Quakers expect results from their investment managers, not just Wall Street gossip.
(1013)
The equivalent of the rosetta stone for colonial commerce had been sitting on George Vaux's shelf for six generations.
(1517)
Half the world cheats, the other half grumbles, when American dollars become a reserve currency for the rest of the world. It will be a long time before the world has a single unified currency, and it may not be desirable.
(825)
Most Americans alive in 2020 will live to be ninety before they die. Forget about lock boxes and other schemes to pay for a thirty year vacation. These people will have to keep working at least until age 70.
(831)
The no-load, open-ended, mutual fund run by the Pitcairn Foundation has consistently outperformed the index by 1.5% as a result of concentrating on firms which continue to be overseen by their founding families.
(909)
Tax cuts make the bonds of the federal government more nearly resemble the bonds of state and municipal governments. (827)
Quakers mean to turn their headquarters near Philadelphia City Hall into a glowing example of how to save money while they save their environment.
(1236)
African oil, refined in Philadelphia, supplies 2/3 of the gasoline on the East Coast.
(1261)
The influence of Austrian economist Friedrich von Hayek is slowly winning out over the views of the English economist Maynard Keynes, even though both of them are dead. Which is worse, inflation or depression?
(1262)
Politicians will assign blame for the housing boom-and-bust, but they should look at themselves. Which is worse, "red-lining" or "stupid loans"?
(1331)
When Jefferson won the deadlocked election of 1800, Albert Gallatin was the obvious choice for Treasury Secretary. But having destroyed Hamilton's Bank, he had the humiliating duty to reverse position to fight the War of 1812. A five-act play, with duels.
(1348)
When money was tangible you had to guard it, now that it's mostly virtual you have to verify it. Hardly anybody can, and that's a problem.
(1349)
The state of Delaware attracts clusters of businesses for reasons having to do with its legal system; call it Delaware Attractiveness. At the moment, it attracts hedge funds.
(1453)
The cost of gas at the pump has soared, and conspirators are suspected. But, awkwardly, nice respectable pension funds and university endowments may be responsible.
(1476)
Of course, first comes damage control. Soon afterwards, any crisis presents a political opportunity to reform -- or, to make matters much worse.
(1501)
Europe's leaders met in Paris, while finance ministers met in Washington over the three-day weekend in October, 2008. Should nations chance total collapse to save the whole system, or sacrifice the weak to save the strong? Unfortunately, the source of the answer may not be financial but political.
(1525)
At least until he met Madame Helvetius, Benjamin Franklin displayed little interest in moral philosophy. His interest was in science, which was called natural philosophy in the Eighteenth Century. The American Philosophical Society is America's oldest and most prestigious society of scientific scholars. If investing is a science, the APS is good at that, too.
(1537)
A City Controller is expected to criticize the city's administration. Alan Butkovitz does his duty.
(1591)
Philadelphia has a wildlife treasure within a mile of City Hall. The birds know all about it, but the citizens will need to wait a while.
(1812)
The King used to own the whole country. William Penn got us used to the idea that my property is mine, not the King's.
(1815)
The proxy voting power of corporate common stock is disappearing every day, by thousands of shares.
(1882)Investing, Philadelphia Style
Land ownership once was the only practical form of savings, until banking matured in the mid-19th century. Philadelphia took an early lead in what is now called investment and still defines a certain style of it.
Feudalism was a system of military defense organized to protect the savings of communities from predators, since land ownership was almost the only practical system for permanent storage of savings. Jewelry and precious metals might serve somewhat, but their value depended on scarcity, which limited general utility. Paper money was too easily counterfeited until the middle of the 19th century. It took the invention of the business corporation to provide stocks and bonds, and decades of sad experience to make them safe enough for general use. Many of the traditions about what is safe and prudent in this field are Philadelphia traditions, but others are Boston and Silicon Valley traditions. New York, of course, has Wall Street, which evolved traditions of trading and advertising just about the time Wall Street as a physical location started to lose prominence. New York is now a place to make money, Boston and Philadelphia are places to save it.Quaker Investment Committee
|
| Jonathan Rhoads |
Charitable institutions and other non-profit organizations occasionally assemble an endowment, and thus develop a need for an oversight committee to hire (and occasionally fire) an investment manager, to monitor the fund's management, and to assess the manager's fees. The meetings of the oversight committee could therefore be pretty brief, related to two numbers. How had the endowment portfolio performed, compared with some acknowledged benchmark. To these two numbers might be added a brief summary of the investment management fees, compared with the usual benchmarks (40 basis points, or .4%, would be a common standard). However, an agenda so mercilessly sparse seems an inadequate reason to convene a group of worthies for an hour, and quite commonly the committee will chat about investments in general, hoping to pick up some personal pointers. A good tip or two makes the whole effort seem worth while.
On one such occasion in 1987, the famous Quaker surgeon Jonathan Rhoads, Sr was chairman of the committee. The manager of the endowment was a handsome fellow whose picture had occupied a full page of the New York Times financial pages just a day or two before this particular meeting. The picture had been truly spectacular, the tailoring was remarkable, and he surely had perfect teeth. As this gentleman entered the room, the committee gathered around, slapping his back and congratulating him on his fame with great jollity. Little did the group know that within thirty days, the stock market would have its most severe drop in almost twenty years. Unnoticed at first by the merry-makers, Jonathan Rhoads had sat down at the head of a perfectly empty long mahogany table, and was intoning to the empty seats, "We will now begin by reading the minutes of the last meeting of this committee". Visibly shaken, the group immediately broke up and took their seats.
Rhoads went on. We were now to hear the report of our portfolio by our manager. Proudly, it was noted that in February we had bought xyz for 20, and in July we had sold it for 44. And in March we had bought ABCs for 60, and it now stands at 100. When he had concluded, the chairman said, "That's fine. That's just fine. But what bothers me is that point of confusion." Why, what confusion, Dr. Rhoads?
"The confusion between investment genius, and just being in a bull market." Later the same month, the stock market suddenly dropped 22% in one day, thus guaranteeing that no one in the room would ever forget the episode.
http://www.philadelphia-reflections.com/blog/1013.htm
A Prophet In Our Valley
|
| John C Bogle |
John C. Bogle may be 75-plus years old, but he's lively, very charming. Those who never met a living legend, would find him a good place to begin. The Vanguard Investment Company, which he founded, provides him a little think tank office, out of which have come several books and many articles (somebody else is running the company, now.) The drift of most of what he writes and most of his testimony to Congress, or at awards ceremonies, is that mutual funds charge too much. When the press decides to feature him, the spectacular theme is emphasized that in 1996 this current squash and tennis player was just about dead, and had a transplant of someone else's heart to keep him going. A populist graduate of Pre-Vietnam Princeton, and also the embodiment of a medical miracle, now, those things are newsworthy.
Future students of finance, however, will regard those things as minor footnotes. Bogle's real achievement was the invention of the index fund. Indexing had two purposes, and probably stumbled onto a third. It combined diversification, low administrative costs, and outstanding investment performance in a single security. There will be foot dragging in the boutiques and bucket shops, but this invention is well on its way to converting investment management from an inefficient luxury of the rich into an affordable efficient commodity for everybody. You will know that a fundamental has been established on the day when the U.S. Government starts buying index funds, or at least when it permits them to help finance Medicare or Social Security. Such invested funds of a government qualify for the term Sovereign-wealth funds; in fact, since major problems can be imagined if governments start to vote common shares, Heaven help us if they don't stick to index funds. The investment community already knows that something basic has arrived, by their own standards. The original index fund will soon have a trillion dollars invested in it. Just do the math on what you would be paid if you realized a fifth of one percent, year after year, on managing a trillion. And then reflect on the impact on transactional costs generally, when many eminent firms still charge five times that much. To make barrels of money and still be a hero for making your product remarkably cheap -- now, there's a Philadelphia dream.
A technical explanation. Five hundred stocks as one lump are cheaper to buy and sell as a "program trade", and perform more smoothly, than any of them individually, because the ups balance out the downs. Transaction costs are less, because there is hardly any switching among the 500 stocks by the committee in charge, and therefore few taxes to pay. Fine, but what might not be easily anticipated is that the lumped investment performs better, unmanaged, than the vast majority of funds managed by experts. Large funds, at least, are forced to buy the
|
| Wall Street NYSE |
stocks of large corporations. Large corporations are inherently subject to immense scrutiny and publicity, so there remains little advantage to being on the inside, or acting quickly on general economic news. What everybody knows, in Wall Street parlance, isn't worth knowing. Index funds made up of small companies, or foreign companies, may possibly not work out as well as those limited to large domestic companies . For a while, it was thought index funds would out-perform when everything in the marketplace was going up, but under-perform when most things were going down in a bear market. Not so, they seem to work better any way you look at them. They are the standard for performance, not just a measure of the averages. These things are here to stay.
Well, maybe. Reservations remain, although they don't have much to do with investment choices. It may take decades to happen, but it's hard to escape the uneasy feeling that some manager, some day, will figure out a way to divert a hundredth of a percent, or so, into his own pocket. A hundredth of a percent of a trillion dollars is quite a temptation. Perhaps an even more serious concern is that voting control of the corporations in the portfolio inevitably gets diluted by widespread index investing. Management supervision by stockholders is potentially lessened. Whether this will lead to management abuses, a temptation for minority stockholder intrusions, or to government over regulation, taking any of these directions would likely create a new power balance in the economy.
Meanwhile, John Bogle is on his way to financier sainthood. He's certainly in a class with Anthony Drexel and Nicholas Biddle, already. And other icons are under review.
http://www.philadelphia-reflections.com/blog/484.htm
Health Savings Accounts
The legislation removes the hampering restrictions of the 1995 Law. What follows is a brief outline of the main features of the HSA/MSA clause in the 2003 law,
|
| U.S. Capital |
as published by the main authorizing committee, the House of Representatives, Committee on Ways and Means. From this point forward, more specifics of the program will probably be written by the Executive Branch, and published in the Federal Register. The Ways and Means Committee will continue to exercise oversight authority, however, in conjunction with the Senate Finance Committee. As a consequence, statutory modifications of the program are likely to appear in future annual budget reconciliation acts, or else in any new Medicare amendments. The legislative route map becomes more understandable when it is recalled that Medicare itself is considered to be an amendment (Title XVIII) of the Social Security Act.
Committee on Ways and Means
Medicare Prescription Drugs, Improvement And Modernization Act of 2003
Health Savings Accounts (HSA's)
Lifetime savings for Health Care
Working under the age of 65 can accumulate tax-free savings for lifetime health can needs if they have qualified health plans.
A qualified health plan has a minimum deductible of $1,000 with $5,000 cap on out-of-pocket expenses for self-only policies. These amount are doubled for family policies.
Preventive care services are not subject to the deductible.
Individuals can make pre-tax contributions of up to 100% of the health plan deductibles. The maximum annual contributions is $2,600 for individuals with self-only policies and $5,150 for families (indexed annually for inflation).
Pre-tax contributions can be made by individuals, their employers and family members.
Individuals age 55-65 can make additional pre-tax "catch up" contributions of up to $1,000 annually (phased in).
Tax-free distributions are allowed for health care needs covered by the insurance policy. Tax-free distributions can also be made for continuation coverage required by Federal law (i.e., COBRA), health insurance fro the unemployed, and long-term care insurance.
The individual owns the account. The savings follow the individual from job to job and into retirement.
HAS savings can be drawn down to pay for retiree health care once an individuals reaches Medicare eligibility age.
Catch-up contributions during peak savings years allow individuals to build a nest egg to pay for retiree health needs. Catch-up contributions allow a married couple to save an additional $2,000 annually (once fully phased in if both spouses are at least 55.
Tax-free distributions can be used to pay for retiree health insurance (with no minimum deductible requirements), Medicare expenses, prescriptions drugs, and long-term care services, among other retiree health care expenses.
Upon death, HAS ownership may be transferred to the spouse on a tax-free basis.
Contain rising medical costs- HSA's will encourage individuals to buy health plans that better suit their needs so that insurance kicks in only when it is truly needed. Moreover, individuals will make cost-conscious decisions if they are spending their own money rather than someone else's.
Tax-free asset accumulation- Contributions are pre-tax, earnings are tax-free, and distributions are tax-free if used to pay for qualified, medical expenses.
Portability- Assets belong to the individual; they can be carried from job to job and into retirement.
Benefits for Medicare beneficiaries- HSA's can be used during retirement to pay for retiree health care, Medicare expenses and prescription drugs. HSA's will provide the most benefits to seniors who are unlikely to have employer-provided health care during retirement. During their peak saving years,individuals can make pre-tax catch-up contributions.
Chairman Bill Thomas Committee on Ways and Means 11/19/2003 12:56 PM
http://www.philadelphia-reflections.com/blog/860.htm
Investment Strategies
The Latin phrase Quis custodies custodies warns that it's pretty hard to find anyone you can completely trust. Investing for your retirement, you must be careful to avoid transaction fees to pay your agents, and taxes to pay your government to watch your agents, who in turn watch the companies they invest in.
|
| The Pitcairn Financial Group |
Gradually, the world is coming to accept John Bogle's idea of a market index fund as the best most people can do. Investing in the whole market, it doesn't do much trading, whether buying or selling. Therefore, it has minimum costs, minimum taxes. As a by-product, it has maximum diversification, hence maximum safety. Low costs and high safety don't automatically give best performance, except that somehow they do. The Index Fund idea just relentlessly outperforms the vast majority of investment advisers, in both up-markets and down-markets. Investment advisers just hate index funds, bad-mouthing them constantly. But if you buy anything else, you had better have a very good reason to do so.
Well, it's just possible that a second Philadelphia-born idea can do it. The Pitcairn Foundation was created for his family by John Pitcairn, one of the world's all-time champion investors. About fifteen years ago, the Johnny Appleseed spirit caused the Foundation to open up its investment approach to non-family members; they created a public mutual fund company based on the collective ideas and experiences of the Foundation. John Pitcairn bought the Pittsburgh Plate Glass Company, nurtured it to success as PPG Industries, and then eventually sold it, based on the observation that almost no firms, family owned or otherwise, survive more than seventy-five years. Companies should be bought with the intention to sell them, even though they are managed expertly throughout their existence.
The Pitcairn Foundation observed that (although the managers wouldn't always admit it) continuing dominance by the founding family almost always proved beneficial for the running of the company by hired expert managers. Nepotism was often a bad thing in the managers, but a very useful thing in governance. But if you go too far with this idea, you may get into the stifling arrogance of family control in European and Oriental firms. Founding family control keeps the managers from over-paying themselves or worse still, under-working themselves. But if you allow the inevitable minority of worthless family members to pilfer the company, you get the same thing at a different level of control, where it is just harder to fire them.
After a great deal of intense scholarly work, it was observed that there are about six hundred major American corporations where the founding family maintains control. About a quarter of them have no outside directors other than the family, and the performance of these companies is about 15% worse than the market (i.e. the index). In the remaining group, family members only constituted about half of the outside directors.
Now, that group of companies regularly perform 15% better than the index. Guess which one you ought to buy as an investor.
So, now we have the Constellation Pitcairn Family Heritage Fund, open to the public as a no-load mutual fund. Its portfolio consists of fifty-five of those six hundred family dominated companies (with a market capitalization of at least $200 million each), selected by the Pitcairn Financial Company, entirely owned by the Pitcairn family. As long as it continues to outperform the index by 150 basis points, you can be fairly confident that the principle of family domination will endure, up and down the line. But not exclusively; it must be mixed with professional management. The family owns the fund manager, which is run by professionals, who watch the governance of the portfolio components, which are run by professional managers, overseen by founding family members on the corporate board -- themselves overseen by an equal number of non-family independent board members. It's like a Calder mobile, which by the way, is still another Philadelphia idea.
If you are looking to get rich fast, this isn't much of an idea. But since the Family Heritage Fund has consistently outperformed the index by 1.5%, it looks as though the advantage of selecting better corporate governance in the portfolio distinctly outweighs the disadvantage of reduced diversification.
http://www.philadelphia-reflections.com/blog/455.htm
Economics of La Cosa Nostra
|
| Angelo Bruno |
During all of the reign of Angelo Bruno, it was common street opinion that The Organization tried to stay away from drugs, prostitution and shooting anybody except other mobsters. Some of that attitude is found in the scene of the movie The Godfather where a neophyte going to his first killing is instructed to "Watch out for those goddam innocent bystanders". It was okay to bribe the police, not okay to annoy them. Counterfeiting and kidnapping were big no-no's, even though counterfeiting was a core activity for the ancestral Mafia in Western Sicily during the Nineteenth century.
|
| Al Capone |
According to Robert Simone's book, the Philadelphia mob was mainly enriched by loan sharking. There are a lot of people who suddenly need cash desperately and can't get it quickly from banks. Simone himself was a compulsive gambler and frequently was in urgent need of money, either to throw it away or pay it back. Other people get caught in some illegal activity and suddenly need bail money to stay out of prison, or up-front money for a lawyer. Or whatever. The Philadelphia mob had a reputation for being able to loan amounts of fifty or a hundred-thousand dollars in response to a phone call, with home delivery of the money in fifteen minutes. For this they would charge interest in the range of three percent a week, well above the usury limit, but probably not greatly out of proportion to the risk of loss. The police have little interest in transactions between willing parties, at least until the borrower fails to pay it back. Even at that point, it becomes a question of whether kneecaps will actually get broken, or baseball bats actually come in contact with skulls. Probably not very often, because the threat seems a credible one.
To run such a business requires large amounts of cash, hidden in safes or bricked up in walls. From this comes theft or attempted theft, with violent defense measures that often don't concern the police, much, unless those aforementioned bystanders get injured. Sometimes couriers get tempted to make unscheduled detours, but the police are fairly tolerant of informal restitution efforts. All in all, it's a nice clean illegal business.
An interesting sidelight is income tax evasion. It's entirely possible that The Organization would be willing to pay taxes if it could be done without filling out all those forms. Restaurants, bars and market stalls can be run as a way to launder money and yet pay tax on it. But boys will be boys, and no doubt the IRS has, or had, some legitimate concerns. For years I felt the government was over-reaching when it jailed Al Capone for income tax evasion, after being unable, however convinced it may have been, to convict him of overtly illegal activities. That's one side of it. But if you envision these organizations with millions of dollars in cash hidden away, it's easy to imagine them extending invisible credit to their associates for services rendered but not yet paid out and, of course, untaxed. Calling for such money on demand is not much different from having it in a bank. If appreciable amounts of that circumvention go on, the Internal Revenue Service really might have a grievance. Its image would be improved by demonstrating it is pursuing a named crime rather than a pretext to jail someone it doesn't like. Legislation could surely be devised which more carefully specified such illegalities. It might then be possible to bring an end to the appearance of putting people in jail for merely enjoying an ornate lifestyle. People who, almost by definition, cannot be proven to have committed a crime.
http://www.philadelphia-reflections.com/blog/1168.htm
John Head, His Book of Account, 1718-1753
|
| American Philosophical Society |
Jay Robert Stiefel of of the Friends Advisory Board to the Library of the American Philosophical Society entertained the Right Angle Club at lunch recently, and among other things managed a brilliant demonstration of what real scholarship can accomplish. It's hard to imagine why the Vaux family, who lived on the grounds of what is now the Chestnut Hill Hospital and occasionally rode in Bentleys to the local train station, would keep a book of receipts of their cabinet maker ancestor for nearly three hundred years. But they did, and it's even harder to see why Jay Stiefel would devote long hours to puzzling over the receipts and payments for cabinets and clock cases of a 1720 joiner. Somehow he recognized that the shop activities of a wilderness village of 5000 residents encoded an important story of the Industrial Revolution, the economic difficulties of colonies, and the foundations of modern commerce. Just as the Rosetta stone told a story for thousands of years that no one troubled to read, John Head's account book told another one that sat unnoticed on that library shelf for six generations.
|
| Colonial Money |
The first story is an obvious one. Money in colonial days was mainly an entry in everybody's account book; today it is mainly an entry in computers. In the intervening three centuries coins and currency made an appearance, flourished for a while as the tangible symbol of money, and then declined. Although Great Britain did not totally prohibit paper money in the colonies until 1775, in John Head's day, from 1718 to 1754, paper money was scarce and coins hard to come by. Because it was so easy to counterfeit paper money on the crude printing presses of the day, paper money was always questionable. Meanwhile, the balance of trade was so heavily in the direction of the colonies that the balance of payments was toward England. What few coins there were, quickly disappeared back to England, while local colonial commerce nearly strangled. The Quakers of Philadelphia all maintained careful books of account, and when it seemed a transaction was completed, the individual account books of buyer and seller were "squared". The credit default swap "crisis" of 2008 could be said to be a sharp reminder that we have returned to bookeeping entries, but have badly neglected the Quaker process of squaring accounts. As the general public slowly acquires computer power of its own, it is slowly recognizing how far the banks, telephone companies and department stores have wandered from routine mutual account reconciliation.
|
| John Head's Account Book |
From John Head's careful notations we learn it was routine for payment to be stretched out for months, but no interest was charged for late payment and no discounts were offered for ready money. It would be another century before it became routinely apparent that interest was the rent charged for money and the risk of intervening inflation, before final payment. In this way, artisans learned to be bankers.
And artisans learned to be merchants, too. In the little village of Philadelphia, chairs became part of the monetary system. In bartering cabinets for money, John Head did not make chairs in his shop at 3rd and Mulberry (Arch Street) but would take them in partial payment for a cabinet, and then sell the chairs for money. Many artisans made single components but nearly everyone was forced into bartering general furniture. Nobody was paid a salary. Indentured servants, apprenticeships trading labor for training, and even slavery benignly conducted, can be partially seen as efforts to construct an industrial society without payrolls. Everybody was in daily commerce with everybody else. Out of this constant trading came the efficiency step for which Quakers are famous: one price, no haggling.
One other thing jumps out at the modern reader from this book of account. No taxes. When taxes came, we had a revolution.
www.Philadelphia-Reflections.com/blog/1517.htm
http://www.philadelphia-reflections.com/blog/1517.htm
David F. Bradford, 1939-2005
|
| David Bradford |
We should take the word of his friend and colleague, Daniel Schaviro, that the core of David Bradford's professional career as an economist was his conviction that a very deep wrong existed when two people could earn exactly the same income over their lifetimes but the one who spent every cent immediately would pay less in taxes than the other who carefully saved for his retirement and heirs. Bradford was offended by this message our society was broadcasting.
Working for a time in the U.S. Treasury Department and later as a member of the President's Council of Economic Advisor's, he was able to explore the mechanical workings of tax law well enough to translate moral conviction into a workable proposal for political reform. In 1977 he published "Blueprints for Tax Reform" , introducing these practical ideas at the highest level of academic rigor. The impact of his ideas in this paper extended through three presidencies, particularly the present one.
Bradford saw the tax injustice which penalized the Protestant ethic could be corrected in two ways. Either the tax code could shelter individual savings from taxes until they are spent (the IRA), or else convert the income tax into a consumption tax (like VAT). In either case, taxation would take place at the same time as consumption, rather than at the time of earning. Notice the person who saves money to spend later will suffer from both inflation and taxes on taxes on the inflation "gains". The political choice between the two proposed solutions was made by Senator William Roth (R, DE) who sponsored the Individual Retirement Account (IRA) and shepherded it through an intensely political Congress. His was a wise decision, since its voluntary nature made it attractive to politicians, while the French experience with a mandatory Value Added Tax (VAT) created political opportunities to favor certain industries, which politicians were quick to understand.
After twenty-five initially slow years, the eventual popularity of the IRA has now encouraged its extension to Social Security. That's what agitates domestic policy debate at the time of David Bradford's unfortunate death. The IRA model is also the basic concept underlying Health Savings Accounts (HRA), which struggled for many years but have reached their own period of growing acceptance. The Blueprints idea has thus dominated domestic politics for nearly three decades, while its originator remained largely unknown. Far from being a sign of weakness of the idea, it is a proof of the revolutionary nature of this simple concept that it initially provokes public resistance, but also inspires relentless tenacity among those who have taken up its challenge.
David Bradford returned to Princeton from his Washington experience, resting for decades at the quiet center of an Economics department that is not known for its quietude. After a most unfortunate fire at his home, he died of the burns in nearby Philadelphia, which hardly knew him.
http://www.philadelphia-reflections.com/blog/907.htm
The Minnesota Investment Standard
|
| Wall Street |
The performance of mutual investment funds is commonly compared with the stock market as a whole, or some surrogate index of it. The uncomfortable thing is that successful funds grow, and when they get big enough, they just have to resemble the market as a whole. Subtract some fees and expenses, and they are the market. If there is no substantial difference between a managed fund and an unmanaged one, job security for investment managers comes into serious question. You would expect to hear a lot of gallows humor about a situation like that, but in fact it is largely treated as too painful to mention. Except perhaps, by Quakers.
One highly successful veteran of multiple famous Wall Street boar dooms is not a Quaker, but having spent twelve years in Quaker schools, certainly talks like one. His brand of humor has brought many weighty meetings to a halt, and in this case he has developed what he calls "The Minnesota Investment Standard." The allusion is to the little town that Garrison Keillor made famous, where all of the women are beautiful, and all the children are above average.
"In this remarkable case, however, all the mutual funds seem to perform below average."
http://www.philadelphia-reflections.com/blog/1012.htm
Mutual Fund Governance
|
| Mutual Funds |
Unfortunately, mutual funds' main advisory revenue often or even usually comes from selling the fund they work for to corporate pension systems. Although the money belongs to the employees, the choice of fund is usually left to the employer. The revenue of that fund, and hence the revenue of that fund's management adviser firm, is based on the volume of assets; the bigger the fund, the more they all are paid. For the most part, corporation managements can readily change the mutual funds which handle employee pension savings. Consequently, If word gets around that some fund manager often votes the proxies against corporate management in proxy fights, there's ample opportunity for retaliation. So, effective reform of both corporate governance and mutual fund performance seemingly must either exclude corporate management from the selection of employee pension advisers, or else from the right to vote the proxies. However, that's too simple. The unspoken bargain is "If you don't criticize our performance (and reimbursement), we won't criticize yours."
http://www.philadelphia-reflections.com/blog/771.htm
A Single International Currency?
|
| $100 bill |
After three hundred years of fumbling experiments, and now twenty years of satisfactory testing, maybe America has stumbled upon a currency system that works. Resting on the fact that most Americans are either debtors or creditors, and the rest don't care, the quantity and value of American dollars grow out of negotiated agreement between banking and government. All banks want higher interest rates, and all governments, perpetually in debt, want lower ones. Other creditors trust the incentives of banks, other debtors trust government, both sides know trickiness in endless negotiations is futile. What was once a battlefield, is now peaceful; these people actually respect each other. Many people may dislike the prevailing rate, but all acknowledge the process is legitimate.
|
| match wits with ben franklin |
Aside from some don't ask, don't tell, mystery that somehow compels agreement by regions of the country feeling injured by agreements their representatives make , negotiating postures are pretty simple and clear. It is safely assumed that the government wants to inflate; all governments have done so for thousands of years. Therefore, the basic Federal Reserve policy of targeting interest rates to restrain inflation is clearly a concession to banks. Banks would naturally want the highest rate that does not cause a recession. Debtors do not mind lower rates yielding just a little inflation, hoping to pay off their debts later with cheaper money. Government, acting as agent for debtors, nevertheless knows that rampant inflation loses elections and occasionally, as in inter war Germany and Austria, destroys the middle class. So, with everyone else resisting inflation, debtors must be satisfied with 2% annual inflation. That's arbitrary, reflecting its origin in the haggling process. Inflation-targeting plus two percent; that's the system.
If only there weren't all those other countries in the world. If they inflate or deflate, we can just float our currency exchange rate to maintain international trade; that isn't so bad, although frequent readjustment of prices is a costly nuisance to international settlements. If some country freezes its currency at an unrealistic price, however, speculators will move money around to take advantage. Enter Gresham's Law, commonly expressed as Bad money drives out the Good. In the present situation, the phrasing might be, "When two currencies of unequal value circulate together, the good currency quickly disappears." So, when truant governments cheat on their currency values, well-behaved countries find their own currency is hoarded. Potentially, that leads to currency shortages, as happened to Argentina when Brazil devalued in 1999. So, countries running an honest currency soon feel pressure to print more of it; Brazil exported its inflation to Argentina. Plenty of wars have been started for less provocation. When something causes that extra money eventually to come out of hiding, there will be inflation, notwithstanding the attempt to target inflation by the central bank. The Federal Reserve in our case would be forced to raise interest rates sky high, promptly triggering housing and stock market crashes. So the point returns; if our Federal Reserve system works so well, why can't everybody do the same thing on an international level. In fact, what's the matter with having one big world currency?
Maybe, some say, we could have a World Reserve Bank, issuing an international currency. What we seem to have in place is U.S. money serving as a Reserve Currency for the world. The force behind this system is again Gresham's Law, that since we have the strongest currency in the world, when it circulates in other countries in the company of local currencies, it quickly "disappears". That is, it is hoarded out of sight and nothing but local money is ordinarily visible. Unfortunately, that implies that if it ever should weaken, it will quickly reappear and flood the host country with inflation, whereupon the host government will ship it all back to enjoy your own inflation, thank you. Thus, being the reserve currency for the whole world allows you to have some inflation and ship it abroad, but if it ever comes back home, there could be a painful disruption. The last time this happened was when the British Pound surrendered the reserve role to the American dollar. It was a bad time, especially for the British economy.
The question periodically arises whether it might be better to use a "basket" of currencies as the reserve against temporary monetary shortages, with the United States sharing some of its free ride on inflation, but reducing the disruptive risk of someday getting it all back at once.
Using a basket of everybody's money as a pool of international reserves might smooth out the tidal waves, but it probably would not create the same stability we enjoy with the Federal Reserve. If you regard a country's money supply as one great big short-term bond, then a basket of currencies is a basket of bonds, issued by a world full of debtors. In that situation, world-wide inflation is almost inevitable. It might be slow to arrive, but this basket needs balance from a regiment of bankers, all insisting on restraint, or even deflation. In a world with nationalized banks, and subsidized banking systems, it is hard to imagine any international banking voice without a strong political component. Mandatory contributions of gold bullion might be considered, but it is hard to think of any adequate substitute for the flexibility of adversary tension between permanent creditors and permanent debtors. The situation is not permanently hopeless, however. The risk is that some nations have more to lose from a collapse of trade than others. Continuing world improvement in economic conditions may one day make a unified world currency feasible. But as St. Augustine famously said, "Not yet."
http://www.philadelphia-reflections.com/blog/825.htm
Delaware's Court of Chancery
|
| Chancery |
Georgetown, Delaware is a pretty small town, but it's the county seat so it has a courthouse on the town square, with little roads running off in several directions. The courthouse is surprisingly large and imposing, even more surprising when you wander through cornfields for miles before you suddenly come upon it. The county seat of most counties has a few stores and amenities, but on one occasion I hunted for a barbershop and couldn't find one in Georgetown. This little town square is just about the last place you would expect to run into Sidney Pottier and all the top executives of Walt Disney. But they were there, all right, because this was where the Delaware Court of Chancery meets; the high and mighty of Hollywood's most exalted firm were having a public squabble.
Only a few states still have a court of Chancery, but little Delaware still has a lot of features resembling the original thirteen colonies in colonial times. The state abolished the whipping post only a few decades ago, but they still have a chancellor. The Chancellor is the state's highest legal officer, and four other judges now need to share his workload, which was almost completely within his sole discretion seventy-five years ago. In fact the Chancellor usually heard arguments in his own chambers, later writing out his decisions in longhand. The Court of Chancery does not use juries.
|
| Sir Francis Bacon |
Going back to Roman times, the Chancellor was the highest official under the Emperor, and in England the Lord Chancellor is still the head of the bar in a meaningful way. Sir Francis Bacon was the most distinguished British Chancellor, and gave the present shape to a great deal of the present legal system. A court of Chancery is concerned with the legal concept of equity, which is a sense of fairness concerning undeniable problems which do not exactly fit any particular law. The Chancellor is the "Keeper of the King's conscience" concerning obvious wrongs that have no readily obvious remedy. You better be pretty careful who gets appointed to a position like that, with no rules to follow, no supervisor, no jury, dealing with mysterious issues that have no acknowledged solution.
|
| George Read |
Delaware's Court of Chancery evolved in steps, with several changes of the state Constitution over a span of two hundred years. As you might guess, a few powerful chancellors shaped the evolution of the job. Going way back to 1792, Delaware changed its Supreme Court from the design of the 1776 Constitution, and George Read was the new Chief Justice. However, it was all a little embarrassing for William Killen, who had been the old Chief Justice, getting a little old. Read refused to have Killen dumped, and in this he was joined by John Dickinson, who had been Killen's law clerk. So Killen was made Chancellor, and a court of Chancery was invented to keep him busy.
Under a new 1831 Constitution, the formation of corporations required separate enabling acts by the Legislature, and limited their existence to twenty years. However, the 1897 Constitution relaxed those requirements and permitted entities to incorporate under a general corporation law and allowed them to be perpetual. By this time, other states were distributing equity cases to the county level, but Delaware was small enough to justify a single state-wide Court. That court was attractive to corporations because it could become specialized in corporate matters, but it retained a pleasing number of equity cases among common citizens, thus maintaining a more generally understandable point of view.
But other states thought they could see what Delaware was up to. In 1899 the American Law Review contained the view that states were having a race to the bottom, and Delaware was "a little community of truck farmers and clam-diggers . . . determined to get her little, tiny, sweet, round baby hand into the grab-bag of sweet things before it is too late." However that may may be, corporations stampeded to incorporate in the State of Delaware, and the equity of their affairs was decided by the Chancellor of that state. In one seventeen year period of time, the U.S. Supreme Court reversed the decision of the Chancellor only once.
 Chancery's jurisdiction was complementary to that of the courts of common law. It sought to do justice in cases for which there was no adequate remedy at common law. 
|
|
A. H. Manchester Modern Legal History of England and Wales, 1750-1950 (1980) |
Some legal scholar will have to tell us if it is so, but the direction and moral tone of America's largest industries has apparently been shaped by a small fraternity or perhaps priesthood of tightly related legal families, grimly devoted to their lonely task in rural isolation. The great mover and shaker of the Chancery was Josiah O. Wolcott (1921-1938), the son and father of a three-generation family domination of the court. Most of the other members of the court have very familiar Delaware names, although that is admittedly a common situation in Delaware, especially south of the canal. The peninsula has always been fairly isolated; there are people still alive who can remember when the first highway was built, opening up the region to outsiders. Read the following Chancelleries quotation for a sense of the underlying attitude:
"The majority thus have the power in their hands to impose their will upon the minority in a matter of very vital concern to them. That the source of this power is found in a statute, supplies no reason for clothing it with a superior sanctity, or vesting it with the attributes of tyranny. When the power is sought to be used, therefore, it is competent for any one who conceives himself aggrieved thereby to invoke the processes of a court of equity for protection against its oppressive exercise. When examined by such a court, if it should appear that the power is used in such a way that it violates any of those fundamental principles which it is the special province of equity to assert and protect, its restraining processes will unhesitatingly issue."
That is a very reassuring viewpoint only when it issues from a person of totally unquestioned integrity, a member of a family that has lived and died in the service of the highest principles of equity and fairness. But to recent graduates of business administration courses in far-off urban centers of greed and striving, it surely sounds quaint and sappy. And many of that sort have found themselves pleading in Georgetown. Just let one of them bribe, muscle, or sneak into the Chancellor's chair some day, and the country is in peril.
http://www.philadelphia-reflections.com/blog/459.htm
Finances of the Girard Estate
|
| Stephen Girard |
Stephen Girard died on December 26, 1831. It required 7 years for executors to settle the estate of this richest man in America, valued at $7 million, of which $5.25 million was to establish a school for poor white orphan boys. Two million dollars of that was set aside in the will for the construction of his new school. Considerable criticism was raised about the fact that the various administrators of his estate did not admit a single student for the first sixteen years, during which time extensive trustee tours of Europe were conducted to study suitable models and publish books about them. At the end of that time of preparation, the two million dollars were just about all gone. It turns out that Girard could actually afford this luxurious approach. In 1886 the estate would rise in value to $11 million, in 1914 it was worth $30 million.In 1926 it was worth $73 million. This appreciation was in spite of educating more than 10,000 boys, and also purchasing and repaving (with Belgian blocks) both Delaware Avenue and Water Street, from Vine to South Street as a public service to which more than $2 million was devoted. In 1935 Cheesman Herrick wrote a history of Girard College, in which is found the following, rather delicate, history of the long-term financial management by the Board: "The Board of Directors of City Trusts is a creation of the State of Pennsylvania. At the outset in the administration of the Girard will, the city authorities looked to the state Legislature for an empowering act to proceed with the organization of Girard College. The same authority [then] set aside the control of the City councils and put the Girard Estates and Girard College under a new Board which became a part of the machinery of the city government. Probably no more successful administration of public trusts has ever been known than that by the Board of Directors of City Trusts. Time has known the wisdom of Stephen Girard in leaving the administration of his estate as he did. "Colonel Alexander K. McClure, who knew Philadelphia well and who was relentless in his inquiry as to the discharge of trusts by public officials, paid the Board of Directors of City Trusts a deserved compliment in saying that no shadow of doubt or suspicion had ever fallen upon the doing of that body. It may be added further that probably no other governmental agency or private business enjoys a higher reputation for integrity and efficiency in the conduct of its affairs that does this Board. That this record is good is owing primarily to the standard set by those who have served under the Board in various business and administrative positions.
|
| Colonel Alexander K. McClure |
"When the record of the Board is taken into consideration, and the magnitude of the work which it has to supervise is regarded, one can readily see that service on this Board is a signal distinction. The list of the Board has been a sort of honor roll of Philadelphia's foremost citizens. That the standard in this Board has been so high and that members of the Board have served so faithfully, have been due in no small part to its members' having seen beyond the millions of Stephen Girard, and numerous other funds which they have handled, to the great good which these various trusts are accomplishing. With the interest of the beneficiaries always in mind the Board has conscientiously sought to make the Girard Estate, and the other foundations under its supervision, serve the community to the greatest possible extent. The ideal of service has been the touchstone making the Board of Directors of the City of Trusts a great Board." Starting with Nicholas Biddle, the Board of the institution was certainly composed of men who had distinguished themselves in business and finance. However, a great deal of credit must be given to Stephen Girard, himself. A year before he died, he bought roughly 18,000 acres of Schuylkill County after the discovery of coal outcroppings on the property. In subsequent years over a hundred million dollars of anthracite coal were extracted by the mining agents of the Girard Estate, based in Pottsville, PA. The clean-burning properties of this form of coal were promoted with the image of "Phoebe Snow", and were the basis for much of the industrialization of the region. Coal came down the Schuylkill River on canal barges with a terminus opposite the present boathouses, hence the Lighthouse adorning Sedgwick, the most northern boathouse. Later, it was carried on the Reading Railroad, which at one time was the largest railroad in the nation. The Girard heirs felt this went far beyond Girard's contemplated income from the estate, and went to court to obtain for themselves what they considered a more appropriate share of it. Their argument boiled down to saying Girard College had so much money it didn't know what to do with it, and was returning income to principal. It was their contention that if Girard could have predicted both the revenue and the expenses of the school, he would have left the school less money, and given more to his numerous heirs. The managers of the estate, who felt their own acumen was largely responsible for the windfall, made a sophisticated and ultimately successful rebuttal. Instead of relying on the contrast between the incredibly good performance of the Board of City Trusts, compared with the earlier looting of the estate by City Council, their lawyer
|
| Horace Binney |
(Horace Binney) relied on and largely invented some important legal reasoning. Coal in the ground was a dwindling asset, and speed of its dwindling was under the control of the owners. The managers of Girard's estate had shrewdly transformed the coal into a more conventional source of income by taking proceeds at the best available price, regardless of the needs of the school. With it, they put up office buildings and department stores in the center of Philadelphia on the land around 12th and Market, first intended to be the site of the orphan school. Also, the six hundred acres of Girard's farm in South Philadelphia were converted to rental houses. In time, the income from the coal bearing properties was transferred to center-city rentals -- all within the bounds of real estate which Girard had purchased before his death. The trustees had enhanced the value of Girard's properties by shifting assets amongst them, a result that greatly benefited the entire city and region, and rendered the entire concept of annual income -- irrelevant. The legalisms of this dispute are very clever, but in truth the Girard's heirs probably never had a chance in court against the political and business establishment of the whole state, united in the firm belief they were doing a remarkably benevolent thing for orphans. It is breath-taking to reflect that Girard College's anthracite did become the economic pump for the entire Philadelphia industrial region from Pottsville to Trenton, for nearly a century. And equally breathtaking to reflect that, about a century later, anthracite mining just about ceased entirely. Although there was shrewd later management of the assets, the fact is the coal was discovered, purchased and bound up in irrevocable covenants by a single man in 1829, who was therefore dead during every day of this activity, except during the first year when the plan was organized. If he wanted to do this for orphans, it is scarcely possible even to suggest a reason why he shouldn't.
http://www.philadelphia-reflections.com/blog/755.htm
IRA ... Individual Retirement Accounts (3)
|
| TSR-80100 |
It wasn't Ronald Reagan on the phone, it was John McClaughry, Senior Policy Adviser. I'm not sure how important you are when you are a Senior Policy Adviser, but it rates you an office in the Executive Office Building that has fireplaces and sofas, conference tables, and -- off in one corner-- a desk. I knew at a glance that we were going to be friends, because his desk had a Radio Shack TRS-80 computer on it, too. Seeing that, emboldened me to stuff my temporary White House identification badge in my pocket, because a guy with a computer in 1980 was certainly a member of the brotherhood, and would get me out of trouble if the guards caught me taking souvenirs. I still have the badge,
John was and is a master networker; maybe that's the job description of a senior policy adviser, I wouldn't know, He knew everybody who had anything to do with health financing, in all the branches of government, including one I hadn't known about, the neighborhood Think Tanks. Everybody is forever passing out business cards to new acquaintances and sweeping them into the left-hand breast pocket in one continuous motion. In Japan, everybody passes out cards but makes a big bowing ceremony of receiving them; what then happens to them in Japan I don't know, but in Washington they go into Rolodexes and everybody invites everybody to some gathering or other. One evening, I was the entertainment at such a gathering, and have usefully kept up with quite a few people who attended. It's a different atmosphere from some other functions, particularly in the State Department with the other party, where everyone pretends they are meeting you for the very first time when they really aren't.
A few days after our first meeting, John wrote me a short note. Senator Roth of Delaware was pushing something called IRA, or Individual Savings Accounts. Did I think the idea could be applied to health care financing? I suddenly felt as though someone had shoved a stick into my skull and was stirring it around. Of course, just perfect! Add that to a high-deductible or so-called catastrophic health care policy, and out would emerge individually owned health insurance policies, with the same tax shelter as Blue Cross gets, and the added kicker of earning compound interest, while you are well, in anticipation of high costs when you are older. It gets rid of pay-as-you-go, it puts an end to "job-lock" and all sorts of other bad things. Perfect.
Because of the difference in our previous backgrounds, I was in a little better position than John was to see how many medical pieces would fall in place if you made this simple provision, which after all was only giving to self-employed people what salaried people had been getting for decades. Yes, it had a small cost, but no more than the amount self-employed people (like doctors) were being cheated out of. We were only asking for a level playing field.
John and I had our project, the Medical Savings Account, and although we kept in touch, we went our separate ways to sell it. John's field was the Republican Party, and mine was the medical profession. It might take a year or two, but the arguments were unassailable.
http://www.philadelphia-reflections.com/blog/786.htm
Opposition to Privatized Social Security
|
| The Brookings Institution |
The counter-attack on personal accounts was instantaneous, vociferous, and distorted. It alleged what was clearly not true ("taking our social security away from us"), and failed to bother about more plausible threats (entitlements like Medicare seem likelier targets of fiscal stringency). There is no history of similar agitation about IRAs. or other tax sheltered savings incentives of the same model, and no claims have been made that such programs have caused problems. This uproar seems to emanate principally from AFL/CIO headquarters in Washington, where Mr. Sweeney seems to be the leader. Labor Unions are spending considerable money and effort to stifle this proposal before it can develop momentum. The Brookings Institution contains people like Henry Aron and Reichsauer, who surely understand the true issues involved, but have apparently retreated into silence. What is there about this relatively tame proposal, not particularly useful nor particularly harmful, which threatens the interests of organized Labor?
|
| Teamsters |
With no plausible incentives in sight, we resort to speculation about motives. Either Labor suspects President Bush of devious plans, or has devious plans of its own. The most obvious motive a Republican President might have, and one which is more or less acknowledged, is to "starve the beast", or force reductions in government spending by tax-cutting deficits. However, privatized retirement accounts would not seem to be a very plausible move in that direction.
More likely, Labor has its own interests in the benefits and retirement area that seem threatened by privatized accounts. The notorious retirement fund of the Teamsters is only one example of the long-standing involvement of unions in member benefits. Aside from funds directly controlled by unions, their involvement in Blue Cross boards and negotiations, and their influence on state employee retirement funds has been highly treasured. Workers Compensation is another example of heavy union influence in non-paycheck member compensation. Indeed, it is roughly the case that unions control the employees, while the stockholders control the management. There is imperfect agency in both cases, but until recently it has not been conceivable that unions would dominate corporate directors. But with progressive dispersal of stockholder shareholding, and recombination of those voting rights into mutual and pension funds, even the House of Morgan can be seen to appeal to pension fund managers for control of the company. We've turned over a flat stone in corporate governance, and what is crawling out is the source of some concern.
To some extent, the same issue is raised in the Human Resources departments of corporations, constantly exercising delegated control over employees, and constantly in contact with insurance and pension executives of various ranks. Management controls, or thinks it controls, two thirds of employee income, but HR controls the remaining third, spending most of it on insurance plans of one sort or another. At the board level, mutual funds generally lean toward management whenever pension funds raise stockholder rights issues. But index funds and government savings plans could easily induce some subtle changes in sympathies.
It's speculative, of course. But is it possible this is the real battleground, with partial privatization of social security only an opening skirmish?
http://www.philadelphia-reflections.com/blog/775.htm
Put Corporate Raiders to Some Good Use?
|
| Henry G. Manne |
Henry G. Manne just made an interesting proposal for re-setting the balance of power between corporate executives and their bosses, the stockholders. It appeared on the Opinion page of the Sept. 27, 2005 Wall Street Journal. In essence, Mr. Manne, a resident of Naples, Florida and Dean Emeritus of the George Mason University School of Law, suggests we forget about giving stockholders and independent corporate directors more oversight power. Instead, make things easier for corporate raiders, who will be glad to terrify rambunctious executives with a credible threat of having raiders for bosses. It's an interesting thought.
Whoever puts headlines on articles submitted to the
|
| hedge fund |
Journal called this one The Follies of Regulation. We can presume the headline writer prefers corporate raiders to Sarbanes-Oxley, or to the 1968 Williams Act, or a variety of state (read, Delaware) takeover laws, or the Investment Act of 1940, or potential regulatory curbs for Hedge Funds. Although he seemingly agrees with that, Mr. Manne's case is somewhat weakened by having a political spin applied. Regulation isn't the solution, regulation is the problem.
The case is stronger than that, because the main origin of the so-called "Agency Cost" problem appears to lie in the relentless growth in size of international corporations,
|
| John C. Bogle |
to a point where shareholder power is necessarily diluted too thin to be effective. If you exclude founders of corporations and maybe a few families of founders, the dilution of stockholder power has long been an inevitable feature of the dilution of stockholder ownership. If you want their money you must meet their terms, which are overwhelmingly tilted toward passive investing. It's going to get even worse; John Bogle at Vanguard has convinced just about everyone that index investing is the most cost-effective way to invest in equities.
And since the underlying issue is the servant betraying his master (read, Agency Cost), it does not help much for stockholders to ally themselves with new agents.
|
| grease sale |
That would include the managers of Hedge Funds (read, Private Equity), or New York Attorneys General, state employee union presidents, mutual fund managers -- or revolving-door employees of regulatory agencies. There's a rumor around that investment bankers were the ones who first suggested bribing the managers of acquired companies to grease the sale. Where agents of any kind are concerned, particularly elected representatives, you dare not turn your head to spit.
The interesting thing about Mr. Manne's proposal is that his suggestion of trusting the corporate raiders might just work. You can trust them to work hard and play hard, and be utterly remorseless about the poor beleaguered corporate executives, those home town boys who have worked so hard on your behalf. Or who "live like monks, and give all the company's wealth to worthy causes."
Let's hear more specifics about how to do this, and expose them to the anguished howls of those they might injure. The hubub alone would do some good.
http://www.philadelphia-reflections.com/blog/858.htm
Retiring to the Workforce
|
Most Americans alive in 2020 will live to be ninety
|
| Dr. Fisher |
During the Twentieth century, average life expectancy for Americans at birth extended from a little less than age fifty, to a little less than age eighty -- roughly thirty years. Looking ahead to the next century, it's entirely reasonable to expect a cure for cancer and Alzheimer's disease to extend life expectancy to ninety-five. It's also reasonable to expect that somewhere along this path we will find such retirement expectations are more than the nation can afford. Everyone will have to go back to work.
Working ten years longer means ten years less time in retirement, and it also means ten years more time to accumulate sufficient savings for whatever time is left. Some people who are already working more than they want to, won't like that. There will be attempts to make retirement cheaper and to extract savings from novel sources, but further improvements in health care will wipe out all those efforts. The normal age for retirement will have to move to at least age seventy, probably seventy-five. If employers have problems with that, the solution will have to be second careers. So, let's shift our attention to people who are lucky enough to afford a thirty year vacation. They must go back to work, too.
A moment's reflection reveals that everyone must have a life goal of accumulating more money than is needed to live out his life. Once average life expectancy levels out to a stable point, ingenious life insurance design could bring us to the point of spending the last dime on the last day, providing we consider it worthwhile to spend the extra insurance administration cost. More likely, human psychology will always demand a little extra comfort from a little extra financial cushion, and there's a relationship with the age of retirement. The later you retire, the more likely it is you will have money to spare. For physical or mental reasons there will be people who can't work, but everyone else knows a simple solution to the problem of being able to retire: don't stop working until you can afford to quit. And by the way, the later you start saving, the longer before you can quit.
This vision of elderly America thus generates a need to create new jobs for people unable to retire, but the similarly growing number of elderly too infirm to work creates jobs for the advancing number of elderly who need a new career. Some variation of a voucher system will be needed to make this workable.
We have so far not worried much about the lucky, talented, or just miserly few who achieve life's normal goal of saving just a little more than they need; but that must change, they need to go back to work, too. Philanthropy, a very important part of American life, is struggling and needs their talent. It's likely that our business and economic success as a nation is responsible for diverting our energetic and imaginative talent toward the for-profit sector. The general attitude has been that if things are worthwhile, people will pay for them; businesses run not-for-profit can't really be worth much. That's very wrong, of course, but there's enough truth to it to require some changes.
Nonprofit organizations are often inefficient, because efficiency is usually the consequence of seeking a profit. But the analysis must not stop with this hopeless truism; the manageable problem is to find new goals for efficiency which do not directly require profit-seeking. One approach would be for non-profits to create for-profit subsidiaries, later selling them off to enhance their endowment. The tax authorities would want to examine this approach to avoid harming competitive tax-paying entities, or sham arrangements in which the purported subsidiary dominates a nonprofit shell.
However, this and similar approaches merely continue the present mindset about the role of the donors and the volunteers. Nonprofit organizations tend to gravitate toward a professional staff with nominal trustee oversight, relegating the donors to the function of giving or getting donations. If philanthropy is to acquire a new drive toward efficiency to supplant the absent profit motive, the donors must be actively employed in the organization, noticing any waste or inefficiency, sharing the gossip, and appreciating the triumphs. To some degree, a form of this model is found in the auxiliaries of hospitals and museums, where staff administrators generally chafe in private about the class distinctions and disruptive ability to cut across management hierarchies. If this system is to work effectively, it needs to be studied for ways to be less threatening to the younger employees, and to get more useful work from the older ones.
http://www.philadelphia-reflections.com/blog/831.htm
Who Watches the Watchmen?
|
| Pitcairn Family Heritage Fund |
The Latin phrase Quis custodies custodies warns that it's pretty hard to find hired agents you can completely trust. Investing for your retirement, you must be careful to avoid excessive transaction fees to pay your agents, and minimize taxes to pay your government to watch your agents, who in turn watch the companies they invest in. Those companies are managed by hired experts , who are selected and overseen by a board of directors. The agents hired by the investors are charged with overseeing this process.
Gradually, the world is coming to accept John Bogle's idea of a market index fund as the best most people can do. Index funds don't even try to tell a good one from a bad one; they just buy them all in proportion to their size (successful companies grow, unsuccessful companies shrivel). Investing in the whole market,an index fund doesn't do much trading, seldom buying or selling. Therefore, it has minimum costs, minimum taxes. As a by-product, it has maximum diversification, hence maximum safety. Low costs and high safety don't automatically give best performance, except that somehow they do. The Index Fund idea just relentlessly outperforms the vast majority of investment advisers, in both up-markets and down-markets. Investment advisers just hate index funds, bad-mouthing them constantly. But if you buy anything else, you had better have a very good reason to do so. The performance of an index is called beta; outperforming the index is called alpha. The sad truth is that most experts have a negativee alpha.
Well, it's just possible that a second Philadelphia-born idea can do the seemingly impossible task of showing a small but consistently positive alpha. The Pitcairn Foundation was created for his family by John Pitcairn, one of the world's all-time champion investors. About fifteen years ago, the Johnny Appleseed spirit caused the Foundation to open up its investment approach to non-family members; they created a public mutual fund company based on the collective ideas and experiences of the Foundation. John Pitcairn bought the Pittsburgh Plate Glass Company, nurtured it to success as PPG Industries, and then eventually sold it, based on the observation that almost no firms, family owned or otherwise, survive more than seventy-five years. Companies should be bought with the intention to sell them, even though they are managed expertly throughout their existence.
The Pitcairn Foundation observed that continuing dominance by a founding family almost always proved beneficial for the running of the company by hired expert managers. Notice that, while nepotism was often a bad thing in the managers, it could be a useful thing in governance. If you go too far with this idea, of course, you may get into the stifling arrogance of family control in European and Oriental firms. Founding family control keeps the managers from over-paying themselves or worse still, under-working themselves. But outside investors better watch these founding families; if you allow the inevitable minority of worthless family members to pilfer the company, you get the same thing at a different level of control, where it is even harder to fire them. There's a good idea here, but it needs a little extra.
After a great deal of intense scholarly work, it was observed that there are about six hundred major American corporations available for public participation where the founding family maintains control. Even this select group comes in two types. About a quarter of them have no "outside" directors other than the family, and the performance of these companies is about 15% worse than the index, suggesting the dominance of playboy directors. In the remaining group, family members only constituted about half of the outside directors. Now, that group of companies regularly perform 15% better than the index. Guess which type you ought to buy as an investor.
So, now we have the Constellation Pitcairn Family Heritage Fund, open to the public as a no-load mutual fund. Its portfolio consists of fifty-five of those six hundred family dominated companies (with a market capitalization of at least $200 million each), selected by the Pitcairn Financial company, entirely owned by the Pitcairn family. As long as it continues to outperform the index by 150 basis points, you can be fairly confident that the principle of family domination will endure, up and down the line. But not exclusively; somewhere it must be mixed with professional management. The family owns the fund manager, which is run by professionals, who watch the governance of the portfolio components, which are run by professional managers, overseen by founding family members on the corporate board -- themselves overseen by an equal number of non-family independent board members. It's like a Calder mobile, which by the way, is still another Philadelphia idea.
If you are looking to get rich fast, this isn't much of an idea. But since the Family Heritage Fund has consistently outperformed the index by 1.5%, it looks as though the advantage of selecting better corporate governance in the portfolio distinctly outweighs the disadvantage of reduced diversification. Maybe that's all it proves, but most of us poor saps don't even know that much.
http://www.philadelphia-reflections.com/blog/909.htm
Did Tax Cuts Invert the Yield Curve?
For those who just came in, let's explain an inverted yield curve. In plain English, it means that interest on short-term bonds (set by the Federal Reserve) is larger than interest on long-term bonds (set by the public in the bond market.) That's the opposite of the normal situation, and regarded as an ominous signal of impending economic troubles. But suppose it doesn't have much to do with economic forecasting at all. Suppose it just reflects tax cuts.
After all, when federal taxes are reduced, you eventually approach the point where bond interest is essentially tax-exempt. Everyone knows tax-exempt bonds pay less interest than taxable ones. For this purpose, it doesn't much matter whether income tax, capital gains tax, or dividend taxes are reduced. This creates a small problem for the argument, because several taxes have been cut by differing amounts and thus it isn't possible to calculate the precise level by which interest rates on government bonds should have been effectively reduced. It's clear, however, that cutting taxes will lower bond market interest rates in the general direction of tax-exempts. Since the yield curve is just a ratio of these rates, compared to the short-term rates set by the Federal Reserve, the yield curve is distorted and eventually "inverted".
If there is anything to this idea, the yield curve might have inverted without a tax cut. That's because a majority of U. S. Government bonds are lately being purchased by Asian governments. The Chinese government doesn't pay U.S. taxes, so to them all American bonds are tax-exempt. Federal bonds are a little safer than municipal government bonds, so they should command a little lower interest rate, and may eventually invert the yield curve still further.
By this line of reasoning, the inverted yield curve is not a portent of trouble, because it no longer primarily reflects American owners of the bonds dumping them. It does, however, have some important consequences. If interest rates are lower, retired people, insurance companies and pension annuities are going to be financially worse off. Borrowers, however, are going to be better off, and within limits the economy will be favorably stimulated. One can be uneasy about the overall effect on the real estate and insurance markets, and on the temptation to governments to borrow more than they can repay.
There are lots of mixed consequences to be expected from a general readjustment of the tax rate. But it shouldn't be a mystery that tax consequences affect yields and yield curves. It may not even be a conundrum.
http://www.philadelphia-reflections.com/blog/827.htm
Marty Feldstein Forecasts the Future
|
| Martin Feldstein |
With increasing frequency, the op-ed pages of the Wall Street Journal are opened to important people, or important ideas. On April 28, 2006,Professor Martin Feldstein of Harvard wrote an article which purports to show how it is possible to have the American currency fixed for Americans, but float for foreigners. After reading it twice, I conclude he is saying something rather different, and softening some startling announcements with circumlocution. It is my view that he says the following:
Inflation is not a worry; targeting 2% inflation with adjustments in short-term interest rates will take care of it.
International trade deficits need not be a worry, either, if only the Treasury Department (Could he mean nice old John Snow?) would allow the dollar to float on the international market. Not pure floating, of course, because it is a dirty world out there. The necessary dirty floating might hurt at first, especially American global businesses, but the sooner the boil is lanced, the better we will be. American exports of capital goods, consumer goods, and industrial supplies will especially benefit. Those who worry that trade deficits will weaken the dollar have got it backward a weaker dollar will correct the trade deficit. Yes, some people will be hurt by this.
In particular, high-wage countries like Europe, Canada and Japan will be hurt, possibly severely hurt.
You will be able to tell that this plan has been set in motion when you see an international conference called among low-wage countries. The main purpose will be to reassure them that the U.S. Treasury won't punish them for strengthening their currency.
You will be able to tell this proposal has been rejected, probably for political reasons, if nothing soon happens to soften housing prices. And the word soon is emphasized. Because if they don't soften, they will break.
http://www.philadelphia-reflections.com/blog/818.htm
Medicare/Health Savings Accounts Legislation
Why is it so important?
- The Medicare/HSA Law is an historic and transformational step for the American system of health and healthcare. For the first time since in 1965, seniors will now have a prescription drug benefit as part of Medicare.
- It returns decision-making control to the individual by allowing individual to put money into an IRA-like tax free account to be used for health related expenses.
- Like traditional Medicare, the new Medicare/HSA law will take care of seniors who are already sick but it takes the next step to help keep them from getting sick in the first place.
- The new Medicare /HSA law begins to transform healthcare into a 21st Century model that is market mediated yet still government regulated that will lead to higher quality care, with greater choice at lower cost.
What if I like the Medicare program I am currently enrolled in, do I have to switch?
- No, it completely voluntary. You can stay in the traditional Medicare program and keep your Medi-gap insurance if you choose. However, seniors will now be able to choose other plans that better fit their unique healthcare needs.
I am not a senior but a young worker, why does this matter to me?
- Young working now have an incredible opportunity to accumulate substantial health dollars in a personal health savings account (HSA) over a lifetime of work their healthcare expenses after they retire.
What is an HSA?
- HSA's are the most important change in financing healthcare since the advent of employer-based healthcare system in 1943.
- An HSA is a Hwealth Ssaving Aaccount that allows an individual to contribute pre-tax dollars that can grow tax free while earning interest. The money in the account can be used to pay health related expenses also without paying a tax.
Who owns the accounts?
- HSA's are like an IRA or a 401K, they are owned by the individual.
- They are real assets that can be passed on to loved ones as part of an estate if account beneficiary were to die.
Who can contribute to my health savings account?
- Individuals, their employers, and family members so long as they cannot claim you as tax dependent.
Who decides how my HSA health dollars can be spent?
- You will control your health dollars as long as they are used for qualified health related expenses.
- HSA's return the individual to the proper market role of the customer so that healthcare provides will complete for health dollars. This completion will improve service and quality and lead to greater choices and lower costs for every American.
- HSA's are encourage every American to become a wise consumer of healthcare, which will lead to more knowledge healthcare consumers who are able to make better decisions about their own health, their treatment options, and staying healthy.
What if I change jobs, what happen to the money in my health savings account?
- HSA's are completely portable, and because you own them and control them they follow you from job to job and into your retirement.
What expenses can I use my health dollars to cover?
- HSA dollars can be withdrawn tax-free to pay for qualified medical expenses, such as prescription drugs, doctor visits, health insurance for the unemployed including COBRA and long term care insurance and services.
What if there is money left over at the end of the year in my HSA, do I get to keep it?
- Yes, the money invented in an HSA is just like money invested in an IRA or 401K, it may earn interest and will rollover from year to year allowing you to accumulate health dollars for retirement.
How do I qualify for HSA?
- To qualify you simply purchase a health insurance plan with a minimum dedication of $1,000 for an individual or $2,000 for a family.
How much can I contribute to my HSA?
- You can contribute up to 100% of the insurance plain¿½s deductible amount but not to exceed $2,600 for an individual or $5,150 for a family.
If I am over 55, will HSA's be significant to me?
- Yes, if you are between the ages of 55-65, you can make additional pre-tax contributions of up to $500 annually starting in 2004 and $600 in 2005 and an additional $100 more per year to a maximum of $1,000 per year in 2009. This will allow you to accelerate the growth of your health dollars for retirement.
How does this new law help the working uninsured?
- This legislation will make health insurance more affordable because it provides incentives for people to get insurance so they can realize the tax-free savings benefit.
- Insurance plans with higher deductible are more affordable and because more people who may now be playing the healthcare lottery by not having insurance will be encourage to purchase a policy will increase the size of the risk pool and will lower the risk which will also make health insurance more small business companies to offer insurance as a benefit. Moreover, competition for your HSA healthcare dollars will drive down cost for everyone.
What if I suffer from multiple diseases, such as obesity and diabetes, how will I benefit from this Legislation?
- Because 5% of the entire Medicare population with an average of 5-7 diseases spends 50% of Medicare dollars or19 times more money per person, patients with multiple diseases will finally have access to coordinated care among all their care providers, thus reducing unnecessary, duplicate treatments, or dangerous combinations of prescription drugs. That will allow for better quality of care, dramatically higher safely at lower cost.
What happens to my HSA when I die?
- When you die, your health savings account can be passed on to your surviving family member as part of your estate.
Can I pay for my healthcare premium from my health savings account?
- If you are retiree, your healthcare savings account can pay for retiree health insurance premiums, other than Medi-gap, and your Medicare premiums.
- If you are not a retiree however, your health savings account cannot be used to pay your health premiums, but you can still use your money to for other health related services such as prescription drugs costs.
Will this new Medicare/HSA law really lower the cost of my prescription drugs?
- Yes, in 2004, every senior citizen who chooses one, will be given a discount drug card allowing them to save significant amounts of money on their prescription drugs.
What about those with lower incomes, how will they be helped?
- In 2004, low-income senior will receive an additional $600 credit on their drug card to be used for their prescription drug program.
$400 billion dollars is a lot of Money, doesn't this mean bigger government?
- Healthcare is neatly 14% of the Gross Domestic Product and growing. To address the continuing rising healthcare cost is necessary to make an investment into improving and changing the current system of health. This Legislation for the first time puts the consumer at the center of their own care and gives them more choices. Choice creates competition and that drives down costs while improving the quality of services not only for seniors, but for every American.
- Moreover, for a reasonable cost, seniors will for the first time have a prescription drug benefit. Today, prescriptions drugs are indispensable in order to keep people healthy and out of the hospital. They also in many causes eliminate more expensive treatments if the drugs were not available.
Are preventative care services subject to my deductible?
- NO.
What technology and Innovations enhancements were added to the Medicare bill?
- The new Medicare/HSA law includes incentives for electronic prescription, grants to pay for physicians to implement a prescription drug program, pay for performance demonstration projects, and incentives for hospitals invest in life-saving IT and reports quality outcomes.
What will the law mean for my local hospital?
- Hospitals will receive additional reimbursement for providing quality information for 35 indicators. This will allow consumers to choose a hospital based on their quality of service.
http://www.philadelphia-reflections.com/blog/859.htm
Rise and Fall of Life Insurance
|
| Hammurabi Code |
While it is possible to see traces of the origin of insurance all the way back to ancient Mesopotamia, insurance of a currently recognizable form began around 1500, with maritime insurance creating risk pools for ships at sea. Eventually, insuring the life of a ship and insuring the life of a person did not seem greatly different in principle; sooner or later everyone dies, but in those days sooner or later most ships sank. From the records of such pooling efforts we can see that a sailor in colonial times had a 40% chance of not returning from a typical voyage. Learning this, some of the plot of Shakespeare's Merchant of Venice becomes more understandable, and the enormous wealth of successful sea captains, privateers, whalers and ship owners seems more justified by the risks they were taking. In retrospect it seems hard to understand why anyone at all went to sea, thus why it took so long to discover America. Selling maritime insurance was a way to gamble on these risks. You might not get wet, but you were still taking big risks with your money.
|
| Insurance Company North America |
Life insurance was a comparatively late arrival on the insurance scene, and grew out of experience with maritime risk pooling. The first life insurance company was the Presbyterian Ministers Fund, a Philadelphia institution if there ever was one. In essence, the church had undertaken to support the widows of ministers. Insurance tailored to the life of each minister, when pooled together, approximated the church's collective widow-support risk. Only ministers were insured by this fund, however. The Insurance Company of North America (now Cigna) seems to have been the first company to sell life insurance to all comers. That's definitely an improvement; limiting the risks to a particular occupation amounts to "adverse risk de-selection", unintentionally excluding for example, women and blacks. On the other hand, the concept was totally new; no insurance at all would have been attempted if it had been initially impossible to limit the risk.
Insurance has since spread to many other topics, but it remains true that life insurance has one central unique feature. It is absolutely certain the customer will die, the policy will be cashed in. The uncertainty is when it will happen. After a while it became evident that premiums would be collected until the final date, and could be invested until it happens. When the pool of customers gets large enough, there is almost perfect predictability about the average age at death, so the bigger the company the safer it should be.
There is one great potential weakness in this system, lying in the fact that the person who buys the policy and receives the assurances will not be around to complain about failures of those assurances at the time the policy is cashed in. It takes many years before public trust in such promises overcomes skepticism. The growth of life insurance was therefore slow until the Civil War suddenly demonstrated there were unpredictable risks around. Unfortunately, abuses of the system by fly-by-night companies in the last half of the Nineteenth Century led to heavy government regulation of the industry. Philadelphia's reputation for integrity rapidly expanded its dominance of insurance, but could not prevent the heavy hand of regulation from holding it down, or local taxes from driving it into other jurisdictions. State Insurance commissioners were originally charged with guarding against an insurance company going bankrupt by using unrealistic low prices to attract business. The public interest was redefined to mean low premiums, by the obscure but effective method of legally shifting the debts of a bankrupt insurer onto its surviving competitors -- neither the public nor the Legislature had to worry about it any further. In the insurance capital of the country, stockholder returns and executive salaries gradually went from too fat to too thin. Insurance companies, one by one, moved to other states or at least to other counties. It is now possible to wander through the abandoned executive suites on the top floors of the former insurance palaces, and feel as though you were at Luxor, wandering through the abandoned Egyptian temples of Karnak.
To be fair about it, it is also possible to have a real estate agent take you through the former estates of life insurance entrepreneurs whose business practices amply justified some regulatory over-reaction. Plenty of old retired lawyers will be glad to tell you of the times they wrote new insurance laws for their insurance client, who just forwarded them to Harrisburg for enactment -- before the Second World War. But the destruction of this industry does no one any good, and it is surely fair to argue that excessive profits were the lesser of the two evils.
Setting the regulatory risk to one side, the life expectancy of Americans has dramatically lengthened in the past century, nearly eight years in the past fifty years. Such unpredictable reduction of risk ought to lead to increased profitability for the insurer, but it also leads the public to shift to less profitable term insurance. The young buyer can see a period of several decades of dependent children, followed by a long period of life when the death of the breadwinner is less tragic. I needed, living too long becomes a modern new concern, the outliving of accumulated savings. When the investment manager of the insurance e company is faced with a choice of more investment safety or greater investment return, he must produce a combination of both, an impossible assignment. And so, insurance business drops off as clients wander away toward more glowing promises, or at least toward promises unconstrained by the growls of a consumer-driven insurance commissioner. During the Great Depression of the 1930s, only two life insurance companies went bankrupt, so at least the old way of running these companies produced safety. The 1930s now seem a long time ago.
http://www.philadelphia-reflections.com/blog/635.htm
Supply-Side Tax Cuts
Some tax cuts are good, some are bad. Aside from the political truth that cutting my taxes is always better than cutting yours, there's the question of timing. Tax cuts are usually inflationary, so there are times when they should be resisted. Taxes on some things are disincentives; that's been the argument for taxing cigarettes and liquor, maybe it is now an argument for raising gasoline taxes. But the argument for lowering taxes on capital gains and dividends is far more mysterious. It's supply-side economics, and absolutely no one knows what that means.
The place to start is to recollect that the dividends on state and municipal bonds are exempt from federal taxes. Tax-exempts have a lower interest rate than similar bonds issued by corporations, or the federal government, because such tax-free income is more valuable to the purchaser than taxable dividends. But forget about the purchaser for a minute. The state or local government gets enabled to borrow money at a lower interest rate. That's the supply side.
So, although it passes through extra steps, corporations would find it cheaper to issue bonds if the customer paid less income tax on the bond dividends. Not only does the issuing corporation get an interest-rate reduction, all other corporations do too, as the prevailing cost of capital is lowered. There's even an enticement for economic nationalists: only American bond-buyers get an American tax reduction. And all this is true whether you lower the rate from 25% tax to 15%, or eliminate taxes entirely. Corporations get an incentive to borrow more money, which we all pray they will use wisely so good things will happen to jobs and the economy. It's known as lowering the cost of capital.
It doesn't make a bit of difference whether the taxpayer who "gets" the tax cut is rich or poor, and in that sense the argument for doing it isn't political. But in another sense, it may be. State and local governments are already getting cheaper capital, so we have in the past created an artificial incentive for them which disappears if everyone gets it. There's a large segment of the country that believes the country would be better off with less government, based on efficiency, economics, and yes, political grounds.
http://www.philadelphia-reflections.com/blog/836.htm
The Economic Power of Laws
Philadelphia is tucked down in the Southeast corner of Pennsylvania, right next to Delaware and New Jersey. All three states once belonged to William Penn, and started out Quaker dominated. In time, they settled down to a life of independent states, and with the growth of population plus speed of transportation, they are all getting smudged together again. The Quaker influence is there if you look for it, and rather fierce, even hostile, political competition between the states is there, too. But if you were a foreign visitor who doesn't look at maps, you could drive around the metropolitan area without knowing which state you were in. To a large extent, the Rand-McNally lines are a hindrance to commerce and convenience, but they have their value. The quirks of political jurisdiction give the Philadelphia metropolitan area six U.S. senators, and the opportunity to take shrewd advantage of the three legal systems. You can buy things without a sales tax in Delaware, and estate tax lawyers tell me that if you must die, die in Delaware. At one time, New Jersey was a great place to get an uncontested divorce, Pennsylvania a better place to start an unincorporated business. More recently, the New Jersey doctors are complaining that malpractice rates are unbearable, but they are not as bad as they are in Pennsylvania, and it is rapidly becoming true that if you are going to be born, you will need to be born in New Jersey because the obstetricians have all moved there. That's also true in the Dictrict of Columbia; obstetrics has just about entirely fled to Virginia. Better watch out where you have your auto accidents, too. Neurosurgeons and orthopedists have also responded to the local disincentives to live near certain types of juries.
Long ago, James Madison designed things this way on purpose. The main author of our constitution hated taxes and oppressive government as much as any other founding father, and argued it was a good thing to let neighboring states have differing laws. Corporations which do interstate business hate the complexity of course, but as Madison argued, people do shift their business, their businesses, and even their residence if the neighboring states become too extreme in their differences. It's still worth a thirty minute drive to buy silverware and china in Delaware, and if you are driving to the New Jersey shore, you ought to fill up your gas tank on the Jersey side of the bridge. At one time, there was a thriving resort town in the Jersey woods, mostly entertaining people who needed a spell of New Jersey residence to be eligible for New Jersey divorces.
These things respond to local circumstances fairly rapidly. I once met a man from the Delaware Chamber of Commerce who boasted that the Chamber could get a Delaware law changed over a weekend if it had some particular commercial advantage. Governor du Pont saw the bigger advantages of this flexibility, and got some laws enacted which drew most of the big credit card companies to Delaware, and at least a branch of all the big national banks. Delaware is starting to emulate Lichtenstein , and fairly successfully.
The effect on Philadelphia banking has been disastrous. Once the banking center of the whole continent, Philadelphia now does not have the headquarters of a single major bank. True, banking is becoming an obsolete industry whose products no one really wants, but the particularly severe effect in Philadelphia comes from the fact that if you were going to have a big bank in the metropolitan area, you would have it in Delaware.
The location of so many corporate headquarters in the little state attracts lots of outside lawyers, of course, and it puts a heavy burden on the Delaware Court of Chancery , the court for corporate disputes. The judges are appointed by the governor, and it doesn't take all that much outside money to lean on the governor, so the nation's giant corporations are at the mercy of a very small group of local politicians. The politicians, on the other hand, operate freely in an environment where comparatively few of their constituents have any interest in the goings-on of major corporations from far away.
It's an interesting thing that the legislatures of all three formerly Quaker states are torn with sectional disputes. In Pennsylvania and Delaware, it's the cities against the farmers. In New Jersey, it's the North versus the South. All states are having a hard time balancing their budgets in a recession, but somehow New Jersey has worse deficits than the others, and therefore more quarrels about taxes. The northern politicians dominate the legislature, and the south feels it is often the victim of state laws designed to help the North in its constant war with New York City. Ever since 9/11 , the financial district of New York has been sending its subsidiary employees to safer cheaper regions. That might have meant going to New Jersey, but the tax flounderings there have led to many of those relocations going on a few miles to upstate Pennsylvania. You don't ordinarily think of Scranton as a financial center, but take another look. Madison, no doubt, would smile at the tendency, but wrinkle his brow at all the unintended consequences. At least, everyone in the region speaks English more or less, otherwise the European Common Market could learn a lot from studying our local scene. About fifteen years ago, there was actually an unsuccessful provision on the ballot for South Jersey to secede.
http://www.philadelphia-reflections.com/blog/662.htm
The Rise and Fall of Life Insurance
|
| Hammura |
Life insurance was a comparatively late arrival on the insurance scene, and grew out of experience with maritime risk pooling. The first life insurance company was the Presbyterian Ministers Fund, a Philadelphia institution if there ever was one. Only ministers could be insured by this fund, however, and the Insurance Company of North America seems to have been the first company to sell life insurance to all comers. Even the Presbyterians would have to admit that limiting the risks to a particular occupation skirted the present tendency to regard "adverse risk de-selection" as a no-no, excluding as it undoubtedly did, women and blacks. On the other hand, the concept was totally new; no insurance at all would have been attempted if it had been impossible to limit the risk.
Insurance has spread to many other topics, but it remains true that life insurance has one central unique feature. It is absolutely certain that the customer will die, the policy will be cashed in, and the only uncertainty is when it will happen. After a while it became evident that premiums would be collected until the final date, and could be invested until it happens. When the pool of customers gets large enough, there is almost perfect predictability about the average age at death, so the bigger the company the safer it should be.
There is one great flaw in this system, lying in the fact that the person who buys the policy and receives the assurances will not be around to complain about any failures of those assurances at the time the policy is cashed in. The growth of life insurance was therefore slow until the Civil War suddenly convinced people there were unpredictable risks around. Unfortunately, abuses of the system by fly-by-night companies in the last half of the Nineteenth Century led to heavy government regulation of the industry. Philadelphia's reputation for integrity rapidly expanded its dominance of insurance, but could not prevent the heavy hand of regulation from holding it down, particularly after the Populist movement came to recognize the strategic power of the state Insurance Commissioner. The commissioner was originally charged with seeing that an insurance company did not go bankrupt by charging low-ball prices, but in time that mandate gradually changed to holding down the premiums. In the insurance capital of the country, stockholder returns and executive salaries gradually went from too fat to too thin. Insurance companies, one by one, moved to other states or at least to other counties. It is now possible to wander through the abandoned executive suites on the top floors of the former insurance palaces, and feel as though you were at Luxor, wandering through the abandoned Egyptian temples of Karnak.
To be fair about it, it is also possible to have a real estate agent take you through the former estates of life insurance entrepreneurs whose business practices amply justified a regulatory over-reaction. Plenty of old retired lawyers will be glad to tell you of the times they wrote new insurance laws for their insurance client, who just forwarded them to Harrisburg for enactment -- before the Second World War. But the destruction of the industry does no one any good, and it is surely fair to say that excessive profits were the lesser of the two evils.
Setting the regulatory risk to one side, the life expectancy of Americans has dramatically lengthened in the past century, nearly eight years in the past fifty years. Such unpredictable reduction of risk ought to lead to increased profitability for the insurer, but it also leads to a shift to less profitable term insurance. The young buyer can see a period of several decades of dependent children, followed by a long period of life when the death of the client is a less tragic future. Indeed, living too long becomes a concern, outliving the accumulated savings. When the investment manager of the company is faced with a choice of more safety or greater investment return, he must produce a mixture of the two, an impossible assignment. And so, insurance business drops off as clients wander away toward more glowing promises, or at least toward promises unconstrained by the growls of a consumer-driven insurance commissioner. During the Great Depression of the 1930s, only two life insurance companies went bankrupt, so at least the old way of running these companies produced safety. But the 1930s now seem a long time ago.
http://www.philadelphia-reflections.com/blog/974.htm
Tulips, Jay Cooke, and Google
|
| Google Logo |
The majority of flowers for sale in any flower shop in the world come from Holland. These highly perishable items are air shipped to the florists, and the pricing of flowers must be quickly individualized according to their condition, quality and market variables. This is how it is done: carts of fresh flowers are wheeled into an auction room, priced and sold, and wheeled out to the trucks of distributors, within fifteen minutes of arrival. You can almost hear the airplane engines starting up as they arrive at the auction. The Auction itself is held in a large amphitheater, with every seat equipped with a little computer terminal. The buyers identify themselves on the keyboard, and sit there with a finger poised over the action key. Directly in front of the audience is what looks like a 20 foot clock, marked off with prices around the dial. As the cart of flowers is wheeled in, the pointer on the dial starts to revolve, and the buyers, who have keyed in how many dozen they want to buy, strike the action key as the pointer passes by the price they are willing to pay. The prices go from high to lower, and the pointer keeps moving lower until all of the shipment is bought; sometimes no one bids, and they do it again. The atmosphere is much like a church bingo game. If you think about this Dutch auction process a minute, you see that it extracts the highest price, the last guilder, the collective audience is willing to pay. A search of the subject on Google fails to reveal whether they were using the Dutch auction process when Holland had the famous tulip bulb mania of 1636.
The IPO process this Dutch auction is supposed to replace was brought to its present form by the Philadelphia financier Jay Cooke. As you might expect, all the other tycoons hated Cooke for upsetting their apple cart, and there was much rejoicing when Cooke went bankrupt in the panic of 1873. He didn't die until 1905, and the joke was that his funeral was well attended by people who wanted to be real sure he was dead.
Cooke's opportunity came when the Federal government failed utterly in selling U.S. bonds to finance the Civil War. Cooke persuaded the Secretary of the Treasury (Salmon Chase) to let him sell the bonds for a commission. He was given the right to sell $500 million of the bonds, and by hiring 2500 sub-agents to go beat the bushes, he actually sold $11 million more than that. Oversubscribed. Cooke instructed his agents to forget about the bankers and tycoons, and go to the small towns, instead. Part of the process was to give a patriotic sales pitch to the editor of the local newspaper. Later in the war, Cooke repeated this process for a sale of $830 million more. From that point forward, one of the main things an investment banker does for his client is to provide a distribution network. If the distribution is successful, this process, too, will produce the highest possible price for the seller. If it fails to sell all the goods on the first offering, well, the price has to be reduced to clear the market. The incentives for the investment banker are therefore structured to reward success, and penalize failure. If you can't do it well, don't touch it at all.
Is it any surprise that you've been reading a lot about this coming IPO, for at least six months, in your local paper? By the way, Cooke later invested in a Utah silver mine and got rich again. A pious man, he donated his house in Ogontz as the site of the Ogontz School for Girls.
http://www.philadelphia-reflections.com/blog/1005.htm
After the Convention:Hamilton and Madison
|
| Signers Declaration Independence |
The Federalist Papers were written by three of the founding fathers after the Constitution was completed, to be published in New York newspapers for the purpose of persuading that State to ratify the proposal. It should be more emphasized that The Federalist was composed of arguments most likely to persuade New York, and that the authors held back from discussing matters of more concern to other regions of the nation. John Jay only wrote five of the essays, almost entirely concerned with issues of foreign relations. The remaining essays were written by Alexander Hamilton and James Madison, who became the leaders of two bitterly opposed political parties almost as soon as the Constitution was ratified. It is true that Madison's essays were mainly concerned with relations between the several states, while Hamilton's were overweighted somewhat with considerations of the powers of the various branches of government. But it is nevertheless striking that two men who proved to harbor strikingly opposed visions could suppress them to collaborate so extensively on discussions of the topic with such apparent unity of purpose. To some extent this paradox will probably always seem perplexing, but some of us are comfortable with the idea that it dramatically illustrates the speed and power of political adherents to reshape the mind of their leader. Today, it is common to slur politicians for pandering to lobbyists and special interests, but that too is a slanted description of more powerful forces shaping leadership opinion.
As a curious thing, both Hamilton and Madison were short and elfin, and both relied heavily on their ability to influence the mind of
|
| George Washington |
George Washington, who was quite a large formidable personage. Washington had no strong inclination to run things and, once elected, no particular agenda except to preside in a way that would meet general approval. He had mainly wanted a new form of government so the country could defend itself, and its soldiers get paid. Madison was a principal author of the Constitution while Hamilton's role in the design was small. On the other hand, the proceedings of the Constitutional convention were kept secret, and the official history was written by Madison. It would not be the last convention in which the real decisions were taken outside of the chamber, and often misunderstood by reading descriptions written by an activist secretary.
The difference between the two men immediately appeared in the way they chose a role to play. Madison the Virginian chose to dominate the legislative process as the leader of the largest state delegation within the
|
| Alexander Hamilton |
House of Representatives, in those days the dominant chamber. Hamilton sought to be Secretary of the Treasury, in those days the largest and most powerful department of the executive branch. It's now a familiar pattern: one wanted to form policy through dominating the board of directors, while the manager wanted to run things his way, even if that led in a different direction. Both of them knew they were setting the pattern for the future, and each of them pushed his ideas as far as they would go. Essentially, this could go on until Washington roused himself.
After a short time in office, Hamilton wrote four historic papers about two general goals: a modern financial system, and a modern economy. For the first goal, he wanted a dominant national currency with a mint to produce it and a bank to control it. Second, he also wanted the country to switch from an agricultural base to a manufacturing one. You could even say he really wanted only one thing, a national switch to manufacturing, with the necessary financial apparatus to support it. Essentially, Hamilton was the first influential American to recognize the power of the Industrial Revolution which began in England at much the same time as the American Revolution. Hamilton was swept up in dreams of its potential for America, and while puzzled -- as we continue to be today -- about some of its sources, became convinced that the secrets lay in the economic theories of
|
| David Hume |
David Hume and Adam Smith in Scotland, and of Necker in France. Impetuous Hamilton saw that Time was the essence of opportunity; we quickly needed to gather the war debts of the various states into the national treasury, we quickly needed a bank to hold them, and a mint to make more money quickly as liquidity was needed. It seemed childishly obvious to an impatient Hamilton that manufacturing had a larger profit margin than agricultural products did; it was obvious, absolutely obvious, that this approach would inspire huge wealth for the new nation.
|
| Industrial Revolution |
Well, to someone like Madison who was incredulous that any gentleman would think manufacturing was a respectable way of life, what was truly obvious was that Hamilton must be grabbing control of the nation's money to put it all under his own control. He must want to be king; we had just got rid of kings. Furthermore, Hamilton was all over the place with schemes and deals; you can't trust such a person. In fact, it takes a schemer to know another schemer at sight, even when the nature of the scheme was unclear. Madison and Jefferson couldn't understand how anyone could look at the vast expanses of open continent stretching to the Pacific without recognizing in this must lie the nation's true destiny. Why would you fiddle with pots and pans when with the same effort and daring you could rule a plantation and watch it bloom? If anyone had used modern business jargon like "Win, win strategy", the Virginian might well have snorted back, "When you say that to me, friend, smile."
http://www.philadelphia-reflections.com/blog/1134.htm
Reflections on Swensen
A. Techniques of rebalancing. Three directions to take this, occur to me.
1. Purchase 60/40 mutual funds and let them do the rebalancing. This would offhand seem the easiest way to do it, but what are the results? Do you think it would be practical to construct a 60/40 mutual fund by combining and rebalancing a world-wide index fund with a bond fund? Since bond funds are dubious, how about a mutual fund that contained the equity index fund and did its own bond juggling? How about a family of funds, mixing 50/50, 55/45, 60/40, 65/35, 70/30, 75/25. 80/20, as the investor chooses? Since this would probably amount to a pool that sold virtual shares, almost any combination seems feasible. But is it legal? At one time the fund of funds was illegal for whatever reason; possibly Vanguard has a right to object to such a secondary use of its funds. By getting a fund together, there should be enough volume to consider real-time rebalancing. When you consider doing it for yourself, the fund approach seems increasingly attractive.
2. Establish two brokerage accounts at Vanguard, one for equities and one for bonds, each of which is linked to its own separate money market sweep fund. Monthly rebalancing should be possible from the monthly statement, with the money market of one account purchasing shares of the other asset class as needed for rebalancing. A refinement of this might be to purchase shares of the "wrong" account and hold them until the capital-gains period has expired, then transfer to the "correct" account. I presume that transfers between two money-market accounts would be fairly simple, avoiding the perplexities of buying shares with one account but depositing them in another. Adjusting the order to reinvest dividends or not reinvest seems like a nice refinement, lessening the need to sell things.
3. Doing the whole business in Quicken. If you are thinking of doing this for clients, you might want to avoid the hazards of actually doing the transactions, simply sending the client a set of suggested monthly instructions to give to his broker or transact electronically. This might seem attractive to people running trust funds, who already carry the fiduciary hazard.
B. Selecting or deselecting, those companies who regularly rebalance their own debt/equity ratios. One of the important insights I get from Swensen is that company treasurers are often rebalancing in the opposite direction from the investors. That is, issuing more stock as their price/earning ratio gets ridiculously high, buying back their stock when the price gets cheap. Not all companies do this, and those who do probably reduce their volatility considerably. If this is a really major reason for investors to rebalance in the other direction, then there may be a considerably reduced value in rebalancing companies that are doing it for you, and an enhanced value in rebalancing the rest.
1. Since you don't know the intentions of a company, and anyway they may change treasurers without your knowledge, there is a need to find some surrogate for this activity. That's particularly true of companies that may only do it in one direction, and thereby alter the balance between raising equity capital and borrowing. Does the p/e ratio seem adequate to you as a surrogate? If not, is there a practical alternative?
2. I've been told that small companies borrow from banks, large companies issue bonds. Is this of any practical value to an investor? Are they a distinct asset class? After all, you can change your debt/equity ratio by adjusting either component, or you can reduce your total external capital requirement by using internally generated funds. Does this issue get you anywhere in selecting asset classes?
3. Companies or asset classes with a lot of volatility apparently give Swensen an opportunity to rebalance profitably. Aside from that, it is better for a company to have low volatility or high? If all companies got religion and did their own rebalancing, would there be any value in investors continuing to do it? To put it another way, just where is the value added by rebalancing? What signs would you look for, to decide that rebalancing is no longer cost effective?
C. Life insurance to reduce taxation. The October 18, 2006 Wall Street Journal observes that the IRS has issued clarifying instructions about using life insurance to reduce taxation; it also goes on to say that lawyers will charge you $10-20,000 to read them to you. But, apparently it's ok to do this if you follow the rules. Essentially, life insurance investments compound internally without taxation, and also escape estate taxes if you donate ownership of the policy to your heirs.
1. In the case of a spousal trust, the estate taxes are already waived, so one complexity is reduced or eliminated. There is no need to transfer ownership of the policy.
2. So the issue reduces itself to avoiding dividend and capital gains taxation, short and long. I gather they have not thought of the requirement to distribute all income from a spousal trust, so there is a chance some agent would balk at the technicality.
3. So, except for this risk, it's a simple trade-off between the fees for insurance versus the taxes saved, and I strongly suspect the fees are worse, so the issue isn't worth considering at all. But of course I don't know what the fees are, so I don't know the threshold level where tax avoidance becomes an important asset. Even the health issue is semi-answered, since you could escape a physical exam by selecting an annuity life insurance; more fees to overcome, of course.
D The same Wall Street Journal includes a quotation from unknown research that calculating the dollar value weighting of mutual funds versus fund results demonstrates that all reasons for not buying-and-holding combined show a 1.5% penalty for all strategies other than buy/hold.
1. Therefore, the 0.5% advantage of rebalancing over buy/hold is actually a 2.0% advantage over the penalty for deviating. That's a more substantial argument than has so far been made for rebalancing, but needs to be re-examined to be sure the penalty is not actually hidden in the 0.5% claim, since if so that would convert it into a 1% loser strategy.
2. For no visible reason, broker-handled funds average 0.5% lower return than direct-buy funds. May I suggest some hidden kick-back has surfaced?
3. Low-volatility stocks seem to produce an 0.8% advantage over high-volatility stocks and a shocking 2.8% difference on a dollar-weighted basis, suggesting volatility makes investors lose their nerve in addition to the innately inferior performance. Is it reasonable to give them a neutral weighting in a portfolio?
http://www.philadelphia-reflections.com/blog/1145.htm
BEA Monitors the Economy
|
| Global Interdependence Center |
The Global Interdependence Center meets at the Philadelphia Federal Reserve, organizing frequent seminars of outstanding quality about finance. This week, the speaker was Andrew Hodge, head of Profits Research, U.S. Department of Commerce, Bureau of Economic Analysis. Someone there once had the brilliant idea that aggregate national income was almost identical to Gross Domestic Product, so national income could be easily derived from tax information at the I.R.S. Originally probably seen as a way of verifying GDP statistics derived in other ways, aggregated income and profits looks in some ways to be superior to the data coming from Wall Street earnings reports. As a leading indicator, it appears to be outstandingly effective in predicting an impending upswing in the business cycle, just about at the time everyone is getting discouraged about downswings . It's not so good at predicting market peaks.
|
| Wall Street |
seems to be superior to Wall Street earnings reports in four ways. 1) Wall Street is not particularly useful in distinguishing domestic from foreign activity within multinational firms. 2) Wall Street reports generally attempt to avoid seasonality noise by comparing this-month with this-month-last- year. If market direction has changed during the past year, downswings may cancel upswings and such comparisons can be misleading. 3) at market inflection points, volatility gets exaggerated by firms going out of business at the bottom or businesses formed or expanded at the top. 4) Wall Street is only 40% of the economy. The other 60% has private ownership, particularly in S-corporations.
Out of studying the differences between the two types of statistics about the economy, it emerges that the tax-derived BEA statistics are quite good leading indicators, particularly when the economy is in a trough. They are sort of leading indicators of coming market peaks as well, but they lead by longer intervals. A lead of as long as a year isn't very useful as an indicator.
As the jargon goes, that's the take-home message. BEA data is pretty good at predicting market bottoms. But some interesting sidelights appear, as well.
Our economy is becoming less volatile, with milder cycles and less frequent ones. But national income is just as volatile as ever, particularly in stock prices. This would appear to be due to the steadily increasing proportion which is in the financial sector (or decreasing proportion in the manufacturing sector). The financial sector is characterized, world-wide and for a long time in the past, as having "sticky" wages and costs. With the cost side comparatively inert, profits becomes much more volatile. In the final analysis, the stock market becomes more volatile than the underlying economy.
A final conclusion is my own. If the best personal investment vehicle is a broad index fund representing the whole economy, then you had better be watching national statistics like the BEA, rather than sector statistics. At the moment, the problem is deciphering what's available on BEA.gov in tabular rather than graphic format.
http://www.philadelphia-reflections.com/blog/1153.htm
Big Pharma Loses Momentum
|
| Chemical Heritage Building |
listened to the analysis by G. Steven Burrill, a noted venture capitalist who specializes in this area. The big firms, like Merck, Wyeth, Johnson and Johnson have recently reported disappointing earnings, and it seems they have been reducing their American research divisions, with more use of small niche research firms as subcontractors, both American and foreign. As they tend to reduce their emphasis on research and manufacturing, Steve Burrill feels they will concentrate mainly on marketing. That sounds like good news for Wyeth, with its traditional focus on marketing, and bad news for Merck, which has always been strong in new product development.
|
| G. Steven Burrill |
Burrill also has his eye on the statistic that only 8% of health care spending is devoted to pharmaceuticals, while 40% is spent on nostrums to promote wellness. The sly observation slipped out that if 40% of health spending goes for products of questionable value, just think how big the market would be for new products that really do promote some wellness. So that, in his opinion, is where investors will prosper.
Some of us in the back of the room were troubled by these thoughts. In the first place, the major drug houses have long operated with a financial business plan that takes profits from old established drugs and uses them to pay for research on the new drugs of the future. Small niche companies, that only work on one phase of this cycle, have had difficulty financing expansion and mostly accepted a subsidiary role. You might develop a wonder drug in your garage, but you had to license it to a big pharma concern in order to thrive. The thought pops up that the protracted wait for
|
| PA Drug Industry |
Food and Drug approval might be stretching the old-drug/new-drug interval to the point where patent expiration on the current revenue generators interrupts the internal recycling of profits into new drug research. That's been a threat ever since the passage of the Kefauver Amendment, but a new twist has appeared in the form of a tidal wave of cheap liquidity from the Far East, working its way into venture capital pools and assisting the niche firms with their historical shortages of capital. If that's a significant feature of the present environment, it could fizzle out when the Far East stops pumping liquidity into world markets. A new Premier of Japan might be all it would take, or else a drop in the price of oil. Japan's interest rates are now held below 1%, while a realistic price for oil is $45 a barrel, not $65.
And as far as the promotion of wellness is concerned, that concept might just turn out to be a fad. Congress doesn't try to evaluate scientific trends, but it is very fond of insisting that "if it ain't broke, don't fix it". A major advance in the treatment of cancer and or Alzheimer's Disease might very well dampen Congressional enthusiasm for spending 15% of Gross Domestic Product on what's then left to treat, which would mostly be wellness.
http://www.philadelphia-reflections.com/blog/1232.htm
Quaker Gray Turns Quaker Green
|
| Miriam Fisher |
Miriam Fisher Schaefer, at one time the Chief Financial Officer of the American Friends Service Committee, had to cope with the economics of renovating the business headquarters complex for various central Quaker organizations. They're housed in a red-brick building complex, naturally, located on North 15th Street right next to the Municipal Services Building of the Philadelphia City Hall complex. The original building within the complex is the Race Street Meetinghouse, funds for which were originally raised by Lucretia Mott. The Quakers needed to expand and renovate their offices, a nine million dollar project. Miriam, a CPA, calculated that the job could be made completely environment-friendly for an extra $3 million. The extra 25% construction cost explains why very few buildings are as energy-efficient as they easily could be. However, in the long run a "green" building eventually proves to be considerably cheaper. Not only would a green Quaker headquarters be a highly visible "witness" to environmental improvement, it would pay for itself in reduced expenses after about eight years. That is, if friends of the environment would provide $3 million in after-tax contributions, they would provide a highly visible example to the world, and reduce the running expenses of the Quaker center by a quarter of a million a year, indefinitely. Effectively, this is a charitable donation with a permanent tax-free investment return of 12%, quite nicely within the Quaker tradition of doing well while doing good.
|
| Rockefeller Center |
Energy efficiency isn't one big thing, it is a lot of little things.If you dig a well deep enough, its water will have a temperature of 55 degrees, and only require heating up another 15 degrees to be comfortable in winter, or cooling down thirty degrees to be comfortable in the summer; that's described as a heat pump. Then, if you plant sedum, a hardy desert succulent plant, on the roof it will insulate the building, slow down rainwater runoff, and probably never have to be replaced. Rockefeller Center, you might be interested to learn, has a "green roof" of this sort, which has so far lasted seventy years without replacement.The Race Street meetinghouse was built in 1854 and has so far had many roof replacements, each of which created a minor financial crisis when the need suddenly arose.
The ecology preservation movement is full of other great ideas for city buildings, because buildings --through their heating, ventilating and air conditioning -- contribute more carbon pollution to the atmosphere than cars do. For another example, fifty percent of the contents of landfills originate in dumptsters taking construction trash away from building sites. What mainly stands in the way of more recycling of such trash is the extra expense of sorting out the ingredients. Catching rainwater runoff allows its reuse in toilets, eliminating the need to chlorinate it, meter it, and transport it from the rivers. And so forth; you can expect to hear about this sort of thing with great regularity now that the Quakers have got stirred up. You could save a lot of air conditioning cost by painting your roof white. At first, that would look funny. But do you suppose oddness would bother the Society of Friends for one instant? No, and you can expect them to make it popular, in time. People at first generally hate to look funny, but with the passage of time they grow to like looking intelligent.
A lot of people want to save the planet. So do the Quakers, but they have come to the view that the public is more easily persuaded to save money.
WWW.Philadelphia-Reflections.com/blog/1236.htm
http://www.philadelphia-reflections.com/blog/1236.htm
Immigration
|
| Gold |
We're alluding indirectly to immigration as a general topic in this article, because sooner or later every discussion of every aspect of immigration adds a claim of "fairness" to the balance. In this case, plain talk about fleecing peasants first requires definition of an unfamiliar term. Seigniorage, also spelled seignorage, or seigneurage, originally only denoted a fee which governments charged for milling coins out of precious metal. Developing nations often didn't have the necessary technology, so they paid some other country to do it for them. That was fair enough, but soon "trimmers" would shave the side or surface of coins and gather up the dust for sale. That practice led to clever serration of the formerly flat edges, much simpler than weighing coins to detect cheats.
|
| immigration |
In time, improved printing techniques allowed governments to keep precious metal in vaults and issue paper currency, some of which inevitably got burned, shredded or lost. Since the issuing government could then keep the whole value of lost currency minus printing costs for itself, the term seigniorage evolved to include this more lucrative method for governments to cheat citizens, abusing their monopoly on currency issue. There might seem to be some temptation for governments to print money on fragile paper, except it is overbalanced by the need to make it hard to counterfeit. Happily, this sort of seigniorage always seemed less offensive because everybody agrees that if you have money in your pocket, shame on you if you lose it. As transactions become more sophisticated however, some innovative modern arrangements which loosely fit the definition of seigniorage become a new source of moral dismay. One facet of currency razzle dazzle concerns immigration, which is itself always a contentious matter.
|
| Spanish |
Right now, it is authoritatively estimated that the Social Security program has collected half a trillion dollars in Social Security and Medicare taxes, whose rightful owner is impossible to determine. Some of the beneficiaries may have died without claiming the money, so some of this topic might be classified as escheat, or abandoned by the owner. But very likely the bulk of this money, under modern circumstances, was withheld from illegal immigrants by their employers, either without their knowledge or using counterfeit social security numbers; and the fugitive status of the owners made them reluctant to claim it. Half a trillion is five hundred billion dollars.
This sort of discovery leads to some troublesome thoughts. If the immigrants are legal, or if now illegal may receive amnesty, they will be fully eligible for social security benefits. You might say they earned such benefits, but our tormented public pension system is in fact almost entirely funded by one generation funding its parents' generation. That borrowing between generations means paying for it later, so of course it enjoys the politician spin-term of "pay as you go". An American of multi-generational descent has paid for his parents while he works, and expects to have his own pension paid for by his children. An immigrant, never mind his citizenship, is paying the same taxes, but has no parents as beneficiaries. When the newcomer retires he may be a burden to his children like the rest of us, but his current payments go into the black hole of government deficits without paying for any parents. Here we have seigniorage on a much grander scale. The money presently diverted from the usual channels by this ingenious arrangement is calculated to be two trillion dollars, or four times as much as the paper money seigniorage, and many many times as much as the shaved-coins scam. Just for comparison, consider that America is estimated to have 900 billionaires. Their aggregate net worth is probably only slightly greater than the amount our government garners from illegal immigrants.
The matter really does seem to be important enough for us to learn how to spell seigniorage, and even reconsider whether to apply the term to its most popular current manifestation.
http://www.philadelphia-reflections.com/blog/1254.htm
Herbert Hoover, Mining Engineer
The tragedy of Herbert Hoover
|
| Herbert Hoover |
is poorly understood without considering two issues which heavily influenced his thinking. First, he was forty years old when the Federal Reserve System was created in 1913; to him in 1929, that's still an experiment. Secondly, the use of gold money had proven over many centuries to be the one and only defense against unrelenting pressure by governments to debase the currency. Hoover's attitudes were certainly reinforced by his own career. He became a rich man consulting and investing in metal mines. Although not born wealthy, when he left the Presidency in the depths of the depression, he moved to an apartment in the Waldorf-Astoria.There are no other examples of such an energetic, imaginative and effective executive in the White House.
|
| Hilter & Mussolini |
After leaving his meteoric twenty-year business career in boredom at its lack of challenge, he took on a monumentally successful job of administering famine relief to a European continent devastated by World War I. On occasions in the course of it, he personally confronted both Hitler and Mussolini with disdain. Franklin Roosevelt was so impressed that he suggested him as a Democratic candidate for the Presidency; Hoover declined. He was nominated at the Republican convention on the first ballot, elected in a landslide. As President, he hit the ground running, simply peppering the Congress with innovative programs and proposals. A substantial part of what would be known as Roosevelt's New Deal grew out of initiatives that Hoover had begun during his short presidency.
|
| Stock Market Invincible |
Under the circumstances, it is not surprising that Hoover was disturbed by the irrational exuberance of the stock market in 1927-28, undisposed to resist proposals by George Harrison of the Federal Reserve to deflate the stock bubble by tightening the money supply. Some observers feel the fatal illness of Benjamin Strong (President of the New York Branch) weakened resistance of the Federal Reserve to this adventurism. The stance of Hoover is not now known, but it must have been a toss-up between lifetime allegiances to hard-money and resistance to government intrusion into commerce, particularly by a comparatively new agency. In any event, tightening money worked too well. The stock market tanked in October 1929,
|
| Stock Market Crash |
followed quite promptly by the whole economy. The irony is that Roosevelt proceeded to run for twenty years with the claim that the Depression was caused by Hoover's failure to restrain the 1928 stock bubble. In fact, the befuddled Federal Reserve bounced around during Roosevelt's time in office as well, turning a recession into the deepest depression in history. When England went off the gold standard, the Federal Reserve tightened again to prevent a flight of American gold to speculators. The result was a run on the banks, so the Fed loosened again, and half of the American banking system disappeared. Following the 1929 crash, the stock market continued to go down -- for fourteen years.
|
| Milton Friedman |
After a while, it became clear to everyone that three things -- the money supply, the economy, and the stock market -- go up and down together. The basic question was the same as the political one -- which one goes first, and which ones follow? Although the political parties continue to spin the facts, the world of economists seems nearly unanimous that Milton Friedman and Anna Schwartz and Milton Friedmansettled the matter some time ago. Their classic work of scholarship,A Monetary History of the United States 1867-1963 , traces out four American and eleven foreign examples of shifts in monetary tightness which were unrelated to the economy, and demonstrate that the economy promptly follows the direction of the money supply. Almost all of these anomalies took place during the interval after World War I, when the gold standard was temporarily suspended. Different countries returned to gold at different times, and after the 1929 crash abandoned it in different ways at different times. Since the publication of Friedman's work, independent scholars have provided over forty confirmations of the sequence, money leads, the economy follows.And politicians posture. There is a disconcerting note, however. Almost all of the examples studied by monetary scholars could be used as proof of quite a different slogan. In almost every case, a country rescued itself by abandoning the gold standard, and the sooner it got rid of gold, the better it did. That would of course be true, during a period of concealed deflation where exuberant economic growth exceeds the expansion of gold supplies. A serious weakness of the gold standard has certainly been identified, leading to expressions like barbarous relic and crucifixion on a cross of gold. But there is the other, time-honored, side of it; since the beginning of history, governments have been tempted to inflate the currency in order to dishonor their debts. Governments will do so again at the first opportunity. Without the discipline of a gold standard, the only dependable defense against the catastrophe of hyperinflation is now the courage of the Federal Reserve, and the rather faint hope that we have learned everything about monetary policy that is important to learn.
http://www.philadelphia-reflections.com/blog/1258.htm
Africa Comes to the Schuylkill
|
| Ghazvinian book |
A journalist, John Ghazvinian, recently toured the many countries of Africa, wrote a book about it and carried his message to the Right Angle Club of Philadelphia. Philadelphia does not think of itself as particularly involved in oil matters, or African ones. But the fact is the refineries on the Schuylkill down by the airport generate two thirds of the gasoline now used on the East Coast, and right now it mostly comes from Nigeria. There was a time when the crude oil coming to Philadelphia came from Venezuela, but politics are a little unpleasant there at present, and anyway Venezuelan oil is heavy and full of acids. The refineries which specialize in that kind of heavy oil are on the Gulf Coast. Long before the Venezuelan era, the Philadelphia refineries were constructed to refine crude oil from upstate Pennsylvania. They were once the main source of dominance of the Pennsylvania Railroad, because oil refining from Bradford County gave the Pennsy a return freight, whereas the competitive railroads running out of New York and Baltimore had to return from the West without cargo.
|
| African Map |
There are 54 countries on the continent of Africa, quite different from each other in character. One dominant characteristic of Africa is its lack of natural ports, and even the Mediterranean ports are cut off from the rest of the continent by the huge transcontinental stripe of Sahara desert. Major wars and famines, monstrous genocides, unspeakable cruelty and poverty go on there without much notice by the rest of the world.
|
| Nigeria |
The largest country in Africa is Nigeria. Anyone with even minor dealings with Nigeria soon sees that corruption and dishonesty pass all Western imagination, and they have serious tribal warfare as well. The discovery of large deposits of oil in the region faced the international oil companies with a rather serious difficulty. For instance, Shell Oil has had over 200 employees kidnapped for ransom, and is seriously contemplating abandoning its whole venture. At the moment, corruption is coped with by constructing oil wells a hundred miles out in the ocean.It's almost true that the huge tanker ships make from Philadelphia and return, without the crew talking to any natives of Africa.
We hear that genocide is in full bloom in the Sudan, and that poverty in that country similarly passes belief.
|
| Chad Poverty |
They have oil in the South of Sudan, so we may hear more of it. Chad has poverty and oil, and civil war. They have a big Exxon facility, but there isn't a single gasoline station in Chad. At the moment, Angola has paused in its enormous civil war, which killed millions, and Chevron will surely encounter unrest before it is done. Gabon appears to be extremely prosperous, from oil money of course, but they are being ravaged by the Dutch Disease, of which more later.
Apparently, Equatorial New Guinea sets some sort of record for wild behavior. It has lots of oil, and a strong Chinese influence. The current
|
| Mbasogo and Jintao |
President of Equatorial New Guinea got his job by shooting his uncle. But don't feel too sorry for the uncle, who used to have an annual Christmas morning celebration, consisting of herding his enemies into a football stadium, and shooting them for the edification and entertainment of the populace. After listening to Mr. Ghazvinian, it seems small wonder that so few American tourists, or journalists, or even missionaries, manage to complete extensive African excursions. As everyone notices, if you don't have journalists, there is never any news.
Let's turn to the Dutch disease,
|
| David Ricardo |
of which Africa currently displays many examples likely to torment economics students for decades after Africa eventually rivals Houston. Let's start with David Ricardo, who electified the Nineteenth Century world of economics with his principle of comparative advantage. Ricardo pointed to the obvious truth that always and everywhere a nation does best for itself by identifying its best economic feature and then sticking to it. If every country wakes up and does that, every country must then trade with its neighbors for other things it isn't so suited to make. Consequently, tariffs and trade barriers are a hindrance for everyone, in time impoverishing all nations in the cycle, whatever short-run advantages of tariffs may seem enticing.
|
| North Sea Gas |
So far as I know, Ricardo was quite right, but someone had better hurry up and reconcile his underlying premise of comparative advantage with the Dutch Disease. The Dutch disease was identified and named by an anonymous writer for the London Economist about thirty years ago. Noticing that the Netherlands experienced a marked worsening of its general economy after the discovery of North Sea gas deposits, the observer for the magazine concluded that sudden accumulation of wealth in the gas industry led to a rise in the value of the Dutch currency, soon making it impossible for non-gas industries to export, unable to compete at home with now-cheaper foreign imports. Naturally, investors rushed to invest in gas, sold their holdings in other industries, and Holland was propelled in the direction of a one-industry economy, quite at the mercy of fluctuating prices of gas. Thus was the Dutch Disease born, and Ricardo's principle of comparative advantage exposed to quite a severe challenge from which it has not completely recovered. This is important, so how about a simpler description: When gold is discovered, people drop tools to have a gold rush. Wealth lost from dropping tools is greater than wealth gained from the gold.
Fear of the Dutch disorder seems to be the reason why the Chinese are buying our Treasury Bonds, the Japanese engaging in the astonishing "carry trade", and the Arabs buying American private equity funds. The common strand through all these schemes is this: By sending their bonanza savings abroad, they "sterilize" them from their tendency to force their currency upwards. They are exporting inflation, but also endangering their own struggling non-bonanza industries, which are the main hope for diversifying their economies and getting rid of the Dutch effect. Somewhere during this balancing act, politicians get involved, and make things worse. So they call in their generals and admirals, to explore solutions we prefer they were not in a position to explore. Simpler description: When you discover oil, inflation soon follows. And all too often, revolution follows that.
The 1787 the American Constitution unknowingly cured thirteen cases of the Dutch Disease, by imposing absolute freedom of interstate commerce. After eighty years, the benefits of this national union would persuade the North to bleed and die for it. Although the Confederacy thought they were fighting for their way of life, meaning slavery, even the Southerners today recognize they are better off in a Union. Unfortunately today, the European nations are still having a hard time believing the benefits of union could possibly outweigh their allegiances to language, religion, and the wartime sacrifices of their ancestors. They are very wrong, but we are wrong to sneer at them. Except for maybe Switzerland, it is difficult to name another instance in all of history where several independent states gave up local sovereignty for the benefits of a diversified economy with local pockets of comparative advantage. Let's restate it again: the Dutch disease is a result of sudden single-industry prosperity in a country too small to control it.
By the way, what eventually happened to the Dutch? It seems likely that absorption of little Holland into the European Common Market helped dilute the corrupting effect of gas prosperity. It suggests the possibility that Dutch can be reconciled with Ricardo through the common denominator of reduced national barriers to trade and currency-- reduced sovereignty in a milder form. But it's a hard slog. Maybe we could envision annexing Alberta to soften the commotion of oil tar, but it takes a lot of imagination to see the amalgamation of China and India, any time soon. There may thus be nations too big to merge, but nevertheless it would probably be less destabilizing to merge with all of Canada than just with Alberta if you overlook the obvious fact that it is easier to persuade a small country than a big one. Just kidding for the sake of example, of course, since Canada shows no interest in the idea.
Meanwhile, take a look backward from the highway overpass the next time you travel to the Philadelphia Airport. There's a lot more going on in those refineries than just black liquid flowing into steel pipes.
WWW.Philadelphia-Reflections.com/blog/1261.htm
http://www.philadelphia-reflections.com/blog/1261.htm
Hayek Confronts Keynes
|
| The Four Horseman |
Catastrophes seem to have fashions. There was a time when the four horsemen of the apocholypse -- pestilence, war, famine and death -- rounded up the main things to keep you awake with worry. Perhaps it is too soon to gloat, but pestilence and famine seem tamed, even ready to be "put down". War remains a serious cause for concern, but a case can be made that two economic disasters, inflation and recession, have moved up to dominate our nightmares. Indeed, it is the Summer of Love in 1967 which seems to mark the watershed moment, when basic survival stopped being the main risk in life, supplanted by threats to existence that are largely self-inflicted. The first warning of this sea-change appeared in the fall of 1929, when it seemed to be deflation, unemployment and all the other havoc of economic recession that caused wars, famines and pestilences. The 1929 crash did not send a fully readable message however, because it was so one-sided. It took another 37 years for the world generally to appreciate there was an opposite side to it; inflation was just as bad as recession, and both problems were largely man-made. One person gets most of the blame for the distorted emphasis. John Maynard Keynes, later Lord Keynes, was the prophet who seemed to save the world with the doctrine that the deflation emergency was so dire that civilization could not afford to worry about the long-term drawbacks of deliberate inflation. He persuaded world leaders to inflate the currency before civilization disappeared. After all, in the long run we are all dead.
|
| Roosevelet Stamps |
There's an irony that Franklin Roosevelt was a hobbyist who collected postage stamps, because stamp collectors were about the only Americans who were dimly aware that Germany and Austria had hyper-inflation as a main curse. Austrian postage for billions of marks gradually filtered into our collections of odd foreign stamps, arousing mild international curiosity. But Friedrich August von Hayek was living in the midst of it, painfully aware of its pain and chaos. It became the central focus of the life of an aristocratic decorated war veteran who became a distinguished economist, eventually winning a Nobel Prize. What caused inflation? Why didn't it stop? Why was it so destructive? How can inflation be prevented? How could Maynard Keynes possibly urge the leaders of nations to inflate their currency deliberately?
|
| Maynard Keynes |
As a scholar in the dismal days of world depression, Hayek had a hard time, living for long periods on the charity of a few philanthropists who recognized his talents. He is best known for his scorching analysis of collectivism, a craze which swept through academic and political leadership, particularly in Europe, and his persuasive views probably constitute the main intellectual force which ultimately ended the Cold War. It is seriously stated that personal animosity by Socialist-leaning academics materially injured his academic career, although it probably gave him more time, and motive, for serious writing. Inflation and political collectivism do not seem tightly connected, but it is easy to observe that command economies do inevitably clash with private property and market decisions. For the present, it seems useful to set aside Hayek's monumental political achievement of discrediting Communism, and focus on his penetrating view of inflation.
|
Philadelphia PA Mayor Nutter received two years in a row $60,000 checks to help keep open and operate the city swimming pools.
These checks came from AmeriChoice Health and on the surface seems like fine gifts.
Yet, they are Bribes non the less, these checks come from a company who receives all its money from the Federal Government as a vendor for Medicare Medicaid services is not allowed to offer bribes kickbacks and money gifts of any kind in order to promote its share of the market place.
This is not allowed as a use of your taxpayers dollars yet it happens.What does it really cost the City of Philadelphia to receive this money?
Americhoice Health has a long history of corruption over the years yet seems to be protected by those who are responsible to over see their actions why is that?