Too harsh a judgment?

Without a doubt, there are some who might think that describing American economic and political activity as a "disease" is being too harsh. I can understand their feelings, even if I don't agree with their judgment. After all, just what is a "disease"?

The Free Dictionary (online) provides us with three definitions, all of which are fairly standard:

1. A pathological condition of a part, organ, or system of an organism resulting from various causes, such as infection, genetic defect, or environmental stress, and characterized by an identifiable group of signs or symptoms.
2. A condition or tendency, as of society, regarded as abnormal and harmful.
3. Obsolete Lack of ease; trouble.

While the first is generally directed to physical organisms, there is nothing that restricts us from applying it to any organism or system of an organism, such as the "body politic", or "the economy" or "society", or whatever. This is, in essence, acknowledged in the second definition, as it can describe any condition or tendency regarded as abnormal or harmful.

I suppose we could argue all day whether our culture or our society can be considered an organism, but the analogy has been used for centuries without anyone complaining. I don't see why this has to be an issue now. Moreover, we could also spend all our time arguing about what is "normal", thereby attempting to determine what does not fit into that scheme (i.e. that which is "abnormal"). This does vary from society to society and from culture to culture, but the other word used does provide us with a sound starting point, leaving us with "a condition or tendency regarded as harmful". There is little question that the US form of capitalism is harmful, in many ways.

When we consider the amount of pollution it produces, the amount of environmental damage it inflicts, the wealth inequality and poverty that it generates, the "stress" (on individuals and whole peoples), I think we can start identifying the "group of signs or symptoms" required by the first definition above.

Don't get me wrong, the Americans aren't the only ones, but they are the cheerleaders for more, not less, capitalism; the US is home to the idea of unfettered free-market capitalism; in the US there is simply no discussion that is not ultimately, if not solely, about money/capital (most often expressed in the can-we-afford-it argument). When the Americans start propagating this outside their own borders (which is precisely what the corporate takeover of the world is about), well, that's when it starts looking infectious, dangerous, most disease-like.

The good news is, it can't go on for ever. Like any faulty system of thought, any destructive ideology, it carries within itself its own seeds of destruction. Capitalism lives from the notion of unlimited growth; the earth, however, is limited: there is only so much space and so many resources, so when either (or both) of these hit their limits, there is simply no more growth. Capitalism, if left to itself, will consume itself. The bad news is that if the environmental catastrophe that wipes out (perhaps only most of) the human race before that time, the destruction may be more than we all can handle. Of course, at that point, none of us will have to worry about anything anymore.

Capitalists like all-or-nothing arguments, but they avoid this one. No, when seen from a broader perspective, it's just a disease, and the disease peddlers aren't even thinking about a cure.

There's never enough time

There's never enough time ... at least not enough to really do what we want. It seems the more "advanced" our society becomes, the less time we have for things, important things, like family, friends, rest, relaxation, reflection. All our conveniences and labor-saving devices have failed us. How many of you feel like you're working more than ever, even if it's only because your mobile (cell) is on making you "on call". When I travel -- which is way too often -- I see people of all ages, glued to their devices, be they smartphones, tablets, or laptops. Some very few are listening to music or playing games, but most of what I see looks like work: lots of spreadsheets, lots of calendars, lots of email windows with long, long lists, and serious-looking PDFs. There are some Luddite-likes on board; that is, people working on paper. But these, too, often look like printed versions of what others have on-screen. Sure, during normal working hours this doesn't strike me as odd, but I'm talking about evenings and weekends. I hate it when I have to do business travel at these times, and I avoid it as much as possible. But even when I must, I certainly see no reason why that should obligate me to do business then as well. Sometimes, we simply need some time to ourselves.

You see, our modern, average work week is somewhere between 35 and 40 hours. It seems to me that if this is what we are paid for (and granted, here in Europe, many employers have general-time and/or comp-time accounts for their employees, most of which I've ever heard about have upward limits ... and oddly enough, everyone I've ever talked to was always pushing those limits as it is), this is what is expected of us. I'm the last one to advocate just letting your pencil drop at 4 or 5 or whenever the working day is over, and there may be exceptions to the rule, but what happens when the exceptions become the rule? This is what I'm seeing too much of, and it bothers me. A lot.

What I see are too many parents who are either working or going back and forth to work, so the children are too often on their own or with a baby-sitter. I see men and women consumed by their jobs and unable to switch gears for the family. I see kids who are shuffled from school to sports activities to music lessons to tutoring sessions to who-knows-where-else so they'll have greater opportunities in life. But what opportunities are we talking about? It's clear: a life of work-work-work with little family and if you end up with one, not knowing what to do with it, because you never learned how, because you never experienced one growing up.

But here's the real issue: why do we work so hard and so long? Because we need (and there are some who want) the money. We do it for the money. In the end, it's about money. The house, the car, the alma mater, the boat, the plane, the power weekend in the Caymans ... but money, well, there's are some things it just can't buy, like peace of mind, love, friendship, compassion.

Recently I read that some US law firms started offering dual career paths for incoming associates. You could choose a modest, but decent salary, a 40-hour (only) week, and no real chance for advancement; or, you could opt for the standard career path: long hours, big bonuses, and a chance at becoming a partner one day. The encouraging news was they were having trouble finding recruits for the partner path. Maybe, just maybe, younger people are realizing how ridiculous our generation has made the world. At least it's reason for hope.

Out of sight, out of mind

It's summer. It has been, at least according to the calendar, for about a month now. By this time, even here in Germany where the summer breaks in the various Bundesländer are staggered so as not to unduly clog the highways when everyone heads south to catch some rays, just about everyone is on holiday (as they say here); that is vacation to those of you across the pond. Yes, I have written quite a bit about education lately, and I know it's time to stop. All of us know: when you don't have to think about school, you don't. I suppose not many of us now in the summer break want to think about it at all.

The powers-that-be (TPTB), however, take this particular opportunity to think about it a lot. That's why they are so successful. They do so much when the rest of us aren't looking that we always act surprised when we find out how badly we've been outwitted again. I read recently that in the US, efforts have been redoubled to institute voucher; that is, privatization programs; into a number of states in which they haven't taken hold yet.

You should know that I'm one of those long-extinct dodos who believes that an educated citizenry is a necessary component of a democratic society. Since we've turned our backs on schools and education, though, we've left them to the devices of those who only have one obsession: namely, getting all our money. All we're going to do is transfer some public funds into private pockets, we're going to call it market-based progress, and we're all just going to grab our ankles in the end. I guess it isn't welfare if you don't call it welfare, even if that is all it is. TPTB define what words mean. Reality can take a backseat.

As the old saying goes, "money talks", and so those who have it will simply tell the rest of us what we are supposed to think, how we are supposed to act, and what we are supposed to do. School vouchers are one small, but significant, ploy in the movement to simply get it all. All of you out there who think you've secured your finances, have figured out how to finance your golden years, and who think they might even have something to leave to their heirs ... if you aren't part of TPTB -- and if you're reading this, it's pretty safe to say that you aren't -- all I can say is dream on. They chip away at it every day. A lowered interest rate here, a smaller dividend there, a bit of inflation to spice up the mix, and when they finally do get around to raising taxes, which they will have to do eventually, you can bet it won't be on those who could afford it.

I wish the new were better, but it isn't. TPTB are not going to stop until they have it all. And, by the way, don't think for a moment that I'm talking about duly elected governments when I speak of TPTB ... not at all. Duly elected governments are merely the "face to the public" that legitimizes what is going on behind the scenes. This isn't a whacked-out, paranoid, conspiracy, rant. I'm just calling them as I see them.

Through a gla$$ darkly X

In capitalism, risk is supposed to be borne by the actor. In this recent case, the risk was private, but the loss was made public. This is an aberration unheard of in the annals of finance. What is more, it was institutionalized, made policy, expressed as the truth of the realm, but in fact, all of the rules were changed to suit the Wizard and the rest of us were literally left holding the bag.

In my day, people taking risks were considered gamblers, and gamblers did not have much of a reputation, well, at least not a good one. They were most often considered greedy, dishonest, deceitful, and unreliable. How is it that we turned the gambler into the pillar of society. I'm sorry, but I just don't get it.

I have nothing against capitalists in principle, as long as they play by their own rules, take their risk and losses like mature individuals and demonstrate by their own actions and behavior that they understand which world it is in which they operate. But, they have made their problems into my (and your) problems, and they have convinced the powers-that-be that it is only good and right and proper that the rest of us should not only pay for their mistakes, but that we should reward and continue to honor them because they are the rich, the powerful, the masters of the universe, the best and brightest ... which they aren't, never had been, and never will be. And that's, quite frankly, what turns my stomach every time I hear or see others fawning over them, kow-towing to them, catering to them and their wishes, believing their lies, their deceit, and never, ever questioning what they are doing. Why? Because for the most part, we have been repeatedly told that we can't understand this highly complex, if not complicated, world of modern finance.

Really?

Don't get me wrong, I don't claim to know all the ins and outs of the details of all the nonsense that they perpetuate, nor do I think it is necessary to do so. What we need is a basic understanding of how "the system" works so that we can recognize them for what they are: gamblers, and gamblers who play with other people's money. Your money, my money, pensioner's money, anybody's money but their own. And that simply has to stop.

The system they created isn't really much of a system, it is a shell game, a sleight-of-hand act, an illusion. We need to put some reality back into the system and they need to be put back in their place. As long as we can't, or won't, acknowledge the reality behind the illusion, they can continue to act as badly as they have so far and we will continue to be victimized by them and their elected henchmen.

At that moment that we traded in our society for a mere economy, we placed money (and property) rights above human rights, we made money the measure of all things, including ourselves. I'm not convinced that was a good idea. When the good St. Paul was writing his letter, he was, of course, talking about a different kind of salvation, but if we want to save ourselves from this nonsense, we need to understand what is going on, or as Paul put it "see [things] face-to-face"; that is, see things for what they are. It's not rocket science, it is business, it is a little economics, and it should be a whole lot of common sense.

It's time to expose the man behind the curtain.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly IX

What happened in the run-up to 2008 was seen by everyone involved. Anyone who tells you differently either doesn't know or is being disingenuous. Anyone who has the slightest understanding of how banks work, both commercial and speculative could see that what was being done was neither wise nor prudent nor even truly worthwhile. It wasn't going to benefit anyone but the slickest and quickest. And when the house of cards fell, the Grand Capitalists stepped forward with the cry, "But, we're too big to fail!". And most everyone believed them (Iceland is a notable exception). What to do, what to do?

If anyone has been following even casually, it does not take much to understand that the "size" of these institutions; that is, the size of the numbers on their balance sheets, was in most cases hopelessly and shamelessly inflated. In terms of actual value, most of it was made up. We like to think that financial instruments are backed by something real (a car loan with a car, a mortgage with a house, money by gold or the like), but the truth is they aren’t. The so-called "value" of all the bundled paper at the time of the "crash" was six times the world gross product.

A national or regional or even world gross product, it will be remembered, is the estimated value of all the resources, products and services in possession of or produced by a given entity. In this case it was the world and the paper was "worth" six times everything the world can do. I'd say that is just slightly absurd, and to act as if it that "value" (of the paper) is "real" is patently absurd. These institutions weren't any bigger than the legendary Wizard of Oz. It is known: Beware of the man behind the curtain.

To add insult to injury, this fiction of "value" was treated seriously and the most basic rules of capitalist economics were ignored. You will recall that riskier investments (e.g. a loan to a first-time home-buyer) often carry higher interest rates than well-secured or trusted loans. That's why local banks were once more successful, for they could better estimate their degree of risk. That risk, of course, was expressed in terms of interest rates. The higher the rate, the riskier the investment; that is, the less likely it will turn out.

So, if I can buy a savings bond that will yield around 1.75% interest, I can buy a similar Greek bond that will (possibly) yield (on average over the past 15 years) 7.7%, well, yes, I perhaps stand to make more money by "investing" in Greece, but there is equally a greater chance that I won't earn anything at all. Some people like the increased risk (you have to bet a lot to win a lot), and I suppose they should be allowed to play that game. But, I also believe that they should play the game, and I should have nothing to do with it at all. The speculator's losses shouldn't be my losses. But that's what was done to the rest of us. Exactly that.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly VIII

Picking up where I left off, in my bank, some of the loans that I have made are good, sound, loans. Some are, for whatever reasons, a bit of a stretch. Perhaps the people will lose their jobs when the factory shuts down or someone with a loan gets ill and loses their job for that reason, or perhaps someone simply misjudged the reliability of the loan recipient and it doesn't look like the bank is going to get their money back. In the traditional system, the good loans offset the bad ones and the trick was to make as few bad ones as possible. Now, however, we have other possibilities.

Let's assume that Mary, one of the bank's new employees, has a brilliant idea. Why not take some of the good loans and some of the bad loans and wrap them all up in one single bundle. You then get a rating agency to give it a AAA stamp-of-approval and then you simply sell the whole bundle to someone else for some set price, a price that is perhaps lower than the whole bundle if counted individually, but more than if the bad loans in there didn't get paid back.

You have two advantages: first, you are rid of part of your risk, and two, you have immediate cash in hand to turn around and loan out or invest and not have to wait until all the individual payments from all those individual loans come trickling in. And that's what they started to do, in various ways, with various colors and variations and who knows what all, but pushing these bundles of paper around – which are, it should be noted, a "derivative"; that is, an "investment" that derives from other forms of investment – becomes so popular and so many folks are getting used to speculation of all kinds that before long side markets show up where these things are bid upon, traded, exchanged, and who knows what else and everybody is just have a grand old time making up such derivatives and finding others who are willing to buy them or bid on them.

Again, it doesn't take a genius and just a moment's reflection reveals that the value of these bundles is pretty fictitious too. All of sudden there are bundles upon bundles that are bigger and bigger and all of them are "safe" because they've been rated safe, which increases my safe capital in my own institution, which means I can loan out more money and make more investments to grow and grow and grow and get richer, richer and richer. The only problem is that deep down beneath all those levels of paper and in spite of all the creative ways of accounting for these "instruments", as they were called, there's really nothing real at all. The "value" and the "worth" of any individual bundle was not the same. The bundles were once backed by whatever those bundles represented but once bundles were bundled and further bundled – the process can theoretically go on indefinitely – well, if you ask me, it all just starts getting absurd. One day someone is going to wake up, realize they are being sold a bill of goods and the house of cards could come tumbling down.

Welcome to the financial crisis of 2008.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly VII

The fact that Tom now owns the shares, not the company, is the point, unfortunately, that most people miss. The issue company only has so much to do with its stock as it is concerned to keep its value reasonably high, but this is more for image than financial reasons. People who buy and sell stock do so to make money. Anyone who "plays the market", as it is most accurately described, buys stock in the hopes that the price will rise so that they can sell it later for a profit.

In other words, the company should do well enough that the share price rises so they can make money. Since the issuing company's only obligation is to increase it's share price so that others can generate income, it is not truly accurate to call the stock buyers "investors". They aren't investing in the company, they are investing in themselves. Technically, the shareholders are "owners" but for the most part they are only concerned about the share price, not the working conditions, the employees, the customers, or the products or services themselves ... or only insofar as these things have a positive influence on the share price.

The stock market, then, is really more like a casino than an investment, as one chief financial officer told me. What amazes me the most, though, is the amount of media coverage this particular casino gets. Fluctuations in the stock market are more often than not market players' emotional reactions to all kinds of events, but not really a sound indication of the health of the economy. I don't think it's ever a good idea to take your temperature in a casino.

It doesn't take a genius to realize that the kind of person who does well in prudent investment and helping local enterprise get along is really not the kind of person who does well in the rough-and-tumble world of speculation. There was a time when the government saw to it that these two realms remained separate. This was way back in 1933 when the so-called Glass-Steagall Act was passed and signed into law. Its real name was the Banking Act of 1933, and it covered a lot of territory, but for our discussion here, it separated commercial banking from speculative banking. Over time, of course, lots of folks started thinking this was old-fashioned and during Clinton's second term that was stated so definitively, in terms of the Gramm–Leach–Bliley Act of 1999, which repealed the affiliation restrictions that Glass-Steagall had imposed.

It will be recalled that back in Through a gla$$ darkly IV it was shown that a bank can only lend out (or invest; that is, put at risk) about 10 times what is has "safe in the bank". Another way of saying this is that it essentially lends out (or invests) the same capital multiple times. The trick comes when we ask ourselves what is "safe in the bank".
If a bank has ∆1,000 "safe in the bank", it can loan out or invest up to, say, ∆100,000. Some of these loans – like we described in our examples then – are relatively safe. And, if the bank lends out, say, ∆1,000 at 5% for a year, it will get back – if all goes as planned – about ∆1,020 at the end of the year (it's actually slightly more but for the purposes of illustration here, inconsequential). In other words, it lent ∆1,000 but the "value" of that loan is ∆1,020. This is to say that the value of the bank is equal to what it safely has and what it expects to have at some point in the future.

The important point here is that the bank's value is actually a fictitious number. It's not real like the ∆1,000 upon which it bases its business is real. The art which allows us to keep track of such things is, of course, accounting. Or, as I like to say, it is not "counting" but "a [that is, one particular way of] counting, but that, too, is another story. But now that the door is open for all kinds of real, kind-of-real, and even imaginary things to happen, since commercial banks may now also speculate, let's take it all a step further, next time.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly VI

Let's start with borrowing since it is the most familiar to most of us. You go to a bank (usually) or other financial institution (could be a credit union, or Aunt Marge) and you negotiate a sum to be paid back over a specified period of time, and at a certain rate of interest. The riskier the bank feels this lending is, the higher the interest rate you end up paying. (It was once rating agencies which made such decisions, but they managed to tarnish their own reputations lately.)

The second way is to beg. Actually, the organization itself offers promissory notes (in everyday speak: IOUs) called bonds. The organization is, within certain limits of course, free to say when and how the bonds will be paid out, but there are several agreed on standards. Perhaps the most commonly known type of bond is the savings bond. When you buy a bond today for $37.00, in seven years the government promises to pay you back $50. The organization is basically saying, "trust me", and if you do, you can lend it money.

Whimsical as I am, I listed "stealing" as the third way, but that's obviously not 100% accurate. The third way of generating cash is to issue shares of stock. These shares represent ownership, so the percentage of shares you hold determines your "share" of the business. Such an issuing can be private, that is, you offer a part of your business to someone else and you negotiate between yourselves how many shares and what they are worth. We don't often hear about these kinds of transactions in the news. But, such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

A few years ago, a German low-cost airline went "public" and sold €1,000,000,000 worth of stock on the first day! Not bad, eh? But this is where the "stealing" comes in. They didn't take all that cash home with them. After paying fees and premiums and costs for staging the sale, they had a mere €400,000,000 to take home. I don't think it is out of line to wonder why the people who put on a sale earn more than the folks for whom the sale takes place, but that's another story.
What's worth noting, though, is that this is a one-time deal. Once those shares are in the public domain (on the stock market), they can be bought and sold and speculated with and the issuing company receives no money whatsoever when these shares change hands. If I buy some stock at the beginning, then the company takes home some of that money. If I sell them to my friend Tom a week later, I get money from Tom, but I don't have to give anything to the issuing company. They don't own those shares anymore: I did, and now Tom does.

And why is this so important? I'll tell you next time.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly V

So what did our example tell us?

A moment's reflection brings us to the realization that as long as everyone plays by the rules, there's really no problem. The bank "makes its money" by investing someone else's money (in this case its depositors') and earning a return (in the form of interest or value-appreciation of some sort), and the bank, at least ideally, then shares some of those earnings with the people who provide it with its resources.

You see, it's all actually very simple. But everything was simple in Leave-It-To-Beaver Land, and we don't live there anymore, in fact, we're not in Kansas anymore either.

There was a time – and there are some places – in which banking was a conservative, prudent, and cautious business. Banking was local for the most part. The bankers knew their clients, knew about their work and family relationships and assessed the risk of any of their loans, for example, based on this knowledge. A person with a steady job and without a lot of other debt was a pretty safe risk for a mortgage on a house suitable for his or her family. Yes, the house itself was used as collateral for the loan (that is, if you couldn't pay off the loan, the bank would end up with your house), but the bank really didn't want the house, it wanted the money you made in payments. Why? Because it could take that money that you paid in an loan it out to other loan seekers, or invest it somewhere they could expect a reasonable return. The key to the whole system was reason: the bank knew its customers, knew its strengths and weaknesses, knew its capabilities and acted accordingly.

All the while, outside the banking system as just described (in the last couple of posts) – the commercial banking system, there was another system for another set of clients and customers. This was called investment banking. Here, the stakes were higher and the returns were higher. It's called investment banking, but it really isn't investing in the same sense that we might have put our money in a savings bond or such. No, here more volatile things were involved: stocks and futures (the infamous "pork bellies" one often heard about), and more. Here, however, I need to make a small detour before moving on.

In the world of business, there are three ways for an organization to generate extra cash. Extra? Yes, that is, money that is not generated through regular operations. Money the organization wants to invest. We all know that it is wiser to save up for a large purchase before buying it, but in the go-go-go, consumer-driven world today, we too often resort to credit to satisfy our impulses. Some things, like a home, of course, are really too significant a purchase to save up for, but cars and stereos and smart phones and refrigerators are in fact manageable.
The savings of business are called retained earnings, and sometimes these reserves are not enough to finance the next step forward for a business, so they have to get the money elsewhere. The three avenues open to them are, as in everyday life, to beg, borrow or steal. Really? Let me explain what I mean (next time).

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly IV

In this happy little scenario, you will notice there is no speculation. People who knew other people lent them money because they were pretty sure they were going to get it back – yes, with interest, but that interest was modest and everyone ... the bank, the depositors, the borrowers ... all benefitted from the "system". And two immediate questions raise their eerie heads: why is the banking scenario no longer so happy; and just how is it with the bank and its ability to "invest" at all. Let's take a look at how this works, starting with the bank's ability to invest at all.

The astute reader, or anyone who has been following along, will recognize that the bank can only lend money if it has money to lend. In other words, as long as I, and my neighbors and other people in the community, bring our money to the bank, then the bank has money that it can lend to others. That makes perfect sense. We got interest on our savings accounts because we put this money at the bank's disposal, and we expected them to be prudent and reasonable in investing this in such a way that they would get a return and that they would share that return with us. The real question is, just how much money does a bank actually have to have and how much are they able to loan out to others? And this is where things start getting interesting.

Although it goes under different names and at different times was determined by any number of different formulas, for simplicity's sake we'll just call it the bank's capital requirement. Not all capital is cash, and some non-cash capital can be relative risk-free and other may entail a lot of risk. While the requirements have changed, for example from the so-called Basel agreements (we're at Basel III now), at present you only have to have about 8% to 10% capital "in the bank" at any one time. So what does this mean? Well, in simplest terms, you and me and Joe and Joan down the street may have our savings in the bank, and the bank itself may be well-capitalized and be holding at around the 10% level, but all that means is that they have about 10 times more "out and about" (invested, loaned, whatever). A simple example can help make this clear:

Let's say a bank has 1000 units of whatever as their way of meeting the 10% requirement. (You can think of these units, which we'll call ∆ for lack of anything better at the moment, in terms of singles, tens, thousands, millions of whatever; it doesn't really matter.) Mrs Jones needs a small-business loan and the bank lends her ∆500. Mr Smith wants to improve his house and gets a ∆250 loan approved. Acme Products needs to make payroll and wants a short-term cash injection of ∆1000. The bank has invested as well, say, ∆10,000 in various securities (bonds, treasury bills, etc.), and the list goes on and on. Simple arithmetic reveals that the bank has already used more "money" than it actually has (i.e. ∆11,750) but it can continue doing this until it reaches its ceiling of ∆100,000 in total. Of course, everyone (or almost everyone) to whom the bank makes a loan makes periodic payments and the total of those payments will be greater than the sum loaned out because the bank in charging interest on those loans. Not everybody who has money in the bank will want their money all at the same time – generally speaking – and so the bank is safe, so to speak, in lending out more than it actually "has".

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly III

What is a bank? Silly question, is it not? Maybe, but I don't think so. There was a time when many of us knew (or thought we knew) what was meant when we used the term, but times (and conditions) have changed. Let's take a walk down memory lane.

Believe it not, there was a time when I took my "extra money", that is, the money I wanted to save (to buy a house, car, go to college, etc.), to a bank and deposited it because they paid me to have my money there. I had a savings account and they paid me (at the time) about 4% compounded semi-annually, and I thought this was a great deal. "How and why could they do that?" was the question that I had then and the answer was actually very simple: they used my money to invest in "whatever" and they shared their success with me. What a lovely idea. Almost idyllic, isn't it? My question, of course, was "What do they invest in?".

It turns out that they "invested" in the local businessman: the accountant who wanted to stabilize his cash flow, the metal-shop owner who wanted to buy new machines and equipment, and more. They also invested in the local community: the homeowner who wanted a second mortgage to make improvements to his property, the first-time buyer who needed a loan to buy a new house, a family who needed a new car and didn't have the cash to put down for a new one. In other words, people just like you and me doing things just like you and I do. They charged interest on these loans they made, because there was a certain risk involved. What if the accountant lost his clients, or the metal-shop owner didn't get the new production contracts or the home or car buyer became unemployed and couldn't make the payments? The level of "risk" (real or perceived) determined the amount of interest that the borrower had to pay for the loan. Young people buying their first car paid higher interest rates than long-term employees of a local company. The home owner paid a lower interest rate on his second mortgage than the first-time buyer. There was something to back up the loan: the house, the car, the reputation of the borrower, his or her standing in the community. Most bankers knew who they were dealing with and how reliable they were. Still, the risk was covered, and if everyone made their payments, then the bank could pay me my bonus for letting them use my money in the first place: the interest that accrued on my modest savings account.

OK, OK, I know, the past was in Technicolor. Reality tends toward black-and-white. But, in reality, that's not true. It's more shades of grey.

And that's where we'll pick up next time.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly II

I can't put my finger on the exact moment it happened, but at some point – in the not-too-distant past – we exchanged our society for a mere economy. If we look far enough into the past, we find that there was a time when there were human beings roaming the earth who were social creatures, not only economic ones. I still had the feeling growing up, in what was anything but a perfect society (hell, we hadn't even achieved civil rights and equality yet ... ooops, we still haven't ... but we pretend that we have) but it was still a society. There was something social about everyone I knew, even if the realm of their acceptance only extended to the neighborhood. In most cases, though, it went further: to the church congregation, the community, and even, in some cases the nation. Little of that exists anymore, because in the meantime, money talks, and there is nothing else to say.

Despite this, I have not yet given up all hope. OK, I've given up most of it, but there is still a kernel left, and it is on this basis that I am going to try to put together a most basic primer on banking, finance, and economics. I know many of you are now rolling your eyes – and I don't blame you. How often do we have to go through this. Well, the teacher in me says, "until we understand what we're talking about". There is nothing I am going to say that none of you has not heard before. My hope is that I will say it in such a way that if you haven't grasped the basic principles by now, you will by the end of this series. Bear with me, at least my intentions are honorable.

As promised the last time, here's what I am going to try to do: first, we're going to look at what a bank is and how it functions – once again, in simplest terms. I then want to examine how a bank, as a privately owned organization fits into the grander scheme of what we might call a national economy. Yes, I'm approaching this very step-by-step, level-by-level – even hierarchically (against my better nature) – just so we all have a common understanding of how it all fits together. I'm not offering solutions, I think they become fairly obvious once an insight into the "system" has been gained.

And now, for my major disclaimer: I'm sure there are any number of you finance, banking and economics wizards out there who will testify that I'm oversimplifying and reductionally distorting the "truth" of the matter. If I am wrong in principle, let me know. I don't claim to be perfect or to know it all, but I do believe that I generally understand what is principally at stake.

Note: This series was originally published in slightly modified form on the Daily Kos.

Through a gla$$ darkly I

"Through a glass darkly" is how St. Paul described our normal perception of reality. Now, there is hardly any issue the good saint and I agree on, but I have to say that when it comes to banking and finance, this is one point upon which I believe the good saint knew what he was talking about.

It's too bad, actually. We like to consider ourselves educated people, but are we? Do we in fact know how things truly function in our world? Are we really informed? Do we have any real idea how institutions and organizations and people interact to produce this reality in which we find ourselves. I would like to think "yes", but the more I interact with and engage my fellow man, the more I think "no".

In one way or another and in various places both written and otherwise, I have tried to point out that that there is a need these days to reflect upon, and in the end question, things that we simply take for granted. In that case, it was our relationship to technology. Here, it is about our relationship to money, banking, finance and economics. In what follows, I will be referring to this subject by any of these terms. They are not interchangeable, but they are intimately related and it is really not all that necessary to painfully and excruciatingly keep them separate. They are different aspects of the same phenomenon, this is true, but my intent is to help understand the principles involved, because, if we don't understand the principles, we really don't understand the phenomenon at all.

I'm a big fan of principles. As a wise man once noted, "I stand on principle, because it's the only place where I don't get shit on my boots." He knew what he was talking about. Another wise man once told me that if you can't explain yourself to an eight-year-old, you don't know what you're talking about. I think both of them are spot on. Now, I don't think any of you are merely mentally equivalent to eight-year-olds, but it is nevertheless essential that we get down to essentials. And it is this level of simple, essential principles that I am aiming toward.

Let's face it, we go to school and the first things we learn – and rightfully so – are reading, writing and reckoning (arithmetic); that is, the good old 3 R's. Not everyone who learns them become critics, authors or engineers. We don't need to. It's not about being an expert in any given individual field of study; we go to school to help us understand the world in which we find ourselves, to make sense of what is happening around us, but above all else, we go to school – or should be going to school – to learn how to distinguish the real from the crap. Too few can do this anymore, but that's another matter (and perhaps diary) for another time.

Note: This series was originally published in slightly modified form on the Daily Kos.

Those still haunting Brussels blues

Don't worry, you'll be off the hook soon. I promise: this is the last reaction from Brussels. And yes, I managed to find my carbonnade, and Belgian beer is still excellent, so there are still things that are right with the world. But, still ...

Just missing the motivation boat is not the only blunder that "the industry" has allowed itself. There was the constant drone at the conference that not enough women were getting into the industry. One large, international telecommunications company gave us samples of one of their latest marketing gags: nail polish; one a light green (Mint) and one deep magenta (an important color for the company). (I need to add here, that MINT is the German form of STEM, not everything translates perhaps as well as we would like.). I have a bottle of each on my desk right now. I'm still marveling at them. This is how you attract young girls to become interested in getting into telecommunications, I suppose. I'm glad to see that in our emancipated world today, old stereotypes have been eliminated so completely. It just goes to show you, though, just how out of touch organizations can be.

It amazes me how out of touch most organizations are. I'm not picking on any one in particular; the one just mentioned is merely an example. The young are not, at least as far as those at the conference were concerned, all that motivated by glitter, glamor or even so-called prestige. Another young participant stated quite clearly in the plenum that the companies up front talking the loudest and making the biggest pledges were simply not offering him the opportunity to follow his technologically relevant bliss, the were more of a hinderance than a help. This is in harmony with the notions I mentioned last time. What is driving the young technologically savvy these days is being able to do one's own thing together with others while remaining true to what is good and right and that benefits others (that's the real "Hacker Ethic"), and that is, I'm afraid we all realize, antithetical to the maximization-of-profit ideal that so many -- particularly these large, globally active, mostly American corporations.

It is quite the dilemma, I will admit. Most people, the vast majority of people, inside or outside this industry, here in the West, work for companies that are small or tiny. Too often, they are simply looking to survive while the really big players are wallowing in their wealth. This means that what's making the world go round is not their riches, it's the blood, sweat and tears of the little guys. But it is there that the ideals that seem to resonate with the young people seem to be.

You can make it about technology, and you can make it about growth, and you can make it about money, but that doesn't make it real. If you want to attract youth to the the hard, tough, demanding world of STEM, don't try to make it fun or attractive or lucrative. Make it worthwhile. Go ahead. I dare you.

Those haunting Brussels blues

No, I'm not obsessed, either with Brussels or the blues, but I do have a bit of this and that I have to work through yet. Here's another notion that's been haunting me for the past couple of days: STEM.

Once you get even a little close to any kind of bureaucracy, you start getting overwhelmed with acronyms and abbreviations. I guess bureaucratic days are so full that they just don't have time to speak in full words. STEM stands for "Science, Technology, Engineering, Mathematics", and it alludes to those disciplines of learning and study that we need to emphasize if we are going to remain competitive as an economic area and if we are going to advance as a civilization (whatever that means). We simply don't have enough people getting into these areas and over the day-and-a-half in Brussels there was a lot of urgent debate and a lot of wringing of hands, how we were going to accomplish this. I don't know about you, but I find the whole issue rather odd.

STEM is supposed to be about hard science, mathematically rich disciplines of technology (whereby I think IT is most often meant, as if there weren't any other kinds) and engineering. I suppose it's only physicists, mathematicians, technologists and engineers who get anything done. OK, it is an American neologism. I suppose that explains a lot more than we might like to think. Young people are apparently not all excited about entering these fields. They are perceived as too hard, too demanding, too complex, or are they simply uninteresting? The surrounding discussions remind me of those I've heard from church representatives regarding the lack of attendance and participation of young people in church. Their answer is make it more "attractive": more singing, dancing, role-playing, play-acting ... whatever, so that it will be "fun" to go to church. Yes, if we could only make STEM more "fun", then wouldn't young people flock to it in droves? Well, to be honest, no.

The world in which we're called to work these days is anything but fun. Employers think that so-called smart technology can make you accessible 24/7, so now your employer has access to you 24/7. If you come up with a good idea, it belongs to the company, not to you. When you enter the workplace, you leave your conscience at the door and sell your soul. I, for the like of me, can't figure out why young people aren't lining up for that. By the way, once your current skill set is no longer productive, you're out, and by the way, we're not going to pay for your development, personally or professionally, you have to do that on your own, especially on your own dime, and by the way, I'm going to pay you well, but not nearly enough to make repaying those student loans too easy; nothing worth anything should be obtained too easily. Yes, that's the world I'm inviting you to, so why aren't you beating down my door to get it? Yeah, I don't understand it either.

One young panel participant near the end said that he got into technology because of three concepts he had gleaned from the book The Hacker Ethic which he referred to as freedom, challenge, and impact. I took this to mean that he was driven by wanting to do things that may not be easy but needed to get done in such a way that others would benefit and, as is often stated so blithely, that the world would be a better place. I found it fascinating that the motivators weren't anything related to STEM. Those things are just means to a much bigger -- may I say, softer -- end.

I really have to ask myself. Who's not getting it?

Brussels blues deja vu

It was an interesting day-and-a-half, not exciting, not surprising, but interesting nevertheless. There was a lot of "high-level dynamism", as it was called, or hot air, as it could be understood, and there were a lot of serious and sincere individuals who showed quite clearly that they wanted to find a solution to a problem ... unfortunately a problem that probably does not exist.

The real problem as I see it doesn't have anything to do with a skills gap or getting more people into work. It's about big IT companies pitching their wares so that they appear more important than they really are. The biggest round of applause of the day went to a question from the audience asking why the big-company certification programs are so expensive. The answer was that we get national governments to pay for them, so it's not an issue. Not an issue? Our tax euros are at work again, giving money to people who don't need it for a problem that probably doesn't exist. Or, how about the day before when an economist in the crowd merely asked what's the answer to the supply/demand equation? No response. You can't expect the "industry" to make things more attractive to potential employees, just because they are needed. No, I didn't think so. It would appear we're seeking solutions to a problem that doesn't really exist.

Throughout the day-and-a-half, I heard of project after project that was being implemented and what unmitigated successes they were. But we've still got a problem. The participants were allegedly key players in the technology revolution that changes everything, but none of these projects had been heard of by others, so I have to ask who's using the technology for what? This topic has been on the table for at least 15 years, it was interrupted once when the "industry" imploded (remember that dot.com thing?) and once they got their bearings again, they started crying wolf that without qualified personnel, the industry in Europe was doomed, Europe was doomed. I couldn't shake the feeling that we were being told that if we didn't do what they wanted this time, there would be hell to pay. And I suppose there will be.

For me, one of the most telling moments of the conference was when a well-placed individual from one of the largest high-tech companies in the world, and particularly in Europe, stated with unmitigated candor that in his company alone, within the next two years, over 10,000 people were going to lose their jobs if they did not re-skill. Yes, there is a skill gap, in this company at any rate, and it was also clear, that this company didn't feel the slightest necessity at all to do anything about their own employees. They are their employees, I suppose, when they are helping deliver profits, and they're on their own, when it looks like they won't be able to.

Yes, the next round of give-me-what-I-want has kicked off. Now, who is going to rise to the challenge? Who's going to make the necessary sacrifice? We know who isn't, so now it's up to either government or potential employees to react. Do we have what it takes? I hope not.

Brussels blues, redux

Perhaps I shouldn't be blaming the technology. Perhaps the real source of my aggravation is not the industry looking for a handout (I mean, they could say "no", but who says no to a free lunch), but rather the unmitigated nonsense that passes for rational argumentation. There is more at stake here than just "jobs". Although it may not seem so at first blush, the issue lies much deeper.

Over the past few years, I've been involved in a number of IT-industry-related projects, all of which have been funded by the European Commission. We have received funding for these initiatives because they have sought to narrow the gap between skills that are needed in the industry and those that potential employees are in possession of. It's been a matter of providing people with the right knowledge, skills, and competences for the positions that exist and will exist in the industry. Sounds noble, I know. And it is, in a sense, but the longer I deal with the matter, the more I am coming to believe that the cure is worse than the illness.

The big general push, both here in the EU and in the US is getting the right people in the right jobs. Across the board, people are pushing for a closer cooperation between education and industry so that the matches are better and more long-lasting. Both here and there, a lot of criticism has been raised against the education sector, be it public schools, vocational education and training, or (so-called) institutions of higher learning: find out what industry wants/needs, and give it to them. And that, my dear friends, is precisely the problem.

The key word describing this is "employability". We have to make people more "attractive" for the employer. Why? No, I don't want to hear about how the employee will be more productive. Employees have been more productive than ever for the past 40 years and all they have to show for it is higher rates of unemployment, lower wages, and highly exaggerated management compensation. No, I don't want to hear how the employee will deliver higher quality. Insisting that one person do the job of two, insisting on unpaid overtime "to get the job done", to push for ever higher margins all have nothing to do with quality. The customer gets the quality that is possible at the lowest cost of production, period ... at least that's how it works in consumer markets. So that's not it either. No, I don't want to hear about how the highly skilled workforce is what drives the economy forward. High-skilled means higher pay. High-skilled means the worker knows what s/he's doing and when you're cutting corners. High-skilled means ... well, trouble.

Oh, I hear what industry says they want, and they want lots of it, especially if the government is willing to subsidize it so they they don't have to pay for it themselves, but at bottom what they want are ready, willing, and ably conforming drones to do what they're told and to go away when they are not needed any longer. We might say it's about training and education and skills and competences, but what it's really about, in the end, as always, is money.

The ultimate privatization?

I wasn't going to say anything else about the election in the States because, as should be obvious by now, I'm simply glad the freakshow is over. However, one thought did strike me that I just can't shake: the two parties, together, spent more than $6,000,000,000 on their campaigns. I don't care who you are, that's a proud chunk of change. Of course, it's an obscene amount of money. Of course, it's the most that's ever been spent. But, we have to ask ourselves what it actually means. I'll tell you what I think:

What we just witnessed in the US was the privatization of democracy. Oh, they've been trying hard in all kinds of areas, such as education, water, prisons, regulation, Social Security, Medicare, and privatization is a staple of American foreign policy (just look at what the IMF is requiring of Greece if you don't believe me) and, of course, the military and security (about a third of US intelligence operatives are private contractors). Americans love privatization, and now they've managed to privatize their elections as well. Who would have thought?

You think I'm exaggerating? Think again. Where did all that money come from? For the past four years the Teabaggers and the Republicans have been raving about the deficit. Cut! Roll back Reduce! Slash! Save! That's all we've heard. Americans don't have money for anything. They're facing serious infrastructure problems - very clearly revealed by that blowhard Sandy - community after community is going into insolvency (I would be they're giving the Greeks a run for their money ... or is it a run for their debt, no matter), and even earned benefit programs are being squeezed. There's no money for anything. But, there's more than enough money for elections. Where do we think all that cash came from? I can assure you that the people who fronted the cash, particularly those who hedged their own bets, know exactly where it came from. And, they know exactly whom they have to talk to in order to get their money's worth. I'm not a betting man, but I'd bet you a dollar to a doughnut without a hole in it that they're already calling in their chits.

No, I think for anyone who wants to see, it has become clear what democracy in America means. Money talks, and private money talks loudest, I guess. And what I hear is that a huge investment has been made in making sure that the same-old really remains the same-old. I guess you really do get what you pay for.

Money 101

Recently, I've been giving business and financial institutions a bit of a hard time, so it only seems fair to add a little perspective to the discussion. Though to many it seems that business is only about money, it is nevertheless worth asking ourselves what is the real role of money in business.

Perhaps an analogy can help. Strategy is not just a business concept, it is an everyday concept as well. Strategy, in a certain sense, is the answer to the simple question we have all been asked: "What do you want to be when you grow up?" Each of us makes decisions early in life that determine the course of actions leading us into certain fields and careers. Any life counsellor will tell you that the person who is following their heart (doing what they like) is the happier and more productive person. We look to the future, fix our eyes on a goal, and then continuously work towards it. That is thinking and acting strategically. The only real obstacle to it all though is staying alive. Life is, after all, an exceedingly risky undertaking.

In the business world, staying alive is objective #1 ... not strategy #1. Staying alive is the objective, being something when we grow up is the strategy. In addition to shelter and clothing, we all have to eat, that is, we need food to survive. In the industrialized world, many people used to grow their own, but the specialization of labour has removed most of us from food-production, so we must go elsewhere to get our food. Businesses, in a very strong sense, mirror their creators. What is it, then, that any business needs to stay alive, to live to fight another day in the sometimes dog-eat-dog of global commerce? Yes, money.

There we have our analogy: money is to business as food is to people. Today, we have become divorced from our sources of food; we do not always eat what is good for us. Many people are overweight, others are starving. Certain things are in abundance in some areas, non-existent in others. In the western world, a certain knowledge of nutrition, then, is a good thing. What to eat, how much to eat at what time of day or in which season, different ways of preparing food that make it more digestible and useful to our bodies are all good things to know. Those who inform themselves and act accordingly tend to lead longer, healthier, and, in the end, happier lives. Similarly, in business, setting reasonable profit margins, building reserves (retained earnings), maintaining a "healthy" level of debt, and making acceptable, suitable, and feasible investments are ways toward a longer, healthier business life.

Finance, that is, knowing how to deal with money in the context of business, is not what business is all about. Business is about producing the better product, providing the better service and fulfilling market needs. To do this, however, we need to understand finance so that we can lead the kind of business life that enables us to be whatever it is we want to be when we grow up.

Stock market 101b

As I mentioned yesterday, businesses have three options to generate extra cash, the third of which is issuing stock. We also saw that a stock issue can be private, but such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

On the other hand, such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

A few years ago, a German low-cost airline went "public" and sold €1,000,000,000 worth of stock on the first day! Not bad, eh? But this is where the "stealing" comes in. They didn't take all that cash home with them. After paying fees and premiums and costs for staging the sale, they had a mere €400,000,000 to take home. I don't think it is out of line to wonder why the people who put on a sale earn more than the folks for whom the sale takes place, but that's another story.

What's worth noting, though, is that this is a one-time deal. Once those shares are in the public domain (on the stock market), they can be bought and sold and speculated with and the issuing company receives no money whatsoever when these shares change hands. If I buy some stock at the beginning, then the company takes home some of that money. If I sell them to my friend Tom a week later, I get money from Tom, but I don't have to give anything to the issuing company. They don't own those shares anymore: I did, and now Tom does.

This is the point, unfortunately, that most people miss. The issue company only has so much to do with its stock as it is concerned to keep its value reasonably high, but this is more for image than financial reasons. People who buy and sell stock do so to make money. Anyone who "plays the market", as it is most accurately described, buys stock in the hopes that the price with rise so that they can sell it later for a profit. In other words, the company should do well enough that the share price rises so they can make money. Since the issuing company's only obligation is to increase it's share price so that others can generate income, it is not truly accurate to call the stock buyers "investors". They aren't investing in the company, they are investing in themselves. Technically, the shareholders are "owners" but for the most part they are only concerned about the share price, not the working conditions, the employees, the customers, or the products or services themselves … or only insofar as these things have a positive influence on the share price.

The stock market, then, is really more like a casino than an investment, as one chief financial officer told me. What amazes me the most, though, is the amount of media coverage this particular casino gets. Fluctuations in the stock market are more often than not market players' emotional reactions to all kinds of events, but not really a sound indication of the health of the economy. I don't think it's ever a good idea to take your temperature in a casino.