Memorial Day

Memorial Day is not about beer, hot dogs, barbeque, hamburgers, the pool or the beach. It's about those who sacrificed their lives so that we might be free.

Nor should we forget the warriors who survived but with wounds that cause them permanent disability. We owe them special thanks and remembrance too.

Sarah Palin and Feminism

One of Sarah Palin's feminist inspirations, she claims, is Susan B. Anthony.

Your correspondent wonders if Ms. Palin has considered that her new heroine once said:

"I distrust those people who know so well what God wants them to do because I notice it always coincides with their own desires."

Enough said.

Corporations Acting Badly

The recent oil spill in the Gulf of Mexico appears to be much more than a mere accident. Shoddy workmanship, corner cutting and deliberate disregard of warning signals all appear to have contributed to the disaster.

The situation brings to mind something that Freeman Dyson, arguably the best physicist never to have received a Nobel Prize, once said:

"Wherever one looks in the world of human organization, collective responsibility brings a lowering of moral standards."

Cutting corners, taking actions that are ethically suspect even if they are not quite illegal, and ignoring the accepted bounds of decent behavior are all too often characteristics of corporate life. The Hall of Shame has no shortage of exhibits. Enron, Goldman Sachs, most of the medical insurance industry, the vast majority of tort lawyers, a whole gallery of grossly overpaid and under performing CEOs, another gallery of predatory sub-prime lenders and, now, BP are all prominently displayed.

It would be nice to think that there is a solution but the population is too large, and modern life too complex, for a return to Thomas Jefferson's ideal of an agrarian paradise where, among other things, individuals take total responsibility for their own actions. When faced with low standards of behavior, the statement 'we don't do that here' is powerful but it needs to be repeated - very frequently - by parents, teachers, managers and executives. That is, everyone in any position of authority.

Such is your correspondent's desire. Unfortunately, he has a strong suspicion that he may merely, in the words of William F. Buckley Jr., "be standing athwart the path of history shouting STOP."

The Corruption of Language (10)

John Brennan is President Obama's top counter-terrorism advisor. In a speech, today, at the Center for Strategic and International studies, Mr. Brennan is quoted, by the Washington Post, as saying:

"Our enemy is not terrorism, because terrorism is but a tactic. Our enemy is not terror, because terror is a state of mind and, as Americans, we refuse to live in fear.

Nor do we describe our enemy as jihadists or Islamists, because use of these religious terms would be play into the false perception that al-Qaeda and its affiliates are religious leaders and defending a holy cause when, in fact, they are nothing more than murderers.

The United States is at war. We are at war against al-Qaeda and its terrorist affiliates."

Reading these clear and simple words, compared to the mangled syntax of most bureaucrats (and that of former President George W. Bush), is a rare pleasure.

The rate at which George Orwell is spinning in his grave is surely a little slower.

Oil Spill in the Gulf

Out of control oil wells used to be common. Now there is technology that, when it works, quickly brings a gusher under control. As a result, in the past forty years, there has not been a major oil spill in US waters.

Until now.

This time, the Blow Out Preventer, which is the device designed to shut down a runaway oil well, failed. The wonder is that anyone was surprised that such a thing could happen. All technology fails - for one reason or another - as this version of Murphy's Law states:

"If anything can go wrong, it will and at the worst possible time, in the worst possible way."

The wonder is that BP seems not to have had a plan to manage a runaway well in the conditions in which it was operating and, more than a month since the blowout, is still making things up as it goes along. Worse, the Minerals Management Service, an Agency of the Department of the Interior, does not seem to have required that there be a plan. Worse yet, neither the Coast Guard nor the Environmental Protection Agency seem to have a plan, or access to sufficient resources, to respond effectively to what may become one of the worst environmental disasters ever in North America.

Those who undertake potentially risky and dangerous, albeit often very valuable, activities should make detailed plans to respond to things that, inevitably, will go wrong. When making these plans, they should also keep in mind another really important adage:

Murphy was an optimist.

Drilling for oil, in the deep waters of the Gulf, is important to our national and economic security. While the current situation shows that much more effective regulation is required, let us hope that the Congress can refrain from taking, or forcing, hasty and ill considered actions that serve no better purpose than to create sound bites and generate campaign contributions.

The first objective must be to maximize the chances that drilling can take place without a major spill occurring. The second objective is to ensure that there are plans in place, complete with the necessary resources, to minimize the damage that will occur when the inevitable technology failure occurs.

Last Word on Rand Paul

Dr. Rand Paul, a darling of the Tea Party Movement, is now the Kentucky Republican Party's candidate for election to the United States Senate. His reported opinions on such Federal laws as the Civil Rights Act of 1964 and the Americans with Disabilities Act can only be described as both eccentric and extremist.

As soon as the furor broke over Dr. Paul's remarks, he ran for cover. After presenting an incoherent defense of his position in various interviews, Dr. Paul then canceled his scheduled appearance on NBC's 'Meet the Press', one of America's most significant news shows.

While his words may indicate that Dr. Paul is just a common or garden variety bigot, his actions certainly show that he lacks courage.

Worse, while peddling snake oil in the form of a Balanced Budget Amendment that will never be ratified, Dr.Paul opposes any cuts in Medicare which, after Social Security and Defense, is the third largest budget line item - and the one that is most out of control. Perhaps it should be no surprise to find that that Dr. Paul is an ophthalmologist and, according to various reports, at least half of his patients are covered by Medicare.

That makes Dr. Paul just another politician who is unwilling to do the right thing if it would include any sacrifice on his part. While bigotry, cowardice, and hypocrisy are all common characteristics of politicians, they usually go to great lengths to conceal them. For failure to conceal these faults, add incompetence to Dr. Paul's resume.

The world will be a better place if the voters of Kentucky permit Dr. Paul to continue his medical career by not forcing him to work in the United States Senate.

More on Rand Paul

Dr. Rand Paul, following his victory in the Kentucky primary election on Tuesday, is now the Republican candidate for election to the United States Senate in November.

Among Dr. Paul's less acceptable ideas include his apparent belief that the Civil Rights Act of 1964 and the Americans with Disabilities Act of 1992 represent gross intrusions by the Federal Government into matters that are properly the responsibilities of the States. He also seems to believe that the right of free association, as guaranteed to citizens by the First Amendment, allows businesses to exclude or otherwise discriminate against those that they do not like - for any reason or none. For more detail, see this article from the May 20th edition of the Washington Monthly: http://tinyurl.com/2dchh29

A citizen does indeed have the right to associate with, to avoid, or to dislike anyone, for any reason, whether good or bad. Notwithstanding the Supreme Court's recent curious decision in the matter Citizens United vs. Federal Election Commission, that right to discriminate or avoid applies to individuals, and does not, nor should it, apply to corporations and businesses or to individuals acting as agents and employees of those businesses.

Notwithstanding the provisions of the Fourteenth Amendment, ratified on July 9, 1868, which guarantees equal protection under the law, none of the former Confederate States, prior to 1964 and the passage of the Civil Rights Act, had any intention of changing the invidious and hateful 'Jim Crow' laws that enabled - and frequently mandated - discrimination and segregation. There was, therefore, no alternative to Federal action. Similarly, when it comes to treating disabled people properly and fairly (full disclosure - your correspondent is a double leg amputee), there are times when only government action can force businesses to do what is both morally right and, as it happens, good business.

Before Dr. Paul again expresses his views on these matters, he would be well advised to read the Declaration of Independence which, while not a legal document by which we are governed, well describes America's ideals and aspirations:

"We hold these truths to be self evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness..."

What more need be said?

A Just Reward

Politicians usually get away with unprincipled acts. Just occasionally, however, they do receive their just rewards.

Last year, Senator Arlen Specter switched parties for no other reason than the fact that, as a moderate Republican, he was unlikely to win the 2010 Pennsylvania Republican primary. This was no act of principle: just a desire to keep a job that he had already held for too long.

Senator Specter's analysis was more acurate than he thought. Not only was he unlikely to have won the Republican primary but, yesterday, he was solidly defeated (54% - 46%) by Representative Joe Sestek in the Democratic Party primary.

Our country will be a slightly better place without a man who, having held the job for nearly thirty years, now seems to define himself as a Senator rather than as a man who is serving his country in the United States Senate.

Enjoy your retirement Senator Specter. Your country will be happy to see you enjoying the quiet life.

Balanced Budget Amendment

Today is Primary Election Day in Arkansas, Pennsylvania and Kentucky.

In the Kentucky Republican Senate Primary, Rand Paul is the favored candidate of the Tea Party movement. Part of his campaign speech includes a commitment to fight for a Balanced Budget Amendment to the United States Constitution.

The idea of a Balanced Budget Amendment is nonsense and Dr. Paul should know better than to be promoting it. If he does not, then he lacks sufficient knowledge of economics (and of the United States Constitution) to serve effectively in the United States Senate. The world, then, would be a better place were he to return to the practice of ophthalmology.

A modest deficit - in the range of two percent of the Gross Domestic Product over the economic cycle - is entirely supportable provided that the money is spent on real investment such as infrastructure (roads, bridges, ports, air traffic control systems etc) that will provide significant returns over many years. Basic research, where the value of any given project is unpredictable and therefore will not be performed by corporations, is also worthy of funding with debt. Deficits also allow for some automatic stimulus - the deficit grows a bit - in recessionary times and some automatic fiscal restraint - the deficit shrinks or even becomes a modest surplus - in boom times.

Another use of government debt is to provide a benchmark interest rate for debt that is free of credit risk. In addition, there is a desire, on the part of retirees, pension funds, banks and other financial institutions, for highly liquid investments that carry zero credit risk.

Even if there was no good economic rationale for government debt, the likelihood of a Balanced Budget Amendment ever being adopted is close to zero. The Constitution is extremely hard to amend (see Article 5 http://www.usconstitution.net/xconst_A5.html) because it requires a two thirds vote in each of the Senate and House followed by ratification by three quarters of the States. The only Amendments that have survived this process are those that command overwhelming support.

Even were a Balanced Budget Amendment to be adopted, there still remains the hard labor of deciding what expenditures to cut and, if that is not sufficient, what taxes to increase. To do that work does not require that the constitution be amended.

Since the proposed 2011 budget shows that the Federal Government plans to borrow more than thirty cents of every dollar it spends, abolishing foreign aid and other trivialities like the Departments of Energy and Education, will hardly make a difference.

Rather than engaging in Orwellian doublespeak, perhaps Dr. Paul would like to tell us what cuts he proposes and whether they will be sufficient to achieve a balanced budget. If his proposed cuts are insufficient, then he should tell the voters whether he will abandon the effort or whether he will propose increased or new taxes.

There is an old adage that a nation gets the government that it deserves. If we fall for lies and misinformation, dressed up as easy solutions, then we will indeed deserve what we get.

Starting Right

The United Kingdom's fiscal problem bears a strong resemblance to America's: too much debt and too large a budget deficit.

The only redeeming factor is that the bond market vigilantes, who have hammered Greek government bonds and are now eyeing those of Spain and Portugal, have not yet turned on either the USA or the UK. As a result, interest payments on our monstrous debts are, at least for the moment, relatively modest.

At its first meeting, the new British Cabinet decided that the Prime Minister, and all members of the Cabinet, would take an immediate five per cent pay cut. Not a pay freeze but a real cut. While this is a largely symbolic act, it is also a distinct sign that there are politicians who do understand some of the basic concepts of leadership. The message is clear:

Times are going to be hard, and there will be savage spending cuts, but we are all in this together.

It would be wonderful if President Obama and his Cabinet would make the same sacrifice. Even better would be to see some of the multi-millionaire political appointees and members of the Congress - specially those serving [themselves] in the Senate - decide that it would be appropriate for them to work for their country as 'dollar a year men'.

Don't hold your breath waiting, you will only turn blue.

The Corruption of Language (9)

Last month, at a press conference, President Obama made a big announcement: he had ordered his Cabinet Secretaries to find $100 million dollars in spending reductions.

At the time of the announcement, your correspondent was unable to find suitable words to describe that paltry sum compared to a total budget of some $3.7 TRILLION dollars and a projected deficit of about $1.3 TRILLION dollars. This short video, however, makes the point clearly, understandably and concisely: http://www.wimp.com/budgetcuts/.

President Obama claims Abraham Lincoln as one of his heroes. Perhaps he, and every member of his staff, would be well advised to spend some time, every day, thinking about President Lincoln's views on "spin":

"You can fool some of the people all of the time and all of the people some of the time but you can not fool all of the people all of the time."

All Mr. Obama has done with his posturing is to cast doubt on his seriousness while, simultaneously, causing an increase in the speed at which George Orwell is spinning in his grave.

Customer Service

We are still enduring the aftermath of a serious recession and it will be months, more likely years, before the economy is back to normal. Companies, therefore, should be competing hard - both on price and service - to attract as much business as possible.

Some do but many do not.

There are too many companies that have forgotten - or never learned - how to pronounce the words CUSTOMER and SERVICE. They also seem to have forgotten that there are other suppliers and, in a time when frugality is becoming cool again, the option to do without is real.

Although not widely regarded as a management thinker, Mahatma Gandhi understood the real relationship between a business and its customers:

"Who is a customer? The customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption of our work. He is the purpose of it. He is not an outsider in our building, he is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so."

Those are simple thoughts but many business failures can be linked to neglected or ill treated customers. Sometimes the issue is incompetence and lack of interest on the part of the company's employees. More often, however, the culprit is fixation on routine together with resistance to any deviation from established process and procedure.

Because employee judgement is far from perfect, it is inevitable that companies, which trust their employees to do the right thing, will incur losses. The gains, however, so greatly outweigh the losses that any other course of action can only be based on a misunderstanding of the real world.

Acting in accordance with the old adage 'doing well by doing good' actually works. What more needs to be said?

The Nature of Lawyers

As primary election season begins, one of the noteworthy features of the political landscape is, as always, the number of lawyers who are reinventing themselves as politicians.

Since lawyers thrive on conflict, they make poor politicians when there are, as now, hard choices to be made. Anyone who doubts their love of conflict should consider this old adage:

The only lawyer in a small town will be poor. If a second one moves to town, both will soon be rich.

Lawyers can provide useful services but they are technicians rather than leaders and strategists. J.P.Morgan exactly characterized their nature when he said:

"I don't hire a lawyer to tell me what to do, I hire one to tell me how to do what I want to do."

Enough said!

Goldman Sachs and the SEC (2)

Recent reports in the Wall Street Journal www.wsj.com indicate that Goldman Sachs's management is showing interest in a settlement of the civil fraud charges filed by the SEC.

CFO David Viniar and Vice Chairman J. Michael Evans are both reported as saying that the company would be happy to settle. Viniar is further quoted as saying: "the company does not want to antagonize the SEC."

Only two conclusions can be reached from these reports. The first is that Goldman's senior executives were lying when they denied any wrongdoing. Given that both ethics and honor appear to be endangered species in the Wall Street jungle, such actions are, while more than regrettable, merely part of the background. Were the Senate Finance Committee to ask the Department of Justice to bring charges of perjury against Goldman's executives, with respect to their testimony - under oath - before the committee, the world would be a slightly better place.

The second conclusion, based on the quote about 'not wanting to antagonize the SEC' is that the government has successfully blackmailed an innocent company - although, admittedly, it can hardly be described as either honorable or sympathetic - and will, eventually, extract large sums of shareholder funds in a so-called settlement. Your correspondent uses the qualifier 'so-called' because the payment would be better described as ransom.

If the latter situation is the case, then Goldman is facing yet another example of excessive and unrestrained government power. That the power is being directed at one of the current villains does not make its use right.

Wasn't there a successful revolution in America, about two hundred and twenty five years ago, that was provoked by the abuses of power committed by the British King and his Ministers?

Head Scratcher (6)

The United Kingdom, like the USA, holds its elections on a work day: Tuesday for America and Thursday for the British.

Today is Election Day in the United Kingdom and the polls opened at 7:00 a.m. which is the same as the usual opening time in the USA. British polling stations, however, will be open until 10:00 p.m. in contrast to ours which generally close at 7:00 p.m or in some places at 8:00 p.m.

The head scratcher, given our generally poor turnout, is why we do not keep our polls open later so that it is easier for those with jobs, and difficult schedules, to vote. Perhaps the election workers get tired (poor dears!). Or, worse, are demands from the television channels for prime time results overwhelming the democratic process?

Your correspondent begs to differ with those who claim that on-demand mail in ballots can solve the problem. Voting is a civic duty but so is paying attention to the entire campaign. Other than in exceptional circumstances, voting three weeks before election day does not meet the test of engaged citizenship.

There is a relatively simple solution. The wonder is that so few are interested in considering it.

To Pay or Not to Pay...

According to a report in the Washington Post today, the Internal Revenue Service has notified the Department of the Interior that, as of September 30, 2009, 2.36% of its employees owe back taxes. A check of the Department's website http://www.doi.gov/employees/ shows that it has approximately seventy thousand employees. Simple math leads to the conclusion that there are approximately 1,650 delinquents.

Since these people are violating their obligations, as citizens, to comply with the law - regardless of whether or not they like it - they should be summarily dismissed. Better, since tax deadbeats are likely not the most productive of employees, they would hardly be missed and there would be no need to replace them. Such action would be a start, albeit somewhat modest, in the process of reducing the size and cost of our government.

But why stop at the Interior Department?

The process can be repeated in every other Department and Agency. Assuming that the percentage of delinquents is substantially the same throughout the government, and given that there are approximately 1.43 million civilians employed by the Federal Government, there is an opportunity to reduce the size of government by nearly 34,000 deadbeats.

Just don't hold your breath waiting for it to happen!

Free Markets

Following the financial crash, there is much bloviation on the subject of free markets. While markets are clearly better than the alternatives, they suffer from defects even though far too many right wing politicians seem to suffer from the delusion of market perfection.

For markets to work effectively, honesty and transparency are essential. Whether those conditions can actually be achieved without government regulation is doubtful given the market power of large corporations. Then, too, there is the very human tendency to feel little obligation to engage in ethical and honest behavior when a stranger, specially one with little ability to take effective revenge after being wronged, is the other party to a transaction.

Given the imperfections of markets, some level of government regulation is essential but it should be light and, to the maximum extent possible, based on principles rather than detailed rules. Penalties for those proven to be doing the wrong thing should be draconian: starting with jail without parole for executives and dissolution for corporations

The principal objective of government regulation must be to keep market participants honest and the playing field level. Keeping the players honest includes insistence on full disclosure in order to avoid excessive asymmetries of information. Much of the reason for the contempt in which we hold old style used car salesmen is because of their reliance on such asymmetries for a large part of their income.

Regardless of the government's skill in creating and enforcing regulations without inflicting excessive costs or reducing the benefits of free markets, there is a major imperfection that will never resolved: that is the all too human tendency to refuse to read the instructions or the fine print. Effective government regulation is not a good reason to believe that fools will be protected from crooks and con men. Although government can, to some extent, deter fraudulent and dishonest behavior, there are no guarantees.

Unfortunately, the increase in rules based regulation has often made it possible for the unethical and dishonest to follow the letter of the law while making it hard, even for a sophisticated market participant, to detect the wrongdoing. Those who refrain from caution and vigilance will soon relearn, the hard way, that a fool and his money are soon parted and that if something seems to be too good to be true, it probably is.

Free markets are good but participants must always keep in mind the old adage: caveat emptor (buyer beware).

Investing Strategies (3)

The annual meeting of the shareholders of Berkshire Hathaway took place yesterday in Omaha, Nebraska. Presiding over the festivities, sometimes referred to as Woodstock for Capitalists - although lacking the hallucinogenic, and other mind altering, recreational substances that were abundantly available at the original, was Chairman Warren Buffet.

Worthy of note is that fact that the Berkshire has never lost money in the latest technological fad, whether it be computer hardware or software, dot coms, alternative energy, bio-technology and the like.

Nor has the company ever made money in those sectors. Since Mr. Buffet does not understand the technologies, and since it is nearly impossible to determine how, if, or when, the companies involved will make money, he declines to invest.

For an historical insight, consider automobiles - the hot new technology of 1900. By the 1920s, there were still many companies making automobiles in the USA. Vicious competition and economies of scale, however, ensured that only a few prospered. Most are now long gone: American Motors, Packard, Hupmobile, Studebaker to name only a few. Wikipedia's very comprehensive list of defunct automobile manufacturers http://tinyurl.com/defunctautos is an eye opener.

Between 1850 and 1875, railroads - another hot new technology that changed the world - went bankrupt almost every month.

Whatever the latest and greatest 'change (or save) the world technology' may be, things are not going to be different this time. Except for those, such as venture capital funds, with the ability to make many early investments in a given technology, the risks far exceed the likely rewards.

For individual investors (disclosure: your corespondent owns a modest stake in Berkshire Hathaway), these principles, derived from studying Mr. Buffet's record, may be of value:

• Only invest in businesses that you understand.
• Never overpay: 'buy high, sell higher' is for gamblers, not investors, and the odds are against you.
• Have enough cash on hand to avoid leverage while still being able to take advantage of opportunities.
• Complicated investments are associated with high - sometimes really high - fees and expenses. As a result, sellers may well have their, not your, best interests at heart.

A starting point, from which a competent investor may realize decent returns without taking on excessive risk, is 'keep it simple, stupid'.

Enough said!