The Root Cause of America's Financial Problems...and a Good Solution

It all started with the people who wanted to buy something they couldn't afford. Rather than save up until they could, they applied for a loan: for example, for a new car, a home, real estate investment, new furniture, jewelry, vacation, etc.

In earlier times, if their income suggested they would be unlikely to afford to pay back the loan, lenders would turn them down and the person would have been forced to save some money or increase their income before trying again to get a loan.

But in recent years, lenders had a lot of money to lend and had methods--often deceptive methods--of making a profit even if the loan went unpaid, so lenders offered to lend money to unqualified borrowers.

And those borrowers accepted the loans, many knowing they were unlikely to afford to pay it all back but could later walk away from their car or credit card debt, or sell their real estate at a profit if the market went up or walk away from their mortgage if the market went down. And so now, for example, a record number of U.S. homes are in foreclosure. The number of repossessed cars has increased 10% last year and expected to rise an additional 7-10% this year.

In short, the root cause of the problem is borrowers' and lenders' poor ethics.

If poor ethics is the core cause of America's financial mess, then, even if the taxpayer ended up repaid, is the wisest solution to bail out the miscreants with $700 billion ($6,200 from every household in the U.S.) of your and my money? Especially a bailout that even its advocates are unsure how helpful it will be to us on Main Street or even to Wall Street?

(Update: The $700 billion has now been additionally larded with $150 billion in pork. Even in crisis, politicians will be politicians.)

Is the solution yet more government intervention, thereby shackling the invisible wise hand of the free market? Remember the government's track record. Here are a few examples in the financial arena:

• Fannie Mae and Freddie Mac, massive government-sponsored enterprises, now in financial disarray and under conservatorship. Fannie's stock price has crashed from 70 a year ago to 1.5 today. Freddie's has plummeted from 62 to 1.7.
• The Community Reinvestment Act, which encourages lending to underqualified borrowers in the name of "social justice" and thus helped cause America's current financial disaster.
• The Sarbanes-Oxley Act, which mandated that U.S. companies submit mountains of paperwork that cost companies and in turn consumers $1.4 trillion(!) without clear evidence of SOX providing even a small fraction of that amount in societal benefit. You can't legislate integrity; unethical people will always find a way to be dishonest.

Yes, a modest increase in regulation is probably prudent, for example:

• Requiring buyers of CDOs, CMOs,and CDSs to meet margin requirements, just as stock buyers are.
• Preventing conflicts of interest between credit rating agencies and issuers of CDOs, CMOs, and CDSs.
  
• Ensuring that the companies that write insurance on those securities keep enough capital on hand to make good on the policies they issue.
  

But in my judgment, a taxpayer-paid bailout and a major increase in government regulation are not the answers to America's financial crisis.

If we are to get to the root cause of our financial crisis and of many other structural problems in the U.S. economy, a far wiser solution is to make the citizenry more ethical.

Of course, that's no easy task. After all, every business major must take an ethics course and that has hardly solved the problem. But I'd certainly rather see the nation invest $700 billion on improving people's ethics than to bail out the bad guys and then try to police everyone from being unethical again. That's not much more likely to succeed than Prohibition was to eliminate drinking.

How would I invest $700 billion to improve Americans' ethics?

1. Parenting education in the public and private high schools, colleges, adult schools, churches, etc., including how to--from Day One--ensure that your child treats ethics as the highest priority.

2. A critical-incident-based ethics curriculum from preschool through college. Many educators will claim that the school day is already overpacked but I believe the time would be better spent on ethics than, for example, on P.E., history, art, and yes, even the currently sacrosanct multicultural education.

3. A public education campaign, much like that used to reduce cigarette smoking, to emphasize the primacy of ethics to the life well-led and an America worth living in.

4. Periodic ethics training in the workplace. Just as annual sexual harassment workshops are required, annual ethics workshops should be. This training should focus on ethical stress points in that particular workplace: for example, whether a salesperson should voluntarily disclose a product’s weaknesses to potential customers.

5. 1-800-ETHICAL. Just as participants in Alcoholics Anonymous can call for counsel and support when tempted to take a drink, a government-paid-for hotline should be available for people, especially in the workplace, tempted to do something unethical.

6. Reinventing our system of electing leaders. Currently, it is rife with opportunity for dishonesty. We get the message that ethics is not primary in America when we see that our leaders get elected by accepting cash from special-interest donors, money that is used to air deceptive commercials and to hire spinmeisters.

7. Enforce our laws. For example, if we allow 13,000,000 people to illegally step ahead of the legal immigration line, and if we bail out unethical lenders and packagers instead of punishing them, we are taught, by example, that ethics is not primary in the U.S.

Of course, forgoing the bailout will mean a serious decline in our economy, but that decline is likely to be shorter and the eventual recovery more enduring than one that would follow a bailout.

As corporate America, government, indeed all of us should have done in the past, we need to eschew short-term profit for long-term, sturdy growth.

Your thoughts?

This I Believe

I just read a book, This I Believe II, which consists of 75 people's essays on their core belief. That motivated me to write my own.

The book suggests that a good "This I Believe" essay must be truly honest, short, and based on a specific anecdote. Okay.

I would have thought I'd have no trouble landing a professorship. After all, I had a Ph.D from the University of California Berkeley, specializing in education program evaluation (a hot field then and now), my dissertation was nominated for UCB's dissertation of the year, and I've always been told that I'm a fine teacher and writer.

Yet I applied for a number of professorships, and after a while wasn't too picky about it--I even applied to places like the tiny Brescia College in Owensboro, Kentucky. Yet I was offered not one job that was more than a low-pay, part-time, temp, fill-in.

Finally, I was interviewed at San Francisco State for a tenure-track position. It was the interview from heaven: The professors nodded and smiled in agreement throughout the interview. When the chairman asked the other interviewers to leave and for me to stay, I was sure I'd finally be offered a job.

But he said, and I remember it word for word: "Marty, if you tell anyone I said this, I'll deny it but I want to save you the cognitive dissonance. Marty, you are by far the most qualified candidate for this job, and you don't stand a ghost of a chance of getting it. The dean has informed us that the next seven tenure-track positions to be filled will (emphasis his) be women and minorities."

Over my 2,900 career coaching and higher education clients over the past 23 years, I have seen countless examples of such reverse discrimination. Indeed, reverse discrimination is not the exception; it's the norm.

And my perhaps most deeply held belief is that the benefits that derive from reverse discrimination are far outweighed by its liabilities. Society is ultimately doomed when it prioritizes something other than merit in choosing its bridge builders, medical school students, brand-name-college undergraduates, government, non-profit, and corporate leaders, etc.

The latter reminds me of a client--an eminent, brilliant minority woman, I might add--who serves on the board of three major corporations. She told me that to meet government "goals" and to avoid the Jesse Jackson/Al Sharpton machine boycotting the companies or getting the media to call the companies racist, the companies have to hire and promote many blacks who, on the merits, never would have been hired. She continued to say that they may have brand-name degrees, (also the result of reverse discrimination) but they're not good employees. "The companies just write them off as a loss and farm them out to the jobs where they can do the least harm."

I worry terribly that reverse discrimination and its devastating effects, rampant already, will only accelerate under an Obama administration. His spinmeisters paint him as a "post-racial candidate" but a careful reading of his 2008 speech on race, and more important, his long-term associates--not just Reverend Jeremiah Wright and Frank Marshall Davis, but most significant, his wife who, for example, headed Public Allies--makes clear to me that Obama will use his prodigious abilities to push merit yet further toward the back of the bus. To devastating effect.

This I believe.

Performance Reviews: Giving Them, Getting Them

I just read an article of that title, which motivated me to write one myself.

Most people dislike giving and getting performance reviews, yet they can be invaluable. I believe these are the keys to making the most of them: 

When Getting a Performance Review

1. Be prepared. Ideally ongoing, you should keep a file or all your accomplishments and praise you've received. Whether you're aiming for a raise or just to avoid the axe, that goodie file can be invaluable. Bring a printout to your performance review or email it to your boss in advance.

2. Before entering the room, remind yourself that if you follow the advice below, a performance review can really help you.

3. Encourage candor. Some bosses won't give negative feedback for fear of demotivating you. It's in your interest to get the straight scoop: it will help you grow or at least help you learn what you need to improve in to avoid getting fired. 

So to encourage candor, at the beginning of the meeting, say something like, "I've been looking forward to this, sure, to hear the good things so I can continue or build on those, but also to hear the areas for growth because I really want to be as good as I can be." 

4. When receiving negative feedback, it's usually wise to not disagree on the spot. If you can't simply say, "Good point. I'll really work on that," say in a pleasant or at least not-defensive tone, "I appreciate your candor and want to take some time to reflect on it." That avoids the boss thinking that your not objecting is tacit agreement with the criticism. Certainly, however, ask follow-up questions so you fully understand the boss's real concern.

5. If you're unhappy with some or all of the performance review, end by reiterating that you'd like a little time to reflect and would appreciate  a follow-up meeting in a few days. 

6. When you get home that day, review your notes and take an honest look at yourself: What can you do to build on your strengths? Is he correct about your weaknesses? Not sure? Ask a trusted colleague.

When Giving a Performance Review

1. Be honest. You're dealing with your supervisee's life here. He at least deserves the straight scoop so he can work to improve. Or if a weakness is unlikely to improve, perhaps you can readjust the job description to be a better accommodate him or if necessary, let him know he needs to look for another job that is a better fit.

2. Start with the positive. That will make the evaluee more open to suggestions for improvement.

3. Always give suggestions for improvement. We all need to grow. Be as constructive as possible, for example, rather than say, "You speak in a monotone," say, "I believe you can be more effective in meetings if you say every sentence as though you were a concert pianist: varying loudness, pace, emphasis. "

4. If the supervisee gets defensive, that's the cue for you to get as calm as possible. Let the person spew and only when finished say something like, "I understand how you feel. Take a couple of days to reflect and perhaps check out my perception with a colleague or two, and then let's set up a time to talk again. Whaddya say?"

I am aware that following such advice is easier said than done. Performance evaluations are stressful for all concerned, but having a game plan going in will help you do better. 

One Approach to Falling Asleep and Staying Asleep

I've shared my sleep ritual with my clients who have sleep issues. Even some who have attended Stanford's Sleep Clinic said it has helped them. So, perhaps it might help you.

I do the same sleep ritual every night. It's comforting, in the same way that people's religious rituals are comforting. Here is that ritual:

1.  Two to four hours before my likely bedtime, I ride my exercise bike for 30 minutes.  That way, after the immediate energizing effect of exercise has worn off, I will have tired myself.

2. I do not have a fixed bedtime. When I start to feel tired (That varies within a one-hour range), I head downstairs from my home-office, brush my teeth and get undressed.

3. Like a hibernating bear, I keep the bedroom cool, which lowers your metabolic rate, making you more likely to sleep.

4. I hop into bed with my wife (or a stuffed dog when she's not there) on one side, and my real dog, Einstein, curled up against me on the other.

5. I read pleasant things that close down my brain: for example, a gardening mail order catalog, mutual fund report, or the book 14,000 Things to be Happy About. 

6. When I feel myself getting quite tired, on my bedside CD player, I play the CD: Through a Dog's Ear:  Music to Calm Your Canine Companion. Developed to calm hyper dogs, it also calms me. It's classical piano music that has been slowed down and simplified.  I rarely change the CD. Its familiarity is part of the ritual.

7. I turn out the light and envision something pleasant: usually my strolling along a tree-shaded creek, picturing and then rating every plant in my garden, or simply monitoring my breathing, thinking: "In with the good air; out with the bad."

8. If I get up in the middle of the night (rare), I think to myself, "Perhaps my body is telling me I don't need to sleep." (That reduces any anxiety about not getting enough sleep.) But I know I probably do need more sleep, so I repeat steps 6 and 7 above. 

I hope that at least one aspect of my ritual, if not the entire one, is useful to you. Post here to let me know, or if you have other suggestions that might help my sleepless in Seattle or wherever readers. 

Ron Paul Strongly Opposes the Bailout

I just received this from Ron Paul. At minimum, it suggests to me that we shouldn't rush to providing a $750 billion bailout.

Dear Friends:

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."

Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?

Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

In liberty,

Ron Paul

"ONE MILLION People Falsely Accused of Domestic Violence EACH YEAR"

I just received this from a nonprofit called RADAR (Respecting Accuracy in Domestic Abuse Reporting):

Tuesday, September 16, Wendy Flanders of Lancaster County, Pennsylvania, was convicted of making false claims of domestic violence and for committing perjury in a child custody hearing.

Ben Vonderheide, the target of the charges, explained he had been subjected to more than 40 false allegations over the past six years, including charges of domestic violence, harassment, and even the kidnapping of his own son.

"All I wanted was for Wendy Flanders to get help, and stop behaving in these awful ways, destroying her life and ours. " Vonderheide revealed. "I'm overwhelmingly happy for the fathers down the road who may not have to go to jail, for the children who are going to know their fathers, and love their fathers."

Ben Vonderheide is just one of the one million(!) (See Note 20 on p. 12) persons who are falsely accused of domestic violence each year. 

In order to stop the wave of false allegations, the theme of the 2008 Domestic Violence Awareness Month is "False Claims Hurt True Victims: Fix VAWA Now!"

(VAWA is the Joe Biden-sponsored Violence Against Women Act, which excludes male victims of domestic violence and makes it easy for wives to use false domestic violence claims against their husbands as a way of getting more desirable settlements in divorce cases.)

RADAR has prepared a flyer to hand out at political rallies, meetings, or other meetings. The flyer can be found here: http://www.mediaradar.org/docs/RADARflyer-DVAM2008.pdf. 

To learn more the problem of spurious charges, we invite you to read RADAR's Special Report, "A Culture of False Allegations: How VAWA Harms Families and Children:" http://www.mediaradar.org/docs/RADARreport-VAWA-A-Culture-of-False-Allegations.pdf

Ben Vonderheide's battle cost over $350,000 in legal expenses. False allegations of domestic violence have become a legal and social travesty. For our children, we must work together to stop this epidemic.

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R.A.D.A.R. – Respecting Accuracy in Domestic Abuse Reporting – is a non-profit, non-partisan organization of men and women working to improve the effectiveness of our nation's approach to solving domestic violence. http://www.mediaradar.org. 

Higher Education's Iconic Status Continues to Erode

I've long written, for example, in an article in the Chronicle of Higher Education, that higher education is America's most overrated product. 

I've also pointed to growing support for that contention in major media outlets. The most recent occurred today in a BBC editorial denigrating no less than Harvard Business School. 

It is ironic that the more prestigious a college, the worse the instruction is likely to be. That's because colleges gain most of their prestige from their professors' research productivity, which is inversely correlated with the ability and desire to teach. Also, compared with low-prestige colleges, prestigious universities spend a higher proportion of their budgets on research. 

Designer-label colleges can get away with charging so much and providing so little because students are brand-name driven in choosing a college, knowing that, with a designer-label diploma, employers will hire them, whether or not they learned anything at college.

Interestingly, the BBC invited Harvard Business School to respond to the scathing segment--Harvard declined to.