A Dialogue With A Leftist Banker

I know, you probably are thinking "What is a 'Leftist Banker;". However, there are some people here in the US who consider themselves to be "revolutionaries" but are in fact, capitalists. The individual to whom this email was sent has held jobs as a real estate broker, a day trader and stockbroker, and most recently is employed in a responsible position for a large New York bank. He is an avowed liberal, 

Now, this might seem like a "conflicted" individual. But then again, how is it possible to be a "leftist banker?" The following was sent on November 24,2010 in response to an email. 

"Hi ----:

A general reply, as short as I could make it. I’m not a money guy, or an economist, but I am a “small” business owner, and have been since 1978.

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Americans are well educated. We remain one of the highest educated countries on the planet. I suspect part of the problem is that we have become “information parrots.” We hear something and we repeat it. If the President, or some congressman,  or some talking-head or anyone of purported importance says something, or quotes a statistic, frequently out of context, then the public repeats it. Just hit the button and Tweet! It’s so easy!

Here’s an example: “deflation.” If housing costs are removed from the current BLS data, then inflation (CPI-U) is about 1.9%. It’s the Fed’s avowed policy to control inflation at 1.5 to 2.0 %. Seems we are there, doesn’t it? (and this is using the “modern” CPI-U calculation, which significantly lowers the measurement of actual inflation). So what are the talking heads spouting about? There’s been a significant amount of talk this year about “the fears of deflation.” People who become “acolytes” and spread this stuff cause real problems, as well as do harm, to themselves and to others. At my condo association, we now have people who believe this stuff,  have been acting accordingly and now expect lower prices. They were convinced this would result in an association 0% fee increase, or possibly a decrease, just as we had last year. But that didn’t happen. Instead there was a 7% fee increase (long story as to precisely why). These same people then came to the board and complained “How can our fees go up? We’re in deflation and costs should be going down!” They assumed that because they heard “we are in deflation” and prices “always go down in deflation” (I’m quoting a unit owner) then it’s logical and only possible that their fees will go down! Of course, these people haven’t done the numbers, because using a calculator is a lot more difficult that turning on the TV, or browsing or texting or whatever their source of misinformation. So what really happened in 2010? In my county in 2010 we had a 12% water rate increase (because of larceny on the part of a government official). We also had a ComEd electricity increase. Gasoline is up about 10% since 11/1/2009. Food prices are up slightly.

So costs are up, and not by just 1%. Seems like modest inflation to me!  And yet, we have people saying or misquoting that we are in or near “deflation.” Meanwhile, back in “reality” our condo association costs are up. We use water for caring for 40 acres of grounds, and for man-made streams. We use electrical energy for outdoor lighting and moving the water over three waterfalls and connected “streams.” Our contractors fees go up as energy and the cost of materials increase. Another “real world” example; asphalt (bituminous concrete) increased about 200% in 2008-2009. Not good for anyone purchasing roofing shingles and doing street repairs, or new driveways. Our association is doing all of these. Duh! “How could my fees go up?” You get the picture. So in my practical life, which is to say, for most of the necessities of life, prices are in fact, “up”. Going a bit deeper, even our condo association insurance has increased and is now reached the point that it is double our electricity costs. In fact, my portion of condo insurance now exceeds my personal “homeowners” insurance policy cost. Deflation? 

Our problem isn’t education. It’s “critical thinking skills” and simple mental laziness. As organisms, we’ve become very sloppy. We can survive, and even thrive, even though we may exhibit, as individuals, incredible stupidity. Of course, this isn’t limited to the USA. Stupidity growth may be exponential, as people “grow up” and raise children, who then “grow up” and raise children, etc. Is it possible each generation is becoming, pardon the poor English “more stupid?” I sometimes think many of us exist in that third domain of knowledge, where “we don’t even know that there are things we don’t know.” It’s a complex way of saying that we are living a life of obliviousness.

Eventually, we may reach the point in which we have millions or billions of dumbed-down human beings on the planet. Perhaps the US is ahead on this curve, just as we have led in so many others. We certainly aren’t alone. I enjoy reading the “Darwin Awards” from time to time. It’s a barometer. As an example here’s a Darwin Award about taking “handicapped accessible” to a different level:

http://www.darwinawards.com/darwin/darwin2010-08.html

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Question of the day regarding education:

What is the value of an education that provides me with the tools to do whatever it is that “I” want to do, if that skill isn’t marketable? On a recent airplane trip, in which I was flying first class (very unusual), I sat next to a financial person, who struck up a conversation. He was sitting next to me, on a commercial flight, because according to him, the corporate jet was grounded, and he had to get where he was going; poor guy, things are tough all over. Perhaps the entire conversation was all BS, but the lengthy discussion had the ring of authenticity. He related to me how difficult things were in the banking and finance industry, what with all the new restrictions. We discussed the economy and employment problems. During the conversation he related employee and employment issues and problems. He also told me about a new employee just acquired. She has a masters in finance. How much is he paying her? $25,000 a year!  Welcome to the new reality!

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On your comment about “small business”, the SBA defines “small business” as having 500 or fewer employees. It’s natural for smaller businesses to take risks that larger ones will not. It’s very easy to move small businesses in different directions, and quickly. As an example, in the nasty “double-dip” recession of 1980-1982, I grew my business. It was very difficult to attract talented people in a recession, but I did increase in size by 1000 percent. It was very risky; how many people grow a business in the midst of a nasty recession? I did that, concluding that if I didn’t grow, I would fail. My business did survive; actually, it spawned a second business and that business also thrives today. Or, at least I believe it does, I haven’t had much contact with the principals in the past 5 years.  We parted in 1987, having achieved the purpose and I chose a different path. A large business would have great difficulty doing that.

Taking on the ideas of smaller businesses, larger businesses then develop or “exploit” the inventiveness of the smaller ones. It’s normal and natural for slower moving or constrained businesses to allow other, more nimble one’s to exist “on the bleeding edge.” It also entails much less risk. I consider “small businesses” as breeding tanks for ideas, many which never make it past the gestation period.  Small businesses, as you know, also have a much higher failure rate. I see the relationship between big and small as somewhat symbiotic. Merger and Acquisition activity is one of the results. It’s one way for a large business to acquire some of the characteristics of a smaller one. Google, HP, Microsoft, Oracle, etc. have all done this and it will continue to happen. What’s wrong with that? Many of the owners of “small business’ have retired rich that way, and very young.

On a personal note, I’ve been asked many times why I never patented some of the technology I have made. For a variety of reasons, I decided to keep a low profile for most of my career. That decision meant that I was seldom publicly acknowledged, but I was always busy and because of my success, was given increasingly difficult tasks. For most of the past 15 years, I have been frequently employed in situations in which success, as in meeting all goals and objectives, was considered to be somewhere between “difficult” and “impossible”. I conducted my own training for this. As an example, for one year (1988-89), I ran a consulting experiment in which I guaranteed to take on any problem and solve it, for a consulting fee of $3,000 a day plus expenses. That was a hoot, and I found myself in some really, really difficult situations in which I had to think way, way beyond the 9 dots, from preliminary analysis to completion. After a year, I decided I had learned whatever value I could from the experiment and focused my efforts on running my “normal” business. Of course, these situations go both ways. In 1991 I attempted to use a newer technology at a process plant. It looked good, passed pre-deployment tests, etc. However, on deployment in a real world situation, hidden flaws were revealed. It was serious, and not easily solved. One year later, and about $90,000 out of my pocket, I had a successful installation. You win some, and you lose some.

That decision not to patent was consistent with a desire to have low visibility and was a simple one. Once patented, and revealed, it’s very easy to copy technology and “embed” it into a much larger system, anywhere on the planet, and who is to know? If one is to be a “knowledge worker” it’s critical to retain control of that knowledge. So that was a consideration. Retain control and install only where I was explicitly paid to do so. Therefore I have never patented and never will. I also limit what I publish, for the same reason. There was a small danger of someone taking my ideas and patenting them, but in fact, most of the better ideas are somewhat difficult to replicate and require special skills simply to figure out how these systems work. Ideas, per se, aren’t patentable. So I don’t worry much about that. For about 20 years, I made it a point to embed my knowledge in computerized systems that were very specialized and difficult to copy, and NEVER in a PC. In that manner, I could control the dissemination and replication of that knowledge. I obviously succeeded. So much so, that I’ll be finally “revealing” or porting one of those systems to a general purpose programmable controller in March 2011. That system was invented by me and installed in a number of process plants throughout the U.S. in the 1980s. This one is in Texas, and I installed this application in 1989 in a specialized microprocessor controller, which I also provided to that Texas facility. It’s been running a critical process ever since (20+ years!), even though the production plant has expanded and evolved, and this processor is now integrated into a much, much larger and more sophisticated distributed control system. Of course, I was financially rewarded to allow that device to expand and evolve with the plant, and was paid to figure out how to effectively accomplish such integration. It’s like the “ghost in the machine.” God, I love my work! Now, I’ll be financially rewarded to allow this final change, so this process can become autonomous and not dependent upon me or the specialized controller, which is becoming a concern. It’s like getting paid to walk out the gate. I even volunteered a discount for the work, which led to a really great conversation with the engineer who is in charge of this project. I’m assuming others will figure out how it works, after it is in the new processors. There are a lot of really bright engineers in this country. If they can’t, well I suppose I can return to help them out.

This marks a final shift in my career, which includes training others to make their own good decisions, or  giving some of it away. How stupid of me, you might say! But how freeing! I’ve never based my survival, or success, on avoiding the educating of others. That approach always forced me to create new and better ideas, acquire new skills, and to test and develop them. Survival, financial viability and relevance was dependent upon a continuous succession of innovations. At this point, I suppose I could possibly sell my ideas or my company. But then what? Invest the proceeds, or purchase an large annuity, etc.?  I prefer to continue on my path and chart my own way, as a creation, albeit a very, very small one. But isn’t that what living one’s life is supposed to be?  

Returning to the patent concept. Of course, if one can develop something that has true “mass production” possibility, then a patent makes some sense. However, there are other ways, and I succeeded by developing ‘niche market’ devices, programs and strategies, and retaining an independent identity. I always assumed I’ll never get rich using my holistic approach (my definition of rich = accumulating a liquid net worth of $5 million or more, by my own means, by the time I reached 60). I think I could have made it, but a divorce was financially devastating, and set me back about 15 years. However, if “getting rich” was my goal, I certainly would have done so, divorce or no divorce.  I had decided at 28 that “making a difference” and “making a contribution” was more satisfying and rewarding than “making money.” So I changed my path in life, and began the pursuit of learning how to “make a difference.” It’s a personal choice. As a consequence, I have a somewhat different view of the consequences of pursuits which have a monetary reward, or tie us to “success” as defined by this consumerist driven, narcisstic society. That includes the negative impact of living a life with a significant commitment to the accumulation of wealth, the avoidance of disappointment, of avoiding risk or transferring such risk to others, or of taking the easy road.

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Small businesses are important to the economy, but for adding jobs, business startups are probably more significant. There are currently very few startups, using published statistics. I am aware of the issues facing small business, and I do use my personal experience as a barometer. Small businesses are usually internally funded; one exception is the short term funding of receivables, which many banks will still do. However with constraints on credit cards, and a continued weak economy, many small businesses which survived the recession are now reaching the limits of their capital. Many have been consuming cash for two or three years (or longer; I first saw the signs and experienced a slight pre-impact of the recession on my business in 2006/2007). I’m sure other businesses saw this reduction also. These businesses all contributed to the decrease in truck and rail shipments in 2007 and thereafter; rail peaked in 2006. (These shipments are now increasing and it is expected there may be a shortage of truck drivers in 2011-2012; another job opportunity in the new economy?).

Because of the duration of this downturn, the next wave of business closures is occurring as these underfunded and undercapitalized small businesses run out of cash. I get calls about once a week from brokers who want to assist me with a SBA small business loan; one of the advantages of the “service economy” is having these firms out there to assist me and other small businesses? Fortunately, I don’t need their help.

In my case, even with the recession, I never saw a business loss, so I paid corporate income taxes each and every year. That was because I had prepared, and because I was lucky. I began shedding unnecessary expenses in 2005-2006. In 2007, as a protective measure and part of that preparation, I obtained a large home equity loan. This was a very cheap “line of credit” which is very typical of the financial avenue available to small businesses, because banks are willing to lend to secured individuals, but not to their businesses. [My spouse] nearly freaked when I told her of my intentions, but at the time I told her “It will be years before we can do this again.” I also assumed real estate prices would drop, reducing the potential available should we seek such a line of credit in the future. So she agreed and we got it. It was a much better deal than using credit cards, etc. So far, I haven’t had to tap that “line of credit”, and I won’t except in some form of emergency.  

As I said, I’m lucky and overall, my business is operating at about 3% ahead of it’s long term (10 year) average, with 4 of those years above and 5 below the current fiscal year’s net level. However, I am doing NO sales or marketing this year (but I’ve done very little for three years; less than $5,000 worth each year). It’s a calculated decision on my part and will probably reduce my business activity level for FY 2011. Had I succeeded in convincing my business partners in my office building venture to sell in 2006, when I wanted to, I’d probably be working even less today. But I gotta pay the office rent! So it’s not all perfect in the real world.

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 I don’t consider “grey market” or “black market” businesses in quite the same light as “small business.”. I consider a “small business” as one which produces something and from that production, generates income and pays taxes. It issues W-2s and 1099s, purchases unemployment insurance, pays FICA, FUTA and Department of Unemployment Security fees in the state in which it resides, has commercial liability insurance, and purchases similar business insurance for automobiles that are used for business purposes. These are the basic characteristics of what I define to be a “small business.” A more stringent interpretation would include one that pays rent for an office or manufacturing location, or owns such assets. I don’t want to exclude “home based“ business, or “very, very small businesses.” However, many of those pay few taxes, avoid special business taxes, such as business based telephones and cellphones (which paid taxes designed to pay for computers in libraries, etc.) and in that manner, these very, very small businesses seem to have more of the characteristics of very large businesses which also avoid taxes.

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Re: your question about the “scattergun” which was a military shotgun, going back to the blunderbuss (Dutch donderbuss, 1700?). The earliest were sometimes filled with small rocks, nails, other junk and then fired with black powder. This would damage the barrel which was softer brass, and they could explode or misfire, damaging the user or others in the vicinity. Later versions sported iron barrels.

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Re: the “scattergun” and the Fed move. It lacks focus, can have unexpected outcome and is dangerous; there’s a 50% probability it will backfire, and in some unusual ways. It is unlikely this will stimulate U.S. job growth or stimulate the economy. Just the opposite; it may inhibit the very modest recovery we are currently experiencing. It will punish those international savers who are holding U.S. debt. Some will trade in that debt for the dollars being printed. And purchase what? The underlying assumption of this move is seriously flawed. Will debasing the dollar put unemployed financial workers, or automotive workers, or all sorts of manufacturing workers, whose jobs are now in China, back to work “doing what they did before”? Of course it won’t. Will it accelerate business startups? Probably not.

The fed move will help the devaluation of the dollar and will cause a continued rise in commodity, energy, and food prices. This will reduce disposable income and may reduce retail sales.  Just what we need at this juncture, isn’t it?

If the Japanese or the Chinese shed (sell) U.S. debt, it will result in an increase in inflation.  Will that be helpful?

The fed move is designed to force savers into riskier markets. Where they can then lose money in the next big Dow drop? I can hardly wait to see the consequences of the panic of 2012 or whatever.  

I think the U.S. government is out of bullets, and is firing blanks. This entire move is one of desperation. Any day now, I expect Obama or, should we make it that long, his successor, to don a sweater, sit in front of a fireplace and tell the American people “It’s going to be difficult.” Just as Jimmy Carter did when he was president!

Will this Fed move lead to another recession? Who knows? That’s as much psychological as anything else. The employed are nervous, have been saving (5%) and simultaneously reducing revolving debt (at an 8.75% annual rate).  At present, due to optimism on the part of the consumer, and a much better personal balance sheet, retail sales are supposed to be OK this holiday season. In other words, the wallet is apparently open, if only slightly. However, give “Joe and Jane Consumer” a jolt and he or she will quickly close that wallet or purse and hunker down. That’s what happened in winter 2008. It could very, very easily happen again. Consider what happens if there is a slight reduction of “growth” statistics, a shock to the Dow, or the “talking heads” start mouthing “double dip recession” and then “depression” instead of “deflation.”

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One way to stimulate employment, is get those boomers out of their jobs and into retirement, creating opportunities for new workers. That may be the one thing that does stimulate the economy. The government can assist by printing more money to pay back those “IOUs” in the trust fund drawer. So the choice boomers face is this;  continue working, saving and paying income and SS taxes, or retire and begin receiving, which will only exacerbate the balance of payments problems and deficit spending of the US government. Debasement [of the US currency] seems impossible to avoid.

For the boomers, there will be means testing, or a reduction in benefits, or both. This will be a wide net and current retirees will be pulled in. The 0% SS COLA adjustments are the “shot across the bow.”  Most of the boomers have figured that out. That’s why most boomers who can, are working longer and saving more. At least, that’s what I’m being told by the ones with whom I can have an intelligent and honest conversation.

Of course, spending of retirees in retirement will be squeezed by the consequences. That won’t help the economy either, will it?

I can hardly expect that those in the “Y-Me” generation, who are in college today or just out, will be thrilled to discover limited job prospects and the added joy of paying for the boomers social security retirement and medical benefits. There was a lot of noise when companies cut back on 401K contributions during the most recent recession. When younger people begin to realize that about 7.65% will be taken “off the top” to pay for retired boomer’s benefits (SS + Medicare) and a matching 7.65% is taken from their employer’s pocket, while they get minimal 401K contributions or reduced wages, or both, I then suspect things will get interesting.  

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As for the hedge funds, Soros, etc., they hardly excite me. The problem in the U.S. is structural. True, the hedge fund people and their ideas and money “manipulation” have done harm and do cause problems. However, most of our problems were caused by millions of Americans who either sold or bought, or built real estate for 30 years. The seeds of this destruction can be found in the shift to a service economy, where millions entered high paying jobs for the sole purpose of becoming very skillful salespeople. They made and many continue to make extraordinary amounts of money, be they realtors, mortgage or stock brokers, lawyers in that sector, or financiers and bankers. Another contributor was the government shift to a perception of a home as an investment, in the early 1980s. Finally there were the government policies over the most recent 20 years, which were intended to put everyone in a home, even if someone else was to pay for it.

Even at this late date, after four years of resets, there remain about $400 billion in mortgages which will be recast or reset in 2011 and 2012. As we all know, there is an additional $200 billion purported to be in need of bailout at Fannie and Freddie. I sometimes think the Fed policy is intended in part to keep interest rates low to protect these people until 2013.

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One final thought on the “critical thinking” issue, and here is an example. I see that electric cars continue to be promoted as “zero pollution” vehicles, although such vehicles require a big, smoking power plant to make them work. The facts: 50% of the electrical energy produced in the US comes from 600 coal burning power plants. Of those states producing power from coal, based on capacity, 15 of the top 16 are located east of the Mississippi. Combined, those 15 states  generate 66% of the electricity produced from coal in the entire U.S. Many of these plants were built prior to 1970 and are inefficient and use older technology. But the cars that will be recharged from the electrical grid fed by these smoking, polluting, behemoths are called “zero pollution vehicles.” Does this make sense? Of course not, but if you purchase one, you can feel good about yourself as you helped “save the planet.” Plug it in at night, and turn on your electric blanket, while you are at it, and keep those power plants humming along. And get a really big screen TV, too!

The nail in the coffin; it might also be useful to check on the methods and energy required to make those exotic batteries under the hood of that electric car. But that would further spoil the fun, wouldn’t it?

Here’s another spoiler; as someone pointed out a couple of years ago, those wonderful “electronic picture” frames do consume electricity. I saw them being advertized again for Christmas 2010. Supposedly, the quantity sold in the US in  2007 consumed the entire electrical output of a medium sized power plant. So we should each give one for Christmas! Let’s accelerate global warming, and then go with a loved one, or boy friend or girl friend, to a movie about the poor polar bears!

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That’s the problem with large numbers of people, as in hundreds of millions, who all do the same thing; collectively we consume huge quantities of everything.  That’s the real source of the current problem. Millions of consuming Americans! There was a line in the movie the Matrix, that compared human beings to bacteria. At times I think the writers had a valid point. There is one difference, however, bacteria, it is said, can’t think. Give us a few years and perhaps we’ll be just as mindless.

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The good news? Lots of people are again making money in real estate. Just as they did 40 years ago. It’s probably a “once in a lifetime” opportunity. It will be a long term venture, and there are risks, but people do have to live somewhere, don’t they?"