Wednesday, October 15, 2008

You Can Defeat Three Kinds of Poverty from Wherever Your Are (Blog Action Day 2008)

This is BLOG ACTION DAY against poverty.

Poverty, to me, isn't about having few material possessions. It is about not being able to live well in this world. It is about being left on the sidelines of life.

The technical term "marginalization" means essentially the same thing, but I like the more visual sports metaphor. Picture some people always sit out the game while others have a great time playing.

Everyone is needed in this game of life. So here is my manifesto for Blog Action Day against Poverty:

1. Every human being has a unique genius inside them. We are put here on this earth to bring forth that which makes us unique; to give to the world what only we can give. Our genetic blueprint is utterly unique; you only have one chance to bring forth that uniqueness that is you and you alone.

2. Poverty is what stops us from bringing forth our unique contribution to the world. Poverty is rarely just one thing. It is the cluster of things that keep our potential locked inside. I believe there are three kinds of poverty:

a. Material poverty. The lack of food, clothing, shelter, safety, communications, all of those external things.

b. Relationship poverty. The lack of the kinds of relationships that enable us to take action to lead a good life. Someone in the developing world may lack the connections to sell their crafts to anyone but foot-travelers. Your neighbor's child may lack for kind words when she needs them. Villages can be consumed by violence and the enmity and distrust that it breeds.

c. Inner poverty. Anyone can be poor inside who cannot see the love, joy, wonder and potential for themselves and others in life. People often settle for what is right in front of them because dreaming hurts too much.

3. The best way to end poverty is to help people go after what they themselves want, whether it is an individual, a village, a family.

Uniting people with their deepest dreams can cure inner poverty.

Bringing people together to work toward a common goal can cure relational poverty.

And when people believe in themselves and have support for their actions, their material poverty cannot help but lessen. This is the wonder of capitalism.

And the true glory of being human on this earth will flourish in more and more places. People who thought of themselves as poor, on the sidelines of life, are suddenly right smack in the middle of the best life has to offer.

Anyone can begin to end poverty at any moment....including one's own.

Friday, October 10, 2008

Why Positive Thinking Won't Beat The Recession

Many commentators are encouraging business owners to REFUSE to participate in the coming economic recession.

I completely disagree.

Here is the reality: We ARE ALL participating in this recession because we are all alive and part of this world and economy we live in.

Those who do well in a crisis FACE reality head-on. It is common sense. It is also what responsible research has found.

Let me say it again: there "ain't any stinkin' positive thinkin'" anywhere to be found when you look at research on how super-resilient people handle crises.

Based on Kathryn Cramer, Ph.D.'s research on super-resilient people

Stage 1 has two steps that should be done simultaneously: FIRST: assess honestly how the economic crisis affects you -- face facts -- and start to brainstorm about what you need to do to protect yourself. DON'T RUSH INTO ACTION....but just come up with ideas. SECOND: Control any panic reactions you are having (remember that "we have nothing to fear but fear itself.")

When panic reactions are under control -- then you can look at your defensive ideas and start to implement them, stage 2. Failure to take comprehensive defensive early means the crisis can still drag you down. And you can start brainstorming about what you might do now that your old plans are out the window.

Once you have implemented your protective measures, you can start in stage 3 to make decisions about what opportunities or actions would be in your best interest to move on in life.

In stage 4 you start implementing your decisions and tracking your progress.

Positive thinking about real estate values and stock prices is a lot of what got us in this crisis. Realism is what is going to get us out of it.

For detailed techniques for each stage and copious research citations, see the book Staying on Top When Your World Turns Upside Down by Katherine Cramer, Ph.D., available through Amazon.

Thursday, October 9, 2008

Will Wall St Meltdown Affect Your Small Business?

I'm concerned that so many small business owners are confident that the economic distress currently gripping Wall Street won't spread to them. While optimism is the hallmark of an entrepreneur, it is exactly the wrong attitude to take into a financial crisis.

The first step must be to accurately assess the risks and protect yourself. Only then can you start creating your response to your new situation. What I want to get across in this post is that the likelihood is that the entire economy will contract over the next few years. Now is the time to define your safe harbor in the storm that is coming...and start moving toward it.

Forecasts I've read recently call for a severe two-year recession AND a dial back of the Dow to 7000. Since most forecasters missed the financial meltdown, I take these economic bears very seriously.

What follows below is a post describing a 12-step descent into financial hell in the American economy. Interesting, it was written in February of this year. The author, Professor Nouriel Roubini of NYU's Stern School of Business, is the only analyst to have been bearish enough to be remotely right.

This full post is in the subscription-only section of his blog, but I repost it here. If you will slowly read through all the steps, I think you will begin to get a fuller picture of the severity of the situation we are in. And only then can you start devising realistic strategies for your own business and personal well-being.

Nouriel Roubini
February 2008
(Notes are mine.)

, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. (Note: Check!)

, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. (Note: Check!)

Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. (Note: starting....)

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. (Note: bailout of AIG, bankruptcy of Lehman Bros. foretold)

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. (Note: quiet so far)

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. (Note: Wachovia is the latest)

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious ri)sk. (Note: this is what the bailout/rescue is dealing with now.)

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. (Note: many of these are our clients.)

Ninth, the "shadow banking system" or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. (Note: the shadow banking system has essentially disappeared).

Tenth, stock markets in the US and abroad will start pricing a severe US recession (Note: recent sharp drops in the market.)

Eleventh, the worsening credit crunch will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. (Note: further slowing corporate growth)

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. (Note: how a credit based recession that starts in the financial sector spreads to Main Street.)


If you have stuck with it this far -- please ask questions and make comments! I'd like to have a discussion that starts with a sober look at what is really going on.

Thursday, October 2, 2008

Bailout's PR Failings Damaging American Economy

Richard Edelman's blog dissects the serious PR blunders in the "bailout" that have fractured us politically as a nation.

Read it for some real wisdom about our current crisis:

Getting tagged with the term "bailout" is one of the failings he lists.

How about "economic stabilization." Let's hope that is coming....

Global Economy is Why Bailout Is Needed

I received a note from a financial educator colleague opposing the bailout. However much I agree with her about the causes, I reach the opposite conclusion about the bill. Here is my take.

Unlike all of the other financial debacles you cite, this one is global and its attendant risks are unprecedented. At least 10 other countries have intervened to prop up illiquid banks. This one is more like the run-up to the 1930s Depression that only ended because of WWII. In other words, it got so bad that no one could put the economy back together again. Symbolic and real action by the US is essential to limit the scope of the current crisis and prevent it from getting into that zone where a functioning financial system can't be put back together.

I find George Soros' concept of reflexivity, and his analysis of the generic features of booms and busts, very instructive and very compatible with you comments about risk. The flaw in the system is a human one, in which higher and higher levels of risk become socialized as normal. It's not just the CRA of the's the young homebuyers who felt it was normal to get a interest only mortgage! Or to flip a house for $100K in two years! This is much as it was in the 1920s....income and equity became a lower and lower share of one's financial story, because everyone thought everything would go up and up forever. I would add to Soros's analysis that the risk models are linear and institition-specific, whereas in a globally interconnected economy, the risk issues don;t just sit there on your spreadsheet -- they interact with each other in new ways. Risk doesn;t just increasse in a linear fashion -- it rises and them falls off the cliff into breakdown. That is where we are now.

And on the mortgage side, many banks sold off those sub-prime loans as mortgage-backed securities in tranches reflecting risk. That is the move that has made this a global crisis. Pension funds in Finland bought securities backed by interest only and CRA mandated mortgages! Can you imagine the long-term damage to our nation in foreign affairs, to our global leadership, and to our future economic prospects if we stiffed those countries left and right?

In other words, we can cast blame and rightly so, but everyday Americans will pay a much higher price if there is no action to stabilize the economy.

The idea I favored (see a previous e-mail) would have acquired assets from troubled institutions by issuing preferred stock in a government owned "stabilization corporation." That corporation would be seeded with $100B of taxpayer money (not $700B). The net effect is that the banks would have owned the bailout, not the government owning the banks. If asset sales went well, the stockholders would make money....if not, the would not make money. The bad loans were off their books, crisis solved, but not on the taxpayers nickel.

Unfortunately, that excellent idea never got the time of day on the Hill. The bailout is what it is, and I am glad it appears to move forward, however flawed.

I am blogging on this subject at the address below. Like you, Colleen, something in me has changed deeply over this crisis. I grew up in the Rust Belt and know how horrendous it is to have no opportunity because the fundamentals of the economy turn against you. I don't want to see that happen in this country, which has been the source of much that is good in this world -- including economic growth and financial strength.

That is why I hold my nose and support the bailout as the best of two lousy choices.

Wednesday, October 1, 2008

Risk Creep

Anyone involved in contracting knows about "scope creep" -- that nasty habit of jobs getting bigger and bigger (oh, why not add another sink? I thought YOU were going to coordinate the meeting) as time goes on.

The same phenomenon is at work in this economic bust.

Let's go back to post-WWII when the modern S&L was born. Savings and Loans were created to finance the building of the suburbs by making mortgage loans and paying interest on savings accounts from those earnings. Sounds like a low-risk business. BUT a few changes introduced a gradual risk-creep that just kept going.....

Obviously the S&L concept works well with stable interest rates, so the banks can manage a nice profit from the spread between what they take in on loans and what they pay out on savings accounts.

But in the globally interconnected economy, with interest rates fluctuating, such a model is in trouble. S&Ls got locked in to low income from low rate mortgages while needing to pay out higher savings rates. This led them to search for higher returns from their investment -- inviting both fraud and financial innovation.

In two words, Risk Creep.

What is the Economy?

Economic history can be viewed as nothing more than the struggle to structure buying and selling in a world of constant change.

Adam Smith saw "equilibrium" as an achievable state in which those activities were in was available that equaled demand. On a small scale, in early industrializing England, that may have been true for a few years, at the birth of the industrial economy.

But since then, the "levers" have become many and their relationships tangled and complex. It is a struggle to describe how the economy works in such terms that a lay person (heck, that competing economists) can agree on. And the relative importance of those levers shifts as the underlying economy shifts.

But make no mistake -- the economy is a human creation. It is not a "thing" out there. George Soros calls the human element "reflexivity." In complex and often hard to parse prose, Soros lays a considerable amount of blame for booms and busts, not on impersonal economic forces, but on .... people.

Read more....

Don't Take the Economy for Granted

The current financial crisis is scary to us because it exposes the economy for what it is.

It is NOT a given. It is an ACCOMPLISHMENT.

A soundly functioning economy is the product of a host of actions: from business owners, workers, government regulators, banks and other lending institutions, and the "back office" organizations that keep everything humming along.

And at the core of this cobbled together structure called capitalism is one word: TRUST!

At the consumer level: here's an example of trust in the financial system. If you hit my car, I don't try to steal yours to make up for my loss. I TRUST that GEICO my insurer will handle my claim and I will be made whole.

The same is true at more esoteric levels of the financial system. In the case of AIG -- if I held mortgage backed securities, and those securities went down in value, I have to keep more money in my company to balance that out.

And if those securities become valueless -- I know that my insurance premiums I pay to AIG will cover my losses and prevent my business from going out of bsuiness. Without that security, well, it becomes too risky for me to lend; it's more lucrative to just sit on my cash while everyone else who lends goes under.

Would you risk driving a car you if woke up one day and there was no car insurance? Probably not. Could you get to your job? Buy groceries? Go to the gym? And if the government didn't intervene, don't you think the economy would tumble? If consumers can't buy goods, stores will lose money, many will close, jobs will be lost.

Like with Humpty-Dumpty -- all the kings horses and all the king's men wouldn't be able to put the economy back together again. The trust -- and the infrastructure that generated the trust -- will be gone.

Same is true in the global economy right now: don't take this economy for granted if you aren't willing to invest in the infrastructure that makes it successful.