Quotes From the Honest Guru

Only small companies can think big, and big companies only small.

Just Another Anniversary

Once again I have been informed by my medical insurance company that at the anniversary of my policy they will reduce the coverage, while increasing the premium well above inflation.

It is scary to think that the price of insurance per family is the equivalent of a new family car every year. It is even scarier when you realize that even with insurance, my medical expenses in the USA are higher than when I was living in Europe without insurance.

But would you expect any difference, when profit, and not medical care, is the only objective they are measured by?

Capitalism Goes Bananas

Tomaz Lopez, a lifeguard at Hallandale Beach, Florida, was fired by his employer, Jeff Ellis & Associates, for saving the life of a drowning man outside his jurisdiction.

The End

CPI adjustment

What Bernanke said: “Over a period of time, we want to move inflation always back toward 2 percent,”

What Bernanke thought: “... and we’ll keep changing the way we calculate inflation to guarantee that the numbers always meet this objective.”


... and in Haiku form:

C.P.I is made

To be what I say it is

Bernanke Dumpty

The financial industry and value destruction

In this book, Simon Lack exposes what many in the industry has known all along, but preferred never to let out. The financial industry creates value for the manager of the financial industry, but destroys value for  investors. That is, 84% of all profits of the hedge fund industry, as a whole, went to the pockets of a few hundred hedge fund managers. They were not the investors.

This is a must book for anyone who wants to understand how distorted a system have we created. It is also a must for any politician who wants to make things better, and not only for themselves. But do such people exist?

Privatization and Electric Outages

A person holding a hand saw is cutting the branch he is stilling on. The branch snaps and he falls down. ‘Bad luck’ he mutters to himself.

A great deal of our misfortune we blame on luck. Sometimes it is, but often it’s lack of foresight. ‘How could we have known,’ we mutter while clearing the bruises, only to ignore the next warning signals. We blame luck as individuals; we blame it as groups; as companies and as a nation.

It’s bad luck that this year my town in Connecticut has suffered from total of 14 days without electricity. We still sit in the dark – 4 days after the snow fall – and it is likely to be two more days before electricity is restored.

We love it. We heat our house with wood. We cool our fridge with snow; we bring our flushing water from the nearby pond; we use head-torches for light, and we play board games and tell stories around the fire. In a computer age, outage days are nearly the only opportunity we’ve had for family bonding. I’m sure that the environment is happy too. This is pastoral, but this is not the way one of the most (self-proclaimed) advanced states in the world (and clearly one of the most expensive) should run.

Bad luck, they say.

I would agree that Irene, the 6 hours snow last Saturday, and the few other short occasion this year were all irregular events. But none of them was truly extreme. Only the outcome was. Canada, North Europe, Japan all suffer regularly from bigger storms. Yet, a week without electricity is unheard of in most of the developed world. The town elders say that until recently it was unheard of even here.

So is it bad luck, or have we cut the branch we were sitting on?

Having a reliable infrastructure, such as power, requires large investment, with long horizons for returns. This is unattractive for private companies. So they do not invest. Instead, they are reaping the benefits of operating a state-built infrastructure, and running it to the ground. This was to be expected when the push for privatization took place. But easy money blinded everyone. The signs of deterioration were slow to appear, but just like old age they were there all along.

Privatization is the heart of capitalism. But there are two factors that make capitalism work: competition, and good return on investment. These conditions are not fulfilled when infrastructure is involved. But for those who do not see privatization as a strategy but as a religion, logic makes no difference.

Four days later, I am still sitting in the dark, and our infrastructure keeps deterioration.

The sight of a needle about to pierce the skin sends shivers down many backs, enough to prevent them from going for a medical treatment, enough to block their minds from considering blood donation. According to Red Cross statistics, a mere 3% of US citizens have ever donated blood, a much lower rate than in most of Europe, and a real problem for the blood bank here in the US.

Donating blood was a regular part of my life. Since I was a teenager, I would donate blood twice a year. I the many countries I lived in, the process was nearly identical: step into a station nearby, fill in a quick questionnaire, get your arm stung, and be out with a cup of juice and a cookie in no more than half an hour. US has been the exception. Despite the big 'We need your blood' posters, the pleas and the expensive advertising campaign, donating blood in the US remained an ordeal.

When I first arrived here I thought of continuing my donation tradition and sought a place to donate. The station nearest to my place was too far to be convenient; the station nearest to my work, had inconvenient operation schedule. And when I once drove past a blood donation bus and stepped in, even though there was only a single person waiting, I was asked to arrange an appointment and come back another time. I never did.

But,as the say goes, if Mohammad is prevented from going to the mountain, the mountain will eventually come to Mohammad. After long advertising campaign, posters and emails, the Red Cross came to our office. They were not very popular, and the line was short. So, with a questionnaire in my hand, I waited for my turn.

Unlike any short blood donation questionnaire I had ever filled in, this one had seventy questions. They wanted to know if anyone I had sex with had ever used a needle (as if I'd know). They asked if, since 1977 I had ever taken money, or other payment for sex. (As if it matters). They could not answer if my wife's dinners and a nice bottle of wine should be considered 'other payment'.

But this was not the reason I failed their test. I failed because in the past 10 years I have spent more than three months in the UK, which made me a possible carrier of mad cow disease.

Next week they are coming again to my office. This time, there will be one less person in the already short line.

Market Economy

“US market up on stimulus hopes”; “US market down as hope for stimulus abates.” Up or down, one thing is clear, the US market no longer believes in market economy.

Bombs and Euros

I don’t understand Iran’s obsession with their nuclear program. After all, if all they want is to bring US to its knees, all they need to do is sell their oil for Euros. This will not only devastate US much faster, it will also shatter the American national spirit.  

Wisdom and Anarchy

Tunisia, Egypt, Libya, Greece, Israel and now the UK. Demonstrations and anarchy are spreading into the developed countries, where economic reality rapidly erodes the standard of living – taken for granted by the population. The US behaves as if it's economic policy has nothing to do with social order; as if it is immune. The wise learn from others' experience. Show me wisdom before reality catches up.

All or Nothing

picture by Stacy Annx (http://xstacyxannx.deviantart.com/)

Las Vegas ...

An entire city built as a grandiose backstage for the largest deliberate illusion man has ever created. A city built with a single purpose in mind, to take your material possessions in return for hopes and dreams. An ostentatious illusion created to make you believe that with a role of the dice, you too can change your luck. 

Just like most other religious cities, like Guadalupe in Mexico or the city of Medjugorje, the pilgrims to Las Vegas believe that their fate will not follow that of the millions who depart worse off. Instead, they all hold the belief that they are the chosen ones; the few and far between that will be blessed with a miracle. 

But it’s not Las Vegas alone. This faith is the very heart of the American dream, or as some may call it, “The Great American Delusion.” It’s the delusion that luck and alchemy can turn debt into ever-lasting prosperity. 

So far, however, the alchemy has worked in the opposite direction. Generations of American economic growth has yielded 12 trillion dollar debt. That is, every man, woman and child in America owes someone overseas over $35,000. The debt is of such magnitude that no economist, academic or politician knows how to tackle the problem. It’s a debt that cannot be paid by our generation, which makes us the first generation in modern history that robbed wealth from their children. This dubious honor will not be forgotten by future generations who will not be able to afford the life that today we take for granted. 

It’s absurd that the more economically successful America has been the bigger its debt has grown. After all, common sense dictates that an economy that has been expanding since WWI – as we are often told – should have accumulated wealth rather than debt. But common sense has not been part of any financial policy for quite some time. 

It’s nonsensical to believe that we can increase debt forever, without bearing the consequences. Because if there is one thing we know about debt, it’s that it does not go away by itself. For a country, just like for an individual or a company, when the last lender has refused to lend any further, financial collapse is imminent. Who will be our last lender? 

It’s irresponsible to base our entire financial system on millions paying for the very few at the top of the pyramid. This is a pyramid scheme, also known as a Ponzi scheme. When Madoff’s scheme was found out he was sent to 150 years in jail, when an entire country is based upon a similar scheme, we call it ‘economic model’. Whatever we call it, there are two things we know about Ponzi schemes. The first is that they always collapse. The second is that collapse happens without a warning. A great success today can turn into a total ruin tomorrow. And once collapse has occurred, recovery is impossible. 

Like any other Ponzi scheme, this one is based upon faith – the belief that with a stroke of luck, debt will turn into prosperity. This is the very same belief that built Las Vegas. 

Just like in Las Vegas, millions of hopeful pilgrims pay for a handful of winners. Unlike Las Vegas, where casinos always win, this house is bankrupt. 

… and the dice keep rolling.

If you still don't understand Wall Street

Despite the two years of non-stop information about the financial crisis, I still find that many do not understand how our financial system really works. I hope that this old fable, will demystify Wall Street for you, once and for all.

Once upon a time in a village in India, a man announced to the villagers that he would buy monkeys for $10. The villagers seeing there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10, but, as the supply started to diminish, the villagers stopped their efforts.

The man further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms.

The offer rate increased to $25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf.

In the absence of the man, the assistant told the villagers: 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when he returns from the city, you can sell them back to him for $50.'

The villagers squeezed together their savings and bought all the monkeys back.

Paying Tax

This is one of these rare occasions in which I copy someone else's post. And this time it's a post I don't even agree with. But I like it nevertheless, as it questions our most fundamental assumptions. And questioning assumptions is something we don't do enough, but need to do much more:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected.

They would still drink for free. But what about the other six men? The paying customers?

How could they divide the $20 windfall so that everyone would get his fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man, like the first four, now paid nothing (100% savings)

The sixth now paid $2 instead of $3 (33% savings).

The seventh now pay $5 instead of $7 (28% savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $15 instead of $18 ( 20% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free.

But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $ 20,"declared the sixth man.

He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a Dollar, too.

It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth man and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him.

But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, this is how our tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

The financial system and the Hudson River Landing

It’s been a year since the amazing emergency landing of the Airbus A320 on the Hudson River after the aircraft had struck a flock of geese. This landing was a demonstration of risk management at its best.

This was the very first time that landing on water had been attempted successfully. Yet, simulators were built, procedures put in place, and pilots trained to handle such an unlikely risk. None of these were based on historical events, but rather on foresight. It was this foresight that made the difference and saved the lives of the 155 people aboard the plane.

This should be a lesson to the financial industry.

But this is not the only lesson. Learning from other mistakes and disasters in the airline industry can be just as valuable.

For instance, a couple of years ago a pilot of a Garuda Indonesia, who had crashed his aircraft, was charged with negligence and deliberately causing an accident. It was shown that the captain had knowingly ignored 15 warning signals from an onboard system and from his co-pilot, and force-landed his Boeing 737, which then skidded off the runway and burst into flames killing 21 people.

The investigation found that had the pilot listened to the warnings and followed the proper procedures, he’d be required to fly his plane round the airstrip a second time. This would have consumed more fuel and cost him his ‘saving fuel bonus.’ So he chose to land. This is the very same incentive that led to the crash of many financial institutions – the incentive to ignore risk signals in order to maximize personal remuneration.

We too often forget that the financial industry is not the only industry that practice risk management. Many industries and disciplines – from airline to drug manufacturing, from space exploration to building submarines – have developed ways to manage risk. None is based on historical analysis alone, as is the common practice in the financial industry. Yet, the financial industry has arrogantly chosen to ignore all these important development and insisted on practices that benefits a minority of individuals who run these institutions, and nobody else.

So why don’t we force our regulators and those who invest our money to learn how other disciplines manage their risk? After all, we have already been proven us that we cannot rely on the financial industry to self-regulate itself, nor make socially responsible decisions. So let us force them. Isn’t that what democracy and capitalism should be about?

The ultimate solution to the American debt

The solution to the spiraling American national debt crisis is quite simple. Instead of the government printing money they don’t have, they should allow us, citizens, print money directly. This ingenious policy has three advantages over our current, post-financial-crisis, system:

First, if individuals are only allowed to print physical money, they can’t print it faster than the government, so the overall increase of national debt will cool down. 

Second, as the money will be in our hands, we will consume more, which will help refuel the struggling economy (after all, how many new houses or cars can the few rich financiers that receive most of the tax payer money buy?)

Third, the government will be able to tax us more, but as we'll be able to print it, even the Republican wouldn’t mind. The additional debt will help the government close the public debt, and allow the Democrats pass the Health Bill, which will make it the very first time in American history that a policy satisfied both parties - a great way to alleviate our growing bipartisanship problem.

Naturally, all citizens will have to declare that they will not print more than they need to. But as we can include it in our tax return declaration every year, it will even be easier and more efficient to handle than the presidential election.