 25% of Americans in homes that carry loans greater than the home’s current market value, the math of moving is not compelling or even possible for many. With suddenly risk-averse banks curtailing their lending activity, who is there to financially support the risk inherent in leaving one place and going to another even when a new job is in the offing? If Americans cannot create sufficient opportunity where they are because of oppressive social conditions and they can no longer move in search of opportunity, then what have we become? It’s not just about housing.
Political debate around the immigration and housing crises would be better informed if more of the actors in those discussions possessed empathy for those impacted most personally by these situations, if they had developed a better sense of the true personal and social ramifications of the ideas that they espouse. For us to remain human in the true sense of the word, we must possess the ability to stand in another person’s shoes—whether a refugee mother in Darfur or an unemployed dad in Detroit.
Imagining life as a parent from somewhere else will not make solving humanity’s problems any easier (indeed, it may make them more difficult because we will know more), but it will help us keep those problems human-scale. It is hard to get people inspired about raising GDP; it is easier to motivate them to seek to provide a better life for the people they care about most.
Somewhere in the world right now, there is an adult in a small village without clean water, without a school, without police who serve and protect, and that adult is wondering, perhaps wistfully, “What would it be like to be a parent in America, that land of wealth and promise and opportunity?”
Let’s hope that America long remains the type of place that people dream about, and let’s make the hard decisions necessary to keep America worthy of their dreams.
Friday, October 8, 2010
On the Cattle Trail
In Colorado, a conversation with a stranger can quickly turn into a nostalgic journey, particularly when speaking with someone whose family has been in the area for at least three generations. If so, then there is a good likelihood that you’ll end up discussing cattle—stockyards, cattle trading, ranching, slaughter houses, packing houses and the like. For whether their family came here to escape the politics of colonial Mexico, tuberculosis on the east coast, or pogroms in eastern Europe, whether they were drawn by the opportunity of a vast new state or simply got sidetracked on their way to California, there’s a good likelihood that they ended up participating in or otherwise experiencing the cattle business.
In most cases, that cattle-driven conversation would be a nostalgic one set in places that don’t exist anymore, or certainly not in the same way. It would describe ranches once owned by families that were set on the windswept high plains of eastern Colorado, in the stunning San Luis Valley that is in so many ways closer to New Mexico than to metropolitan Denver, and scattered across the Western Slope around Delta and Montrose. Many of these ranches still exist and some still function as such. But many are now barren, or have been sold to a major agricultural conglomerate, or have even become retirement communities complete with golf courses and shopping centers.
The remembrances would be set in the years prior to the early 1980s, in Commerce City or Greeley or Longmont where smallish family owned businesses raised cattle, traded them, slaughtered them, butchered the sides and packaged them into filets, tenderloins, rib-eye, skirts, and even bacon and sausage, and transported them by truck, rail, and ship across the country and around the world.
Those small family owned businesses are few and far between now. Some were forced to close due to volatility in cattle prices and union demands, others were snatched up by regional corporations, then national and multinational powerhouses. A handful still operate in a modest form but are sustained financially by other professions or businesses with steadier, more significant income. Those that remain in operation most effectively tend to be far from the urban centers of the Front Range
Clues to the former trade abound, but you have to be looking. The drive along I-70 into downtown Denver from our International Airport takes one past the former stockyards, though plenty of people drive that route every day without noticing the history whizzing past the windows or even knowing to look. It would be hard now to envision the area formerly teeming with thousands of heads of cattle coming and going on the many train tracks that connect Denver to Omaha, Kansas City, Oklahoma City, and Chicago.
A few blocks to the east of the stockyards, former slaughter houses and packing houses congregate along Washington Street, quiet now. No bellowing from the cattle being unloaded from trucks, no banter in the parking lots between hard-working men in white coats red with blood. Some buildings have fallen down, others remain empty, still others have become offices, warehouses, and at least one laser tag facility.
While every January thousands of people still travel from across the plains to participate in the National Western Stock Show, one can—and most do—remain ensconced in the urban core and suburban neighborhoods and never be touched by what likely appears to many to be a relic of the past or a quaint tribute to rural life. Even though beef is on nearly every menu in town and in every grocery store, it is hard for many to believe that there are still families—real people living real lives—who get up every morning to raise cattle, breed them, care for them, and bring them to market, albeit a market that is now much farther from where most people live and work.
And while some remain deeply connected to the cattle business, most of the children, grandchildren, and great grandchildren of those who once built and lead this dynamic, rich, and vital part of our culture live largely in a different world. They are consultants and investment advisers, real estate agents and nonprofit leaders. They are in manufacturing and energy and technology. While a fortunate few maintain some connection to this former world, most people know it mostly as a story, one often collecting dust on the shelves because it has not been recently told.
America’s bookshelves are populated with stories such as this. The Western Pennsylvania story of steel mills lining the Allegheny, Monongahela, and Ohio Rivers, drawing immigrants from across Europe and helping build America’s bridges, cars and skyscrapers. The Oregon story of wood lots and timber mills producing the lumber that houses families across America and even a few in Japan. The family dairies of Wisconsin that were financially viable for generations until the world changed and the economics shifted and so many were forced to close and create a new life.
America was born by people seeking to change their lives. It is and always has been a tumultuous country. One generation comes here because it is possible to build a life here, to start an industry, a company and to pass it along to future generations. Yet that same vitality has a destructive quality as well. For the very forces that enable one to start a packing house, a steel mill, a timber mill, a dairy farm, make it challenging for others to sustain it over time. All of the stories referenced above—Colorado, Oregon, Pennsylvania, Wisconsin—reached their denouements in the early 1980s. These are not journeys into ancient history, nor are they exceptions.
As difficult as many find this time in history—whether one calls it the Great Recession or the Great Deleveraging or simply shrugs and looks worn out—America has been here before many times. It is a time of reinvention, a time where elements of life that we thought were timeless (e.g. housing appreciates at 10-20% per year) have proven not to be.
So long as we believe that new stories can be written and so long as we maintain policies that enable them to be written, then we should be all right. If, however, we no longer believe that we have the power to create new stories, if the personal and social will to create are gone, it does not matter who we elect or what they do in office.
Better that we look forward to creating the stories our grandchildren will tell than lament the passing of those that already have been told.
In most cases, that cattle-driven conversation would be a nostalgic one set in places that don’t exist anymore, or certainly not in the same way. It would describe ranches once owned by families that were set on the windswept high plains of eastern Colorado, in the stunning San Luis Valley that is in so many ways closer to New Mexico than to metropolitan Denver, and scattered across the Western Slope around Delta and Montrose. Many of these ranches still exist and some still function as such. But many are now barren, or have been sold to a major agricultural conglomerate, or have even become retirement communities complete with golf courses and shopping centers.
The remembrances would be set in the years prior to the early 1980s, in Commerce City or Greeley or Longmont where smallish family owned businesses raised cattle, traded them, slaughtered them, butchered the sides and packaged them into filets, tenderloins, rib-eye, skirts, and even bacon and sausage, and transported them by truck, rail, and ship across the country and around the world.
Those small family owned businesses are few and far between now. Some were forced to close due to volatility in cattle prices and union demands, others were snatched up by regional corporations, then national and multinational powerhouses. A handful still operate in a modest form but are sustained financially by other professions or businesses with steadier, more significant income. Those that remain in operation most effectively tend to be far from the urban centers of the Front Range
Clues to the former trade abound, but you have to be looking. The drive along I-70 into downtown Denver from our International Airport takes one past the former stockyards, though plenty of people drive that route every day without noticing the history whizzing past the windows or even knowing to look. It would be hard now to envision the area formerly teeming with thousands of heads of cattle coming and going on the many train tracks that connect Denver to Omaha, Kansas City, Oklahoma City, and Chicago.
A few blocks to the east of the stockyards, former slaughter houses and packing houses congregate along Washington Street, quiet now. No bellowing from the cattle being unloaded from trucks, no banter in the parking lots between hard-working men in white coats red with blood. Some buildings have fallen down, others remain empty, still others have become offices, warehouses, and at least one laser tag facility.
While every January thousands of people still travel from across the plains to participate in the National Western Stock Show, one can—and most do—remain ensconced in the urban core and suburban neighborhoods and never be touched by what likely appears to many to be a relic of the past or a quaint tribute to rural life. Even though beef is on nearly every menu in town and in every grocery store, it is hard for many to believe that there are still families—real people living real lives—who get up every morning to raise cattle, breed them, care for them, and bring them to market, albeit a market that is now much farther from where most people live and work.
And while some remain deeply connected to the cattle business, most of the children, grandchildren, and great grandchildren of those who once built and lead this dynamic, rich, and vital part of our culture live largely in a different world. They are consultants and investment advisers, real estate agents and nonprofit leaders. They are in manufacturing and energy and technology. While a fortunate few maintain some connection to this former world, most people know it mostly as a story, one often collecting dust on the shelves because it has not been recently told.
America’s bookshelves are populated with stories such as this. The Western Pennsylvania story of steel mills lining the Allegheny, Monongahela, and Ohio Rivers, drawing immigrants from across Europe and helping build America’s bridges, cars and skyscrapers. The Oregon story of wood lots and timber mills producing the lumber that houses families across America and even a few in Japan. The family dairies of Wisconsin that were financially viable for generations until the world changed and the economics shifted and so many were forced to close and create a new life.
America was born by people seeking to change their lives. It is and always has been a tumultuous country. One generation comes here because it is possible to build a life here, to start an industry, a company and to pass it along to future generations. Yet that same vitality has a destructive quality as well. For the very forces that enable one to start a packing house, a steel mill, a timber mill, a dairy farm, make it challenging for others to sustain it over time. All of the stories referenced above—Colorado, Oregon, Pennsylvania, Wisconsin—reached their denouements in the early 1980s. These are not journeys into ancient history, nor are they exceptions.
As difficult as many find this time in history—whether one calls it the Great Recession or the Great Deleveraging or simply shrugs and looks worn out—America has been here before many times. It is a time of reinvention, a time where elements of life that we thought were timeless (e.g. housing appreciates at 10-20% per year) have proven not to be.
So long as we believe that new stories can be written and so long as we maintain policies that enable them to be written, then we should be all right. If, however, we no longer believe that we have the power to create new stories, if the personal and social will to create are gone, it does not matter who we elect or what they do in office.
Better that we look forward to creating the stories our grandchildren will tell than lament the passing of those that already have been told.
Friday, October 1, 2010
Guiding Principles for Effective Stewards
The libertarian in us would like to believe that all industries—including the nonprofit sector—can reliably self-regulate. In our regard for individual responsibility, we expect that organizations should have the insightful leadership, altruistic ideals, and financial security necessary to control behaviors which most deem to be unethical. Our freedom loving selves believe that organizations can and will conduct themselves in a manner which betters society through the pursuit of enlightened organizational self-interest.
The federalist in us would like to believe that the US government—through its statues, regulations, and agencies—provides for-profit and nonprofit organizations with a mature, thoughtful guiding hand. We expect that government crafts a legal framework in which competent agents of the state clearly define and reward appropriate behavior, thereby effectively balancing the tension between social good and individual freedoms.
However, neither our libertarian nor our federalist extremes live in the real world where the nonprofit sector and investment industry meet. Both nonprofits and investment professionals struggle mightily to define appropriate behavior and best practices in the absence of clear, definitive legal or cultural guidance. One can reference the Uniform Prudent Management of Institutional Funds Act (UPMIFA) but it does not define how to be a responsible steward. The SEC, FINRA, and other investment regulatory bodies issue many regulations yet leave an extensive gray area where definitions of “ethical,” “suitable,” and “appropriate,” vary considerably.
Even though the intersection where the nonprofit sector and investment industries meet is clear, too many nonprofit organizations perceive their finances as isolated from their mission and program. This perceived division between social and financial is common in the nonprofit world, yet false. Sustainable change requires prudent stewardship. For nonprofit organizations, programmatic mission and finance are interdependent, not mutually exclusive.
In our experience, the separation stems from those nonprofit leaders who see money as a necessary evil rather than as a necessary good. They did not get in the nonprofit business because they cared about money and so approach it reluctantly and perhaps even with animosity. If they see capitalism as a source of poverty rather than as a source of potential enrichment, then the situation is all the more difficult. This difference in perspective is profound and explains in part why so many nonprofits with inspiring missions and phenomenal programs do a poor job of managing the financial resources in which they have been entrusted. Ultimately, they are forced to constrain their programming and limit their long-term impact.
With this in mind, Syntrinsic has crafted the following seven Guiding Principles for Effective Stewards. Our hope is that the Boards and staffs of more and more nonprofit organizations will embrace these Principles and improve the practice of nonprofit stewardship.
Guiding Principles for Effective Stewards of Nonprofit Financial Resources:
1. We strive to make the most effective use of the financial resources to which we have been entrusted by the broader community.
2. We conduct financial affairs in a manner that is transparent and that avoids taking any action which may be perceived as self-dealing or otherwise conflicted.
3. We demand that our financial advisors also conduct their business in a manner consistent with our Guiding Principles.
4. We dedicate the time and energy necessary to develop, implement, and monitor the strategy for prudently managing our organization’s finances.
5. We ensure that our board members, committee members and senior staff understand and fulfill their responsibilities as they relate to financial management and oversight.
6. We integrate our financial management into our overall strategic planning so that our mission and our stewardship are aligned.
7. We promote effective stewardship throughout our organization and amongst our stakeholders, vendors, and other strategic partners.
Those who have spent considerable time in the nonprofit sector know that many organizations would have difficulty enacting these Principles in a meaningful way. Those who are steeped in the investment industry know that some of these principles directly conflict with common industry practices (e.g. transparency, conflicted relationships, etc.).
We are not naïve. Posting these Principles will not cause radical change to sweep through the nonprofit community making prudent stewardship a primary driving force in nonprofit decision making. Nor are we jaded. There are phenomenal professionals and volunteers who already shepherd nonprofit resources in an exemplary manner.
At the end of the day, our hope is that those who serve and support nonprofit organizations will set the highest standards of fiscal stewardship regardless of the decisions of nonprofit and financial market regulators. In so doing, these organizations will better be able to feed, shelter, educate, protect, guide, and empower those most in need. That would be something both libertarians and federalists could celebrate.
The federalist in us would like to believe that the US government—through its statues, regulations, and agencies—provides for-profit and nonprofit organizations with a mature, thoughtful guiding hand. We expect that government crafts a legal framework in which competent agents of the state clearly define and reward appropriate behavior, thereby effectively balancing the tension between social good and individual freedoms.
However, neither our libertarian nor our federalist extremes live in the real world where the nonprofit sector and investment industry meet. Both nonprofits and investment professionals struggle mightily to define appropriate behavior and best practices in the absence of clear, definitive legal or cultural guidance. One can reference the Uniform Prudent Management of Institutional Funds Act (UPMIFA) but it does not define how to be a responsible steward. The SEC, FINRA, and other investment regulatory bodies issue many regulations yet leave an extensive gray area where definitions of “ethical,” “suitable,” and “appropriate,” vary considerably.
Even though the intersection where the nonprofit sector and investment industries meet is clear, too many nonprofit organizations perceive their finances as isolated from their mission and program. This perceived division between social and financial is common in the nonprofit world, yet false. Sustainable change requires prudent stewardship. For nonprofit organizations, programmatic mission and finance are interdependent, not mutually exclusive.
In our experience, the separation stems from those nonprofit leaders who see money as a necessary evil rather than as a necessary good. They did not get in the nonprofit business because they cared about money and so approach it reluctantly and perhaps even with animosity. If they see capitalism as a source of poverty rather than as a source of potential enrichment, then the situation is all the more difficult. This difference in perspective is profound and explains in part why so many nonprofits with inspiring missions and phenomenal programs do a poor job of managing the financial resources in which they have been entrusted. Ultimately, they are forced to constrain their programming and limit their long-term impact.
With this in mind, Syntrinsic has crafted the following seven Guiding Principles for Effective Stewards. Our hope is that the Boards and staffs of more and more nonprofit organizations will embrace these Principles and improve the practice of nonprofit stewardship.
Guiding Principles for Effective Stewards of Nonprofit Financial Resources:
1. We strive to make the most effective use of the financial resources to which we have been entrusted by the broader community.
2. We conduct financial affairs in a manner that is transparent and that avoids taking any action which may be perceived as self-dealing or otherwise conflicted.
3. We demand that our financial advisors also conduct their business in a manner consistent with our Guiding Principles.
4. We dedicate the time and energy necessary to develop, implement, and monitor the strategy for prudently managing our organization’s finances.
5. We ensure that our board members, committee members and senior staff understand and fulfill their responsibilities as they relate to financial management and oversight.
6. We integrate our financial management into our overall strategic planning so that our mission and our stewardship are aligned.
7. We promote effective stewardship throughout our organization and amongst our stakeholders, vendors, and other strategic partners.
Those who have spent considerable time in the nonprofit sector know that many organizations would have difficulty enacting these Principles in a meaningful way. Those who are steeped in the investment industry know that some of these principles directly conflict with common industry practices (e.g. transparency, conflicted relationships, etc.).
We are not naïve. Posting these Principles will not cause radical change to sweep through the nonprofit community making prudent stewardship a primary driving force in nonprofit decision making. Nor are we jaded. There are phenomenal professionals and volunteers who already shepherd nonprofit resources in an exemplary manner.
At the end of the day, our hope is that those who serve and support nonprofit organizations will set the highest standards of fiscal stewardship regardless of the decisions of nonprofit and financial market regulators. In so doing, these organizations will better be able to feed, shelter, educate, protect, guide, and empower those most in need. That would be something both libertarians and federalists could celebrate.
Friday, September 24, 2010
For Loan Oft Loses Both Itself and Friend
Many of us first encountered the word “covenant” in the Old Testament story of the bond forged between God and Abraham and his descendants. In the context of faith, “covenant” conveys a mutual commitment of the most intimate sort.
Later in life, we encounter “covenant” in its more secular context when we take out a mortgage to buy a home, establish a line of credit to launch or grow a business, or in other realms in which we accept the status of borrower or lender. In such relationships, the covenants have come to mean the formal terms of the relationship, the metrics to which parties are to be held accountable, the conditions to which both parties are bound, and the consequences for violating those terms.
Perhaps more important than these formal agreements have long been the informal covenants between lenders and borrowers, that is, the societal expectations that supersede those drawn up by legal compact.
Think about the word “bond” for a moment. We use it to describe a security now, but what is it really? When investors buy bonds, they really are loaning money to a country (United States Treasury), a company (General Electric), or municipality (Los Angeles Public Schools). They also might be loaning money to a pool of credit card holders, a pool of mortgage holders, a pool of churches, or other borrowers. This use of the term “bond” is no accident, for the security represents a literal binding between lender and borrower, the forging of a relationship of mutual trust, confidence, and respect that provides assurance to both parties.
Over time, social convention has defined that bond or relationship between borrowers and lenders: A lender will not change the terms of the loan outside of parameters agreed upon in advance; a borrower will repay the lender in a timely fashion as promised; the lender will receive the rights commensurate with the lender’s position in the capital structure (secured, unsecured, senior, junior, etc.); the borrower will conduct itself with due care and loyalty to the lender at least until the borrower has fulfilled is obligations. In this social framework, the lender-borrower relationship remains built on the premise that loans are bonds and that covenants are sacred. But is that framework still operating?
Modern securities markets are such that lenders and borrowers rarely know each other. In the vast majority of cases, the lender knows neither why the borrower wants or needs the money nor how the money will be used. Instead, many lenders rely on a credit rating, yield, and maturity to ascertain whether the borrower is worthy. Likewise, the borrower rarely knows the lender. A municipality raises funds from thousands of faceless lenders located across the municipality and many living outside of it. The corporation borrows money from lenders seeking yield and some level of safety but who may have no other investment in the success of the corporation.
This evolution of the borrower-lender relationship from a true bond to one that is largely detached from a sense of mutual obligation is causing some intriguing and troubling events. In Harrisburg, capital of Pennsylvania, Mayor Linda Thompson is faced with a choice of maintaining city services or paying the city’s lenders (aka bondholders). For her, the choice is clear: do not cut services. According to the Wall Street Journal (“Harrisburg Surrender,” 9/8/10), Ms. Thompson said, "To disrupt [services] because we can't make a bond payment would just be unconscionable. And as a leader I couldn't do it," To her credit, she also is concerned about scaring off bond investors, recognizing that to do so would impact a critical source of financing.
A similar tough choice is faced by Michael Thomas, a leader of the Pequot tribe in Connecticut, owners of one of the world’s largest casinos at Foxwoods: Pay dividends to tribal members from Foxwoods’ revenues versus pay bondholders who have lent money to build Foxwoods. (WSJ, “Tribe’s Roll of Dice Rattles Lenders,” 9/17/10) The Pequot and other Indian tribes are in a privileged position for now because as sovereign nations, they can’t be forced into bankruptcy, and even if they declared it, their lenders would not be allowed to operate casinos on reservations. That said, the casino business will suffer greatly if by stiffing current lenders, the pool of future lenders dries up.
Ms. Thompson and Mr. Thomas are not alone in this dilemma. Municipal borrowing (states and cities) has grown from $1 Trillion in 1990 to $2.4 Trillion in 2010, an increase of 140% over 20 years. Not evident in these numbers is the concurrent sharp increase in unfunded or underfunded pension and health care obligations municipalities have accepted. These commitments paired with a sharp decline in tax revenues have converged to confront municipalities with multi-horned dilemmas of epic proportions: Pay underfunded pensions versus support public education versus build infrastructure versus support unemployed citizens versus pay secured lenders versus maintain vital emergency services versus raise taxes versus encourage new business investment versus get reelected versus…
An early sign of the current economic crisis occurred when banks stopped lending to each other following BNP Paribas’s announcement that it could not adequately value the loans on its books. The overnight interbank lending rate spiked and the crisis of confidence began. Soon after, investment banks stopped supporting the auction rate market, another marketplace where lenders and borrowers met to support each other’s interests. The municipal bond market experienced its greatest shock since the 1860s. These events occurred in late 2007 and early 2008, well before the escalated fears of municipal defaults, declining tax revenues, and unfunded pension obligations, and before the failures or near failures of Bear Stearns, Washington Mutual, Lehman Brothers, AIG, Merrill Lynch, General Motors, Wachovia, Goldman Sachs…you get the idea.
So where are we today? We all operate with an investment marketplace driven by computer algorithms and high frequency trading, an investment industry populated with countless exchanges, traders, product engineers, and money managers, a regulatory framework with agencies possessing complex mandates without rationalizing guidance to address conflicts like those described above, and a global pool of millions of borrowers and lenders striving to make the most effective decisions for themselves every day.
Despite these complexities and technological innovations, at the end of the day, we have borrowers and lenders who desire confidence in the larger system and in their relationships with each other. For all of our wizardry, those who lend and borrow want to have the assurance that comes from relationships built on a shared commitment to each other.
America is at a crossroads in so many ways, and the most difficult of our collective economic decisions still lie ahead of us. Before we further diminish the sanctity of the relationship between borrower and lender, we need to recognize how doing so irrevocably impacts our culture. This is not a time to say that our social contracts do not matter because they force difficult choices; this is a time to make difficult choices precisely because our social contracts are what bind us.
Later in life, we encounter “covenant” in its more secular context when we take out a mortgage to buy a home, establish a line of credit to launch or grow a business, or in other realms in which we accept the status of borrower or lender. In such relationships, the covenants have come to mean the formal terms of the relationship, the metrics to which parties are to be held accountable, the conditions to which both parties are bound, and the consequences for violating those terms.
Perhaps more important than these formal agreements have long been the informal covenants between lenders and borrowers, that is, the societal expectations that supersede those drawn up by legal compact.
Think about the word “bond” for a moment. We use it to describe a security now, but what is it really? When investors buy bonds, they really are loaning money to a country (United States Treasury), a company (General Electric), or municipality (Los Angeles Public Schools). They also might be loaning money to a pool of credit card holders, a pool of mortgage holders, a pool of churches, or other borrowers. This use of the term “bond” is no accident, for the security represents a literal binding between lender and borrower, the forging of a relationship of mutual trust, confidence, and respect that provides assurance to both parties.
Over time, social convention has defined that bond or relationship between borrowers and lenders: A lender will not change the terms of the loan outside of parameters agreed upon in advance; a borrower will repay the lender in a timely fashion as promised; the lender will receive the rights commensurate with the lender’s position in the capital structure (secured, unsecured, senior, junior, etc.); the borrower will conduct itself with due care and loyalty to the lender at least until the borrower has fulfilled is obligations. In this social framework, the lender-borrower relationship remains built on the premise that loans are bonds and that covenants are sacred. But is that framework still operating?
Modern securities markets are such that lenders and borrowers rarely know each other. In the vast majority of cases, the lender knows neither why the borrower wants or needs the money nor how the money will be used. Instead, many lenders rely on a credit rating, yield, and maturity to ascertain whether the borrower is worthy. Likewise, the borrower rarely knows the lender. A municipality raises funds from thousands of faceless lenders located across the municipality and many living outside of it. The corporation borrows money from lenders seeking yield and some level of safety but who may have no other investment in the success of the corporation.
This evolution of the borrower-lender relationship from a true bond to one that is largely detached from a sense of mutual obligation is causing some intriguing and troubling events. In Harrisburg, capital of Pennsylvania, Mayor Linda Thompson is faced with a choice of maintaining city services or paying the city’s lenders (aka bondholders). For her, the choice is clear: do not cut services. According to the Wall Street Journal (“Harrisburg Surrender,” 9/8/10), Ms. Thompson said, "To disrupt [services] because we can't make a bond payment would just be unconscionable. And as a leader I couldn't do it," To her credit, she also is concerned about scaring off bond investors, recognizing that to do so would impact a critical source of financing.
A similar tough choice is faced by Michael Thomas, a leader of the Pequot tribe in Connecticut, owners of one of the world’s largest casinos at Foxwoods: Pay dividends to tribal members from Foxwoods’ revenues versus pay bondholders who have lent money to build Foxwoods. (WSJ, “Tribe’s Roll of Dice Rattles Lenders,” 9/17/10) The Pequot and other Indian tribes are in a privileged position for now because as sovereign nations, they can’t be forced into bankruptcy, and even if they declared it, their lenders would not be allowed to operate casinos on reservations. That said, the casino business will suffer greatly if by stiffing current lenders, the pool of future lenders dries up.
Ms. Thompson and Mr. Thomas are not alone in this dilemma. Municipal borrowing (states and cities) has grown from $1 Trillion in 1990 to $2.4 Trillion in 2010, an increase of 140% over 20 years. Not evident in these numbers is the concurrent sharp increase in unfunded or underfunded pension and health care obligations municipalities have accepted. These commitments paired with a sharp decline in tax revenues have converged to confront municipalities with multi-horned dilemmas of epic proportions: Pay underfunded pensions versus support public education versus build infrastructure versus support unemployed citizens versus pay secured lenders versus maintain vital emergency services versus raise taxes versus encourage new business investment versus get reelected versus…
An early sign of the current economic crisis occurred when banks stopped lending to each other following BNP Paribas’s announcement that it could not adequately value the loans on its books. The overnight interbank lending rate spiked and the crisis of confidence began. Soon after, investment banks stopped supporting the auction rate market, another marketplace where lenders and borrowers met to support each other’s interests. The municipal bond market experienced its greatest shock since the 1860s. These events occurred in late 2007 and early 2008, well before the escalated fears of municipal defaults, declining tax revenues, and unfunded pension obligations, and before the failures or near failures of Bear Stearns, Washington Mutual, Lehman Brothers, AIG, Merrill Lynch, General Motors, Wachovia, Goldman Sachs…you get the idea.
So where are we today? We all operate with an investment marketplace driven by computer algorithms and high frequency trading, an investment industry populated with countless exchanges, traders, product engineers, and money managers, a regulatory framework with agencies possessing complex mandates without rationalizing guidance to address conflicts like those described above, and a global pool of millions of borrowers and lenders striving to make the most effective decisions for themselves every day.
Despite these complexities and technological innovations, at the end of the day, we have borrowers and lenders who desire confidence in the larger system and in their relationships with each other. For all of our wizardry, those who lend and borrow want to have the assurance that comes from relationships built on a shared commitment to each other.
America is at a crossroads in so many ways, and the most difficult of our collective economic decisions still lie ahead of us. Before we further diminish the sanctity of the relationship between borrower and lender, we need to recognize how doing so irrevocably impacts our culture. This is not a time to say that our social contracts do not matter because they force difficult choices; this is a time to make difficult choices precisely because our social contracts are what bind us.
Thursday, September 9, 2010
Beware the Financial-Industrial Complex
Three days before the end of his term as President, Dwight D. Eisenhower—Republican, architect of D-Day, and senior military officer for the United States in the closing years of WWII—gave the American people his parting thanks and a stern warning about the growing interdependence of the Federal government and what he described as the “military industrial complex.” He said in part:
“This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”
While we lack the bully pulpit and gravitas of a departing president, we would like to issue a similar warning about our society’s changing relationship with financial services. We ask you to reread Eisenhower’s passage above, substituting “financial” wherever you see a reference to “military.” It would start, “This conjunction of an immense financial establishment and a large finance industry is new in the American experience. The total influence—economic, political, even spiritual—is felt in every city, every State house, every office of the Federal government…” And so on.
Is this overstating matters? Consider that the financial services industry spent over $5 billion on campaign contributions and lobbyists in the decade leading up to the financial crisis, that by 2007, nearly 3,000 lobbyists represented the industry in Washington, and that the cost of bailout, stimulus, TARP and other recent programs stands at over $3 trillion. From 1998-2008, campaign contributions from the financial sector rose by 185% to $443 million while lobby expenditures grew by 117% to $455 million. Meanwhile, the Standard and Poor 500 fell by 13%.
It is important for all Americans to acknowledge that the political contributions and policy missteps (deliberate or well-intentioned) occurred under both Democratic and Republican leadership reflecting the near-even split in political contributions from banks, securities firms and insurance companies. (See: “Sold Out” http://www.wallstreetwatch.org/) This is not one party’s problem.
People could give in to cynicism, chuckle at the irony of financial reform being named after Barney Frank and Chris Dodd, stare in amazement at political candidates who claim to represent the “regular folks” yet are funded by those who exploit their ignorance of finance, shake their heads when government officials promote annuity sales as the basis for retirement planning, and marvel that so little has changed structurally in how investments are crafted, regulated and sold. But that would be a weak response, a concession not worthy of those who are aware of these problems and can potentially influence their successful resolution.
Eisenhower, too, could easily have succumbed to cynicism in his farewell message; however, his next paragraph admonished Americans to be more vigilant. He stated that,
“We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”
So let’s imagine for a moment that we share a similar goal with regards to the relationship between American society and financial services. What would it take for us to more effectively “compel the proper meshing of the huge (machinery of finance) with our peaceful methods and goals, so that security and liberty may prosper together?”
While the question deserves a more comprehensive review of cultural, regulatory, and operational changes, there are some low-hanging fruit that are ripe for the picking that do not necessarily require Washington’s acquiescence.
· Create much clearer and more restrictive policies regarding how past and present senior officers and directors of major banks, broker-dealers, and insurers can serve in positions of authority or influence at the Federal Reserve Bank, in the US Department of the Treasury, the OCC, FDIC, SEC, and other regulatory agencies or offices, state or federal. Obviously, these policies would need to flow both ways. The argument that their “talent” is invaluable has been sufficiently disproven by those who have crossed over previously and failed massively in their economic judgment if not their political adroitness. If enough voters express enough frustration when conflicted appointments are made, fewer will be made.
· Stem the consolidation of financial power in a few financial institutions that have become increasingly dependent on government largess to support their operations. Antitrust or banking regulators could carry this out; in the meantime, consumers decide where to conduct business.
· Support community banks and credit unions that are imbedded in the local community, are more likely to return profits to the community, support FDIC, and are of a more human scale.
· Eliminate the conflicted relationships between broker-dealers and money managers that materially increase costs to investors in a manner that lacks transparency. Rather than waiting for the SEC to take action, consumers can refuse to do business with conflicted professionals.
· Create a fiduciary standard for anyone involved in the manufacture, promotion, or distribution of financial products. That is, require that every financial professional in the supply chain of investment product creation and distribution demonstrates the highest ethical standards and always prioritizes the loyalty and care due to the end client, be it a retired couple, a pension plan, or a municipality. This does not mean that every investment must work perfectly, but that every investment product must be crafted and marketed with the intent of benefitting the end investor—even insurance products. We demand similar accountability in most other industries; finance is largely exempt.
· Reward politicians who refuse to accept money from financial corporations that do business in manner that is conflicted with the best interests of their customers.
Eisenhower’s words of warning resonated and surprised because he had tremendous credibility when it came to military matters. He was an insider. He had seen the evolution of the US military from 1941 to 1961 and—right or wrong—he did not like what he saw.
Financial Services lacks such a powerful figurehead. There is no one voice that can stand up in Washington DC with the credibility of an Eisenhower to warn against the corruption of finance and government. Because of that vacuum, it becomes all the more important that citizens, consumers, and voters of all persuasions express their sentiment in their actions to the best degree they can.
Pogo once said, “We have met the enemy and he is us.” What Pogo forgot to mention is that, “We have met our allies, and they are us, too.”
“This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”
While we lack the bully pulpit and gravitas of a departing president, we would like to issue a similar warning about our society’s changing relationship with financial services. We ask you to reread Eisenhower’s passage above, substituting “financial” wherever you see a reference to “military.” It would start, “This conjunction of an immense financial establishment and a large finance industry is new in the American experience. The total influence—economic, political, even spiritual—is felt in every city, every State house, every office of the Federal government…” And so on.
Is this overstating matters? Consider that the financial services industry spent over $5 billion on campaign contributions and lobbyists in the decade leading up to the financial crisis, that by 2007, nearly 3,000 lobbyists represented the industry in Washington, and that the cost of bailout, stimulus, TARP and other recent programs stands at over $3 trillion. From 1998-2008, campaign contributions from the financial sector rose by 185% to $443 million while lobby expenditures grew by 117% to $455 million. Meanwhile, the Standard and Poor 500 fell by 13%.
It is important for all Americans to acknowledge that the political contributions and policy missteps (deliberate or well-intentioned) occurred under both Democratic and Republican leadership reflecting the near-even split in political contributions from banks, securities firms and insurance companies. (See: “Sold Out” http://www.wallstreetwatch.org/) This is not one party’s problem.
People could give in to cynicism, chuckle at the irony of financial reform being named after Barney Frank and Chris Dodd, stare in amazement at political candidates who claim to represent the “regular folks” yet are funded by those who exploit their ignorance of finance, shake their heads when government officials promote annuity sales as the basis for retirement planning, and marvel that so little has changed structurally in how investments are crafted, regulated and sold. But that would be a weak response, a concession not worthy of those who are aware of these problems and can potentially influence their successful resolution.
Eisenhower, too, could easily have succumbed to cynicism in his farewell message; however, his next paragraph admonished Americans to be more vigilant. He stated that,
“We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”
So let’s imagine for a moment that we share a similar goal with regards to the relationship between American society and financial services. What would it take for us to more effectively “compel the proper meshing of the huge (machinery of finance) with our peaceful methods and goals, so that security and liberty may prosper together?”
While the question deserves a more comprehensive review of cultural, regulatory, and operational changes, there are some low-hanging fruit that are ripe for the picking that do not necessarily require Washington’s acquiescence.
· Create much clearer and more restrictive policies regarding how past and present senior officers and directors of major banks, broker-dealers, and insurers can serve in positions of authority or influence at the Federal Reserve Bank, in the US Department of the Treasury, the OCC, FDIC, SEC, and other regulatory agencies or offices, state or federal. Obviously, these policies would need to flow both ways. The argument that their “talent” is invaluable has been sufficiently disproven by those who have crossed over previously and failed massively in their economic judgment if not their political adroitness. If enough voters express enough frustration when conflicted appointments are made, fewer will be made.
· Stem the consolidation of financial power in a few financial institutions that have become increasingly dependent on government largess to support their operations. Antitrust or banking regulators could carry this out; in the meantime, consumers decide where to conduct business.
· Support community banks and credit unions that are imbedded in the local community, are more likely to return profits to the community, support FDIC, and are of a more human scale.
· Eliminate the conflicted relationships between broker-dealers and money managers that materially increase costs to investors in a manner that lacks transparency. Rather than waiting for the SEC to take action, consumers can refuse to do business with conflicted professionals.
· Create a fiduciary standard for anyone involved in the manufacture, promotion, or distribution of financial products. That is, require that every financial professional in the supply chain of investment product creation and distribution demonstrates the highest ethical standards and always prioritizes the loyalty and care due to the end client, be it a retired couple, a pension plan, or a municipality. This does not mean that every investment must work perfectly, but that every investment product must be crafted and marketed with the intent of benefitting the end investor—even insurance products. We demand similar accountability in most other industries; finance is largely exempt.
· Reward politicians who refuse to accept money from financial corporations that do business in manner that is conflicted with the best interests of their customers.
Eisenhower’s words of warning resonated and surprised because he had tremendous credibility when it came to military matters. He was an insider. He had seen the evolution of the US military from 1941 to 1961 and—right or wrong—he did not like what he saw.
Financial Services lacks such a powerful figurehead. There is no one voice that can stand up in Washington DC with the credibility of an Eisenhower to warn against the corruption of finance and government. Because of that vacuum, it becomes all the more important that citizens, consumers, and voters of all persuasions express their sentiment in their actions to the best degree they can.
Pogo once said, “We have met the enemy and he is us.” What Pogo forgot to mention is that, “We have met our allies, and they are us, too.”
Thursday, September 2, 2010
My Kingdom for a Treasurer!
In a literary reference often overlooked by high school English teachers, Shakespeare’s King Richard called out “A Treasurer! A Treasurer! My Kingdom for a Treasurer!” just moments before he lost his horse. Alas, he had neither reliable Treasurer nor brave horse and thus lost his kingdom. Let’s hope we do better.
In the coming months, voters around the country will select governors, senators, and congressmen. We will vote on controversial amendments and propositions. Further “down ballot” most of us will find elections for school boards, judges, university regents, attorneys general, and the little known and even lesser understood office of municipal treasurer.
Treasurers of municipal districts (states, cities, counties, etc.) are an underappreciated lot. Given their intense responsibilities, they also are under-scrutinized by voters and the media, and in too many cases under-qualified or under-resourced. Cynics might argue that the Treasurer’s office is nothing more than a political stepping stone to the greater glories of mayoralty or governorship or a chance to pocket some spare change from vendors of various stripes.
However, we believe that electing someone to serve as caretaker of the community’s purse is one of the most vital decisions voters can make and one worthy of the most thoughtful consideration. Syntrinsic has crafted a generic job posting for Municipal Treasurer in an effort to capture a sense of the arduous and often thankless task faced by the keepers of the purse strings.
**********************************************************
For Immediate Posting: Municipal Treasurer
The Municipality of [Insert locale here] seeks a Treasurer who possesses the judgment of King Solomon, the courage of King Arthur, the compassion of Mother Theresa, and the communication skills and media savvy of Oprah Winfrey.
Responsibilities
The following responsibilities are to be completed in full, without exception, every day, even during election cycles, with limited staff, without undue influence caused by partisanship, media hype, special interest pressure, kickbacks, traveling salesmen, or CNBC:
· Renegotiate unrealistic pension obligations made by previous administrations. Do so without causing taxpayer revolt, regional strikes, or municipal bankruptcy. Honor the sanctity of contracts while modifying them.
· Unwind illiquid derivative contracts with obscure counterparties without negatively impacting the balance sheet or attracting the attention of credit rating agencies, the press, voters, regulators, or former municipal employees whose jobs were cut to pay for the failed investments.
· Vet the fiscal health and ethical business practices of all financial institutions with whom the municipality does business, including custodians, bond issuers, credit providers, money fund issuers, bond traders, investment banks, broker-dealers, consultants, insurance underwriters, banks Pension Plan platforms, money managers, research providers, technology vendors, and other assorted financial partners.
· Assist in evaluating how the municipality can take on greater regulatory oversight for financial institutions and finance professionals within your jurisdiction, given changes in the national regulatory landscape.
· Improve education by cutting education spending. Stimulate the economy by raising taxes on businesses. Encourage employment by increasing the cost of hiring new employees. Identify other contradictions and address them with grace and composure.
· Predict the future.
Skills
Eligible candidates should be able to demonstrate the following skills and traits:
· Fearlessness
· A wonkish delight in policy balanced by a disdain for wonkishness
· Healthy skepticism
· Hope and faith
· The ability to make impossible choices
· The ability to make sure that no one blames you for the impossible choices you have made so that you can stay in office and make more of them
· The ability to travel to distant regions, meet new people, and persuade them to entrust you with their money
· Offend and inconvenience no one
· Persuade most everyone to share the burden and feel good about it
· Stay out of the press, but keep citizens informed
· Be transparent, but don’t cause a panic
· Make wise long-term decisions without the next election distracting you
· Raise money. (For yourself. It costs a lot to be a Treasurer these days.)
Final Consideration
For those uncertain if they might be suitable candidates, we have found that effective municipal Treasurers often have backgrounds as alchemists, nuclear weapons inspectors, HazMat crew chiefs, and Supreme Court justices. Mortals need not apply.
Please forward cover letter, resume, and glitzy promotional video to the address below. We will review your materials as soon as we can afford to rehire our elections staff. They were laid-off after one of our structured notes failed to protect the municipality’s principal. The lawyers tell us that the prospectus had said that might happen but…well, you know.
Attention: Candidates for Treasurer, State of Distress, One Long Road, Capital City, USA
**********************************************************
Friday, August 27, 2010
Giving Credit Where Credit Is Due
In 1985, a visitor to China strolling about Beijing or Shanghai could expect to see in a day perhaps 10-20 cars struggling to make their way through a phalanx of bicycles and streaming rivers of pedestrians. Now Beijing struggles with almost perpetual traffic jams involving tens of thousands of vehicles that may be stranded on the highway for days—even weeks.
Situations like this make statisticians salivate. How intriguing, they think, to understand these jams. Are they random? Are there causal factors that can be identified and even managed? In short, what is happening? We can’t help but ask similar questions, not about cars in China, but about leverage in America.
1. Why can’t we return to the stock market growth rates of the 1980s, 1990’s, and into 2007?
While we would like to think that stock market growth during those nearly 30 years was primarily due to productivity gains, technological innovation, and good ol’ American know-how, we think that much of that stock market growth was due to the massive increase in our country’s leverage at the exact same time. Heresy? Perhaps. But if we are correct, then investors need to rethink expectations for stocks going forward.
Chart I below compares the growth of the S&P 500 (large US company stocks) to the growth of Public Debt (Federal), Consumer Credit, and Mortgage Debt from January 1976 to June 2010. Syntrinsic has added a “Smoothed S&P 500” line that mitigates the volatility of the S&P from 1994 to the present, so we can better see the general S&P 500 trend excluding extreme market noise.
Source: Treasury Direct, Federal Reserve, Bureau of Economic Analysis
The Debt is almost perfectly correlated to the Smoothed S&P 500, with correlation between them of 0.99. It could be coincidence, but we think such a strong relationship indicates something more important. While there has been a lot of noise over the past 35 years (fall of USSR, emergence of internet, rise of China, rise and stagnation of Japan, NASDAQ bubble, 9/11, Iraq, Afghanistan, housing crisis, etc.), leverage is a prime suspect in driving stock market growth during this period.
Just to emphasize how much our country was increasing its use of borrowed money, during this period leverage grew at a rate of 4.8 times the concurrent rate of inflation.
Based on the relative growth of Debt and the S&P 500 during this period, the Debt could be responsible for 50 - 60% of the stock market’s increase. If we were to factor in growth in municipal and corporate debt, the role of leverage would be dramatically higher.
2. But wasn’t our strong stock market of 1981-2007 due more to robust domestic growth than to leverage?
We wish that it were so; however, we think that domestic growth had a less significant impact than the increase in leverage. Chart II below compares the growth of the S&P 500 to the growth of America’s Gross Domestic Product (“GDP”). GDP is an imperfect measure of the economy, but it is the most comprehensive imperfect measure we have. Importantly, it includes much of the growth due to the increase in real estate values.
As with leverage, the smoothed stock market grew as GDP grew with a correlation of 0.99, (remember, perfect correlation is 1.00). However, the stock market grew 3.7 times faster than GDP grew during that period. Accepting that the correlation metric means something, then it would seem GDP is responsible for about 25% of the stock market’s growth. When we factor in the erosive effect of inflation, then the GDP growth rate falls to about 2.5% per year and GDP’s role in stock market growth drops below 10%.
The information below summarizes the annualized returns of these measures. Note that the sum of the annualized growth of Real GDP (Nominal GDP less CPI) and Public, Consumer, Mortgage Debt is quite close to the annualized growth of the S&P 500 (11.41% v. 10.66% per year); unfortunately, Debt represents over 78% of that sum.
Annualized Growth (Jan 1976 – June 2010)
S&P 500 = 10.66%
Public, Consumer, Mortgage Debt = 8.91%
Nominal GDP Growth = 6.55%
Inflation (CPI) = 4.05%
3. But aren’t we in a Great Deleveraging?
Nearly two years ago we wrote that we were in the midst of a Great Deleveraging, that it was time to rise up and spend down our lavish ways, unwind our collective exposure, and get back to basics—or something like that. Indeed, consumers have stopped increasing our leverage. Since the end of 2007, consumer credit has been stalled out at around $2.5 Trillion and Mortgage Debt has been stuck at about $14.5Trillion.
However, since December 2007 we have grown our country’s Public Debt from $9.2 to $13.2 Trillion, thus increasing the sum of our Public, Consumer and Mortgage debt from $26.3 Trillion at the end of 2007 to just shy of $30 Trillion as of June 2010. In short, we are not in a Great Deleveraging.
4. But if we are continuing to increase our leverage, then why is the stock market still about 25% below where it was in October 2007?
There are many reasons, but let’s consider investor sentiment and the how our leverage has been growing. Assume that 2008 was a shock to most investors and that people generally become more wary of the role of leverage. Certainly, there emerged for many an appreciation for the critical role that consumer credit and mortgage credit had played in America’s historically robust growth during this period.
But that is not the kind of debt we have been increasing; we have only been increasing our public debt. Increasing public debt at such massive levels has been sparking worry and fear, not consumer or investor confidence. Whether you embrace Keynes or Hayek, and whether or not you think the investing public is intelligent, investors are signaling their generalized anxiety about the potential affect of borrowing and printing more money. Thus, unless something enables consumer or mortgage borrowing to reengage, it is hard to see what would cause the market to rise materially.
Soon after news of Beijing’s traffic jam hit the international press, China’s state controlled media reported that the massive gridlock had mysteriously disappeared. Headline changed—problem (apparently) solved. Ah, that it would be so easy to solve an intractable transportation problem or to address our economic challenges. But just as the Chinese must at some point face up to a legacy of poor urban planning, corrupt officials, and a dishonest media, we in America must at some point look at our economy with more realistic eyes and not fool ourselves into believing in past economic glories or some sort of perpetual economic superiority.
It’s difficult to realize that what we had thought was a golden age economically was perhaps just a period of decent growth consistent with historic norms but juiced by leverage. But that realization should serve us better going forward than pretending otherwise.
Situations like this make statisticians salivate. How intriguing, they think, to understand these jams. Are they random? Are there causal factors that can be identified and even managed? In short, what is happening? We can’t help but ask similar questions, not about cars in China, but about leverage in America.
1. Why can’t we return to the stock market growth rates of the 1980s, 1990’s, and into 2007?
While we would like to think that stock market growth during those nearly 30 years was primarily due to productivity gains, technological innovation, and good ol’ American know-how, we think that much of that stock market growth was due to the massive increase in our country’s leverage at the exact same time. Heresy? Perhaps. But if we are correct, then investors need to rethink expectations for stocks going forward.
Chart I below compares the growth of the S&P 500 (large US company stocks) to the growth of Public Debt (Federal), Consumer Credit, and Mortgage Debt from January 1976 to June 2010. Syntrinsic has added a “Smoothed S&P 500” line that mitigates the volatility of the S&P from 1994 to the present, so we can better see the general S&P 500 trend excluding extreme market noise.
Source: Treasury Direct, Federal Reserve, Bureau of Economic Analysis
The Debt is almost perfectly correlated to the Smoothed S&P 500, with correlation between them of 0.99. It could be coincidence, but we think such a strong relationship indicates something more important. While there has been a lot of noise over the past 35 years (fall of USSR, emergence of internet, rise of China, rise and stagnation of Japan, NASDAQ bubble, 9/11, Iraq, Afghanistan, housing crisis, etc.), leverage is a prime suspect in driving stock market growth during this period.
Just to emphasize how much our country was increasing its use of borrowed money, during this period leverage grew at a rate of 4.8 times the concurrent rate of inflation.
Based on the relative growth of Debt and the S&P 500 during this period, the Debt could be responsible for 50 - 60% of the stock market’s increase. If we were to factor in growth in municipal and corporate debt, the role of leverage would be dramatically higher.
2. But wasn’t our strong stock market of 1981-2007 due more to robust domestic growth than to leverage?
We wish that it were so; however, we think that domestic growth had a less significant impact than the increase in leverage. Chart II below compares the growth of the S&P 500 to the growth of America’s Gross Domestic Product (“GDP”). GDP is an imperfect measure of the economy, but it is the most comprehensive imperfect measure we have. Importantly, it includes much of the growth due to the increase in real estate values.
As with leverage, the smoothed stock market grew as GDP grew with a correlation of 0.99, (remember, perfect correlation is 1.00). However, the stock market grew 3.7 times faster than GDP grew during that period. Accepting that the correlation metric means something, then it would seem GDP is responsible for about 25% of the stock market’s growth. When we factor in the erosive effect of inflation, then the GDP growth rate falls to about 2.5% per year and GDP’s role in stock market growth drops below 10%.
The information below summarizes the annualized returns of these measures. Note that the sum of the annualized growth of Real GDP (Nominal GDP less CPI) and Public, Consumer, Mortgage Debt is quite close to the annualized growth of the S&P 500 (11.41% v. 10.66% per year); unfortunately, Debt represents over 78% of that sum.
Annualized Growth (Jan 1976 – June 2010)
S&P 500 = 10.66%
Public, Consumer, Mortgage Debt = 8.91%
Nominal GDP Growth = 6.55%
Inflation (CPI) = 4.05%
3. But aren’t we in a Great Deleveraging?
Nearly two years ago we wrote that we were in the midst of a Great Deleveraging, that it was time to rise up and spend down our lavish ways, unwind our collective exposure, and get back to basics—or something like that. Indeed, consumers have stopped increasing our leverage. Since the end of 2007, consumer credit has been stalled out at around $2.5 Trillion and Mortgage Debt has been stuck at about $14.5Trillion.
However, since December 2007 we have grown our country’s Public Debt from $9.2 to $13.2 Trillion, thus increasing the sum of our Public, Consumer and Mortgage debt from $26.3 Trillion at the end of 2007 to just shy of $30 Trillion as of June 2010. In short, we are not in a Great Deleveraging.
4. But if we are continuing to increase our leverage, then why is the stock market still about 25% below where it was in October 2007?
There are many reasons, but let’s consider investor sentiment and the how our leverage has been growing. Assume that 2008 was a shock to most investors and that people generally become more wary of the role of leverage. Certainly, there emerged for many an appreciation for the critical role that consumer credit and mortgage credit had played in America’s historically robust growth during this period.
But that is not the kind of debt we have been increasing; we have only been increasing our public debt. Increasing public debt at such massive levels has been sparking worry and fear, not consumer or investor confidence. Whether you embrace Keynes or Hayek, and whether or not you think the investing public is intelligent, investors are signaling their generalized anxiety about the potential affect of borrowing and printing more money. Thus, unless something enables consumer or mortgage borrowing to reengage, it is hard to see what would cause the market to rise materially.
Soon after news of Beijing’s traffic jam hit the international press, China’s state controlled media reported that the massive gridlock had mysteriously disappeared. Headline changed—problem (apparently) solved. Ah, that it would be so easy to solve an intractable transportation problem or to address our economic challenges. But just as the Chinese must at some point face up to a legacy of poor urban planning, corrupt officials, and a dishonest media, we in America must at some point look at our economy with more realistic eyes and not fool ourselves into believing in past economic glories or some sort of perpetual economic superiority.
It’s difficult to realize that what we had thought was a golden age economically was perhaps just a period of decent growth consistent with historic norms but juiced by leverage. But that realization should serve us better going forward than pretending otherwise.
Sunday, August 22, 2010
Creating Something Better
A few weeks ago, political commentator and former Reagan speechwriter, Peggy Noonan, joined the chorus of those questioning whether the current generation leading America will leave America’s children something better. In her August 7, 2010 Wall Street Journal column, Noonan writes,
“The biggest political change in my lifetime is that Americans no longer assume that their children will have it better than they did. This is a huge break with the past, with assumptions and traditions that shaped us…The country I was born into was a country that had existed steadily, for almost two centuries, as a nation in which everyone thought—wherever they were from, whatever their circumstances—that their children would have better lives than they did. That was what kept people pulling their boots on in the morning after the first weary pause: My kids will have it better. They'll be richer or more educated, they'll have a better job or a better house, they'll take a step up in terms of rank, class or status…Parents now fear something has stopped…they look around, follow the political stories and debates, and deep down they think their children will live in a more limited country, that jobs won't be made at a great enough pace, that taxes—too many people in the cart, not enough pulling it—will dishearten them, that the effects of 30 years of a low, sad culture will leave the whole country messed up.”
But we have to ask, “Is it true? Has every American generation been confident that they were creating something better for their children? Is America a country that, as Noonan says, has existed steadily? One in which everyone thought their children would have better lives than they did?”
Consider a few major inflection points in American life and whether this intergenerational ethic was as clear and present to those who experienced them as they may appear in our historical mythology.
The American Revolution
America’s very founding revealed a country divided. Roughly one-third of the colonists were Tory supporters of England, one-third were what modern pollsters call “undecided,” and just one-third earned the title of rebel, whether given as compliment or pejorative. There was no consensus that one generation was leaving a better world for the next. That uncertainty was exacerbated—not settled—by Britain’s surrender.
The Civil War
Imagine yourself in the 1850s as the country spiraled ever closer to succession and war over the expansion of slavery. Regardless of one’s politics or geography, it is hard to imagine that either unionists or secessionists were certain they were leading their children down a path to a better country. And during the War itself, people’s confidence in America was shaken by the sheer scale of loss of life, disease and injury, destruction of whole cities, hunger, and fear that America and its ideals were disintegrating.
The Long Depression
The post Civil War Depression of the 1870’s was the worst America had seen in length and depth. Throughout the US and Europe, people were still reeling from devastating wars and economic collapse marked my deflation and bank failures. There were no formal safety nets, no pension plans, and only modest social and civil protections. By the panic of 1873, Americans had been living with a good 20 years of fear, uncertainty, war, and social turmoil. Little was certain, not least the future.
World War I
America’s “doughboys” were fighting a war that few felt would create a better world? The War was largely one of attrition marked more by new technologies of unprecedented brutality than by any sense of social or political accomplishment. The doughboys returned to a country that was not prepared to employ them, help them heal, or otherwise honor their service. Not America’s finest moment, and hardly a time of inspiring confidence in the future for the veterans or their children.
The Great Depression
The generation leading America through the 1930s faced much greater economic, social, and political turmoil than we do today and with far fewer resources for addressing those challenges. Were they confident that their children would be better off? Was America for them “steady?” If we think we are “disheartened” today, imagine how they must have felt.
World War II
Americans confronted global totalitarianism, the physical destruction of Europe, death camps, mass famine, casualties counted in the tens of millions. Our home front was divided far more than our selective and romantic memories recall. The outcome of the War was highly uncertain when America entered, our military was woefully underprepared. Parents sent their children into battle unclear whether the world would be better for it—hoping perhaps, but far from certain. They became what some call “The Greatest Generation” but no one knew that at the time.
This list is not comprehensive, nor does it come close to fully conveying the tremendous uncertainty with which Americans have lived since before this country was founded. But it serves as a good reminder, a grounding, a context for examining our current economic, political, and social challenges in a more realistic manner. We are not as bad off as the persistent social buzz might indicate.
For what has bound America over the years is not the constant assurance that one generation is creating a better world for the next generation; rather, it is the constant aspiration to create a better world. The distinction may seem subtle, but it is everything. We can never KNOW that our children will have it better, but heaven help us if we give up wanting it that way.
America has been about moving forward despite adverse conditions to raise loving families, start important businesses, build new friendships and communities, develop new technologies, build houses of worship, and expand the definition of freedom and human rights. America has never been constant or steady in the challenges it has faced. It has however, found over and over its core, its center, its commitment to persisting anyways in the desire to create a better world.
As always, the elements that have made America great are under tremendous pressure. When things are difficult as they so often are, it is natural that some would cry for more government regulation and control, and some for closed borders. At times like this, people look for scapegoats in immigrants, political opponents, and those from other cultures and religions. It is to be expected that some will lose hope and think that we as a country are lost—such despair is also a constant in American life.
However, we have more tools at our disposal than previous generations, far greater resources, better social support networks, more innovative technology, more accurate information, and most importantly, the wisdom gained from the experience of previous generations. America has not lost or forgotten something; we are simply struggling to recall what we already know and put it to action.
On this anniversary of the founding of our company, we move forward with great anticipation. Our lives have been greatly blessed by the generations before us who sacrificed, worked, thought, risked, persisted, and created. We expect our children—and theirs—to be able to say the same.
“The biggest political change in my lifetime is that Americans no longer assume that their children will have it better than they did. This is a huge break with the past, with assumptions and traditions that shaped us…The country I was born into was a country that had existed steadily, for almost two centuries, as a nation in which everyone thought—wherever they were from, whatever their circumstances—that their children would have better lives than they did. That was what kept people pulling their boots on in the morning after the first weary pause: My kids will have it better. They'll be richer or more educated, they'll have a better job or a better house, they'll take a step up in terms of rank, class or status…Parents now fear something has stopped…they look around, follow the political stories and debates, and deep down they think their children will live in a more limited country, that jobs won't be made at a great enough pace, that taxes—too many people in the cart, not enough pulling it—will dishearten them, that the effects of 30 years of a low, sad culture will leave the whole country messed up.”
But we have to ask, “Is it true? Has every American generation been confident that they were creating something better for their children? Is America a country that, as Noonan says, has existed steadily? One in which everyone thought their children would have better lives than they did?”
Consider a few major inflection points in American life and whether this intergenerational ethic was as clear and present to those who experienced them as they may appear in our historical mythology.
The American Revolution
America’s very founding revealed a country divided. Roughly one-third of the colonists were Tory supporters of England, one-third were what modern pollsters call “undecided,” and just one-third earned the title of rebel, whether given as compliment or pejorative. There was no consensus that one generation was leaving a better world for the next. That uncertainty was exacerbated—not settled—by Britain’s surrender.
The Civil War
Imagine yourself in the 1850s as the country spiraled ever closer to succession and war over the expansion of slavery. Regardless of one’s politics or geography, it is hard to imagine that either unionists or secessionists were certain they were leading their children down a path to a better country. And during the War itself, people’s confidence in America was shaken by the sheer scale of loss of life, disease and injury, destruction of whole cities, hunger, and fear that America and its ideals were disintegrating.
The Long Depression
The post Civil War Depression of the 1870’s was the worst America had seen in length and depth. Throughout the US and Europe, people were still reeling from devastating wars and economic collapse marked my deflation and bank failures. There were no formal safety nets, no pension plans, and only modest social and civil protections. By the panic of 1873, Americans had been living with a good 20 years of fear, uncertainty, war, and social turmoil. Little was certain, not least the future.
World War I
America’s “doughboys” were fighting a war that few felt would create a better world? The War was largely one of attrition marked more by new technologies of unprecedented brutality than by any sense of social or political accomplishment. The doughboys returned to a country that was not prepared to employ them, help them heal, or otherwise honor their service. Not America’s finest moment, and hardly a time of inspiring confidence in the future for the veterans or their children.
The Great Depression
The generation leading America through the 1930s faced much greater economic, social, and political turmoil than we do today and with far fewer resources for addressing those challenges. Were they confident that their children would be better off? Was America for them “steady?” If we think we are “disheartened” today, imagine how they must have felt.
World War II
Americans confronted global totalitarianism, the physical destruction of Europe, death camps, mass famine, casualties counted in the tens of millions. Our home front was divided far more than our selective and romantic memories recall. The outcome of the War was highly uncertain when America entered, our military was woefully underprepared. Parents sent their children into battle unclear whether the world would be better for it—hoping perhaps, but far from certain. They became what some call “The Greatest Generation” but no one knew that at the time.
This list is not comprehensive, nor does it come close to fully conveying the tremendous uncertainty with which Americans have lived since before this country was founded. But it serves as a good reminder, a grounding, a context for examining our current economic, political, and social challenges in a more realistic manner. We are not as bad off as the persistent social buzz might indicate.
For what has bound America over the years is not the constant assurance that one generation is creating a better world for the next generation; rather, it is the constant aspiration to create a better world. The distinction may seem subtle, but it is everything. We can never KNOW that our children will have it better, but heaven help us if we give up wanting it that way.
America has been about moving forward despite adverse conditions to raise loving families, start important businesses, build new friendships and communities, develop new technologies, build houses of worship, and expand the definition of freedom and human rights. America has never been constant or steady in the challenges it has faced. It has however, found over and over its core, its center, its commitment to persisting anyways in the desire to create a better world.
As always, the elements that have made America great are under tremendous pressure. When things are difficult as they so often are, it is natural that some would cry for more government regulation and control, and some for closed borders. At times like this, people look for scapegoats in immigrants, political opponents, and those from other cultures and religions. It is to be expected that some will lose hope and think that we as a country are lost—such despair is also a constant in American life.
However, we have more tools at our disposal than previous generations, far greater resources, better social support networks, more innovative technology, more accurate information, and most importantly, the wisdom gained from the experience of previous generations. America has not lost or forgotten something; we are simply struggling to recall what we already know and put it to action.
On this anniversary of the founding of our company, we move forward with great anticipation. Our lives have been greatly blessed by the generations before us who sacrificed, worked, thought, risked, persisted, and created. We expect our children—and theirs—to be able to say the same.
Thursday, August 5, 2010
Our Modern Age of Exploration
In 1914, toward the end of the Age of Exploration, former US President, Colonel Theodore Roosevelt and famed Brazilian scientist and explorer, Colonel Candido Rondon, led a team of naturalists and camaradas (workers) on an expedition to be the first to map and explore the Rio da Duvida, the Amazon’s River of Doubt.
Their team had no idea of what they might encounter on their adventure. Almost all were capable and almost all had investigated other parts of the Amazon; none had explored this particular river. They had no way to know its course, speed or the nature of the hazards that they might encounter. It may be hard to imagine in our world of GPS that in 1914 (just 96 years ago!) a thousand-mile long river did not exist on any map and was essentially unknown to all except the small number of native clans that lived along its shore, people who had had no contact with the outside world.
Consider some uncertainties they faced:
· What type of boat(s) does one take down an unexplored river? Shallow draft or deep? Heavy or light? Wood, canvas, or metal? What is the ideal length? How should they be powered? How many such boats should be brought?
· What food does one bring and how much on a journey that could last two months, six months or more? Can one rely on hunting or fishing along the way? Since any food must be carried and stored and potentially cooked, and knowing that starvation had claimed the lives of many explorers, how does one prepare accordingly?
· What kinds of people should be included in the team? What traits and skills are needed? What if your one doctor falls ill? Your one naturalist? When do you decide that team member is unfit for the journey? Who decides and what is done about it?
The Commission consisted of a band of smart, courageous adventurers who already had proven their mettle in difficult circumstances around the globe. They knew that they were embarking on a journey of great uncertainty and were hoping that their experience, skill, and will power would enable them to make it through safely and successfully.
But the most powerful character in the adventure and the greatest variable of all was the course and behavior of the river itself. It was completely unknown. Every bend meant a new possibility, each whirlpool or eddy could mean intense danger or nothing at all. Each rapid had the ability to shoot the explorers forward or dash their boats and hopes to pieces. The river—inspiration for such a grand undertaking—could easily have brought about the death of those so inspired.
In Candice Millard’s book, Theodore Roosevelt’s Darkest Journey: The River of Doubt, the author describes various characters gradually accepting or at least being challenged to consider that their past experiences, common sense, and abilities were not necessarily enough to see them through, that they might not complete this journey, that for all their planning and thoughtfulness, they may not succeed and may in fact die on what had started as a rather straight-forward adventure.
The river represented the great unknown. One could wonder whether we more modern Westerners are comfortable with the notion that there are places as yet unmapped. With our quick and easy access to information of both superficial and in-depth nature, and with a rather glib confidence in and reliance upon our technology and analytic skills, perhaps we have grown accustomed to imagining that we can place ourselves at any point in time and place and understand what to do next.
Maybe that is why the political airwaves in this decisive year are filled with soaring—and often patronizing—rhetoric about the economy and other matters. Politicians, analysts, economists, and other commentators have been impassioned in their claims that they know exactly what to do about just about everything, from health care and financial reform to containing Iran and North Korea (not to mention China and Russia), from energy policy to immigration policy to stimulating economic growth.
Col. Rondon knew and demonstrated as he led the Commission down the River of Doubt that a lack of humility about our knowledge is frightening, that blind certainty represents a person’s or a society’s greatest potential weakness. He was as confident and brave as anyone in his position could be in part because he was willing to admit that there were risks he did not understand and was thus not willing to take or ask others to take.
Productive doubt is good. It causes us to give pause, to think more deeply, more carefully, to see things with less ego clouding our judgment so that we can better perceive the variables on the periphery that might be terribly important and yet easily overlooked by decision-makers who think they already know all that there is to be known. Doubt that leads to paralysis is not helpful, but doubt that leads to more deliberate planning can be a welcome friend.
In some respects the Age of Exploration is over. And yet in other ways it is never over, for the world has never been here before, never before experienced this convergence of political, social, technological, economic and environmental conditions. Our path forward is just as uncertain and unknown as the River of Doubt was to Roosevelt, Rondon and their men; thus, our path forward requires that we ask questions they faced as well. How will we move down our river? What supplies do we need along the way? And what types of people are required to make the journey successful? Whether we like it or not, we are on a grand adventure together, one fraught with danger and with great potential to learn about our world and make better sense of it. With good care, it could be quite a journey.
Their team had no idea of what they might encounter on their adventure. Almost all were capable and almost all had investigated other parts of the Amazon; none had explored this particular river. They had no way to know its course, speed or the nature of the hazards that they might encounter. It may be hard to imagine in our world of GPS that in 1914 (just 96 years ago!) a thousand-mile long river did not exist on any map and was essentially unknown to all except the small number of native clans that lived along its shore, people who had had no contact with the outside world.
Consider some uncertainties they faced:
· What type of boat(s) does one take down an unexplored river? Shallow draft or deep? Heavy or light? Wood, canvas, or metal? What is the ideal length? How should they be powered? How many such boats should be brought?
· What food does one bring and how much on a journey that could last two months, six months or more? Can one rely on hunting or fishing along the way? Since any food must be carried and stored and potentially cooked, and knowing that starvation had claimed the lives of many explorers, how does one prepare accordingly?
· What kinds of people should be included in the team? What traits and skills are needed? What if your one doctor falls ill? Your one naturalist? When do you decide that team member is unfit for the journey? Who decides and what is done about it?
The Commission consisted of a band of smart, courageous adventurers who already had proven their mettle in difficult circumstances around the globe. They knew that they were embarking on a journey of great uncertainty and were hoping that their experience, skill, and will power would enable them to make it through safely and successfully.
But the most powerful character in the adventure and the greatest variable of all was the course and behavior of the river itself. It was completely unknown. Every bend meant a new possibility, each whirlpool or eddy could mean intense danger or nothing at all. Each rapid had the ability to shoot the explorers forward or dash their boats and hopes to pieces. The river—inspiration for such a grand undertaking—could easily have brought about the death of those so inspired.
In Candice Millard’s book, Theodore Roosevelt’s Darkest Journey: The River of Doubt, the author describes various characters gradually accepting or at least being challenged to consider that their past experiences, common sense, and abilities were not necessarily enough to see them through, that they might not complete this journey, that for all their planning and thoughtfulness, they may not succeed and may in fact die on what had started as a rather straight-forward adventure.
The river represented the great unknown. One could wonder whether we more modern Westerners are comfortable with the notion that there are places as yet unmapped. With our quick and easy access to information of both superficial and in-depth nature, and with a rather glib confidence in and reliance upon our technology and analytic skills, perhaps we have grown accustomed to imagining that we can place ourselves at any point in time and place and understand what to do next.
Maybe that is why the political airwaves in this decisive year are filled with soaring—and often patronizing—rhetoric about the economy and other matters. Politicians, analysts, economists, and other commentators have been impassioned in their claims that they know exactly what to do about just about everything, from health care and financial reform to containing Iran and North Korea (not to mention China and Russia), from energy policy to immigration policy to stimulating economic growth.
Col. Rondon knew and demonstrated as he led the Commission down the River of Doubt that a lack of humility about our knowledge is frightening, that blind certainty represents a person’s or a society’s greatest potential weakness. He was as confident and brave as anyone in his position could be in part because he was willing to admit that there were risks he did not understand and was thus not willing to take or ask others to take.
Productive doubt is good. It causes us to give pause, to think more deeply, more carefully, to see things with less ego clouding our judgment so that we can better perceive the variables on the periphery that might be terribly important and yet easily overlooked by decision-makers who think they already know all that there is to be known. Doubt that leads to paralysis is not helpful, but doubt that leads to more deliberate planning can be a welcome friend.
In some respects the Age of Exploration is over. And yet in other ways it is never over, for the world has never been here before, never before experienced this convergence of political, social, technological, economic and environmental conditions. Our path forward is just as uncertain and unknown as the River of Doubt was to Roosevelt, Rondon and their men; thus, our path forward requires that we ask questions they faced as well. How will we move down our river? What supplies do we need along the way? And what types of people are required to make the journey successful? Whether we like it or not, we are on a grand adventure together, one fraught with danger and with great potential to learn about our world and make better sense of it. With good care, it could be quite a journey.
Subscribe to:
Posts (Atom)