Whenever you hear the words, “This time it’s different,” be afraid or at least extremely suspicious. I have heard those words at several different times in my life. The best example occurred during the dotcom boom of the late 1990s. Amazon.com was capitalized at a value that exceeded the combined worth of several of the largest most profitable companies in the world. At the time, it was nothing more than a mail order book store that had never turned a profit. I concluded that the entire boom was completely insane. I was abused for this opinion by some of my coworkers. They told me, “This time it’s different. The economy of the entire world is going to the Internet. These stocks can not go down.” Well, most of them went belly up. A few survived and even prospered but their stock prices remain depressed until this very day.
The second example is a little more complicated. While I was horrified by all the interest only mortgages, 50 year mortgages, reverse amortization loans, and other follies of recent years, like most Americans I believed that affordable single family housing could never go down in value, at least not in the significant long term. I knew there was a cap on the value of any individual property that was approximately 3 times the annual salary of the family that lived in the house, but I believed inflation would make residential real estate a relatively bullet proof investment. I started getting a little worried when the value of my house exceeded my ability to buy it, if I did not already own in it, but I never expected the sudden and dramatic crash we have seen over the last 18 months. I heard the condo flippers and real estate infomercials touting their no money down schemes, telling the world, “This time it’s different. Real Estate never goes down.” I should have known what was just over the horizon.
Thankfully, I am old school. In fact I am so old school that it is slightly ridiculous, but more about that later. I bought all the house I could possibly afford 22 years ago. It cost so much to walk through the front door that I needed a short term loan from my father in law to have enough cash on hand to stay fully operational. Like my father before me, I have been programmed to fear debt. My grandmother was so terrified of debt that she bedeviled my grandfather into paying off the mortgage on their farm as quickly as possible. Only two families in that little corner of South Dakota managed to hold on to their family farms throughout the depression. My father’s family was one of the two. I managed to pay off my mortgage in less than ten years. Although I thought about moving up to a more expensive home, one that I actually could afford, I didn’t because I am so frightened by debt.
I confess, I am old school in the extreme. When my wife’s cell phone needed a new battery, I went to several stores but could not find a battery that fit the thing. Finally, I called up the manufacturer. I was told that the life of a cell phone was six months. After that period of time passes, the company considers the instrument obsolete and no longer stocks replacement batteries. I finally located a replacement battery on the internet. It cost about $30 including shipping and handling. When I related this story to a more knowledgeable coworker he asked me, “Why did you do that? You could have got yourself a new cell phone with a new battery included for free.” The idea of replacing a perfectly good cell phone because it needed a new battery would have no more entered my mind than replacing my car because the ash tray was full, but my friend was right. I could have obtained a new cell phone for my wife and it would have been free. Old school is not fool proof.
Today I am hearing, “This time it’s different. Buy and hold and dollar cost averaging no longer make any sense.” First of all can you tell me a better way to pay for a primary residence, still my largest single investment, than “buy and hold?” Dollar cost averaging is nothing more than saving a little bit every month. You don’t have to buy stocks with that money. What you sock away in an insured savings account or the gold doubloons you hide in your basement are nothing more than a variation on dollar cost averaging. The price of stocks, gold, and even the value of the dollar itself rises and falls over time. Please, tell me how one can avoid dollar cost averaging on some level. I would also like to point out that the sage of Omaha, Warren Buffett, does nothing but buy and hold. I admit he took a nasty hit last year. Now he is only the second wealthiest man in world.
While not a get rich quick scheme, old school will generally keep you out of trouble. I know I can not control the world for even a ridiculously short period of time like a thousand years. Some catastrophe could overtaken me in a heartbeat. Ultimately we are all in the hands of God, but the systematic and conscientious management of money using well proven methods is probably the best course for most of us both in boom times and times of great distress.
Just a reminder
Luke 12
[16] And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully:
[17] And he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits?
[18] And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods.
[19] And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry.
[20] But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided?
Friday, May 29, 2009
Sunday, May 24, 2009
Moral Hazard
I am learning about a lot of different things as I work on this blog. It has become a part of both my financial and my spiritual life. Sometimes I learn things that I would rather not know about, but we live in interesting times. While reading reports in a variety of sources concerning the ongoing financial debacle, I have discovered a new term, moral hazard. It seems to be used in two ways, neither is very good.
The first definition seems to come from game theory. The principal agent problem is pervasive in our society. It occurs when someone with more power, the principal, attempts to control the behavior of someone with less power, the agent, through a set a rules that ideally provide sufficient rewards to assure behavior by the agent that benefits the principal. The problem is that the interests of the principal and the agent seldom coincide. As it is written, “The camel has his schemes and the camel driver has his schemes.”
In the recent catastrophes suffered by organizations like AIG, a particular type of the principal agent problem, termed moral hazard, occurred. The agent, in this case the management of AIG rigged the game against the interests of the principals, the shareholders. By insulating themselves from the negative consequences of risky behavior, the management created a situation where they could not lose, but their principals, the shareholders could be totally wiped out. As they were entering into a variety of insanely risky ventures, the agents paid themselves enormous bonuses running into millions of dollars per individual per year. If the gamble paid off the agents would all be billionaires and the stock price would rise significantly. If the gamble failed, they were already millionaires and if they were fired, their contracts guaranteed golden parachutes in the $20 to $60 million range. Imagine that, getting a $40 million dollar firing bonus for wrecking a great financial institution. That is just what Charles Prince of Citibank received after destroying something like 60% of his company’s value.
Moral hazard also seems to be used when describing situations where bad behavior is rewarded and virtue is punished. In numerous psychological studies, it has been proven that behavior can be modified by means of rewards. In fact psychologist managed to teach a pig to ride a little toy bicycle using nothing but food rewards. One of the maxims derived from these studies is, “If you want more of a particular behavior, reward it.” Using this definition our government is engaged in so many different kinds of moral hazard, it would be hard to list them all. For example the government recently fired the chairman of GM. He walked with something like a $23 million golden parachute. I have lost track of how many billions of my current and future tax dollars have been spent on GM and Chrysler. The primary beneficiary will be the United Auto Workers, who have a share in responsibility for the demise of their company. The bond holders, who were willing to place their hard earned money at risk under a contractual arrangement providing certain guarantees, have been told to go pound sand. AIG, Citibank, Fannie Mae, Freddie Mac, and others deemed too large to fail are receiving benefits paid for by healthy responsible corporations, in some cases their direct competitors. The government is underwriting and rewriting mortgages that benefit the irresponsible at the expense of individuals who bought less house than they could afford and paid it off in less than the required 30 years. Finally, the government is offering to pay people a bonus to trade in their worthless old gas guzzling SUVs to buy a new more efficient automobile. If you bought a reliable car that gets 28 miles per gallon, you are out of luck.
Such behavior does have extraordinary bad effects in the real world. The link below connects to a half hour news documentary on the current economic condition of Las Vegas. It includes footage of a real “no notice” eviction. A renter with a valid lease, who paid his rent on time, is thrown out of his house without warning because the landlord took his money but did not use it to pay the mortgage. I could not believe that such an example of moral hazard could occur in this country but it did. Be warned, while this is a primetime news special, it deals with Las Vegas, ground zero for all sorts of moral hazards not covered by the two definitions listed above. If you are exceptionally sensitive to such things you might want to pass on this one. I would rate it PG-13.
http://www.youtube.com/watch?v=rFTZ3flsipE
None of this is new. King David railed on economic injustice on numerous occasions. Two of the Psalms are particularly hot. I choose to include a large portion of Psalm 37 for my concluding meditation, but I could have just as easily used the other example, maybe I will in some future post.
Psalm 37
[1] Fret not thyself because of evildoers, neither be thou envious against the workers of iniquity.
[2] For they shall soon be cut down like the grass, and wither as the green herb.
[3] Trust in the LORD, and do good; so shalt thou dwell in the land, and verily thou shalt be fed.
[4] Delight thyself also in the LORD; and he shall give thee the desires of thine heart.
[5] Commit thy way unto the LORD; trust also in him; and he shall bring it to pass.
[6] And he shall bring forth thy righteousness as the light, and thy judgment as the noonday.
[7] Rest in the LORD, and wait patiently for him: fret not thyself because of him who prospereth in his way, because of the man who bringeth wicked devices to pass.
[8] Cease from anger, and forsake wrath: fret not thyself in any wise to do evil.
[9] For evildoers shall be cut off: but those that wait upon the LORD, they shall inherit the earth.
[10] For yet a little while, and the wicked shall not be: yea, thou shalt diligently consider his place, and it shall not be.
[11] But the meek shall inherit the earth; and shall delight themselves in the abundance of peace.
[12] The wicked plotteth against the just, and gnasheth upon him with his teeth.
[13] The Lord shall laugh at him: for he seeth that his day is coming.
[14] The wicked have drawn out the sword, and have bent their bow, to cast down the poor and needy, and to slay such as be of upright conversation.
[15] Their sword shall enter into their own heart, and their bows shall be broken.
[16] A little that a righteous man hath is better than the riches of many wicked.
[17] For the arms of the wicked shall be broken: but the LORD upholdeth the righteous.
[18] The LORD knoweth the days of the upright: and their inheritance shall be for ever.
[19] They shall not be ashamed in the evil time: and in the days of famine they shall be satisfied.
[20] But the wicked shall perish, and the enemies of the LORD shall be as the fat of lambs: they shall consume; into smoke shall they consume away.
[21] The wicked borroweth, and payeth not again: but the righteous sheweth mercy, and giveth.
[22] For such as be blessed of him shall inherit the earth; and they that be cursed of him shall be cut off.
[23] The steps of a good man are ordered by the LORD: and he delighteth in his way.
[24] Though he fall, he shall not be utterly cast down: for the LORD upholdeth him with his hand.
[25] I have been young, and now am old; yet have I not seen the righteous forsaken, nor his seed begging bread.
[26] He is ever merciful, and lendeth; and his seed is blessed.
[27] Depart from evil, and do good; and dwell for evermore.
[28] For the LORD loveth judgment, and forsaketh not his saints; they are preserved for ever: but the seed of the wicked shall be cut off.
[29] The righteous shall inherit the land, and dwell therein for ever.
The first definition seems to come from game theory. The principal agent problem is pervasive in our society. It occurs when someone with more power, the principal, attempts to control the behavior of someone with less power, the agent, through a set a rules that ideally provide sufficient rewards to assure behavior by the agent that benefits the principal. The problem is that the interests of the principal and the agent seldom coincide. As it is written, “The camel has his schemes and the camel driver has his schemes.”
In the recent catastrophes suffered by organizations like AIG, a particular type of the principal agent problem, termed moral hazard, occurred. The agent, in this case the management of AIG rigged the game against the interests of the principals, the shareholders. By insulating themselves from the negative consequences of risky behavior, the management created a situation where they could not lose, but their principals, the shareholders could be totally wiped out. As they were entering into a variety of insanely risky ventures, the agents paid themselves enormous bonuses running into millions of dollars per individual per year. If the gamble paid off the agents would all be billionaires and the stock price would rise significantly. If the gamble failed, they were already millionaires and if they were fired, their contracts guaranteed golden parachutes in the $20 to $60 million range. Imagine that, getting a $40 million dollar firing bonus for wrecking a great financial institution. That is just what Charles Prince of Citibank received after destroying something like 60% of his company’s value.
Moral hazard also seems to be used when describing situations where bad behavior is rewarded and virtue is punished. In numerous psychological studies, it has been proven that behavior can be modified by means of rewards. In fact psychologist managed to teach a pig to ride a little toy bicycle using nothing but food rewards. One of the maxims derived from these studies is, “If you want more of a particular behavior, reward it.” Using this definition our government is engaged in so many different kinds of moral hazard, it would be hard to list them all. For example the government recently fired the chairman of GM. He walked with something like a $23 million golden parachute. I have lost track of how many billions of my current and future tax dollars have been spent on GM and Chrysler. The primary beneficiary will be the United Auto Workers, who have a share in responsibility for the demise of their company. The bond holders, who were willing to place their hard earned money at risk under a contractual arrangement providing certain guarantees, have been told to go pound sand. AIG, Citibank, Fannie Mae, Freddie Mac, and others deemed too large to fail are receiving benefits paid for by healthy responsible corporations, in some cases their direct competitors. The government is underwriting and rewriting mortgages that benefit the irresponsible at the expense of individuals who bought less house than they could afford and paid it off in less than the required 30 years. Finally, the government is offering to pay people a bonus to trade in their worthless old gas guzzling SUVs to buy a new more efficient automobile. If you bought a reliable car that gets 28 miles per gallon, you are out of luck.
Such behavior does have extraordinary bad effects in the real world. The link below connects to a half hour news documentary on the current economic condition of Las Vegas. It includes footage of a real “no notice” eviction. A renter with a valid lease, who paid his rent on time, is thrown out of his house without warning because the landlord took his money but did not use it to pay the mortgage. I could not believe that such an example of moral hazard could occur in this country but it did. Be warned, while this is a primetime news special, it deals with Las Vegas, ground zero for all sorts of moral hazards not covered by the two definitions listed above. If you are exceptionally sensitive to such things you might want to pass on this one. I would rate it PG-13.
http://www.youtube.com/watch?v=rFTZ3flsipE
None of this is new. King David railed on economic injustice on numerous occasions. Two of the Psalms are particularly hot. I choose to include a large portion of Psalm 37 for my concluding meditation, but I could have just as easily used the other example, maybe I will in some future post.
Psalm 37
[1] Fret not thyself because of evildoers, neither be thou envious against the workers of iniquity.
[2] For they shall soon be cut down like the grass, and wither as the green herb.
[3] Trust in the LORD, and do good; so shalt thou dwell in the land, and verily thou shalt be fed.
[4] Delight thyself also in the LORD; and he shall give thee the desires of thine heart.
[5] Commit thy way unto the LORD; trust also in him; and he shall bring it to pass.
[6] And he shall bring forth thy righteousness as the light, and thy judgment as the noonday.
[7] Rest in the LORD, and wait patiently for him: fret not thyself because of him who prospereth in his way, because of the man who bringeth wicked devices to pass.
[8] Cease from anger, and forsake wrath: fret not thyself in any wise to do evil.
[9] For evildoers shall be cut off: but those that wait upon the LORD, they shall inherit the earth.
[10] For yet a little while, and the wicked shall not be: yea, thou shalt diligently consider his place, and it shall not be.
[11] But the meek shall inherit the earth; and shall delight themselves in the abundance of peace.
[12] The wicked plotteth against the just, and gnasheth upon him with his teeth.
[13] The Lord shall laugh at him: for he seeth that his day is coming.
[14] The wicked have drawn out the sword, and have bent their bow, to cast down the poor and needy, and to slay such as be of upright conversation.
[15] Their sword shall enter into their own heart, and their bows shall be broken.
[16] A little that a righteous man hath is better than the riches of many wicked.
[17] For the arms of the wicked shall be broken: but the LORD upholdeth the righteous.
[18] The LORD knoweth the days of the upright: and their inheritance shall be for ever.
[19] They shall not be ashamed in the evil time: and in the days of famine they shall be satisfied.
[20] But the wicked shall perish, and the enemies of the LORD shall be as the fat of lambs: they shall consume; into smoke shall they consume away.
[21] The wicked borroweth, and payeth not again: but the righteous sheweth mercy, and giveth.
[22] For such as be blessed of him shall inherit the earth; and they that be cursed of him shall be cut off.
[23] The steps of a good man are ordered by the LORD: and he delighteth in his way.
[24] Though he fall, he shall not be utterly cast down: for the LORD upholdeth him with his hand.
[25] I have been young, and now am old; yet have I not seen the righteous forsaken, nor his seed begging bread.
[26] He is ever merciful, and lendeth; and his seed is blessed.
[27] Depart from evil, and do good; and dwell for evermore.
[28] For the LORD loveth judgment, and forsaketh not his saints; they are preserved for ever: but the seed of the wicked shall be cut off.
[29] The righteous shall inherit the land, and dwell therein for ever.
Friday, May 22, 2009
The Creation of Wealth
This one is primarily aimed at the prime demographic, those of you who are between the ages of 18 and 32. The reason that you are called the prime demographic is everyone wants you. In the earlier years this age group establishes brand loyalties that will last the rest of their lives. In the later years you will probably become part of a highly desirable “household formation unit” and you will buy a lot of stuff, like baby carriages, minivans, and three bedroom houses in places like Poolesville. The reason I want you to think about the formation of wealth is I want someone to mail me my social security checks when I turn 62 and continue to mail them to me for the rest of my life.
There are lots of good people in this country doing lots of good things. In fact, I believe almost everyone would consider themselves good people doing good things with their life, except for perhaps drug dealers, investment bankers, and other such criminals. (Just a joke) In the movie American Gangster, the protagonist portrayed by Denzel Washington, considered himself an ethical businessman providing high quality heroin at a reasonable price to a customer base who would buy it from someone anyway.
I am an engineer working for the U.S. Navy. When I watch a U.S. destroyer take out a group of Somalia pirates, I like to think I am a good person trying to make the world a safer place. But I don’t create any wealth. When my wife worked as a medical social worker at a hospital, she was helping people who were sick and sometimes had medical bills that were a real problem. She is a good person doing good things, but she doesn’t create any wealth. Preachers, doctors, teachers, missionaries, policemen, and even investment bankers can all be good people doing good things but none of them create any wealth. Service industries service wealth. The government can do all sorts of socially beneficial things because they can tax people and institutions that create wealth. Think about it. Where are the great teaching hospitals, like Johns Hopkins located, Bangladesh? No, great universities, research centers, and hospitals are found in counties that are very good at creating a great surplus of wealth. What are the implications of this for the future of our country, or for the future of China?
There are only a finite number of ways wealth can be created. A few seeds can be placed in the ground and then many seeds can be harvested, agriculture. Something that is worthless sitting in the ground can be brought to the surface and sold for a great profit, mining. Finally something of little value, say aluminum, can be turned into something of great value, such as a Boeing 767, manufacturing. Don’t think of these categories as limited. They are only as limited as your imagination, but at the end of the day, in order to create wealth, someone must bring something of greater value than the sum of its constituent parts into the physical world. As a nation, we have recently learned that the manipulation of money is not the same thing as the creation of wealth. Thinking that manipulating and insuring debt can make us all millionaires is a variation on the Amway fallacy. Back in the 70s and 80s some folks I know became enamored with Amway. They built giant pyramids of wealth based on the work of others in their mind’s eye, but at the end of the day they discovered that for the whole thing to work, someone had to go door to door and sell boxes of soap. They all went out and found real jobs.
So, I hope some young person reading this blog entry goes out into the material world and manufactures a new cancer drug, or a new type of power generator, or miniature machines that clean my toilet while I sleep, or find a plant in the Amazon rain forest that can be cultivated for food, or something I can not even imagine. Then I hope they share this wealth with the world and build great teaching hospitals, universities, fund missions all over the world, and even send me my social security check.
Proverbs 10
[15] The rich man's wealth is his strong city: the destruction of the poor is their poverty.
Proverbs 13
[11] Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.
[22] A good man leaveth an inheritance to his children's children: and the wealth of the sinner is laid up for the just.
Ecclesiastes 5
[19] Every man also to whom God hath given riches and wealth, and hath given him power to eat thereof, and to take his portion, and to rejoice in his labour; this is the gift of God.
There are lots of good people in this country doing lots of good things. In fact, I believe almost everyone would consider themselves good people doing good things with their life, except for perhaps drug dealers, investment bankers, and other such criminals. (Just a joke) In the movie American Gangster, the protagonist portrayed by Denzel Washington, considered himself an ethical businessman providing high quality heroin at a reasonable price to a customer base who would buy it from someone anyway.
I am an engineer working for the U.S. Navy. When I watch a U.S. destroyer take out a group of Somalia pirates, I like to think I am a good person trying to make the world a safer place. But I don’t create any wealth. When my wife worked as a medical social worker at a hospital, she was helping people who were sick and sometimes had medical bills that were a real problem. She is a good person doing good things, but she doesn’t create any wealth. Preachers, doctors, teachers, missionaries, policemen, and even investment bankers can all be good people doing good things but none of them create any wealth. Service industries service wealth. The government can do all sorts of socially beneficial things because they can tax people and institutions that create wealth. Think about it. Where are the great teaching hospitals, like Johns Hopkins located, Bangladesh? No, great universities, research centers, and hospitals are found in counties that are very good at creating a great surplus of wealth. What are the implications of this for the future of our country, or for the future of China?
There are only a finite number of ways wealth can be created. A few seeds can be placed in the ground and then many seeds can be harvested, agriculture. Something that is worthless sitting in the ground can be brought to the surface and sold for a great profit, mining. Finally something of little value, say aluminum, can be turned into something of great value, such as a Boeing 767, manufacturing. Don’t think of these categories as limited. They are only as limited as your imagination, but at the end of the day, in order to create wealth, someone must bring something of greater value than the sum of its constituent parts into the physical world. As a nation, we have recently learned that the manipulation of money is not the same thing as the creation of wealth. Thinking that manipulating and insuring debt can make us all millionaires is a variation on the Amway fallacy. Back in the 70s and 80s some folks I know became enamored with Amway. They built giant pyramids of wealth based on the work of others in their mind’s eye, but at the end of the day they discovered that for the whole thing to work, someone had to go door to door and sell boxes of soap. They all went out and found real jobs.
So, I hope some young person reading this blog entry goes out into the material world and manufactures a new cancer drug, or a new type of power generator, or miniature machines that clean my toilet while I sleep, or find a plant in the Amazon rain forest that can be cultivated for food, or something I can not even imagine. Then I hope they share this wealth with the world and build great teaching hospitals, universities, fund missions all over the world, and even send me my social security check.
Proverbs 10
[15] The rich man's wealth is his strong city: the destruction of the poor is their poverty.
Proverbs 13
[11] Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.
[22] A good man leaveth an inheritance to his children's children: and the wealth of the sinner is laid up for the just.
Ecclesiastes 5
[19] Every man also to whom God hath given riches and wealth, and hath given him power to eat thereof, and to take his portion, and to rejoice in his labour; this is the gift of God.
Friday, May 15, 2009
A Pause in This Stream of Consciousness
Diane’s mother had a friend who died recently. This wonderful Christian woman was ready (in every sense of the word) to meet her Lord and her Savior. Diane was always amazed at this woman’s faith and her trust in the Lord. As an example, shortly before her death, this woman fell in the hallway of the senior high rise where she lived. She could not get back up. Sometime later someone found her asleep on the floor. When asked what she was doing down there. Her reply was, “I fell and I couldn’t get up, so I thought as long as was lying here I might as well take a nap.”
Wow! What a way to face life.
I have been thinking a lot about money, my money, your money, and the management of money in an abstract theoretical way. My head is full of just about everything but faith. Of course, faith does not live in the head it lives in the heart and that, of course, is the problem. I live in my head not in my heart.
I have thought a lot about authentic communications between individuals. I have concluded dialogue is the essence, the foundation, of relationship. For any communication to be perceived as authentic by the receiver, I believe it must contain some combination of three elements, time, treasure, or emotional energy. Think about it, if I asked you to prove to me that you loved your children, what would you say? I imagine I would hear stories about how much time you spent with your child, perhaps the time you sat up all night with her when she was sick. Perhaps you would point to the cost of a college education at the school of her choice, or the hours spent in anguished prayer during a difficult period during her adolescence.
This, however, is communications between near equals. There is a different kind of communications, this sort of communication is based on power and authority. The centurion understood this kind of communication. He told Jesus, “Speak the word only and my servant will be healed.” I don’t think the centurion understood that he had faith. He did understand power and authority. His orders were backed by the Roman Imperium all the way to the Emperor’s throne room. He saw in Jesus a man who spoke words backed by the full power and authority of God Almighty.
We just don’t believe that we can speak with that kind of authority. I find this curious, as I tend to believe some pretty outrageous Elijah and the prophets of Baal stories told by visiting missionaries returning from some pretty horrid places. Why can a missionary speak with the kind of authority the Bible says is available to all believers, but I can not?
And so we come back around to money. We know that God states, “The silver is mine and the gold is mine.” We know that God owns the cattle on a thousand hills. So why do I spend so much time fretting about what is going to be available when or if I ever am able to retire. Wouldn’t it be better sometimes to just take a nap?
God bless all of you.
Matthew 8
[5] And when Jesus was entered into Capernaum, there came unto him a centurion, beseeching him,
[6] And saying, Lord, my servant lieth at home sick of the palsy, grievously tormented.
[7] And Jesus saith unto him, I will come and heal him.
[8] The centurion answered and said, Lord, I am not worthy that thou shouldest come under my roof: but speak the word only, and my servant shall be healed.
[9] For I am a man under authority, having soldiers under me: and I say to this man, Go, and he goeth; and to another, Come, and he cometh; and to my servant, Do this, and he doeth it.
[10] When Jesus heard it, he marvelled, and said to them that followed, Verily I say unto you, I have not found so great faith, no, not in Israel.
Wow! What a way to face life.
I have been thinking a lot about money, my money, your money, and the management of money in an abstract theoretical way. My head is full of just about everything but faith. Of course, faith does not live in the head it lives in the heart and that, of course, is the problem. I live in my head not in my heart.
I have thought a lot about authentic communications between individuals. I have concluded dialogue is the essence, the foundation, of relationship. For any communication to be perceived as authentic by the receiver, I believe it must contain some combination of three elements, time, treasure, or emotional energy. Think about it, if I asked you to prove to me that you loved your children, what would you say? I imagine I would hear stories about how much time you spent with your child, perhaps the time you sat up all night with her when she was sick. Perhaps you would point to the cost of a college education at the school of her choice, or the hours spent in anguished prayer during a difficult period during her adolescence.
This, however, is communications between near equals. There is a different kind of communications, this sort of communication is based on power and authority. The centurion understood this kind of communication. He told Jesus, “Speak the word only and my servant will be healed.” I don’t think the centurion understood that he had faith. He did understand power and authority. His orders were backed by the Roman Imperium all the way to the Emperor’s throne room. He saw in Jesus a man who spoke words backed by the full power and authority of God Almighty.
We just don’t believe that we can speak with that kind of authority. I find this curious, as I tend to believe some pretty outrageous Elijah and the prophets of Baal stories told by visiting missionaries returning from some pretty horrid places. Why can a missionary speak with the kind of authority the Bible says is available to all believers, but I can not?
And so we come back around to money. We know that God states, “The silver is mine and the gold is mine.” We know that God owns the cattle on a thousand hills. So why do I spend so much time fretting about what is going to be available when or if I ever am able to retire. Wouldn’t it be better sometimes to just take a nap?
God bless all of you.
Matthew 8
[5] And when Jesus was entered into Capernaum, there came unto him a centurion, beseeching him,
[6] And saying, Lord, my servant lieth at home sick of the palsy, grievously tormented.
[7] And Jesus saith unto him, I will come and heal him.
[8] The centurion answered and said, Lord, I am not worthy that thou shouldest come under my roof: but speak the word only, and my servant shall be healed.
[9] For I am a man under authority, having soldiers under me: and I say to this man, Go, and he goeth; and to another, Come, and he cometh; and to my servant, Do this, and he doeth it.
[10] When Jesus heard it, he marvelled, and said to them that followed, Verily I say unto you, I have not found so great faith, no, not in Israel.
Monday, May 11, 2009
TQM and Similar Management Fads
As I have thought about my postings, I have noticed a couple of sub-themes. One of them is not surprising given the state of the economy. In fact I consciously choose the titles for the two entries on General Motors, I’ve been afraid of changing (Parts I and II) from the lyrics of the song “Landslide.” The next line is, “because I’ve built my life around you.” Obviously if we build our lives around something besides Jesus we are likely to be severely disappointed and I think that all of us, to varying degrees, have placed our trust in something besides Jesus. A second theme that has popped up from time to time is the idea, do something, anything, no matter how small, to improve your situation, financial or otherwise, but just do it. Do it today!
Total Quality Management (TQM) is packaged and sold under a lot of different names. The latest flavor has been popularized by Toyota. They call their version Lean Six Sigma. All of these methodologies trace their roots back to the work of W. Edwards Deming, an American statistician who revolutionized manufacturing in post war Japan through the use of systematic process control and improvement. His work has been largely misapplied or ignored by American industry. I think that the most common reason for this failure stems from the very nature of a hierarchical structured bureaucracy. Power in such an organization comes with ownership or control of a process. TQM turns control of the process over to employees effected by the process. In essence, the animals are placed in charge of the zoo. Following strict rules, utilizing measurement and analysis, the employees can change or even, God forbid, eliminate a process entirely. No self respecting corporate satrap could allow such a think to happen.
Back in the late 1980s the first results from the use of TQM in American industry were examined in a remarkably wise article published in the Harvard Business Review. The results were discouraging. The author appalled by the misapplications of Deming’s methodology, observed that initiating TQM was really extraordinarily simple. If you will, please allow me to put this into my own words. If I have the misfortune of falling into a cactus, how do I remove the prickers? Answer: One at a time, starting with the one that hurts the worst. The author recommended that a TQM program start without training the employees or attempting to promote the method with slogans or programs. Pick a problem, any problem, but pick something that is so universally hated that no one will care if your proposed improvement fails. If you fail, your employees will say, “At least he tried.” If you succeed you now have the backing of your employees to go after more difficult or politically sensitive problems.
So, just for today, think up something and just do it. It might not be a very big idea or a very good idea, but just try it and see what happens. Maybe you could collect a little extra each month to help pay down that credit card bill by throwing all your change into a jar at the end of each day and then using that money at the end of each month to get out of debt. Or maybe, like someone I know, you might have wanted to write but one thing or another (generally called real life) prevented the fulfillment of that dream.
This may not be much, but it is a start.
Matthew 13 (NIV)
31He told them another parable: "The kingdom of heaven is like a mustard seed, which a man took and planted in his field. 32Though it is the smallest of all your seeds, yet when it grows, it is the largest of garden plants and becomes a tree, so that the birds of the air come and perch in its branches."
Total Quality Management (TQM) is packaged and sold under a lot of different names. The latest flavor has been popularized by Toyota. They call their version Lean Six Sigma. All of these methodologies trace their roots back to the work of W. Edwards Deming, an American statistician who revolutionized manufacturing in post war Japan through the use of systematic process control and improvement. His work has been largely misapplied or ignored by American industry. I think that the most common reason for this failure stems from the very nature of a hierarchical structured bureaucracy. Power in such an organization comes with ownership or control of a process. TQM turns control of the process over to employees effected by the process. In essence, the animals are placed in charge of the zoo. Following strict rules, utilizing measurement and analysis, the employees can change or even, God forbid, eliminate a process entirely. No self respecting corporate satrap could allow such a think to happen.
Back in the late 1980s the first results from the use of TQM in American industry were examined in a remarkably wise article published in the Harvard Business Review. The results were discouraging. The author appalled by the misapplications of Deming’s methodology, observed that initiating TQM was really extraordinarily simple. If you will, please allow me to put this into my own words. If I have the misfortune of falling into a cactus, how do I remove the prickers? Answer: One at a time, starting with the one that hurts the worst. The author recommended that a TQM program start without training the employees or attempting to promote the method with slogans or programs. Pick a problem, any problem, but pick something that is so universally hated that no one will care if your proposed improvement fails. If you fail, your employees will say, “At least he tried.” If you succeed you now have the backing of your employees to go after more difficult or politically sensitive problems.
So, just for today, think up something and just do it. It might not be a very big idea or a very good idea, but just try it and see what happens. Maybe you could collect a little extra each month to help pay down that credit card bill by throwing all your change into a jar at the end of each day and then using that money at the end of each month to get out of debt. Or maybe, like someone I know, you might have wanted to write but one thing or another (generally called real life) prevented the fulfillment of that dream.
This may not be much, but it is a start.
Matthew 13 (NIV)
31He told them another parable: "The kingdom of heaven is like a mustard seed, which a man took and planted in his field. 32Though it is the smallest of all your seeds, yet when it grows, it is the largest of garden plants and becomes a tree, so that the birds of the air come and perch in its branches."
Saturday, May 9, 2009
Marginal Utility and Unintended 2nd Order Effects
Unintended second order effects are one of the problems that can occur anytime we are willing to risk action. Sometimes these effects occur when pushing the edge of what economists term marginal utility. This concept was explained by my economics professor in terms of beer. The marginal utility of the first and second beer are positive, they make you happy and funny. The marginal utility of the third and fourth beer decline in value relative to the effect of the first two. By the time you finish a twelve pack the marginal utility of the last beer is profoundly negative. You will pass out and wake up with a terrible headache.
Sometimes unintended second order effects occur even when those who initiate the actions have the best of intentions. When I was young I worked in the American textile industry. At the time brown lung was a problem in greige mills where cotton thread was woven into cloth on mechanical looms. The cotton dust in the air caused emphysema and similar degenerative lung disease in the work force. The government decreed that the mills would have to remove 90% of the cotton dust from the air. Turns out that was not much of a problem. This goal could be accomplished by simple inexpensive devices like mist machines placed over the looms that could knock the cotton dust out of the air. Enboldened by their success the government went for a 95% dust free standard. This could only be accomplished using expensive solutions, like fully enclosed looms. At that time return on investment for new textile machinery was about 3.5%. Pass book savings at an insured savings and loan was then running at about 5.0%. The result was the elimination of roughly 250,000 American jobs with a single stroke of the pen. Of course that was not the end of the story. Existing looms and other textile machinery were still perfectly capable of producing cloth, so the companies sold their used equipment to Korea and other countries primarily in Asia. There this machinery was operated by teenaged girls working twelve hour shifts for slave wages. In these countries there were virtually no environmental of safety standards of any sort.
Is the world a better place?
A similar sort of value analysis can be undertaken with any purchase. Whether buying clothing, stereo equipment, or a new car we can mentally create a cost/performance chart, a value curve, if you will. The difference between a $1,000 car and a $4,000 car is considerable. The difference between a $32,000 entry level luxury sedan and such a car that sells for $35,000 is much harder to measure. At some point, say a $360,000 Rolls Royce, the payments will be so high that your wife might divorce you on the grounds of profound stupidity, and then perhaps, you will discover that you will not be able to impress many women before your car is repossessed.
Mathew 16
[24] Then said Jesus unto his disciples, If any man will come after me, let him deny himself, and take up his cross, and follow me.
[25] For whosoever will save his life shall lose it: and whosoever will lose his life for my sake shall find it.
[26] For what is a man profited, if he shall gain the whole world, and lose his own soul? or what shall a man give in exchange for his soul?
Sometimes unintended second order effects occur even when those who initiate the actions have the best of intentions. When I was young I worked in the American textile industry. At the time brown lung was a problem in greige mills where cotton thread was woven into cloth on mechanical looms. The cotton dust in the air caused emphysema and similar degenerative lung disease in the work force. The government decreed that the mills would have to remove 90% of the cotton dust from the air. Turns out that was not much of a problem. This goal could be accomplished by simple inexpensive devices like mist machines placed over the looms that could knock the cotton dust out of the air. Enboldened by their success the government went for a 95% dust free standard. This could only be accomplished using expensive solutions, like fully enclosed looms. At that time return on investment for new textile machinery was about 3.5%. Pass book savings at an insured savings and loan was then running at about 5.0%. The result was the elimination of roughly 250,000 American jobs with a single stroke of the pen. Of course that was not the end of the story. Existing looms and other textile machinery were still perfectly capable of producing cloth, so the companies sold their used equipment to Korea and other countries primarily in Asia. There this machinery was operated by teenaged girls working twelve hour shifts for slave wages. In these countries there were virtually no environmental of safety standards of any sort.
Is the world a better place?
A similar sort of value analysis can be undertaken with any purchase. Whether buying clothing, stereo equipment, or a new car we can mentally create a cost/performance chart, a value curve, if you will. The difference between a $1,000 car and a $4,000 car is considerable. The difference between a $32,000 entry level luxury sedan and such a car that sells for $35,000 is much harder to measure. At some point, say a $360,000 Rolls Royce, the payments will be so high that your wife might divorce you on the grounds of profound stupidity, and then perhaps, you will discover that you will not be able to impress many women before your car is repossessed.
Mathew 16
[24] Then said Jesus unto his disciples, If any man will come after me, let him deny himself, and take up his cross, and follow me.
[25] For whosoever will save his life shall lose it: and whosoever will lose his life for my sake shall find it.
[26] For what is a man profited, if he shall gain the whole world, and lose his own soul? or what shall a man give in exchange for his soul?
Sunday, May 3, 2009
Just a Random Though
This week a coworker introduced me to a study of the stock market by Benoit Mandelbrot, the famous mathematician who discovered fractals. My coworker, by the way, is a notable mathematician in his own right. Basically Mandelbrot contends there are a lot more large unpredictable moves in stock prices than can be explained by normal statistical means. He contends that because this is so, the investor needs to be far more diversified than previously studies recommend.
In simple terms, there are 50 foot rouge waves that can come unexpectedly out a calm sea. Thankfully, they are exceedingly rare, but that isn’t much comfort if your sailboat happens to be in the path of one of these monstrosities.
What Mandelbrot fails to consider, at least in the brief article I read, is the fact that not all stocks are created equal. If a stock has a high or nonexistent Price Earnings Ratio, an unsustainable dividend, and negative cash flow (GM in the spring of 2008) it is in greater peril than a stable conservative company. Coca Cola (KO) has a realistic Price Earnings Ratio, a sustainable dividend, and good cash flow. KO was certainly damaged in the last year, the worst in 80 but basically it maintained its value.
Of course there are limits to diversification. Index funds, for example, buy the market. At that point the market becomes just another stock and as Mandelbrot observes individual stocks can be hit by unexpected statistical deviations, like a 50% drop in some well managed index funds.
Just some thoughts.
Luke 6
[47] Whosoever cometh to me, and heareth my sayings, and doeth them, I will shew you to whom he is like:
[48] He is like a man which built an house, and digged deep, and laid the foundation on a rock: and when the flood arose, the stream beat vehemently upon that house, and could not shake it: for it was founded upon a rock.
[49] But he that heareth, and doeth not, is like a man that without a foundation built an house upon the earth; against which the stream did beat vehemently, and immediately it fell; and the ruin of that house was great.
In simple terms, there are 50 foot rouge waves that can come unexpectedly out a calm sea. Thankfully, they are exceedingly rare, but that isn’t much comfort if your sailboat happens to be in the path of one of these monstrosities.
What Mandelbrot fails to consider, at least in the brief article I read, is the fact that not all stocks are created equal. If a stock has a high or nonexistent Price Earnings Ratio, an unsustainable dividend, and negative cash flow (GM in the spring of 2008) it is in greater peril than a stable conservative company. Coca Cola (KO) has a realistic Price Earnings Ratio, a sustainable dividend, and good cash flow. KO was certainly damaged in the last year, the worst in 80 but basically it maintained its value.
Of course there are limits to diversification. Index funds, for example, buy the market. At that point the market becomes just another stock and as Mandelbrot observes individual stocks can be hit by unexpected statistical deviations, like a 50% drop in some well managed index funds.
Just some thoughts.
Luke 6
[47] Whosoever cometh to me, and heareth my sayings, and doeth them, I will shew you to whom he is like:
[48] He is like a man which built an house, and digged deep, and laid the foundation on a rock: and when the flood arose, the stream beat vehemently upon that house, and could not shake it: for it was founded upon a rock.
[49] But he that heareth, and doeth not, is like a man that without a foundation built an house upon the earth; against which the stream did beat vehemently, and immediately it fell; and the ruin of that house was great.
Saturday, May 2, 2009
Do what I love?
On television and in the popular press we are told, “Do what you love and love what you do.” Pretty simple advice that seems an obvious prerequisite to happiness, but is it? The gospels tell us He has come to bring us life and life more abundantly. The gospels also tell us to pick up our cross and follow Him. Which is it? I have spent a very large portion of my life doing things I really didn’t enjoy because I believe there are some things that are more important than my happiness.
At a retreat, during counseling, my spiritual director observed the Germans had a word, pflichtbewurstrein, that described a condition of the soul. It means to be conscious of duty. My spiritual director believed that I had a bad case of this disease. He is probably correct. At times when I slog through life, I am more likely to hear the voice of my father than the voice of my Heavenly Father.
Consider; one day my father chose to drive to work in an ice storm. He had absolutely no business on the road in such conditions. He drove his car over a railroad bridge. At the bottom of the bridge there was a sharp right hand bend in the road. My father turned the steering wheel but the car did not turn. It continued to go straight into an oncoming truck. Since the speeds were pretty slow our car was totaled but my father was not too badly injured. He was taken to the hospital where it was discovered he had a broken rib. He also had a pretty nasty gash on his chin. They sewed up the gash, wrapped a very large ace bandage around his rib cage, gave him some pain medication, and released him. My mother picked him up in her car and drove him home. My father ate something, got right back into my mother’s car, and drove to work. His values are not the values of a typical American employee. They are the values of a German solider fighting at the siege of Stalingrad.
Now that I have spent almost 400 words explaining why I can not write this essay, let me continue. There are people who get lucky in life. They see an opportunity, they roll the dice, work hard, have the necessary talent, and they win. It doesn’t happen very often. Eight out of ten Americans are dissatisfied with their jobs. The two out of ten that are satisfied tend to be medical doctors, college professors, and ordained clergy. There are exceptions. I once read a story in one of the Millionaire Next Door series (I strongly recommend these books). A young man graduated from a prestigious MBA program and found employment with White Trucks. As he was destined for upper management, he was placed in a program that would expose him to every aspect of the company’s business. In one of his postings, he was asked to sell a wrecked truck to a junk yard. He was given $600 for the truck. The next day he was asked to find a used engine for a truck that was in their shop for repair. He went to the same junk yard that bought his truck and found the correct engine. It cost $600. A light bulb went off in the young man’s head. He worked long enough to buy his first wrecked truck. Then he turned his back on a certain future and never looked back. Today he millionaire many times over and the owner of the largest network of truck junk yards in the Southern United States.
I think the first step is actually determining what it is that we love to do. I think we can tell what we really love by examining where we put our time, treasure, and emotional energy. If you are willing to expend these three commodities on something, regardless of outcome, I believe you have found what you truly love. After hearing Doug’s recent sermon on Nehemiah, I would add one more step. If it is truly something to pursue, I believe that a day will come when you can no longer stand not doing it. Maybe doing it will make you happy and maybe not, but perhaps you will find something more important than doing what you love. Maybe you will find your way through this valley of tears.
May God have mercy on my soul.
Nehemiah Chapter 1 (NIV)
The words of Nehemiah son of Hakaliah:
In the month of Kislev in the twentieth year, while I was in the citadel of Susa,
2 Hanani, one of my brothers, came from Judah with some other men, and I questioned them about the Jewish remnant that had survived the exile, and also about Jerusalem.
3 They said to me, "Those who survived the exile and are back in the province are in great trouble and disgrace. The wall of Jerusalem is broken down, and its gates have been burned with fire."
4 When I heard these things, I sat down and wept. For some days I mourned and fasted and prayed before the God of heaven.
5 Then I said:"LORD, the God of heaven, the great and awesome God, who keeps his covenant of love with those who love him and keep his commandments,
6 let your ear be attentive and your eyes open to hear the prayer your servant is praying before you day and night for your servants, the people of Israel. I confess the sins we Israelites, including myself and my ancestral family, have committed against you.
7 We have acted very wickedly toward you. We have not obeyed the commands, decrees and laws you gave your servant Moses.
8 "Remember the instruction you gave your servant Moses, saying, 'If you are unfaithful, I will scatter you among the nations,
9 but if you return to me and obey my commands, then even if your exiled people are at the farthest horizon, I will gather them from there and bring them to the place I have chosen as a dwelling for my Name.'
10 "They are your servants and your people, whom you redeemed by your great strength and your mighty hand.
11 Lord, let your ear be attentive to the prayer of this your servant and to the prayer of your servants who delight in revering your name. Give your servant success today by granting him favor in the presence of this man."
At a retreat, during counseling, my spiritual director observed the Germans had a word, pflichtbewurstrein, that described a condition of the soul. It means to be conscious of duty. My spiritual director believed that I had a bad case of this disease. He is probably correct. At times when I slog through life, I am more likely to hear the voice of my father than the voice of my Heavenly Father.
Consider; one day my father chose to drive to work in an ice storm. He had absolutely no business on the road in such conditions. He drove his car over a railroad bridge. At the bottom of the bridge there was a sharp right hand bend in the road. My father turned the steering wheel but the car did not turn. It continued to go straight into an oncoming truck. Since the speeds were pretty slow our car was totaled but my father was not too badly injured. He was taken to the hospital where it was discovered he had a broken rib. He also had a pretty nasty gash on his chin. They sewed up the gash, wrapped a very large ace bandage around his rib cage, gave him some pain medication, and released him. My mother picked him up in her car and drove him home. My father ate something, got right back into my mother’s car, and drove to work. His values are not the values of a typical American employee. They are the values of a German solider fighting at the siege of Stalingrad.
Now that I have spent almost 400 words explaining why I can not write this essay, let me continue. There are people who get lucky in life. They see an opportunity, they roll the dice, work hard, have the necessary talent, and they win. It doesn’t happen very often. Eight out of ten Americans are dissatisfied with their jobs. The two out of ten that are satisfied tend to be medical doctors, college professors, and ordained clergy. There are exceptions. I once read a story in one of the Millionaire Next Door series (I strongly recommend these books). A young man graduated from a prestigious MBA program and found employment with White Trucks. As he was destined for upper management, he was placed in a program that would expose him to every aspect of the company’s business. In one of his postings, he was asked to sell a wrecked truck to a junk yard. He was given $600 for the truck. The next day he was asked to find a used engine for a truck that was in their shop for repair. He went to the same junk yard that bought his truck and found the correct engine. It cost $600. A light bulb went off in the young man’s head. He worked long enough to buy his first wrecked truck. Then he turned his back on a certain future and never looked back. Today he millionaire many times over and the owner of the largest network of truck junk yards in the Southern United States.
I think the first step is actually determining what it is that we love to do. I think we can tell what we really love by examining where we put our time, treasure, and emotional energy. If you are willing to expend these three commodities on something, regardless of outcome, I believe you have found what you truly love. After hearing Doug’s recent sermon on Nehemiah, I would add one more step. If it is truly something to pursue, I believe that a day will come when you can no longer stand not doing it. Maybe doing it will make you happy and maybe not, but perhaps you will find something more important than doing what you love. Maybe you will find your way through this valley of tears.
May God have mercy on my soul.
Nehemiah Chapter 1 (NIV)
The words of Nehemiah son of Hakaliah:
In the month of Kislev in the twentieth year, while I was in the citadel of Susa,
2 Hanani, one of my brothers, came from Judah with some other men, and I questioned them about the Jewish remnant that had survived the exile, and also about Jerusalem.
3 They said to me, "Those who survived the exile and are back in the province are in great trouble and disgrace. The wall of Jerusalem is broken down, and its gates have been burned with fire."
4 When I heard these things, I sat down and wept. For some days I mourned and fasted and prayed before the God of heaven.
5 Then I said:"LORD, the God of heaven, the great and awesome God, who keeps his covenant of love with those who love him and keep his commandments,
6 let your ear be attentive and your eyes open to hear the prayer your servant is praying before you day and night for your servants, the people of Israel. I confess the sins we Israelites, including myself and my ancestral family, have committed against you.
7 We have acted very wickedly toward you. We have not obeyed the commands, decrees and laws you gave your servant Moses.
8 "Remember the instruction you gave your servant Moses, saying, 'If you are unfaithful, I will scatter you among the nations,
9 but if you return to me and obey my commands, then even if your exiled people are at the farthest horizon, I will gather them from there and bring them to the place I have chosen as a dwelling for my Name.'
10 "They are your servants and your people, whom you redeemed by your great strength and your mighty hand.
11 Lord, let your ear be attentive to the prayer of this your servant and to the prayer of your servants who delight in revering your name. Give your servant success today by granting him favor in the presence of this man."
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