Campaign Rhetoric

There is too much posturing and not enough substance from the Presidential candidates.

Most of the campaign rhetoric seems to concentrate on issues that are largely personal. Who has experience - or lacks it? Who is elitist and out of touch? Who can relate to the average worker? Who is reckless in his proposed approach to rogue states? How many houses does this candidate have?

While personal characteristics are important - particularly honesty and the willingness to speak truth to the American people, we need to know about policies too. Unfortunately the candidates seem to be conspiring to ignore several 800 lb gorillas that are sitting, not so quietly, in the living room.

To list only a few:

• What do the candidates propose to do about Social Security, whose Trust Fund will be empty in the not so distant future?
• What will they do about Medicare which is likely to bankrupt the Federal Government well before Social Security goes broke?
• How will they address the grotesque over consumption of medical services?
• What are their plans for restoring the U.S. Armed Forces to a situation where they can be counted upon to win small wars and, at the same time, continue to deter potential aggressors (Russia - Georgia, China - Taiwan, North Korea - South Korea)?
• What do they plan to do about our deteriorating infrastructure?
• What is the proper role of regulation and the government in our economy?

A pleasant shock would be for the candidates to tell us how they propose to approach the biggest issue of them all:

• How do the they intend to inspire us to change from being a nation of reckless consumers, who have overdosed on debt that may no longer be available, to a nation, once more, of producers and savers?

There is a limit - and we are fast approaching it - to the willingness of the rest of the world to finance our spending. The sooner that President George W. Bush's infamous exhortation on September 12, 2001 "We are at war, go shopping" ceases to be a part of our culture, the better.

Wall Street Bonuses

An article, today, on the Reuters website http://tinyurl.com/4u922q opines that Wall Street bonuses might drop by 50%.

THAT'S ALL?

It's different this time...

Every financial bubble is marked by pundits and financial industry mavens chanting: 'it's different this time." If you believe that, I have a bridge in Alaska (not yet built, admittedly) for sale at a very reasonable price.

Well, it wasn't different this time - and it wasn't the last time. Or the time before. Or the time before that.

The latest housing bubble, the dot.com bubble, the stock market bubble of the 1920s, the South Sea Bubble of 1720 and the Tulip mania of 1637 - just to name a few - were all essentially similar. Every few years, there is a speculative frenzy as a gigantic herd of financiers, in the grasp of near terminal groupthink, rushes in the same direction followed by the naive and the greedy. As they run, they can be heard chanting - over and over: "you can't lose, buy now before it's too late, it's different this time."

The result, if not the exact timing, is predictable: rising prices, followed by ever higher prices as the "buy high, sell higher" crowd piles on. Inevitably, however, once prices have reached unsustainable levels, some piece of negative news, known but previously ignored, panics the herd.

As everyone tries to escape at the same time, prices crash and those who have borrowed to support their speculations are bankrupted. If that was all that happened, the excessively greedy would be punished and life would continue without much disruption.

Unfortunately, most of the punishment is inflicted on the real economy: the bankrupt default on their loans, banks tighten credit standards and reduce lending, businesses can no longer finance raw materials, inventories or receivables, workers are laid off, consumers reduce their buying and the cycle continues. The nightmare only ends when lenders replenish their capital and regain their courage.

A friend of mine is a highly successful money manager. Twenty years ago he told me that you could see the next financial crisis by looking at the fastest growing category of bank assets (loans). He was right, then, but banks are not the only culprits now: add hedge funds, overly large private equity funds, some sovereign wealth funds, and private speculators of all walks.

If you see the so-called smart money rushing to invest in a specific category of assets, don't walk away from the opportunity. Run away.

Missing out on some of the "gains" generated during a bubble is a minor loss, missing out on the crash that follows is a triumph.

And it won't be different next time!

Rescue the economy

The desire to punish the overpaid "geniuses" (irresponsible maniacs?) who created the current financial mess is very human. On the other hand, the resentment and envy shown by the great majority of politicians, commentators, and the public, is grossly unattractive and entirely counterproductive.

There is a financial tidal wave that is already spilling over the levees and beginning to damage the real economy of jobs, houses, services, goods, vacations and comfortable retirement. Without action, the damage is likely to be severe. Unfortunately, the twin objectives of inflicting suitable punishments upon the guilty and, at the same time, solving the problem appear to be mutually exclusive.

The current Administration plan provides no guarantees of success but is a step forward. While Congressional Democrats are arguing over the details, and doing their best to add punishment to the mix of programs, they are, nevertheless, exhibiting considerable political courage by focusing on a solution rather than revenge. Congressional Republicans resemble nothing more than Olympic sprinters, fueled by a slavish devotion to public opinion polls, racing to a new world record for political cowardice.

All who are involved, but particularly those very same Congressional Republicans, should be guided by these words spoken by Edmund Burke in a speech to the electors of Bristol in 1774:

"Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion."

Weather Forecasting

It is rainy, very windy and, for this time of year, quite cold today in Alexandria, Virginia. Three days ago, none of this was in the forecast.

Nature, however, had other ideas and a deep low pressure area suddenly formed off the North Carolina coast. We are in the backwash.

Even though weather forecasting is much improved since then, these words of Francis Arago, a 19th Century mathematician, are well worth considering:

"Never, no matter what may be the progress of science, will honest scientific men who have regard for their reputations venture to predict the weather".

Rescuing the economy from financial excess

The Treasury has come up with a very expensive, but probably necessary, plan that responds to the risks to the economy caused by the gross excesses of the financial sector. Since the USA is not a dictatorship, spending as much as $700 billion (not a typo - BILLION) requires Congressional approval.

While the Congress is asking for some sensible changes - including the creation of an independent oversight board - it is also playing games. Unfortunately, but not unexpectedly, a piece of "must pass" legislation has become a target of ideological and special interest blackmail. Among other issues, the arguments raging over CEO compensation and direct help to improvident speculators (sometimes called "homeowners") are likely to delay any resolution.

Delay creates uncertainty and there are few if any other conditions that markets hate more.

So, accepting the fact that a rescue is necessary to save the real economy from serious trouble, the Congress should act quickly, although not hastily, and leave the question of a giveaway to unwise home buyers for another day. It wasn't immediately urgent last week and it isn't immediately urgent now.

With respect to financial executives, these lines written by Rudyard Kipling (The Law of the Jungle) are worth considering:

Now this is the Law of the Jungle -- as old and as true as the sky;
And the Wolf that shall keep it may prosper, but the Wolf that shall break it must die.
As the creeper that girdles the tree-trunk, the Law runneth forward and back --
For the strength of the Pack is the Wolf, and the strength of the Wolf is the Pack.

Believing that highly compensated financial executives did not break the Law of the Jungle is a real stretch! The U.S. Treasury should accept that severe consequences - albeit stopping just short of death - are appropriate.

Health Insurance

Most of us have Homeowner, Automobile, and so-called "Health" insurance. Very few medical policies, however, are true insurance: most are just pre-paid plans with relatively small deductibles and co-payments.

The point of insurance is to protect against an unaffordable disaster. To add marketing and administrative costs, as well as profit, to predictable expenses simply does not make sense. True medical insurance has a high deductible so routine medical costs become a household budget item.

As proof of the difference between medical plans and true insurance, consider that it is rare to hear complaints that homeowner or automobile insurance was bought but no claims were made. Contrast that with whining about the lack of need for medical treatment but still having to pay for medical insurance.

Those considering complaining should, instead, be grateful for their good health.

Sound money and Senator Obama

Paul Volcker, who served as Chairman of the Board of Governors of the Federal Reserve Bank from 1979 - 1987, is one of Senator Obama's senior economic advisers.

When Mr. Volcker took office, the U.S. economy was in poor shape. The impact of two oil shocks had been greatly amplified by the flood of cheap money unleashed by Arthur F. Burns and G. William Miller who served as Chairmen from 1970 - 1978 and 1978 - 1979 respectively. The result was high inflation, high unemployment, and anemic growth.

Chairman Volcker's term of office was marked by sound money policies. In the short term these policies were very painful but inflation was controlled. Combined with tax cuts, and reforms to the tax code, during President Reagan's two administrations, sound money policies provided the foundation for a period of economic stability and prosperity that lasted until the dot.com bubble.

After Mr. Volcker, came Alan Greenspan (Bubblespan?) who, during his eighteen year service as Chairman, unleashed another flood of cheap money on the economy. Although general inflation has not yet taken off in the manner of the 1970s, the ensuing series of asset price bubbles has been a disaster. While President Bush's tax cuts likely did little harm, and may have been beneficial, out of control spending has certainly amplified the damage caused by too much, too cheap, money.

A major part of the current economic and financial crisis can be attributed to the reckless and unwise, but probably inevitable, response of investment bankers to this flood of money. A strong argument can be made that we would not be in this financial swamp without the monetary - and fiscal - profligacy of the past eight years.

To date, Senator Obama's economic and tax policies have been notable for class warfare rhetoric - reminiscent of British Labour governments in the 1960s and 1970s. If Senator Obama is willing to listen to Mr. Volcker's advice, and act on it, there is a small ray of hope that class warfare polices will be, if not abandoned, at least moderated.

Senator McCain knows better!

That the Federal government needs a coherent strategy for dealing with financial crises is obvious. New regulatory systems are urgently needed, as are explicit policies regarding the use of taxpayer money to rescue profligate and ill-managed financial institutions. The immediate priority, however, is to survive the very ugly near term.

Senator McCain's criticisms, today, of the Federal Reserve Bank and the Treasury are akin to second guessing battlefield commanders while the fighting is still underway. As a retired U.S. Navy Captain, Senator McCain knows better.

The time for criticism, and the replacement of failed commanders, comes when the fighting is over. If he is elected, Senator McCain will have that opportunity; if not, then his position as a Senator will offer him a sufficient soapbox. For now, silence would have been the best strategy.

Perhaps the Senator, given his admitted lack of knowledge of economics ,should have paid heed to this adage - variously attributed to Mark Twain, Abraham Lincoln, and others:

"Better to keep your mouth closed and be thought a fool than to open it and remove all doubt."

Investing Strategies

After a very ugly week in the financial markets, it would be comforting to think that this investing strategy, offered by the late comedian Will Rogers, could be made to work:

"Buy a good stock, put it away and watch it go up, then sell it. If it doesn't go up, don't buy it."

Meanwhile, we can only hope that our Representatives and Senators will act constructively rather than working really hard, as is their usual custom, to speak in sound bites that make purely partisan political points.

Dysfunctional investment practices

Watching the gyrations in the stock markets is ugly. Uglier still is watching my net worth decline! With the announcement of each piece of bad news comes a precipitous drop, followed by an unjustifiable spike as sentiment changes. The overall trend, unfortunately, has been down for a year.

All too frequently this thought comes to mind: "so what else is new?" Conditions have been parlous for a year so casualties could have been expected. It is only the identity of the casualties that should have been news.

This level of irrationality, demonstrated by market movements in the past few weeks, suggests panic, followed by euphoria, followed by more panic, as money managers rush around in ever diminishing circles and finally disappear up their own fundamental orifices.

The late Benjamin Graham, doyen of value investors, wrote the classic Security Analysis, first published in 1934. Mr. Graham proposed the idea of "Mr. Market", a manic depressive whose daily offers to buy your share of a business, or sell his share to you, were largely irrational. The good news is that there is no cost to ignoring Mr. Market: a decision to buy or sell can wait on the difference between the fundamentals and Mr. Market's offer. If Mr. Market is manic and offering far too much, then sell. Buy if he is depressive and asking far too little.

Competently executed, this style of investing can work really well. There is, however, one critical condition: value investors must have sufficient cash on hand to take advantage of Mr. Market's depressive phases. Unfortunately, the general market model has changed for the worse.

Most investments are now managed by institutions and the majority of those institutions offer mutual or exchange traded funds. This is the vehicle for the smaller investor - including 401(k) plan participants and IRA owners - to own the market or, allegedly, to benefit from the highly skilled efforts of professional money managers.

The first problem is the total reluctance of mutual fund managers to hold cash. Anything more than needed to cover the normal level of redemptions appears to be effectively prohibited. So, when panic strikes, the managers are forced to raise cash by selling into a declining market. When everyone is trying to get out at the same time, the result is a rapid decline in share prices.

The converse is that, when markets are rising, a flood of new money arrives and the culture forces mutual fund managers to buy high. "Buy high, sell higher" is known as "momentum investing" and can be very profitable if an investor can consistently and accurately call the top. Once at the top, the strategy is to sell like crazy, but a requirement to stay fully invested prohibits that.

The second major problem is that mutual funds simply do not hold enough cash to take advantage of the times when Mr. Market is severely depressed.

The mutual fund model is broken. Without the ability - or even the will - to sell and then hold very substantial cash balances when share prices are far higher than the fundamentals justify, the market is trapped in a positive feedback loop. The result is increased volatility and, depending on the direction of prices, euphoria or panic - often succeeding each other in rapid succession.

I am a limited partner in a small private equity (leveraged buyout or LBO) fund. So far, in a little over two years, the managers have drawn 40% of our capital commitments while returning capital and dividends equal to nearly half of that. They are in no rush to spend the rest of our money but, on a day when Mr. Market is more than usually depressed, there is plenty of cash available to take advantage of the opportunity.

The biggest difference between LBO and mutual funds is that we, the LBO fund investors, are along for the ride. We have no exit until the fund's life comes to a natural end: no matter how much we panic, we are unable to force the manager to sell into a declining market.

The incentives of private equity fund managers are well aligned with those of the investors. The model is functional and all that the investors need is a manager with a proper understanding of value - and the discipline to refrain from either overpaying or burdening the portfolio companies with excesive debt. While private equity carries higher than average risk, the returns are also likely to be higher than average. More important is the fact that returns are primarily linked to the skills, and discipline, of the manager and less affected by a mutual fund manager's inability to ignore the day to day irrationality of Mr. Market.

To say that the current investment model is irrational and dysfunctional is one thing. It is very likely an accurate statement but investors are well advised to consider this thought from the late economist Maynard Keynes:

"The market can stay irrational longer than you can stay solvent."

Too clever by half

When used by the British, the phrase 'too clever by half' is a serious insult.

It is used to describe a person or scheme that has failed - often after a promising start - because of complexity and overreaching. 'Too sure of one's intelligence in a way that causes displeasure or damage to people' is another definition. The opposite of 'too clever by half' is the person who knows that 'keep it simple stupid' is often the safest and, in the long run, the most profitable course of action.

The current financial crisis came about because the grossly overpaid "geniuses" on Wall Street were too clever by half. While they "only" did three things wrong, those three things were sufficient to land us all in trouble. Excessive leverage, fees layered upon fees, and gross self deception are clearly classifiable as "big wrongs".

Leverage, in ordinary terms, means borrowing - lots of borrowing. A homeowner who makes a 20% down payment is leveraged 4:1. There is some risk for the lender but it is not excessive and the interest rate charged normally provides adequate cover. When the bank packages those mortgages into bonds, there is little addition to the risk.

It is the Wall Street "genius" who buys these bonds using 9:1 leverage (i.e. making only a 10% down payment on the bond and borrowing the rest) who raises the level of risk to what has now proved to be an intolerable level. Combine 4:1 leverage with 9:1 leverage and the total rises to 36:1 with respect to the underlying value. It is not rocket science to see that it doesn't take much in the way of losses, on the underlying mortgages, for the buyer of the bonds to be left with precisely and exactly zero money if he tries to sell them.

Worse yet, in the world of hedge funds, 36:1 leverage is considered modest!

On top of that, when the seller lends the buyer money to buy the bonds, using the bonds themselves as collateral (which has happened all too frequently), the level of risk becomes - at least for any ordinary person - incalculable. If risk managers ever bothered to calculate the potential damage, it seems that they were overruled by overconfident investment bankers and traders.

See also self deception!

Buying long term debt using short term borrowing is known as the "carry trade". It's profitable work if you can keep rolling over the debt, which is not easy in hard times, and if short term interest rates do not spike above that paid on the bonds.

Engaging in the carry trade is a very high risk activity. While it is very similar to the business model used by commercial banks, where demand deposits in checking and savings accounts fund medium and long term loans, they are heavily regulated and statutory capital requirements do not permit leverage much beyond 10:1. Except, to our cost, no small number of them got too clever by half and started finding ways to keep speculative activity, using highly leveraged instruments, off their balance sheets and, until the system blew up in their faces, concealed from their regulators.

Add self deception to the mix. Just a few companies have insured trillions (not a typo - trillions - and the fancy term for this form of speculation is a Credit Default Swap) of dollars of debt, too much of which is now nearly worthless. Those who bought this so-called insurance thought that they were in a nearly risk free position but are now finding themselves badly exposed. There was never a chance that the insurers could ever deliver on their promises if the bet was called, but Wall Street went merrily on its way taking unconscionable risks for a few extra basis points (hundredths of a percentage point) of yield which was further eroded by supercharged fees.

High risk should be accompanied by high reward: that is the position of a well managed Venture Capital Fund but both the managers and the investors recognize and accept that ahead of time. Very high risk, accompanied by only very modestly higher returns, does not constitute good management nor justify supercharged fees. That, not jealousy, is the basis for my description of the Wall Street "geniuses" as grossly overpaid.

Warren Buffet said it well: "You only learn who has been swimming naked when the tide goes out" .

The tide is a long way out now - and a lot of people have been swimming naked.

Let us hope that the impact on the Main Street economy, focused on delivering goods and services rather than speculating with borrowed money, will be limited. Federal Reserve Chairman Ben Bernanke is a expert on the Great Depression. Perhaps he has learned the right lessons.

Corrupt or Incompetent?

Congressman Charles Rangel (D-NY) is Chairman of the House Ways and Means Committee. As such, he has as much, if not more, influence over our tax laws than anyone else.

Rep. Rangel, in spite of being a tax expert, has neglected to declare, and pay taxes on, income received from twenty years of renting out his Dominican Republic vacation home. On top of that insult to the taxpayers, his vacation home was financed by a no-interest loan from the developer.

Further, his required financial disclosure reports have been shown to be more than a little inaccurate. That the value of some relatively inexpensive Florida property was reported inaccurately is not a major matter. Failure, however, to properly disclose records of privately sponsored overseas trips is more serious.

Of twenty (20) trips listed on his annual disclosure forms, he reported only seven (7) on the separate travel disclosure forms that members must file to provide a more detailed accounting of the cost and purpose of the trips. Destinations included Taiwan, Singapore and the Caribbean Islands.

Were these barely disguised vacations? Or was there significant legislative business conducted on these trips?

The real scandal is that legislators may accept private funds to travel around the world. If a trip is official business, the government should pay: if it is a vacation, the Congressman should have paid. Private sponsorship just reeks of corruption.

Rep. Rangel has stated that, once all of the records are straightened out, he will refer the matter to the House Ethics Committee. That is the right thing to do. On the other hand, he declines to step down as Chairman and, in that, he is supported by Speaker of the House Nancy Pelosi. They are both wrong!

While it is too early to decide whether the Congressman is corrupt or merely incompetent, he should not be the principal person responsible for shaping our tax law. Resignation - sooner rather than later - is the only correct course of action.

Sadly, it is increasingly rare for politicians to accept responsibility for their actions. Doing the right thing, however, should not be an old fashioned curiosity.

Congressman, your duty is to resign.

Wall Street's one way bets

For the past 20 years, the practice of senior Wall Street executives, with board and shareholder acquiescence - if not complicity, has been to construct high risk one way bets for their own benefit.

When they win, they profit enormously: gigantic bonuses and option grants are scattered promiscuously while the shareholders do OK - but not much more. When these bets really blow up in their faces, and the executives are fired, they depart with fat severance packages. The current euphemism is "Golden Parachute", but the reality is that they are being greatly rewarded, at shareholder expense, for failure.

The Chapter 11 (Reorganization) Bankruptcy filing by Lehman Brothers which will likely become Chapter 7 (Liquidation), statements by the regulator of Fannie Mae and Freddie Mac, and the abrupt takeover of Merrill Lynch by Bank of America may, with luck, signal the end of some of these one way bets. The best of the ugly news is a statement by the Federal Housing Finance Agency stating that severance payments will not be made to Daniel Mudd (CEO of Fannie Mae) and Richard Syron (Chairman and CEO of Freddie Mac) despite such provisions in their contracts.

I suspect that the top Executives, and many second echelon ones as well, at Merrill Lynch will find the culture and attitude to risk taking at Bank of America, which is to acquire them, to be radically different from that to which they are accustomed. Given the impending demise of Lehman Brothers, and the expected loss of jobs there, pay scales will be less generous. The supply of investment bankers will likely exceed demand for a few years to come.

It is time for shareholders to restrain the excesses of management. Actively managed mutual funds are notorious for the speed at which they churn (I use the word deliberately) their portfolios: they are speculators not owners. With the rise of Mutual and Exchange Traded Funds that mirror the market's indices, we can hope to find a new generation of money managers who are willing to be owners rather than gamblers.

Money managers should take a lesson from Berkshire Hathaway and its CEO Warren Buffet. Aside from its 100% ownership of a large stable of companies, Berkshire Hathaway is a major player in the stock markets. Acting like an owner, not a speculator, is Berkshire Hathaway's investment philosophy and it is rare to find management, at companies where it is a significant shareholder, with hands too obviously in the cookie jar .

Shareholders of the world unite. (Apologies to Karl Marx!)

Many will blame the current financial crisis on the sub-prime mortgage mess. The reality is that the financial sector, over a twenty year period and with the complicity of former Federal Reserve Chairman Alan Greenspan (Bubblespan?), has constructed a gigantic pyramid scheme, built on sand, which is now collapsing on us.

Shareholders, and the Boards of Directors that are supposed to represent us, acquiesced in this horror show. While management deserves the greatest punishment, we too will suffer but we must accept our share of the blame.

A thought for the weekend

"Never play cards with any man named 'Doc,' never eat at anyplace called "Mom's' and never, never, no matter what else you do in your whole life, sleep with anyone whose troubles are worse than your own."

Nelson Algren (Rules for life)

Entrepreneurs: Debt or Equity?

One of the great strengths of the American economy is the constant creation of new companies and the acquisition of existing small businesses. Since most entrepreneurs lack sufficient personal resources to fully fund these new companies, they are faced with the need to raise capital.

Without getting complicated, the choice comes down to debt or equity - and there is good news and bad news associated with each.

The bad news about equity capital is that it is the most expensive form of capital in existence: the good news is that the money never has to be returned, and dividends never have to be paid, unless the company can afford it. When it comes to debt, the good news is that no form of capital is cheaper (even though using high interest credit cards is not all that cheap) but the bad news is that the money has to be given back, and the interest paid, when promised.

Risk and reward are in balance. The rich rewards reaped by successful entrepreneurs reflect the substantial financial risk that every small business owner must take as well as the skill and hard work that are needed to ensure that the business survives and prospers.

Senator Obama please take note!

NATO, Russia and Governor Palin

Speaking in an interview with Charles Gibson of ABC News, Governor Palin seems to believe that both the Ukraine and Georgia should become members of NATO. In the same interview, she suggests that we may have to go to war with Russia in case of an invasion of a "democracy".

NATO memberships for Georgia and Ukraine are opposed by Russia in defense of its right to control her "near abroad". That, however, is not a good reason why we should flinch from supporting democracies that are under threat from a large and bullying neighbor. On the other hand, the question of whether Georgia and Ukraine will remain democracies is not yet settled.

By admitting Eastern European countries - or, harder, those in the Caucasus - to NATO, the first problem is that, under the North Atlantic Treaty, an attack on one is an attack on all. Thus, all signatories are obligated to come to the defense of the attacked.

Granting NATO membership so freely may be a good thing on moral grounds: the more cynical may ask what is in it for us. It does, however, raises the question of how the alliance will, or even can, respond if Russia attacks a NATO member.

The issue is NATO's ability, lacking resources or even much [European] will to go to war, to deliver on its commitments. America is the only significant military power in the alliance, and there are only two other NATO members (UK and France) with even modest expeditionary capabilities. A reasonable conclusion is that NATO (i.e. America) has been grossly promiscuous in accepting new members and promising membership to other countries.

Would, as during the Cold War, the use of nuclear weapons be considered if we were losing?

Our forces in Europe have been greatly reduced since the end of the Cold War. The bulk of our remaining military will be involved in Iraq and Afghanistan for at least the next three years and, once those wars end, will need a lengthy period to reconstitute personnel and equipment in order to respond to a European crisis.

Then, there are the problems posed by Iran and North Korea, two wannabe nuclear powers, which may require a military response but with few allies or available military assets - other than, perhaps, the Air Force. A China - Taiwan crisis is not impossible either.

Governor Palin (and the McCain campaign) would have been well advised to have taken a lesson from a well known saying of President Theodore Roosevelt:

"Speak softly and carry a big stick."

Worth noting is the fact that President Roosevelt had little more experience (but, perhaps, much greater wisdom) than Governor Palin when he took office in 1901 after the assassination of President William McKinley.

President Bush's two terms have been marked by bluster and empty threats. The "change" promised by both Senators McCain and Obama might have included modesty to go along with strength but Governor Palin has, regrettably, started down an ill-starred path all too well trodden by President Bush and his advisers.

It's been said before...

A long time ago, comedian Will Rogers succinctly identified the causes of our current economic problem. When he spoke these words, however, he was referring to the excesses of the Roaring Twenties:

Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like.

As so often, there is little new under the sun!

Airline Baggage Handling

The gold standard for quality assurance is known as 6 Sigma. Without going into detail, 6 Sigma translates into approximately 3.4 defects per million items.

When it comes to baggage, there isn't an airline in the world that comes close to performing at that quality level.

Since the 6 Sigma defect rate is measured in relation to the number of opportunities to foul up, a reasonable estimate of the "mishandled" (a squishy word for lost, damaged or destroyed) bag rate, under a 6 Sigma system, would be around 6.5 per million travellers. The reason that it is higher than 3.4 is that many bags have to make connections, and some travellers check more than one bag, so the average number of opportunities for loss, damage or destruction is significantly greater than one per trip.

The actual ten year average of "mishandled" baggage reports, for the eight largest airlines in the USA, ranges from 4.25 (Continental) to 5.49 (United) per THOUSAND passengers. It is not too hard to do the math which shows a defect rate that is at least six hundred and fifty times worse than the 6 Sigma standard.

That airline executives can, with a straight face, charge extra for checked bags, while delivering wholly inadequate service, must be considered a marvel of modern business. Adding insult to injury, we hear only excuses and see not very creative efforts to assign blame to someone else.

That is just not good enough. It also brings to mind a thought that crossed my mind some thirty years ago, when I was relatively new in the consulting business: the only reason that any given company is not bankrupt is because the competition is as incompetent or worse.

In the past eight years, all of the major airlines, except American and Southwest, have taken a trip through Chapter 11 of the bankruptcy code. Although Southwest hasn't gone bankrupt, it doesn't count because it is really a single focus hedge fund, speculating in jet fuel futures, that happens to own and fly airplanes. How much profit would Southwest have made for its shareholders if it hadn't bothered to be in the airline business?

It is time for management and unions, whose incompetence (and shortsighted greed) has created this situation, to suffer the consequences. So, too, should the shareholders who have invested (speculated?) without performing a proper analysis of the industry's dysfunctional economics and incompetent management.

The next airline to file under Chapter 11 of the Bankruptcy Code should be refused protection from its creditors and be liquidated under Chapter 7. That is the nature of capitalism: the risk of failure is the other side of the potential for reward. Penalty free "do overs" are for kids in kindergarten, not business people whose salaries are in the millions of dollars.

Books or bytes?

In 2005, Dennis Lyons of the Daily Record http://www.dailyrecord.com quoted Walter Isaacson, President of the Aspen Institute, on the subject of print:

Print. If for the past 400 years we'd been getting all of our information electronically, and somebody invented a way to put it on paper and deliver it to our doorsteps so we could read it in the back yard or bath or bus, people would say this new print technology is so wonderful it will replace the Internet.

Mr. Isaacson was discussing newspapers. There are even greater advantages to print when it comes to books: the fact that no batteries required and they don't break expensively when you drop them are only two. And, remembering my childhood, it would have been hard to read electronic books under the covers after lights out. (OK, OK, flashlights have batteries).

Although I am not a survivalist or a rabid environmentalist, I am a firm believer in avoiding the use of electricity - so long as my comfort is not compromised - whenever possible. Supply is not always available, dead batteries are hazardous waste, and it costs money. There is merit to the [slightly] simpler life.

I don't think that I will be buying a Kindle (R) from Amazon http://www.amazon.com any time soon. The reason is that books are simple, efficient and, in the long run, inexpensive.

No press conferences?

A week has now passed since the announcement of Governor Palin's selection as the Republican Party's choice for Vice Presidential Nominee. At no time since then has Governor Palin appeared in an unscripted environment: no press conference, no interviews with individual reporters.

So, start with former British Prime Minister Harold Wilson's insightful remark: "a week is a long time in politics." If that is true - and it is - then conspiracy theorists will be sure that there is something to hide while the more thoughtful of us merely wonder.

At some stage, the McCain campaign will have to take the risk of letting her speak for herself in the company of probing, if not hostile, questioners. Sooner is better than later, particularly if there are ugly secrets lurking in the background.

One of my mentors - who later became a very high government official - once told me that there are no secrets in Washington DC. He went on to tell me that while there are those who believe that political and personal secrets can be kept, they are engaging in self deception of the worst kind.

If Senator McCain's campaign doesn't yet understand this simple concept, it may be about to learn the lesson the hard way.

A malicious thought...

To liven up the Presidential campaign further, I propose a debate between Senator Obama's former pastor, the Rev. Jeremiah ("God damn America") Wright, and Governor Palin's former Pentecostal pastor, the Rev. Ed Kalnins, whose remarks, as quoted in the Wall Street Journal today, include such gems as:

"I don't think it's God's will to have a war, but in Iraq, America is fighting an enemy that has made it a war over beliefs. I really think it is a holy war. It's a war of gods. ... When someone fights in the name of God, that becomes a holy war."

Would someone tell me how a Christian, who is supposed to believe in one God, can refer to "gods" in the plural? And isn't Allah also the God of Abraham and, therefore, the same God worshipped by Jews, Christians and Muslims?

Referring to President George W. Bush, he also said: "I believe criticisms come from hell. God has placed this man in authority. ... You criticize the authority, you're literally bringing in hell with the criticism."

Neither Rev. Wright or Rev. Kalnins can be described as mainstream, or even well educated, in matters of religion. One can only wonder what malign influences they continue to exert over Senator Obama and Governor Palin.

A debate would be interesting - even if a bit strange. Perhaps Senator Lieberman, being barely a Democrat, hardly a Republican, and a practising Orthodox Jew to boot, might be a suitable nearly neutral party to moderate such a debate!

The Erosion of Freedom

The not-so-slow erosion of freedom continues. It appears that governments - and particularly police officers - consider that We, The People, are the problem. They forget that the authors of the U.S. Constitution firmly believed that the power of government is conditional on the consent of the government.

"Unt ve have vays of making you do the zings ve vant you to do" is UnAmerican - conjuring up images of a police state.

An article in the Pittsburgh Post-Gazette describes the ugly reality of modern day police attitudes to citizens http://www.post-gazette.com/pg/08246/908652-85.stm The topic of the article is the issuance of nearly two hundred citations, by Pittsburgh police in the past twenty months, for the crimes of disorderly conduct relating to swearing, making profane gestures, or just generally acting like a jerk.

While rudeness and bad manners should be decried, it is an abuse of power to consider such actions and words to be criminal offenses. Decisions of the courts are quite clear that that the First Amendment protects speech - albeit not absolutely - up until the level that such speech becomes "fighting words".

While my concern for free speech may seem excessive, it is worth remembering these thoughts (although no written record of the exact words exists) from Pastor Martin Niemoller, referring in 1946 to the Nazi dictatorship:

"First they came for the communists, and I did not speak out--because I was not a communist;
Then they came for the socialists, and I did not speak out--because I was not a socialist;
Then they came for the trade unionists, and I did not speak out--because I was not a trade unionist;
Then they came for the Jews, and I did not speak out--because I was not a Jew;
Then they came for me--and there was no one left to speak out for me."

Freedom is precious and we must constantly be on guard for assaults on our liberty. Those who would take it away from us, whether out of malice or simply for their own convenience, will succeed most easily if they remove it one tiny slice at a time.

Senator McCain and Governor Palin

Senator McCain has selected, as his Vice Presidential running mate, a socially intolerant and religiously extreme Governor who doesn't seem to understand that the First Amendment requires that Church and State be separate. While her selection has energized the conservative (perhaps better described as extreme right wing) base of the Republican party, it is likely to turn off many of the Independents and old style Republicans that Senator McCain also needs to win.

I am one.

I had hoped, this year, that I would be able to vote FOR a candidate and believed that Senator McCain would be that candidate. I regret to say that his selection of Governor Palin, around whom there is also the smell of trimming - on earmarks among other things, hypocrisy, and abuse of power, has removed me from the ranks of enthusiastic supporters of Senator McCain.

I still believe that Senator Obama is unqualified and that his likely policies - as much as we have seen them - will harm our country. While I almost certainly will vote against him, staying home on Election Day is no longer totally out of the question.

Labor Day

As most of us enjoy a day off from paid work, let us remember the words of country singer Tom T. Hall listing the things that will keep most guys happy for a while:

Faster horses,
Younger women,
Older whiskey,
And more money.

As an average guy, I am not too sure what women want but the appeal of more money is certainly sexless.