As Computers Displace Money, Trust But Verify

The Internet has made computing power ubiquitous. No longer need individuals be at the mercy of institutions with whom they do business. However, new habits are hard to learn, so individuals still hesitate to challenge institutions. Sophisticated but inexpensive software from companies like Intuit nevertheless makes it nearly effortless for humble customers to have every bill and transaction cross-checked for them, and actually win the resulting arguments. It's high time balance was restored, because computers do send out lots of errors which have the effect of creating or destroying wealth. Indeed, much of the current credit muddle grows out of abbreviated records systems, organized for the convenience of only one party in a transaction. The transaction system would be streamlined, not hampered, by more adversary challenge and cross-verification at the level of individual items rather than merely cross-footing the totals. Indeed, add the filtering of information by third-party intermediaries, plus monitoring by regulators, and a need for some defined fault-tolerance emerges from the hopeless complexity. We must restructure relationships to ensure that small errors are trapped and isolated, not allowed to aggregate to a point where mysterious failure of the books to balance can bring enormous systems to a halt. In this article we mention the vulnerability of banks, financial derivatives, the Federal Reserve system, and the health insurance system. If everything worrisome went wrong at once, it could be quite a mess.

For the opening example, this article was written two days after the author discovered a sizable error in his stock brokerage reporting. It was in my favor, else I might sound less relaxed. Even so, the condescending stone-walling encountered was a powerful warning, since at the end of the day it proved to be entirely the fault of a software vendor for several brokerage houses. A few decades ago, a housewife would have been in a stronger position with her department store billing department because it was effective to refuse to pay the bill. Just try that today: the current practice of employing vendors to handle merchant billing soon separates the dispute from the circumstances of it. That's an underlying difficulty with all third-party arrangements; expedients selected to avoid a problem often make matters even more frustrating for the defenseless counter party, who eventually longs for government intervention.

To a certain extent, customers have been forced to agree to this situation voluntarily, because of the mind-boggling complexity or greater cost of not agreeing. Until about fifteen years ago, it was conventional to place engraved stock certificates in a safe deposit box. Dividends were received as paper checks, endorsed and deposited in a bank. The bank microfilmed the checks, the customer could photocopy them.

Power was then reasonably symmetrical, arms-length and simple in concept even if overall it was an expensive, inefficient transaction. A mountain of receipts, a quarterly blizzard of mail. At tax time, an error-prone chore to manage the papers. So, in response to the gentle suggestions of tax accountants, it seemed heaven-sent to take certificates out of bank vaults and place them in "street name" with a broker. Tax time condensed to attaching a single piece of paper, the Form 1099, to the tax form. Instead of calling a broker and asking, "How's the market?" people now go to his website and review how a whole portfolio is performing, hour by hour. The efficiency gain is enormous; the transaction cost reduces at least 90%. But then -- you discover seven-figure errors can be created by an invisible computer programmer, initially denied as impossible and then defended with a blizzard of words. Worse still, the error did not come from an employee of the broker, it came from an employee of his software vendor in another city. The error did not surface in the brokerage house records, but in what was transmitted to a second software company a continent away, whose phone is answered in India. Two questions arise: what would have been the predicament if the error had been against me instead of in my favor? And secondly, what might have happened next if the misinformation about my imaginary windfall had been sent, not to a software house, but to the Internal Revenue Service as a Form 1099?

Now think of another order of magnitude. Instead of a housewife coping with the department store bill, replace her with a million brokers, a million investment bankers, a million electronic exchanges, and regulators, and tax collectors. Just one quantitative trader is known to handle ten thousand transactions an hour. Since transactions are global, a zillion foreign counter parties get orders for a zillion zillion transactions. Underneath all this, a magnified error can emerge from one software vendor placing unwarranted faith in one programmer trainee, in a hurry to get home for dinner.

Bye, Bye, Banks

Banking is a comparatively recent invention; in its present form, it's only a couple of centuries old. Paper certificates circulated as money, representing precious metals like gold and silver in the bank vaults, eventually concentrated in Fort Knox as Federal Reserves. When the economy grew faster than the supply of gold, silver was also monetized, then diluted by only parrtial reserving. Finally a couple of decades ago we abandoned precious metal reserving entirely, and resorted to partial reserving leveraged to a virtual concept known as Federal Reserves whose quantity depended on the behavior of American inflation. Almost the whole world soon depended on the American Federal Reserve to stand behind its virtual dollars, formerly redeemable in gold or silver, but now based on inflation targeting. That is, the Fed sets a target of something like 2% inflation a year, and either absorbs currency or floods the world with currency, sufficient to maintain a steady match to the target. It's a little uncomfortable to see the standard of measurement shifting, from inflation as most people understand it, to "core" inflation, which subtracts the cost of food and oil. Especially oil. It's additionally disquieting to realize that the Fed is dependent on its own computers, reading other people's computers, all subject to the frailties of computers. to determine the degree of match to the target. We sort of got into this fix because the supply of precious metals was inelastic; perhaps the present expedient could become a little too elastic because it is so heavily dependent on vast streams of computerized information. Garbage in, garbage out?

Meanwhile, banks simply had to surrender to the obvious efficiencies of using electronic stored-program calculators. Paper checks, canceled checks, and bank tellers are consequently disappearing. Banks themselves are disappearing, as anyone can see by looking at the abandoned stone tombs on America's main streets. At the moment, the process is one of concentration of smaller banks into bigger ones; eventually, there will be some kind of transformation of the way they conduct business to a point where banking could effectively disappear. Who needs banks, anyway? One significant answer to that question is that, the Federal Reserve Bank needs them. And the rest of us need the Federal Reserve because that's how the value of money is determined nowadays.

Customers, however, don't need banks for deposits; money market funds pay higher interest rates. There's no need for banks to provide loans; credit cards do that for small borrowers, while big borrowers float bonds through an investment banker. Bank vaults may be useful to store grandmother's pearl necklace, but no one needs vaults to store securities, which are now mainly held as bookkeeping entries in "street" name. People used banks for the origination of mortgages, but other institutions could serve as well. Anyway, home mortgage origination is what broke down in August, 2007, when banks eluded Federal Reserve lending constraints by selling mortgages to subsidiary corporations they often owned. To repeat, we need banks because the Federal Reserve needs banks to control the currency, through regulating loan volume, which is achieved by regulating the amount of reserves that banks are required to maintain. Reflect on how that matters to currency.

Before a bank makes a loan, only the depositor owns the money in question. After a loan is made, two people have a claim on the money, the borrower and the depositor. Although there is a fine distinction between money and credit, between money and liquidity, the real point is that making a loan effectively doubles the money. If a bank is then only required to keep half of its total loan volume in reserve, the money in circulation is multiplied four times what it was, and so on. Loan volume is also controlled by its scarcity value, which is indirectly affected by setting short-term interest rates. Unfortunately, cheaper money is worth less -- the dollar goes down in relation to the currency of the rest of the world. There are probably other ways which could be devised to control the currency, but a time of frozen credit markets is a dangerous time to consider radical changes in the currency. If the Fed is forced to make such changes, they had better be correct.

It's unfortunately also true that radical changes can only be made when people are scared stiff by a crisis. Is it entirely out of the question that we may soon need to scrap the Federal Reserve system? Just think back to the bitterness when Hamilton and Jefferson, later followed by Biddle and Jackson, fought about whether central banks were necessary at all. Or, more recently in 1913, when Wall Street and the Progressive movement fought about whether there was a need to create a Federal Reserve. Disputes about financial matters have been at the core of most political party disputes, since the founding of the Republic. Decisions made in the past have not always been the right ones. Nevertheless, since the banks anyway appear to be on a long slow slope to extinction as a result of the computers that briefly made them prosperous, maybe we should revise the way the Federal Reserve controls currency. Without the Fed to defend them, banks' prospects look bleak.

National Debt, National Blessing

In 1789 while arguing for the establishment of a National Bank, Alexander Hamilton made one of the most famous counter-intuitive assertions of his controversial career. "A national debt, if it is not excessive, will be to us a national blessing".

The very suggestion of such an idea enraged Thomas Jefferson and his Calvinist adviser, Albert Gallatin. James Madison, ever the political schemer, immediately recognized a new bargaining chip in his move to relocate the national capitol to Virginia. Political parties were promptly invented to mobilize votes on both sides, and the national bank remained a divisive issue for half a century afterwards. Neither a borrower nor a lender be; how could anyone, then or now, say debt was a blessing?

Indeed, that's evidently how the leaders of Singapore, Malaysia, Australia, China and several other prosperous states still feel about it. While not eliminating taxes, these countries accumulated surpluses, and created sovereign-wealth funds. Having paid off the national debt, and still finding a national surplus, what else are you going to do with it? These countries hired investment advisers to buy stock for the funds, evidently feeling American stocks were the safest bet; it's hard to criticize that conclusion. In the present credit crunch, they are investing five and ten billions per transaction in the equity of America's premier investment banks. So far, they only acquire 5 or 10 percent ownership, but then the credit crisis may not be over yet. For them eventually to acquire 51% controlling ownership somewhere is not at all inconceivable. An ominous sign of where that might lead is found in our own captive pension funds. The state employee pension funds have quickly become captive to unions with their own agenda, with the result that the prosperity of the companies in the portfolio could be sacrificed to the benefit of interest groups. And yet,it wouldn't be so hard for America to do the same thing. If Congress had adopted the Bush proposal of three years ago to create an investment fund for Social Security, we ourselves would soon have what amounts to the largest sovereign wealth fund in the world. Could this be a solution to the weakness of the Federal Reserve in controlling the currency with bank debt? Could we somehow create a common world currency based on a common fund of sovereign wealth funds and with that, create a new definition of wealth based on equity rather than debt? The technical answer to the potential corruption issue would probably lie in stripping the voting power from such shares and then submerging them in a world index fund. The United Nations sound of it nevertheless still boggles the mind. Are people who oppose an equity-based world currency going to be forced like Gallatin to eat their own dusty words when the reality of debt-based currency sinks in? How many of the ambassadors of ideas about such suggestions, both pro and con, would eventually surface as sneaky connivers like Madison, with a hidden side-agenda? After all, in a democracy everyone is expected to marshal every argument, weak or strong, for his own self-interest.

The loss of banks as a tool for the Federal Reserve would undermine the way the Fed does its job. A deeper reality is that many governments really don't want the job to be done perfectly and independently. The European common currency, the Euro, is already irking the French and other national governments who sometimes hanker to inflate away their debts, or deflate their way out of the subsequent inflation. A perfectly automatic currency regulation threatens an important ingredient of the sovereignty of nations, thus the whole concept of nationhood. Somehow, the desire of markets to enhance wealth must come to terms with the desire of governments to re-elect themselves.

It will take more than the present crisis to provide credibility for ideas as wild as substituting equity-based currency for the present debt-based one. Unless someone devises a better-sounding scheme, it seems more likely that financial Jacobins will propose sacrificing the unwelcome intruder. Derivatives, whatever that means, started this mess. Maybe we should make them illegal.

Computerized Finance to the Guillotine

Creative destruction seemed a violent driver for the past two centuries, injuring a lot of harmless occupations and provoking their resistance to progress. The Industrial Revolution was bad enough, arousing Engels and Marx. But the computer revolution works faster, putting the pedal to the floorboard in a lot of ways, changing almost every life in some way, only faster. We could be approaching a violent second Luddite reaction if we don't keep our heads.

The legitimate complaint about the electronics revolution is that it is going in the right direction, but exceeding a reasonable speed limit. Elegant novelties that function smoothly deceive us into expecting perfection too soon, developing a habit of depending on innovations which are still a little shaky. But the banking industry, which presently bemoans securitized mortgages, swaps and other products of the computer age, could not possibly have coped with the vast expansion of bank transactions without computer assistance. Computerized fraud is a problem, but street crime has markedly declined in response to ubiquitous cell phones in the pocket of every innocent bystander. The press is vexed by Internet competitors and bloggers by the million, but democracy is the better for it. Sometimes a simple solution will solve a problem created by computers, but to a major degree, only computers can get us out of the fix we are in.

For example, it seems plausible that the flaw in securitized mortgages lies in the inevitable loss of diligence by banks who originate mortgages with full knowledge that they will immediately be sold. Requiring an originating bank to retain 10% of the mortgage would also force it to maintain an accurate tracing system for the other 90%, providing analysts a way to assess the performance of the originator, and regulators a way to control the volume. Maybe a simple rule like that would suffice, but if not the solution would probably consist of a massive computer programming effort to maintain records in excruciating detail.

It's probably true that five years ago hardly any bank president could have offered a simple coherent explanation of what a derivative is, and it is certainly true that's the case for 99% of the population today. But that is the worst possible reason to destroy derivatives, which offer a breath-taking advantage in scale and diversification, and ultimately in transparency. Bundling thousands of mortgages leads to a much more precise estimation of the risk of the bundle than a banker could make of a single mortgage. If you know the risk with precision, the costliness of risk will be more accurate and almost certainly cheaper. There will be, there must be dislocations of prices as one system morphs into another. Temporary halts and moratoriums are justified, but demagoguery and Luddite riots are pitiful but harmful responses. Politicians up for election are a menace in any crisis, and they come in various guises. There's Madam LaFarge, giggling while the heads roll. There's also Charles de Gaulle, purring that he wanted to go to Heaven, he just was in no hurry to get there.

But let's be careful of our slogans, here. It certainly is preposterous to say that anything which is poorly understood must be a villain. It's also unwise to be drawn into a swamp. The banking industry faces dissolution if they can't keep up with electronic advances in their industry, so it is inevitable that speeding up wrong approaches will only make some parts of the credit crunch worse. Most of the cost effectiveness of computers in the past has grown out of revising and replacing old methods, not from speeding up dumb ones. For example, if you want to know why health insurance is so expensive and cumbersome, you need only ask why it is so profitable. Once the huge investment in computerizing a system has been made, replacing it with a better system gets to be nearly impossible.

Ultimately, our present dilemma is this: we don't yet know how bad the problem is. It seems a reasonable possibility that this crunch happened just in time. Bad, it is true, but not yet catastrophic. If 3% or even as much as 10% of mortgages are foreclosed, the present system can absorb the loss, learn its lessons, and move on. A loss of a hundred billion dollars would probably lead to business more or less as usual. A loss of four hundred billion would however probably imply a serious recession, but when you start talking trillions, you are talking disaster. Most of the immediate uncertainty arises from ARM, the adjustable rate mortgages, and the degree of leverage in the debts of financial intermediaries. It's quite uncertain how many people took our mortgages they will not be able to afford at higher future rates of interest, or how many people took advantage of low rates for five years knowing they were planning to sell and move on during that interval, anyway. With regard to business loans, a mild drop in the economy will make it hard for businesses to cover highly leveraged loans. A huge drop will make it impossible for many businesses to survive, and they won't. A trillion-dollar aggregate loss would certainly provoke some welcome bipartisanship in Congress, but it might trigger a collapse of the Chinese economy or other unthinkable contingencies. Forcing more transparency into the present murk is the most urgent need, and that might well imply a concerted crash electronic analysis effort, with the way opened by some enabling legislation. Otherwise, Congressional gridlock would probably be a useful thing.

A Time to Reflect

The Northeast portion of America is cold; most public concern traces back to the high price of fuel oil. The Southwest, however, is warm and more concerned with house prices and mortgages. This geographic split in attention will have a powerful effect on politicians in an election year. We can only hope they cancel each other out and restrain legislative action until it is more clear what the extent of the damage is. A central question is whether there are too many houses in California, or too few. For decades, Westward migration outpaced housing construction, so California house prices have long been too high, mortgage lending too "innovative". While it is natural for western builders to feel that there are now too many houses for sale in California, a case can be made that the present noises are merely squawks as house prices adjust to more reasonable levels. With luck, the West may just ride it out. But, after adjustment for the present flight of emigration an excessive number of housing units per capita might just warrant drastic political solutions. Empty houses usually breed slums.

Different sorts of people should be pondering where the long slow decline of banks is going to lead. It makes a difference whether regular banking and investment banking will merge or have a collision. Much will depend on how well the two industries manage their massive computer systems; the heavy reliance of commercial banks on software vendors is not an encouraging sign. Something is going to have to change in the way the Federal Reserve manages the money supply if commercial lending migrates toward non-bank sources and deprives the Fed of its most useful tools. Commercial banks, investment banks, and the Federal Reserve are at some risk. When the system is placed under heavy stress, it is the weakest link in the chain at the moment which is most likely to break.

Secret Service Gets a New Job

The Internet provides new blessings, but new problems as well. Identity theft has now ballooned from a rarity to a fairly serious issue. After a little confusion, the issue was assigned to the U.S. Secret Service, so if it happens to you, that's where you make your anguished call. (1-877-ID-THEFT) or www.consumer.gov/idtheft

There's a certain logic to regarding identity theft as a modern form of counterfeiting, which has been with us since the days of William Penn. Shirley Vaias, representing the Philadelphia regional Secret Service, recently addressed The Right Angle Club of Philadelphia on the topic. It makes sense to learn the Service is headquartered on Independence Mall, across from the Mint. The crude forms of printing in the 18th Century made counterfeiting easy, and ever since the early days, there's been a race between improvements in technology and improvement in counterfeiting. We now have paper with little red fibers in it, watermarks, serial numbers, color-shifting inks, microprinting of secret messages in the portraits, special magnetic strips, and probably lots of other clever things we aren't told about. The Bureau of Printing and Engraving is changing the currency, one bill at a time, and recently there was a new ten-dollar bill. A counterfeit version was in circulation within six hours.

ATM machines are equipped with counterfeit-recognition devices, and special gadgets are provided for banks and retail stores, but one detection device traditionally catches most fake bills. After handling huge amounts of currency, bank tellers catch a counterfeit just by the feel of the paper. Color photocopiers are getting better and cheaper, but of course they can't change the serial numbers, so they aren't as smart as they seem. About one hundredth of one percent of the currency in circulation appears to be fake, so you are pretty safe, but the possessor of a bad bill is deemed to be the one out of luck. The consequence is that many citizens suspect a bad bill, take it to a bank, and have it confiscated without recourse. That seems terribly unfair, but it results from the wisdom of the ages. Experience shows honest citizens are tempted to try to pass the money on. While the banks don't enjoy being policemen, the effect is that counterfeits will circulate until they hit a bank, and thus confiscation is fairly effective.

As the printing of money gets more complicated, the special presses needed to produce good money became a monopoly of certain German companies, who sell the machines to other countries. Some of the American presses thus got into the hands of some Russians, who sold them to the North Koreans. So for a while at least, the North Korean government was printing American currency. It provoked vigorous countermeasures, the nature of which is confidential.

A bill of any denomination costs the government about half a cent to produce, and lasts about four years in circulation. When tons of old bills are retired from circulation, the serial numbers are recycled; to an outsider, that sounds like an impossibly tedious job, but they say they do it. There's also the issue of seignorage, a term for the profit the government makes when paper currency gets destroyed in one way or another, costing less than a cent to replace. Just how profitable the currency business is, cannot be accurately determined, because a lot of it is buried or hidden in mattresses and might someday resurface. But there is a substantial profit, which like any shrewd businessman, the government weighs against the cost of detection. Bail bonds and casinos are big sources of bad money, as could be readily imagined, and hence it is in their interest to get pretty sophisticated about detection. On balance, however, it can be expected that legalized gambling in Philadelphia will promote more counterfeiting in the local economy.

Over the centuries, governments have learned how to cope with counterfeiting, and there is actually much less of it than a century ago. You win some and you lose some; life just goes on. With internet identity theft, however, the criminals are developing techniques faster than governments have learned to combat them, and it is governments who struggle to catch up. Unfortunately, everybody takes a business-like approach to the matter, asking whether the precautions cost more or less than the losses. It would seem that if money continues its migration from paper currency to bookkeeping entries, it will eventually seem unsatisfactory for only one party in a transaction, a bank let us say, to keep the books while the public simply trusts them. Eventually, each individual will be forced to seek the protection of some sort of computerized system keeping the counter-parties honest, on behalf of the public, and to prevent a paralysis of commerce. Identity theft is getting expensive enough to warrant the effort.

Just how to do all that is not too clear. So, in the meantime, just let the Secret Service figure it out.

What's a Repo?

On St. Patrick's Day, 2008, Bear Stearns became insolvent and was given to J P Morgan. The Federal Reserve assumed all risks. Effectively, the fifth largest investment bank in America was nationalized for $2 a share, because no private bank would buy it at any price. A year earlier it was worth $170 a share, even one trading day earlier it sold for $26.

At the heart of this catastrophe were "repo's", or repurchase agreements. (They should not be confused with repossessions of cars and other hard goods bought on time, which are also called repo's.) Although most people had never heard of the high-finance version of repo's, the volume of these instruments had grown to $5 trillion by January 2005, presumably even several times larger than that when they caused the nationalization of Bear Stearns. Newsmedia accounts offered the guess that 16% of the resources of the whole financial sector were caught in open repo's when the music stopped. Repo's must be awfully good, or awfully bad.

They were both of these things at once. Like so many innovations in the post-computer era, they offered a major cost saving to an inefficient transaction system, but were so successful they overwhelmed the institutions which flocked to their reduced cost. The unanticipated difficulties might have been imagined, but they were not adequately guarded against. Essentially, these loans limited exposure to a few days, a feature that made them appear quite safe. Unfortunately, tons of these loans could expire simultaneously if a rumor got started and everyone held off using them for a week. With a run on a bank, at least people have to take action to withdraw their money; but with these things, simple inaction quickly led to massive cash shortages at the bank. Speeding up the loan process had made it cheaper, but made it vulnerable.

Consider the inefficient complexities of a bank loan. The bank wants collateral, perhaps 80% of the value of the loan. The ability of the borrower must be investigated, a clear title assured, and papers arranged for transfer in case of defaulted collateral. Lawyers must organize the agreements, and it all takes time, costs money. To go through all this for a one-week loan for anything less than huge transactions is simply not practical. So the idea was devised to sell the collateral to the lender at a discount, together with a repurchase agreement to buy it back at full price. For safety sake, the discount could be greater than the interest cost, and part of it returned if all went well. The collateral could be held by a third party, who essentially guaranteed the details while the collateral itself never moved. Bear Stearns had perfected these variations at such favorable prices they dominated the market for them with hedge funds; the margin for error narrowed when interest rates dropped, cash got scarce when investors got uncomfortable, the whole hedge fund industry was suddenly paralyzed, and everything connected to hedge funds was frozen secondarily. Much of this was handled automatically by computers, so huge volume made it impossible for anyone to know who might be insolvent. It seemed comparatively harmless to decline to play this game for a few days, but it was not harmless if most people decided to do so at the same time. The daily variations of interest rates and/or duration generate a ("Gaussian") normal distribution curve for the risk, predicting serious deviations will occur once every two centuries. But when events --even false rumors -- suddenly get everyone's attention at once, small daily fluctuations no longer bear much relationship to the frequency of violent fluctuations. Once-in-a century events start to happen every few years. At those times, the public stops speaking with a million voices and shouts in unison. Quite often, there is no cataclysmic event to trigger it. Like the conversational babel of a dinner party, it can all stop at once for no particular reason.

The mathematics of this matter could be taught to a tenth-grade math class. It starts to get beyond everybody's anticipation however when two such Black Swan events happen at the same time. In this case, an unanticipated pause for a few days bumped into the rule that non-bank institutions must mark their portfolios to the market every day. But for days at a time in this crisis, there could be no trading in certain issues; there was no market to mark to. How then can you demonstrate your solvency -- what might your competitors be hiding during these unannounced market holidays? And, since banks are in the same pickle but aren't required to mark to market, how can you trust them to pay bills? When you see European banks, who must obey new rules called Basel II, go bankrupt and get nationalized, how can you be sure American banks, who needn't obey Basel II until 2009, are any safer bet?

Progress is progress, but how much of it can we cope with?

SCORE

Frank Pace, formerly Secretary of the Army, founded SCORE, the Service Corps of Retired Executives, in 1964. Philadelphia was one of the main founding chapters, but tended to dwindle as business large and small dwindled after the bombing of West Philadelphia by the then-Mayor; former executives living in the suburbs lost interest. In December 2006, Mark Maguire took charge and gave SCORE a new directiion. This former executive of Rohm and Haas is not related to the baseball home-run king, but at least his name is easy to remember.

The new sociology of center city demanded that more small businesses be started by minority residents, who have very little family and cultural experience in this sort of activity, which nevertheless is recognized as the main source of job creation in any area. It turns out that the main source of energy in the minority community is among minority women, who are particularly unfamiliar with the problems of small business. So, SCORE needs to dispel a number of misconceptions and unrealistic ambitions, and familiarize these budding entrepreneurs with the tax and regulatory headaches ahead of them, and teach them to be watchful of common traps and obstacles, learn to cope with fair competition, and how to recognize the signs of fraud before it happens to them.

The usual vehicle for teaching these elements of commercial life is to induce the writing of a detailed business plan, which executives can criticise for lack of realism or inadequate capitalization, suggesting ways to succeed in a field that has 50-60% failure in the best of circumstances. Some of this requires face-to-face discussions, lectures, and required reading. But much of it can be handled with weekly email consultations, a favorite tool of Philadelphia's SCORE chapter. Much of it can be addressed by referring the client to the proper agency or service business, or bank. SCORE has a strict ethical code for its volunteers, including a prohibition of becoming a vendor or participant in the business.

In addition to the changing nature of new small businessmen, there is a changing demographic of the volunteer exectives who do the advising. Over 80% of them decribe themselves as retired, but in fact it is rare for one to be totally retired from all business activity. These guys really like to work, and a thirty-year vacation is not their goal in life. Just by acting as an example, they are conveying an important goal to the young businessmen and women who look to them for guidance. Work is how you accomplish something in life, and work, believe it or not -- is fun.

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