Economics and investing in a new century

Murder at the Margin by Marshall Jevons (Princeton University Press, 1978)

Can economics and English ever mix? I switched from English to Economics in graduate school for a purely economic reason. The tenured professors in the English Department were so incensed with their graduate students going on strike for higher wages that the profs abolished the only source of financial aid in the department…awards for teaching freshmen English.

At a mixer for new grad students in Economics at UW, I was teased by an upperclassman, “Oh, you mean English majors can add?” In one of my many classes where I was the only woman, my professor whipped out a poem by an author I’d never even heard of, and looking straight at me, read it aloud. He concluded with a smile and the statement, “Even we economists can appreciate great literature.”

So it was with some delight and skepticism I picked up a copy of Marshall Jevons’ book, “Murder at the Margin,” the first known mystery by an economist. Both feelings were richly rewarded.

This novel is well worth reading not just for its detective’s many wise arguments, usually made to his most forbearing wife, “Pidge,” that use concepts from economics to figure out what’s going on around them. The detective is Henry Spearman an economics professor at Harvard University. Henry is a detective as distinctive as Adrian Monk, Hercule Poirot, or Sherlock Holmes.

The “margin” referred to in the title has nothing to do with investing, as I first thought. It’s a reference to how the addition of lime to a glass of lemonade tips the balance for Henry when deciding whether to spend a dollar for the drink. It’s the place where a “marginal benefit” of some small thing that adds value to a good or service, pushes the buyer to buy it. I sense that “margin” also refers to the fact that Henry and his wife are vacationing at a resort called Cinnamon Bay Plantation on a remote island in the Caribbean. They, and the murderer are on the margin of society in the geographical sense.

The cast of characters at the resort, all diverse and distinctive are amusing, as is the hero. Readers originally thought the book was written by Milton Friedman not only because of similar names but also because of the parallels between Henry’s physical appearance and way of reasoning to Friedman’s. But it was not one of Friedman’s creations. It was written by two less-well-known economists who collaborated and used “Marshall Jevons” as their pseudonym.

“Murder At The Margin”  has lasted 30 years and is used in high school and college classes for teaching students about economics, but I doubt it’s part the curricula of any literature department. The problem with it is that it utterly fails as a mystery.

One of the requirements for a good murder mystery story is that the reader be given all the clues needed to solve the puzzle. “Ellery Queen Jr.” (pseudonym),  Agatha Christie, and Dorothy Sayers come to mind for their skill in using “red herrings” to fool readers while disclosing all the facts needed to figure out the mystery.  But in this book, the authors* were so busy teaching classical economics reasoning that they forgot to reveal the one detail Henry used to figure out whodunit…

This detail is mentioned twice earlier in the book, but without the simple math behind it, the language of the authors is too ambiguous to grasp what was meant by the clue.

The moral of this book, though, is an interesting one. Just as many cops feel that criminals’ stupidity gets them caught, in this book, on at least two occasions, the criminals are caught out because they are cheapskates. Henry employs his sharp eagle eye to dissect their spending habits and ferret out the truth of their actions.

This book isn’t a great mystery book but it will be a hit with anyone interested in mysteries or economics. Personally i can’t wait to read Marshall Jevon’s second book, “Fatal Equilibrium”!

Copyright © 2009 Nancy K. Humphreys

Sales of U.S. Assets

At the end of the post Our Government: A Business Without Assets? I asked, “What next? Will we soon see ads for giant auctions on the lawn of 1600 Pennsylvania Avenue?”

Apparently the answer is yes. That’s the implications of Ana Campoy’s article in the Wall Street Journal on February 26th, titled “Worries Balloon Over Helium:  Experts Say U.S. Is Mishandling Selloff of World’s Largest Stockpile of the Gas” (page A5).

This article says the largest stockpile of helium on earth is located in the Texas Panhandle. We supply one-third of the global demand for helium. Helium is used in high tech products, and as a result, demand for it has skyrocketed. The problem is that the U.S. is selling off all of its helium from its supply depot in Texas.

Concerned parties, which include a government advisory agency, are asking that all of our helium not be sold off by the target date of 2015. They also believe helium should be sold at market rate instead of the exact price Congress set for it in 1996. Congress has been asked to consider the matter, but is pondering the issue of whether it should consider it.

The government has been selling off other useful rare metals too, but China has stolen its market in those.

The reason Congress is so anxious to sell off its whole supply of helium at a price lower than the market price is that the Bureau of Land Management went into the hole to the tune of $1.3 billion to acquire and process helium. In 1996 Congress made a decision to sell all of our helium to repay that debt.

Yes, if we don’t pay attention to government assets, this is what can happen, especially when our government’s debt and deficit are rising.

Sovereign debt crisis

We think of the U.S. government as a lender of foreign aid to others. But we are among the biggest recipients of foreign aid from other countries. This aid comes in the form of purchases of Treasury investment products. These purchases can be used by the Treasury in lieu of printing money.

The problem is:  Treasuries may not remain desirable investments for other countries. If the U.S. government’s debt becomes so high that its sovereign debt credit ratings go down, demand for Treasuries will fall. This is threatening to happen. If it does, we’re looking at higher taxes, and possibly, inflation. The upside is that Treasuries, which are more risky at that point, will pay higher interest rates to any buyer willing to take a chance on them.

In Our Government: A Business Without Assets? postscript I discussed sovereign debt crises due to off-the-balance-sheet debts of governments in the PIIGS countries. This issue is front and center in Europe right now.

The Fed is also said to be concerned about Greece. Why? Because Goldman Sachs, J.P Morgan, and other large financial companies in the U.S. have been providing “foreign aid” to Greece and the PIIGS countries. These financial companies made deals with the governments of Greece and Italy involving derivatives called “currency swaps” and “credit-default swaps.” These deals may have enabled these countries to seem prosperous enough to enter the European Union, when in fact, they were seriously in debt.

The Fed has the authority to examine U.S. financial institutions to see if their pursuit of profits in any way acts to destabilize any countries or companies. But our own country’s off-balance-sheet debts are threatening to destabilize this country. Perhaps the Fed should look closer to home!

Copyright © 2010 Nancy K. Humphreys

Part 3 of Is Your Job Already Outsourced?

From the start of this century the publishing world has gone in two distinctly different directions.

On the one hand, the number of traditional printed-book publishers has shrunk. American book publishers have been swallowed up by media conglomerates, most of them foreign.

On the other hand, brand-new electronic-book-reader technology from American chain bookstores and computer manufacturers has blossomed. And reminiscent of the “mimeo revolution” of the 60’s and the desktop publishing revolution of the 80’s, downloadable-print-publishing via the Web by self-publishers has exploded too.

Publishing – promotion not production

Up through the 20th century, publishing was classed as part of the manufacturing sector. Publishers typeset, bound, and distributed books. Sometimes books were marketed via publishers’ catalogs and review copies. But promotion was a nominal part of what publishers did.

In the 21st century, almost anyone can publish and distribute a book. Promotion, rather than production, is now key to online bookselling in this era. And publishing is now a part of the Entertainment and Information sectors instead of Manufacturing.

The traditional (i.e., “printed book”) publishing industry charged high prices, yet never paid its workers well. The median return to authors for a published book has hovered around $3,000 for decades. Royalties to authors are often not paid until a year after the book is published and the publisher deducts all costs. Royalties are usually not itemized or ever reported in total on royalty “statements.”

For less than $3,000 an author now can publish and promote their own book and keep 100% of the gross royalties rather than settle for the mere 7-10% net royalties traditional publishers typically pay. Authors can keep their own copyright or creative commons rights to their work. Most importantly, an author can see who is buying their book and even market another book or other kind of product to those buyers.

While media giants scramble for blockbuster print book moneymakers such as the $10 million Springsteen autobiography reputedly in the works, these publishing companies leave many authors out in the cold.

But now authors left out in the cold have many alternatives: they can self-publish their own books; create POD books, books that can be printed-on-demand as readers buy them; or write e-books.

But what do we mean by “e-books”?

As I described above–there are two publishing sectors. The corporate sector aims at “wealth-building” for the few. Simultaneously, there is an economic sector referred to often as “the long tail” [wags the dog] sector. The goal aimed at in this sector is for all in it to “make a decent living.”

So, e-books can refer quite different things, depending on which economic sector you’re talking about.

Electronic-reader e-books

E-books can be books published or repurposed for corporate electronic readers sold by via the Web by large booksellers such as Amazon or Barnes and Noble (i.e., Kindle and Nook). Apple too has jumped into this market with its new iPad, and PC makers are quickly following suit.

These corporate-published “electronic reader e-books” are being made for students in colleges and schools as well as for the general public.  The Financial Times reported on October 26, 2009 (p12) that “A pilot scheme to evaluate e-book technology in the classroom is underway at six colleges and business schools.” Last year governor Arnold Schwarzenegger called for all of California’s public school textbooks to become electronic.

PDF e-books

But e-books can also refer to a booming trend of professionals creating downloadable PDF files for online distribution.

Many of these downloadable e-books, formatted for printing out, are free or low-cost “loss-leaders,” intended to start “selling conversations” with prospective clients for services offered by the professionals who wrote the e-books.

Some of these downloadable e-books are workbooks sold through shopping carts. Others are full-priced multimedia kits one buys online. The word, “e-books,” also encompasses chapters of self-published books that are offered for free or at a lower price to entice new customers to discover an author. Some online “serial” e-books are even supported by reader donations.

Both kinds of e-books are new, but they arise from two very different business models. In their stories about “e-books” traditional corporate media, i.e., newspapers and television, usually are referring to books published by retail book and computer companies for the new electronic readers these corporations sell. PDF e-books, on the other hand, belong more to the blogosphere.

Alternative and corporate and publishing combined

However, these two business models do sometimes overlap. The tail sometimes wags the “master.” For example, a self-publishing writer may use the traditional Hollywood movie “trailer” or a TV appearance to promote their new book.

It’s an individual choice as to what vehicle for promoting a book works best for each author. For example, in the last century Joyce Carol Oates switched back and forth between large American publishing houses and independent small press publishers to get all of her novels out.

Authors today may enter self-publishing with a goal of eventually becoming picked up by traditional publishers or getting their work put out for electronic readers. Other self-publishing authors have no interest at all in getting an agent, publisher, or e-reader book contract. They’d rather be on their own. For all self-publishing authors it’s a brand new frontier out there on the Web!

Be The Media

For a comprehensive look at traditional and new business models on the Web for creative people, providers of services for them, and community-based organizations that use media, see David Mathison’s Be The Media. David was a client of mine, and I’m proud to be an affiliate seller of his book. We have similar work histories and think much alike. David’s book is simply the best coverage of what’s happening with alternative and mainstream media today.

Nancy Humphreys © 2010

National liabilities are the other side of national assets. In my last post, I didn’t discuss this side of things. Governments not only don’t track their own assets; apparently they don’t track their own liabilities either.

Sovereign debt crises are now happening in the “PIIGS” countries (Portugal, Italy, Ireland, Greece and Spain) because of “off-balance-sheet” liabilities. These liabilities includes things like sovereign credit default swaps (CDSs) and securitized investments via banks, as well as private equity deals.

More telling, national off-balance-sheet liabilities also include health and retirement benefits such as our Medicare and Social Security programs. This doesn’t mean those things are intrinsically bad. It just means that someone needs to show the assets that could offset them on the national balance sheet.

And that won’t be taxes. Taxes are just a part of our national government’s assets. Federal taxes will go toward paying only two-thirds of our national government’s projected budget debits in 2011.

Likewise, using our definition of assets as things which bring money into our pockets and liabilities as things that take money out of our pockets, we can see that jobs are liabilities, not assets. It doesn’t matter if those jobs are private or public or how big the numbers of jobs are. What does matter is what kinds of assets for America workers in those jobs produce.

On the other hand, infrastructure improvements are national assets. But while government bureaucrats and Congress point fingers at each other for the failure to make such improvements, the stimulus package has spent very little on infrastructure. The infrastructure our government has spent the most on shoring up is our continuously-eroding banking infrastructure.

So yet again, we’re right back to the key question asked in my original post, Our Government: A Business Without Assets? With Moody’s threatening to lower the United States’ current three-star sovereign credit rating, why aren’t our President and Congress including national assets and liabilities in the discussion about our national deficit and debt?

Copyright © 2010 Nancy K. Humphreys

Before I finish my series on the incredible transition taking place in the publishing industry, I need to comment on the current controversy about our government’s debt and deficit. There’s an important pair of terms related to debt and deficit that aren’t being discussed right now, and they should be.

Clive Crook of the Financial Times asserts that President Obama’s new budget for 2010 is only a “”minutely worded wish-list,” that most likely won’t be honored by Congress. All of us probably agree with that statement. But Crook also  believes the “only remedies [for the US debt/deficit dilemma] are lower spending and higher taxes.” I strongly disagree with that. Only one-third of the U.S. deficit is paid for by taxes, and there IS another way to approach the US government’s debt/deficit problem.

Debt vs. Deficit: What are they?

Debt, as we all know, is what we owe. Sovereign debt, i.e., the debt a country owes, is fast becoming a concern not only abroad, but here. In regard to the US stock market, Uri Landesman, portfolio manager at ING bank’s investment wing told the Wall Street Journal, “Clearly, the sovereign-debt worries are first and foremost for the market right now.”

There’s a lot of agitated talk about our deficit too. But what’s a deficit?

Let’s say you pay all your debts using a credit card. When you receive your statement, your debt is the total amount that you owe to your credit card company. Your deficit on this statement is your credit limit. That’s the total amount that Visa or Mastercard would allow you to borrow.

Many of us have assumed our national government had an unlimited credit limit and could just go on printing money to pay its debts. That isn’t true.

Congress is like a credit card company–it sets limits on the national deficit and the national debt. And it has the power to prevent the federal government from exceeding those limits.

Do you think it’s odd to be discussing our government’s budget in personal terms by comparing it to a household credit card bill? Well, it is. In modern economics, comparing “macro” with “micro” is strictly forbidden.

Comparing macro and micro levels of the economy

The fact is that macro and micro comparisons have to be made, but not, as they were in the olden days of “political economy,” between government and households. Comparisons today have to be made between government and business.

That’s because of the modern Republican Party’s agenda. The Republican Party in the US has long stood on the side of “Business,” large or small. It is still doing so, but with a new twist. In addition to downsizing government and letting business take over many government functions, Republicans aim to give our government a complete makeover. They’d apparently like government to become a business.

What’s missing in the debt and deficit debates

The macro level of our economy is our national government. The micro levels of our economy are businesses, households, and individual consumers. If we compare the federal government with business, we can easily see what’s wrong in Congress.

What’s missing is a serious discussion in Congress of the US government’s debits and assets. At the very least, those who believe government ought to operate more like a business, and produce products, i.e., “results,” that can be measured in terms of cost-benefits, should be asking for debit and asset information. So should Democrats in order to defend their stimulus programs. And so should taxpayers!

Debits vs. Assets: What are they?

What are debits and assets? Roughly speaking, debits (sometimes called “liabilities“) are things that take money out of your pocket and assets are things which put money into your pocket. (If you remember, I talked more about this pair of opposites in my previous blog, “Part I: Banks and People.”)

To go back to the credit card analogy, debits are the items listed on your monthly statement. Debits are what you spent your money on last month. Add up all your debits over time and you get your total debt. But on a business balance sheet (or a household budget), at some point, your debits need to be offset by at least some kind of assets or you’re headed for big trouble. Even if it’s only an unemployment check, you’ll need an asset to offset your debt.

In my previous post, “14 Trillion and What Do You Get? Another Day Older and Deeper in Debt,” my advice was:  “If you do go into debt, it should be for an asset that you are sure will make money for you.” This is true for individuals, businesses and households. But what about our government? What’s it doing about its assets?

Assets? What assets?

We have no idea of the total worth of our government assets. John Rutledge of Rutledge Capital says that financial assets of the US. Government totaled $1,261 billion in the fourth quarter of 2009. State and local governments owned financial assets totaling $2,555 billion. These amounts change, sometimes drastically so, every quarter.

Dr. Rutledge, too, wonders why economists don’t keep track of all US government assets.

But our government doesn’t even know its own assets. An old friend, Bill Murray, who was helping fix up the house I now live in, loves to discuss precious metals as well as tools. One day, out of the blue, Bill mentioned platinum.

“It’s our most valuable metal,” he explained, “because it has so many more practical uses than the precious metals.” Bill told me that the market price of platinum was way off because, “for security reasons, our government owns a lot of it.” He said, “Even they don’t even know how much they’ve got of it.”

Dr. Rutledge states that the Fed only tracks the financial assets owned by our governments. The Fed doesn’t track tangible assets, (things like desks, cars and platinum). And to quote Dr. Rutledge, “… any analysis of the economy that focuses on spending or saving or budget deficits alone, to the exclusion of the balance sheet [assets vs. debits], is almost certain to be wrong…”

When you’re in a financial hole, squabbling over specific items of spending on your credit card without considering if they’re “debits” (things that take money out of your pockets ) or “assets” (things that bring money into your pockets) isn’t how you get out of debt.

But our Congress spends its precious time debating only the size of expenditures and/or whether expenditures are too extravagant, e.g. gold toilet seats for the military. The only time we ever seem to hear about our government ’s assets is when they’re being sold.

A Biggest Loser Auction?

Because of the financial crisis, as well as its own peculiar budget process, in 2009 the government of the State of California was forced to hold a giant auction of its assets. Other states have been doing the same thing.

Government auctions are often described as sales of “surplus” items. But an auction isn’t like a rummage sale where one gets rid of old, useless, junk. An auction is usually a sale of valuable assets that can be used to make money.

Things do look dire when even governments, like companies, households, or individuals, have to sell off assets just to survive. What next? Will we soon see ads for giant auctions on the lawn of 1600 Pennsylvania Avenue?

Copyright © 2010 Nancy K. Humphreys

Source:  Dr. John Rutledge quotes are from his blog article,  Total Assets of the U.S. Economy $188 Trillion, 13.4xGDP

(part 2 of 3) “Traditional Global Publishing, 2005-2010″

Last time, I looked at ownership of large publishers in 2004. We saw that many large American book publishers were taken over by foreign print publishing companies. In 2010 the picture is way worse. Those large foreign publishers have themselves been swallowed up by even bigger conglomerates.

Let’s look first at what happened to American publishing and then to big foreign publishers, including Bertlesmann, Thomson, and Taylor and Francis, the leaders in 2004.

If you check recent US stock statistics, the results for “publishers” are quite strange-looking. Top companies in terms of volume of trading are: Ep Global Communs Inc.; News Corporation; Gannett Co Inc.; McGraw-Hill; Thompson Reuters Corp.; Marvel Entertainment; Yellow Pages; Income Trust Units; Mcclatchy Co. Hld.; New York Times; Idearc Inc (a Verizon spinoff).; and Martha Stewart Living.

This is certainly a very catholic group of companies, with McGraw-Hill being the only well-known book publisher. The rest are an eclectic combination of newspaper, magazine, and even phone book and comic book publishers. What gives?

According to Dan Poynter, well-known advocate of self-publishing, the top six publishers by size today are: BERTELSMANN, CBS CORPORATION, HACHETTE, NEWS CORPORATION, PEARSON, and VERLAGSGRUPPE. Many of these companies are privately owned corporations.

The only American-born-and-bred corporation among the big six is CBS CORPORATION which took over SIMON & SCHUSTER. 

So, let’s look at who the other five giants are.

BERTELSMANN, a German company, owns RTL Television along with RANDOM HOUSE, INC., “the world’s largest English language trade publisher.” Bertelsmann’s founder, Reinhard Mohn, died last October. His company is private and family-owned.

HACHETTE LIVRE is the largest publishing company in France and the second largest publisher in the world. It is a subsidiary of Lagardère Media, the media division of Groupe Lagardère, a limited partnership holding company. Hatchette Livre’s U.S. division, Hatchette Book Group, includes TIMES WARNER BOOKS. Hatchette also took over LITTLE, BROWN AND COMPANY.

NEWS CORP., is a publicly-owned company founded by Australian media mogul, Rupert Murdoch. It is the largest media company in the world. It holds properties all over the world in film, television, cable, magazines, newspapers, publishing, and professional sports, with Fox TV likely its best known property. News Corp owns HARPERCOLLINS, a combination of American publishing companies HARPER & ROW and British COLLINS.

PEARSON PUBLISHING is a publicly-owned UK-based media corporation that claims to be the world-leader in education, business information and consumer publishing. It owns the former leading secondary education publisher in America, PRENTICE HALL, along with the UK publisher, THE PENGUIN GROUP, which previously acquired PUTNAM. PENGUIN-PUTNAM was the second largest trade publisher in the world.

VERLAGSGRUPPE (Bauer Media Group) is a private family-owned media company in Hamburg, Germany that operates in 15 countries in the world and publishes nearly 300 magazines, including Q, a UK music magazine similar to Rolling Stone.

Other publishing imprints such as ST. MARTIN’S PRESS, HENRY HOLT & COMPANY, FARRAR, STRAUS & GIROUX and MACMILLAN were taken over by the German family-owned media conglomerate, HOLTZBRINCK PUBLISHING HOLDINGS.

INFORMA PLC, a publicly-owned UK conference and event promoter, took over FRANCIS AND TAYLOR in 2004.

Last, but not least, THOMPSON CORPORATION, a Canadian publishing giant, spun off a number of it’s educational publishing divisions and merged with Reuters to become THOMSON-REUTERS, an “intelligent information” and “technology” company focused on financial news.

Book publishing is not the main business of these giant worldwide conglomerates. They are actually global media companies with a lot of diverse activities under the umbrella. 

The few well-known American book publishers, such as JOHN WILEY and MCGRAW-HILL, who have survived the conglomeration trend can hardly compete with these international behemoths.

McGraw-Hill, however, is trying. Its About page on the Web says:

“McGraw-Hill aligns with three enduring global needs

• the need for Capital
• the need for Knowledge
• the need for Transparency”

This hardly sounds like the mission of a traditional American book publisher!

The reality is, print publishing is no longer a very important medium within the context of media. CBS Corporation, for example, is far more concerned with what’s happening at NBC or Fox than it is with what’s going on with Simon & Schuster. And with the emergence of new media such as Amazon’s kindle, Barnes and Noble’s nook, and Apple’s iPad, “print” may soon become a thing of the past.

Next time: Online Publishing: The New Frontier

SOURCES: http://www.investools.com and Dan Poynter’s site, http://parapublishing.com/sites/para/resources/statistics.cfm

Copyright © 2010 Nancy K. Humphreys

(Part one of three) “Traditional American Book Publishing, 2000-2004″

Industry Concentration

In my previous blog series on “Banks and People,” I traced how the financial sector is in the process of becoming “concentrated” as a result of the financial crisis. “Concentration” simply means that the share of the market for each bank still standing has increased. In the past year we’ve lost over 140 banks in the US. We’ve lost 180 banks since the financial crisis began. Many more bank failures are expected this year.

Concentration within any industry brings dangers associated with monopoly or oligopoly power at the top. “Rent-seeking” is also found when economic power is concentrated. Rent-seeking is the act of legally appropriating wealth created by other people. Rent-seeking tends to promote economic inequality among individuals and/or among groups of individuals.

But while our attention has been focused on the financial crisis and bank failures, we’ve overlooked the huge foundational shifts taking place in many other sectors of the US economy.  Concentration isn’t just taking place in the banking industry, and concentration has been going not just for a couple years, but during the whole decade.

In this series of three posts, I’ll trace what’s happened in the publishing industry over the past decade as an example. The same pattern found in publishing also applies to many other parts in our economy.

Traditional US Publishing, 2000-2004

The entire American publishing industry is simultaneously growing and contracting. Publishing is going global, yet the traditional publishing market for authors’ writings is shrinking. You probably realize that independent bookstores are closing, and small presses are being sold to bigger presses that in turn are being swallowed up by even bigger companies. But you may not know that more authors than ever are self-publishing their own books.

You’ll find a comprehensive overview about these shifts in all creative fields, including publishing, and the implications for businesses that serve creative people in David Mathison’s Be The Media. David’s book is an epic description of the battle going on for control of creative endeavors on and off of the Internet during this decade.

But here’s my take on the traditional book publishing industry, having watched it closely for over thirty years. Our publishing industry is no longer “our” publishing industry.

Even if you didn’t lose your job during the financial crisis, you may find it’s not with the same employer you had back in the 1990s! In fact, these days your company’s “boss” is very likely to be sitting in an office in another country. Your job in the United States is the one being outsourced by a foreign firm.

Who Owned Whom in 2004:

Bertlesmann, a German company, owned these publishers:

• Alfred A. Knopf
• Ballantine
• Broadway
• Doubleday
• Pantheon
• Random House

Thompson [now Thompson Reuters], a Canadian Company, owned these publishers:

• Brooks Cole
• Course
• Gale
• Southwestern Educational
• Thompson Learning
• Wadsworth
• Westlaw

Taylor and Francis, a British Company [now owned by Informa plc], owned these publishers:

• Martin Dunitz
• Europa Publications
• Gordon & Breach
• Curzon Press
• Fitzroy Dearborn
• GarlandScience
• Bios Scientific Publishers Limited
• Frank Cass
• CRC Press
• Canadian-owned Routledge Group (this includes Routledge, Spon Press, and Carfax)

As you can see, at the start of the 21st century, most large traditional US publishers came to be bought out by foreign companies. Five years later the picture is even more incredible. The publishing industry has truly re-invented itself. Today it is no longer even the “publishing” industry!

Nancy Humphreys © 2010

Next time:  “Traditional Global Publishing, 2005-2010″

At the start of the crisis, the U.S. government said it wanted banks to switch from making investments back to making loans, loans that were sorely needed by businesses and consumers. Now, with TARP about to end, President Obama is still saying the same thing.

The US government estimates it will make a profit of $19 billion from the big banks it bailed out, but laments that the banks are not using bailout money to make loans. Sheila Bair, head of the FDIC, was particularly critical of the government’s TARP bailout program, noting that bank loans declined by 2.8% in the last quarter, the biggest decline since 1984, the year the FDIC began tracking bank loans.

The pairs of four variables in my previous post,  “Part II of Banks and People,” show why this is happening. During the financial crisis  banks eschewed making bank loans to customers (options C and D) in favor of  selling their own stock and bonds along with making short- and long-term investments in government and corporate bonds (options A and B).

The Role of Government

The US government has only itself to blame for its disappointment with banks not making loans. The Fed has encouraged bank investment by keeping bank-to bank (Libor) interest rates low. Because of the government’s low interest rates, banks can borrow cheap from the Treasury and make higher and safer returns through investing in government and corporate bonds than by making loans and/or by paying higher interest on customer deposits.

Another reason banks aren’t making many loans is the terms of the government’s bailout of big banks in programs such as TARP, and in particular, the government’s mandate for lower bonuses for bank executives. Bank executives want out of these programs quickly. And the government is encouraging them to do this. The government is letting big companies such as Bank of America, Citigroup, and Wells Fargo prepay government bailout assistance. This doesn’t encourage banks to make loans either.

Bank of America sold stock itself to raise $19 billion. Wells Fargo wanted to wait and raise money from business profits, but it’s been pressured to sell stock too. It just raised $10.4 billion by selling new shares in itself to pay back half of its loan from the US government. Blocks to Citigroup’s request to repay TARP funds have been removed by the IRS. and it will pay back it’s entire $20 billion debt through sales of its shares. Meanwhile the FDIC has guaranteed $300 billion of bank-issued bonds.

As you can see from the Liquidity and Solvency of Banks table in Part II of this blog series, neither selling bank stock nor selling bank bonds (options A and B) increases these big bank’s solvency. Selling shares and bonds only increases liquidity and leaves the banks still in debt. Meanwhile, on the other side of the banking coin, the “People,” are suffering. Business failures, foreclosures, and layoffs are continuing to rise. Unemployment in Detroit hit 50% this week.

And while banks pay off TARP rather than make loans to consumers, piles of affluent people’s cash invested in money market funds have nowhere to go. This bank-related problem is severely impacting no- and low-earned income people (including many retired people).

Money market funds rely on short-term “securitized” investments. These kinds of short-term investments, packaged and sold by banks by combining consumer loans (loans for cars, mortgages, and education), began to become unsellable beginning in 2007. The Fed has bought $1 trillion of mortgage-backed securities from banks. But the securitized investment market dried up. As a result, money market funds shifted into investing in short-term (weeks to a few months) government bills called Treasury bills.

People and businesses and other organizations, such as condo associations, who depend on Treasury bills for a fixed income are now out of luck. Because of the huge influx of demand for T-bills on the part of money market funds, interest rates on T-bills are almost as low as the pittance usually paid on money market funds themselves. Money market funds serve large investors who “park” uninvested cash in them. The funds have to pay some kind of interest on deposits, and T-bills are their only choice these days.

Only the US government could be remotely happy with this dismal turn of events. It’s getting lots of money out of sales of Treasury bills (and Treasury Bonds) as well as from big banks’ repayment of TARP loans.

Smaller banks, however, have received almost nothing from TARP or from the FDIC’s program that encouraged big banks to make short-term loans to businesses and consumers. The FDIC’s bank loan guarantee program ended last month, small and mid-size bank failures this year topped 130, and bank loans just dropped by a record amount.

As a result of government policies, big banks are still making profits, but cash isn’t trickling down to smaller banks. They’re failing daily. Nor is cash flowing into the economy. Smaller banks and businesses and individuals, particularly lower-income people, are obviously coming out with the short end of the stick.

A Split within Government

The FDIC and the rest of the U.S. Government do not seem to be in synch while trying to solve the “banking problem.” For example, a recent study shows that 60 million adults in U.S. households lack bank accounts. These people use check cashing services and keep their money on hand. They have no relationship with banks.

The FDIC is researching ways to get these people into the banking system, a goal that would bring “real” cash into banking system.

The FDIC is also scrambling to keep failing banks’ deposits “liquid” and “solvent” by transferring them to other banks. And the FDIC continues to guarantee transfer of toxic assets of banks onto the shoulders of solvent banks, hedge funds, and other buyers who can hold these assets long enough to [hopefully] recoup their purchases and make a profit. In short, the FDIC is pushing banks towards doing the business of banking on behalf of the people.

The Fed, the Treasury Department, and Congress, on the other hand, in the name of “prevention” of another financial crisis, are pushing banks towards raising capital reserves. And now the government is allowing banks to deplete their capital reserves by using them to pay back TARP loans early.

Over the objections of the FDIC head and securities analysts, the US government is driving big banks (and large companies such as GM) to raise a lot of money quickly, even if that’s at the expense of the banks’ capital reserves and their customers. These banks, and especially Citigroup, have put themselves in a precarious place by paying back their government loans early. As a result, TARP has failed the both the banking system and the people.

A Suggestion

The government needs to pay more attention to bank solvency along with bank liquidity. More investments in and by big banks aren’t going to solve our “banking problem.” It’s way past time for government to give the “people,” a break.

I would strongly suggest that The Fed, The Treasury, and Congress think harder about ways to encourage all banks to focus more on bank customers again. In fact, it might even be a good idea for government to consider supporting credit unions, check cashing services, and other institutions who do make loans to business and consumers.

Copyright © 2009 Nancy K. Humphreys

Postscript:
If The Liquidity and Solvency of People table in Part II of this series interests you or the ones you care about most, I highly recommend Robert Kiyosaki’s Rich Dad Poor Dad book series or games for yourself or a gift.

“I’ve been here for three years and never once heard the word ‘people’.” [handwritten note posted on bulletin board in graduate department of Economics at University of Wisconsin-Madison]

Last time we looked at two key pairs of opposites that played a role in the financial crisis.

Liquidity vs Leverage (or “Illiquidity)
Solvency vs. Debt (or “insolvency” )

This time we’ll look at how these pairs of “variables” apply to people and to banks. Let’s start with the first of two charts. This chart, the People Chart, is based on Robert Kiyosaki’s “Cashflow Quadrant” (in his Rich Dad, Poor Dad book series).

The Liquidity and Solvency of People

(A) Employees and self employed people
Have jobs (paychecks) or clients (payments) + usually are “cash poor” = liquidity + debt

(B) Homeowners
Own houses with mortgages (i.e., outgoes) + usually are “cash poor” = leverage +debt

[Note: "cash poor" usually means reliance on credit cards to stay solvent.]

(C)) Landlords and business owners
Own income-producing property and/or assets + usually are cash rich = leverage + solvency

(D) Wealthy investors and retirees
Own stocks, pensions, Social Security + usually are cash rich = liquidity +  solvency

We say that landlords, business owners (and homeowners) are “leveraged” because their income comes from assets which can take a long time to sell (months to years). Imagine that pile of money being “lever-aged” over your head. You can’t get your hands on it until it comes back down to earth. On the other hand, employees (who sell their own “labor”) and investors can get paid their money relatively quickly (days to weeks). So we call their income “liquid.”

It’s risky to be leveraged. Picture that heavy bundle of money over your head! What if you can’t get it back down? What if it falls? So leveraged assets usually pay higher returns on your investments in them.

Where “logic is deficient in the face of desire,” or more plainly, when the desire to “get ahead” and have some savings or “security” hits, people often leverage and take on more risk. And guess what? Banks do the same thing. Here’s the Banks Chart.

The Liquidity and Solvency of Banks

(A) Banks that sell stock in themselves or make short-term investments + take in deposits = liquidity + debt

(B) Banks that sell bonds in themselves or make long-term investments + take in deposits = leverage + debt

C) Banks that make long-term loans with higher interest rates + take in deposits = leverage + solvency

(D) Banks that make short-term loans with lower interest rates + take in deposits = liquidity + solvency

Deposits are the debt that banks owe to their customers. If a bank can pay back this debt quickly, it is liquid. The liquid assets of the banks bring in money more rapidly. The fastest way banks raise money, other than by encouraging deposits, is by selling stock in themselves.

But leveraged assets of banks are income the bank usually receives over a longer period of time. For example, bank bonds are usually long-term “loans” made by investors in banks. Likewise, long-term loans made by the banks are usually home loans.

Here, as in the People Chart, solvency refers to how able the bank is to pay out deposits at any given moment.

Some things to observe

(1) If you compare charts you’ll see that “cash” belonging to people in the People Chart shows up as “deposits” in the Banks Chart, and vice versa. People and banks are two sides of the same coin. In any “market transaction” between buyers and sellers we need to pay attention to both sides. Instead, the focus these days is on banks alone, and not people.

(2) Rather than blaming any particular parties, the financial crisis can be seen as a whole system where imbalances occurred among people and the banks. This brought about failures for both. In other words there’s no longer:

A bank for every person.
A person for every bank.

For example, let’s look at the banks’ option C, longer-term loans. When banks made long-term loans to landlords, both groups were leveraged, but solvent. Landlords who took out loans at the bank made rent off their property and paid the banks interest on their long-term loans. Both were better off from the deal. But when banks made long-term loans to homeowners or to landlords who were over-extended, the latter became leveraged and being “cash poor” were in danger of defaulting, i.e., becoming insolvent or bankrupt.

Likewise, looking at option B, when banks made long-term investments, particularly commercial loans in large building projects, or sold structured securities created from conglomerations of long-term personal loans sliced into pieces called “tranches,” banks put themselves in the same position as homeowners – they became highly leveraged and deeply in debt. They couldn’t get money easily, and they were obligated to pay their depositors (who have the right to demand money from them at any time).

Banks which went into debt and over-leveraged their investments to make profits during the bubble times are now failing daily. We’re up to 130 bank failures this year.

This “economic model” or “blueprint” with four paired variables (liquidity/leverage, and solvency/debt) has given us a very simple way to look at the problems of banks and people during the financial crisis. Now, in Part III, we can go ahead and use it to look at the “solutions” the government is using for banks and people.

Copyright © 2009 Nancy K. Humphreys

The first laws of library science are:
For every reader a book.
For every book a reader.

The first law of economics, the “law of supply and demand” is:
For every seller a buyer.
For every buyer a seller.

In other words, you can’t have a “market transaction” without both a buyer and a seller.

Keep these laws in mind as we explore the relationship between banks and people.

People put money in the form of “cash” into banks. This cash is called “deposits” by the bank. Banks use deposits to earn more cash for themselves from other sources. This is how they survive. People use banks as long as banks keep their money “safe.” And sometimes people make deposits because banks pay people cash for their deposits. This is called “interest” on their bank deposits.

The relationship between people and banks is that simple. Banks and people buy and sell (i.e., borrow and loan) cash from each other. Where it gets complicated is in how banks use the cash they get from people.

When banks began failing faster, two supposedly opposite reasons for the failures were raised: liquidity and solvency.

“Liquidity” is the ability to get your money fast.
“Solvency” is having money to get–solvency is having enough to pay the bills.

So did the banks lack liquidity? Or did the banks lack solvency? I feel this is a false dichotomy. Taoist philosophy from ancient China shows us a way out of either/or thinking traps such as this one. Liquidity and Solvency are not opposites. They simply belong to two pairs of opposites. These pairs are:

Liquidity vs Leverage (or “Illiquidity)
Solvency vs. Debt (or “insolvency” )

Liquidity typically applies to Assets. “Assets” bring in money, they’re “incomes.”
Solvency applies to Debits. “Debits” cost you money; they’re “outgoes.”

To understand the term leverage, think “lever-aged” Imagine yourself using a lever to slowly raise and lower heavy piles of money that go up and over your head. Consider what happens if something goes wrong and the lever slips.

In Part II we’ll look at how these definitions of this pair of opposites apply to people and to banks. We’ll show what happened during the financial crisis. In Part III we’ll examine the roles our government is playing and show how different parts of our government are working against each other in trying to remedy the financial crisis.

Copyright © 2009 Nancy K. Humphreys

Last night I caught an early show of a new documentary film with the Yes Men.

Who are the Yes Men? Well, they are kind of like the Blue Men, only they don’t work for a corporation; they pretend to represent corporations, government agencies, and other powerful institutions that the Yes Men don’t like.

Unlike Michael Moore who plays a buffoonish bad boy giving the bigwigs a hard time, the Yes Men become the bigwigs. The two of them in this film give everyone they come in contact with an Alice in Wonderland tour of what the world could be if it weren’t so out of whack. They take dry financial concepts such as “hazard” (a bad thing that could happen) and “risk” (the likelihood that the bad thing could happen) and show us through their own experiences what these concepts really mean to us as human beings.

While there are hundreds of Yes Men walking the world, the film shows just Andy Bichlbaum and Mike Bonanno. Wild and wacky while devising their plans to turn reality topsy turvy, they seem to be able to pass as utterly straight when they step out to play their parts on the world’s stage. Then they become completely believable CEOs, government bureaucrats, and corporate scientists who announce some kind of “new world order.”

Within minutes their speeches begin to pull everyone in the drab conference rooms where society is shaped out of their normal bored weekday doldrums and into the excitement of an altered reality. What is this new reality? The Yes men tell you what they hope it is as you watch their film. But another way to view where they’re headed is to go back to the 1980s when Mary Daly, lesbian-feminist Catholic scholar and professor at Boston College, wrote a famous, or some would say “infamous,” book, called Gynecology.

Daly’s focus in her book was on the oppression of women around the world throughout “history”. Tackling taboo topics such as foot-binding in ancient China, genital mutilation in Africa, and the brutality of the Western medical establishment, one of Daly’s main points was “patriarchy’s” reversal of what was previously done in matriarchal societies.

The most striking image I recall from some 30 years ago when the book came out was Daly’s provocative argument that the early Roman Catholic Church replaced the earthly triple goddess of ancient matriarchies, i.e.. the “crone, mother and daughter” with its own heavenly triple god of the “father, son and holy spirit.”

According to Daly, the early Church retained the Virgin Mary as a symbol of the pre-patriarchic mother goddess. The priests replaced the daughter goddess with the symbol a dead son-god hanging on a dead tree. And, said Daly, the leaders of the Roman Catholic Church eschewed their own sexual nature and donned skirts in order to assume power over their male and female followers alike.

The Yes Men, on the contrary, seem hell-bent on reversing reality back to the core of matriarchal values In particular, they reclaim reverence for life instead of death, and they do this by donning professional men’s business suits. Enter their fantasy world and you become dizzy seeing life as it could be rather than it is.

This shift is most explicit in their prank of passing out a fake issue of the New York Times on the streets of Manhattan. On the big screen we get to watch the faces of many of the 1,000 New Yorkers who read, not “the news fit to print,” but the “news you’d hoped to hear” from a date six months into their future.

I don’t know about your view of New Yorkers, but my experience is they don’t go around downtown Manhattan looking shocked, smiling, and then hopeful and happy very often, and especially not while reading their daily newspapers.

The audacity of The Yes Men had me alternately  gripping the edge of my seat in expectations of their getting caught and hauled off to prison, or laughing out loud with the rest of the audience at their antics.

What most amazed me about The Yes Men is how the hidden “glasses cam” one wears while the other plays the speaker, pans their audiences and brings out something rarely visible to the human eye. I was reminded of an episode from the old TV science fiction series, “Flash Gordon.” In this episode Flash and his men were exploring a cave on Mars. As they pass through the cave, creepy figures of clay humanoid beings emerge from the cave walls and begin following them.

It’s fascinating to watch their audiences as the Yes Men stretch what Mary Daly called the “necrophiliac” (death-loving) values of patriarchal societies way past the boundaries of “good taste.” While some members look shocked or even sickened by what they hear, others beam with joy at the whatever new “final solution” that the Yes Men propose for their fields of work.

With the Yes Men’s glasses cam, you don’t need to slice a V in anyone’s neck to see who the reptiles are who would wipe out all of humanity while not caring a whit. Their faces are right on the screen, glowing with glee.

To me these were the most shocking and startling moments of the film. They’re the moments when you can clearly distinguish the hidden psychopaths, or as they are now called, sociopaths, who walk among us and live and work beside those of us who have consciences and care.

On the other hand, some of the most heartening moments of this film are watching a group of developers cheer the idea of poor people regaining their homes in New Orleans. This would cost the developers money they’d lose from not building upscale condo and shopping projects, but they clapped in approval anyway.

Another moment came after seeing the smiles on the faces of those in India who said two hours of “false hope” from a prank by The Yes Men was worth the pain of the let-down when “reality” returned and they found their dreams of restitution were still a fantasy.

Watch this movie and you’ll both laugh, feel pain, and see the world in a brand new way, unless of course, you’re one of the “Visitors” without a human conscience… Even then, you’d probably enjoy it too, just in a very different way from the rest of us.

Copyright © 2009 Nancy K. Humphreys

Believe it or not, this dismal series on banking is going to end with a hopeful note. That’s because “debt” isn’t always a four letter word.

When Debt is Good to Have

Our world definitely turned upside-down over the past year. “Hedge funds” or “private equity” companies used to gobble up companies for profit and spit out the remains. Now they are being called upon to save our banking system. One of them is even financing highway rest stops in the state of Connecticut.

We’ve left the free market far behind too. The Treasury is now in hock for $14 trillion of guarantees in its attempt to stem the blood flowing from the financial crisis. The US government is fast approaching it’s debt limit of $12.1 trillion. Congress will shortly be embroiled in what is bound to be nasty debate over raising the statutory cap on US debt to $13 trillion for 2010.

Another odd thing about these times is that corporations are heading as fast as they can towards debt by selling corporate bonds. Eventually those bonds (or loans) will have to be paid back with interest to the buyers. Companies and banks don’t seem to care. One corporate spokesperson even told a financial reporter his company didn’t have any need for the cash but the company issued bonds because it thought it would be a good idea to have cash on hand.

Here’s where I had an idea about the future. Based on the work of Armen Alchian, it occurs to me we are likely to be in for a bout of inflation, even though the Federal Reserve protests that nothing of the sort is on the horizon. Here’s Alchian’s conclusion from research he did about business cycles in the decades following the Great Depression.

Alchian found that “net debtors” did better in times of inflation than “net creditors.” ["Net" simply means "overall" a debtor or a creditor.] Now remember, because this was true in the past, doesn’t mean it will be true in the future. But right now several financial writers have been suggesting, for various reasons, that inflation is on our horizon.

Inflation Ahead?

One reason given for possible inflation next year is that our cash-strapped, in-debt-to-it’s-hairline, federal government will need to print more money to pay for some kind of support to boost the mortgage market and/or small businesses.

Another reason put forth is that the issuing of so many US government bonds, many of which are being bought by banks, may create a new danger. There may come a time when there is a surplus of government bonds for sale and fewer buyers than now. Banks will again have a financial liquidity problem when they can’t cash in government bonds.

A more compelling argument is one by David Bowers, a strategist at Absolute Strategy Research. Bowers argues that it is businesses, not consumers, who will lead any recovery. When the financial crisis hit, businesses were caught with large inventories. Producers have been selling off these inventories and not replenishing them. In some cases, such as that of Delphi, the biggest car parts supplier, providers of inventories have gone bankrupt over the past year.

Bowers suggests that corporations will eventually use the cash they’ve raised to hire new employees and reorder supplies only to find that supplies are now scarce. And here we have the traditional definition of “inflation” as “too many dollars chasing too few goods.”

Banks as Net Debtors

According to Armen Alchian banks are “net debtors” by definition. This is because banks make money by taking in deposits from customers and loaning out that money in order to earn interest from the loans. Because banks loan out the money they receive from depositors, they’re net debtors. They owe more than they have at any given moment. Which is why we have the FDIC insurance fund in case there is a run on a bank by depositors.

Alchian’s research showed that banks and other net debtor companies did better during periods of inflation than companies that that weren’t in debt. Interest rates tend to rise during a period of inflation because everyone needs more money to pay higher prices. Banks sitting on a lot of cash during inflationary times do well. They can make lots of high-interest loans.

It would seem that any banks that survive the current bloodbath (124 out of approximately 800 FDIC member banks have disappeared this year) and accumulate enough capital reserves will come out winners during an inflation. And this, perhaps is why hedge funds are so willing to sign on when the FDIC comes calling to ask them to help it bail out a bank.

What About Us?

So what does this mean for us? Alchian concluded that the net debtor advantage during inflationary times applied to both governments and individuals as well as to corporations. Is it possible our government has not been certifiably insane in running up such a huge debt in its attempt to keep the economy from imploding from the credit crunch? Could the U.S. come out smelling like a rose in the end?

And what about us? What will happen if we find ourselves in an inflationary period? What do we do?

First, we need to better understand how “debt” is not necessarily a four-letter word. As Robert Kiyosaki points out in his Rich Dad books and classes, entrepreneurs and the rich think differently from the rest of us about debt. For entrepreneurs debt is a good thing as long as it is used in a way that involves assets and creates wealth.

So, am I saying go into debt or into more debt if you see inflation coming? Not necessarily. But you’ll need to learn to think like an entrepreneur, a banker, or a government economist. If you do go into debt, it should be for an asset that you are sure will make money for you.

A house (mortgage) is a large long-term liability. You must pay and pay for it, unless you are a landlord and have renters bringing in an income for you. A truck could be a money pit or it could be an asset if you can make money by using it. The same goes for a computer. It can be an asset if it brings in money for you or your family, but it’s just another expense if it doesn’t.

How can you use your money and/or time to acquire an asset or assets? If you buy a foreclosed house now, will you be able to afford the mortgage if prices for other goods go up? Will you be able to move elsewhere and rent out the house if inflation bites you? Or will you be able to rent part of your house, condo or apartment if times get really tough?

If you don’t have cash or credit, can you eke out enough from your budget to stockpile canned goods or start a garden? Can you trade for a more gas-efficient car or give up driving?

If inflation comes, will you be able to get your cash out of where it is now to use it before its value drops? Where will you spend your money to make money before your cash loses its buying power during inflationary times?

These are the kinds of questions we should all be asking ourselves right now or any time the economy might bounce from an long tiring recession into the beckoning arms of a brand new inflation.

And finally, remember that assets are not just things. They can include intangibles. “Goodwill” in business refers to clients or customers. Family, friends, and community are all assets too. Assets are the bounties we need to remember to be grateful for.

Copyright © 2009 Nancy K. Humphreys

Who’s the FDIC Gonna Call?

The FDIC, which insures virtually every bank deposit in this country, is rapidly digging itself into a $500 billion hole. Here’s how.

Three banks failed in 2007. 25 banks failed in 2008. Two Fridays ago, the FDIC shut down seven banks in Florida, Georgia, Illinois, Minnesota, and Wisconsin, bringing the 2009 total to 106. This past Friday the FDIC shut down nine banks in Arizona, California, Illinois, and Texas. That is the largest number of bank closures ever in one day. This year we’ve reached 115 failed banks.

In September, the number of “at risk” banks rose from 305 to 415. Now, unnamed government officials are saying 1,000 of the 8,100 FDIC member banks could fail over the next three years. According to the Wall Street Journal last week J.P. Morgan/Chase CEO, James Dimon, said he expects “several hundred additional smaller regional-based banks to not make it.”

The FDIC is running out of money to help failing banks, not because it needs to cover customer deposits (i.e., bank “liabilities”), but because it is spending large amounts of money to buy up bank “assets,” many of these, “toxic” assets. The FDIC has entered into “loss-sharing” agreements with surviving banks and with hedge funds to take over ownership of failed bank assets.

Already the FDIC has spent $50 billion on closeouts of around 135 banks since the financial crisis began in 2008. In addition, the FDIC said this past Friday’s closings would cost its insurance fund $2.5 billion alone.

In its latest loss-sharing deal, he FDIC and the U.S. Bank of Minneapolis agreed to share losses on about $14.4 billion of the combined purchased assets of $18.2 billion from last Friday’s nine failed banks.

As a result of all of its takeovers and loss-sharing arrangements for assets of failed banks, the FDIC has fallen below its statutory minimum for holding reserves to cover customer losses.

A Run On The Bank?

While we have not had a bank run yet, other countries have. In September the Dutch government seized DSB Bank NV, one of the biggest banks in the Netherlands after a run on deposits. Depositors were given three days to take their money out via ATMs at other banks. Even ING and four other big Dutch banks could not buy out this collapsing Dutch bank. In fact, ING is now divesting itself of both its US ING Direct bank and its insurance business in order to pay back some of the loans it received from the Dutch government.

Could this happen to us?

The primary causes of bank failures in the US have not ceased. Along with buying toxic assets like derivatives from investment banks and insurers, banks paid out loans, both secured and unsecured, that are now “underwater” or “nonperforming.” Bank failures have come largely from declines in the housing market, credit cards, and commercial loans.

According to CNN Money.com (Oct 15, 2009), RealtyTrac reports that the number of foreclosure filings is at a record high in the third quarter of this year. CNN’s headline blares, “They were the worst three months of all time.”  The statistics:  almost 1 million homes (I.e., one in every 136 homes) received a foreclosure letter during the last quarter of the year.

Many of those homeowners in foreclosure are working people with good credit who have lost their jobs as businesses downsize. Some small businesses even closed because they could no longer get needed loans from banks. Banks are too busy raising capital and writing off bad loans from the past to make many new loans. CIT Group, lender to nearly a million small and midsize businesses couldn’t raise enough capital to cover losses. It just filed for Chapter 11 bankruptcy, leaving taxpayers likely to hold a bag filled with a now-worthless $2.3 billion dollar TARP bailout investment in CIT stocks.

As foreclosures mount up, some banks are trying creative arrangements. One of these is similar to a reverse mortgage except the bank doesn’t pay anything to the underwater owner. The bank simply lets an older owner continue living in the home the bank now owns. When the bank’s customer dies, their heirs can choose whether or not to buy back their relative’s home by paying off the debt owed on it to the bank. In the fiercely competitive world of banking, this kind of losing arrangement is unprecedented.

Bank credit cards are also taking a hit as more and more people stop paying on them. Even JP Morgan Chase is losing money on its cards. Congress is cracking down on credit card fees next year. Calls are coming in for regulation of bank overdraft fees as well. But most worrisome to banks, the Fed, and the FDIC are commercial mortgages. This market is in far worse shape than the home mortgage market. Along with smaller banks that failed from making commercial loans, Capmark Financial Group, one of the biggest lenders for commercial development projects, just filed for Chapter 11 bankruptcy this past week.

What The FDIC Already Tried

The FDIC has taken steps to replenish its insurance fund. Last spring it levied a $5.6 billion emergency fee on member banks. This fall it requested Congressional approval to collect member bank fees in advance for the next few years. These steps have enabled the FDIC to keep up with extraordinary losses to its insurance fund so far this year.

Seeing that the FDIC could be in deep trouble next year, this past March Sheila Bair went to Christopher Dodd, chair of the Senate banking committee, and requested an increase in the FDIC’s emergency line-of-credit from the US Treasury. She got a $500 billion line of credit.

In May FDIC staff estimated that bank failures would run the FDIC a total of $70 billion between 2009 and 2013.

In August, Bair reluctantly set in place a program of loss sharing with hedge funds who buy failed banks. This set a new precedent at the FDIC. Four members of the FDIC board voted to set a new precedent, while the fifth board member remained completely opposed the idea of letting hedge funds buy banks.

Bair wanted hedge funds to agree to keep “Tier One” capital reserves of 15% on hand, but after pension funds from several states as well as the hedge funds complained, the FDIC board lowered the capital reserves rate to 10% for hedge funds. The FDIC also wanted hedge funds to be “a source of strength” for banks and be available to provide extra support, but this requirement was dropped also because of the need to acquire extra capital to support failing banks.

The fact is that hedge funds have also been failing, and now the largest are selling off their investments. Blackstone, a well-known private equity group, is planning to sell five companies and is listing eight others. Many hedge funds will need to raise new capital within the next couple years. A consulting group in Boston is estimating that 20 percent of the largest 100 private equity groups will fail in that endeavor and will simply vanish within a couple years.

In September, FDIC staff estimated the cost of bank failures between 2009 and 2013 would run about $100 billion. Bair briefly considered drawing on her Treasury line-of-credit, but opted for requesting advances of up to $45 billion in fees from FDIC member banks instead.

With the blessing of Treasury head, Tim Geithner, the FDIC also announced its intention to end its Debt Guarantee Program after October. The FDIC began this program under pressure from the Bush Treasury during the start of the financial crisis in 2008. This program aimed to increase the liquidity of banks by having the FDIC guarantee short-term debt that large banks issued. The FDIC reaped almost $10 billion for fees for this guarantee and as of yet had lost no money.

The biggest users of this $310 billion FDIC program are large retail banks such as Citigroup, GMAC and General Electric. In September the three said they were able to issue debt without any more government guarantees. But now these banks are in trouble. The FDIC had to extend its Debt Guarantee for another six months. Today the FDIC guaranteed $7.4 billion of new debt for GMAC, while the Treasury injected $7.5 billion into this tottering bank.

There is a very real danger that larger retail and regional banks that bought smaller banks will themselves fail or need more help from the FDIC. For example BT&T, a regional bank in North Carolina considered to be very stable, entered into a $7.7 billion dollar  “loss-sharing” arrangement with the FDIC for the purchase of the assets  (mostly commercial loans) of Colonial Bank of Alabama this past summer. On October 20th a Wall Street Journal headline reported that BB&T reported a net decline in value of 58% for the bad loans it now owns.

This “house of cards” the FDIC is building with bank and hedge fund partners reminds me of the Thanksgiving/Christmas/New Year holiday season I sat biting my nails. I’d maxed out all my credit cards, taken a loan from my condo board, and borrowed on my insurance to fix up my wrecked home for sale just as the housing market began sliding down into the pit it’s now mired in. When Bair begins using her $500 billion line-of-credit she will be in the same boat. I was lucky in selling my home before it went underwater. But we’ve all seen what has happened to other borrowers recently. How will it go for Bair and the FDIC?

The FDIC’s estimate that bank failures between 2009 and 2013 would cost the FDIC a total of $100 billion looks utterly shortsighted at this point. The FDIC has already spent over $52.5 billion on around 135 failing banks since the crisis began just over a year ago and it’s now looking at losing as many as 1,000 member banks by 2013.

That $500 billion line of credit from the Treasury looks much more likely to be needed by the FDIC and soon!

But here’s the hitch. Unlike TARP bailout funds, the FDIC’s $500 billion line-of-credit has to be paid back to the Treasury Department, which itself going deeply into debt. How will the FDIC repay such a large amount when it has already tapped out its members for years ahead?

Bair, normally a sensible government bureaucrat, has been forced by extraordinary circumstances to assume the kind of risk usually only a private entrepreneur takes on. Will the toxic bank assets Bair is gambling with in her loss-sharing bank deals recover their full value? Or even part of their value? Ever?

Next time:  “The Treasury:  $14 trillion, and what’d do we get? Another minute older, and deeper in debt”

Copyright © 2009 Nancy K. Humphreys

FDIC: Rescuer or Rescuee?

Last weekend the FDIC seized three smaller banks. This makes a total of 98 banks that failed this year. The banks were Jennings State Bank (Spring Grove, MN), Warren Bank (Michigan) and Southern Colorado National Bank (Pueblo).

The FDIC is chief savior when banks fail. It monitors the financial health of banks. Whenever a bank collapses, the FDIC moves in to arrange auctions of their assets and debts to other banks and/or hedge funds.

Having been a customer of two early banking failures last year (a bank and a credit union), I can personally attest the FDIC process works well. But can the FDIC keep up it up?

The FDIC Deposit Insurance Fund

The Federal government requires the FDIC to keep $1.15 cents on hand for every $100 of deposits by its approximately 8,000 member banks. At the end of 2008, FDIC members had approximately $4.8 trillion in deposits. But the FDICs deposit insurance fund fell by $16 billion down to $19 billion. The FDIC quickly levied a hefty emergency assessment on its members this spring.

By June 2009 the amount of money in the FDIC’s deposit insurance fund declined to $10.4 billion; down from $42 billion in the previous June. This is the lowest level since the Savings and Loan crisis of the 1980s. As a result, FDIC’s fund had only 40 cents for every $100 of deposits. That’s well below the statutory minimum required.

But bank failures are continuing to grow. Recently, government officials estimated that bank failures between 2009-2013 would cost the FDIC up to $100 billion. Seeing that it was due to run out of funds before the end of the year, the FDIC is now demanding prepayment of several years in fees from member banks.

This, unfortunately, will be likely to have the effect of hastening the demise of some of its members.

How can the FDIC be so broke so fast? Let’s take an in-depth look at the answer and what it means for our futures.

The True Costs of Bank Failures

The FDIC will spend somewhere around $19 billion from its deposit insurance fund this year, but little of that money is going to depositors. That’s because the FDIC has been fairly successful at getting other banks to take over the deposits of failed banks. It is the assets, e.g. property, loans, investments, etc., of failed banks that are costing the FDIC so much money.

The costs to the FDIC for handling the assets from bank failures are mounting up. The FDIC estimated it would pay $293.3 million out of its insurance fund for the three most recent bank failures last weekend. And these are very small banks.

Why is this total so high? In January of this year, the FDIC began using a tool from the savings and loan crisis days. It’s called “loss sharing.” Loss sharing is basically a subsidy to other banks and private equity sources to take over failed banks. It means that FDIC costs for handling bank failures aren’t just bureaucratic ones. The FDIC is taking on the risk of owning toxic assets that may or may not improve in value in the future.

For example, when Colonial Bank of Alabama went under in August it was the sixth largest bank collapse in U.S. history. The FDIC entered a loss-sharing transaction for $14.3 billion of Colonial’s approximately $22 billion in assets. BB&T, a Southern regional bank, took on the remaining $7.7 billion.

When Colonial failed in August, for the first time ever, the FDIC included a clawback provision. The FDIC has agreed to reimburse BB&T for the 80 percent of its first $5 billion in losses (after which the FDIC is pledged to reimburse 95 percent of losses up to a total of $14.3 billion). The FDIC’s clawback provision says if BB&T’s losses from Colonial are less than the first  $5 billion, the FDIC gets some money back. But any return of the FDIC’s funds won’t happen until 2019!

This kind of risk-taking isn’t unusual at the FDIC.

When Corus Bank of Chicago went under in September, the $6.6 billion of its deposits went to another Chicago bank. Regarding the $5 billion in assets (valued now at around $2.5 billion), the FDIC then made a complicated loss sharing deal with a group of private equity companies in a 60-40 split.

The FDIC did ensure that all of the Corus’ debt must be paid off before anyone gets any equity. And the FDIC has an option to take as much as 70 percent of any equity raised from Corus’ assets. Unfortunately, Corus assets were mostly non-performing loans for unfinished building projects.

And here’s the sweetener for the buyers. The winner of the auction for Corus gets a number of goodies from the FDIC. It will get access to $1 billion in interest free loans and a subsidized rate on loans after that. It will also get a revolving line of credit, plus $40 million in management fees.

The FDIC estimates that the Corus Bank collapse will cost its insurance fund around $1.7 billion.

Where’s the bottom line?

At least one WSJ commentator has commented acidly that FDIC loss-sharing deals with buyers of failed banks are similar to the kind of arrangements banks made on subprime mortgages. The FDIC’s deals encourage buyers to overpay, and the results could be just as fatal.

Professor of economics at Boston University, Laurence Kotilkoff, estimates that the FDIC now has more than $6 trillion in contingent obligations against its deposit insurance. By getting prepayment of fees from member banks for up to three years in advance to pay this year’s bills, the FDIC looks to be paying Peter to pay Paul while mortgaging its own future for years.

The obvious questions for our futures? What will happen if the FDIC can’t pay for the equity it’s buying from the failed banks? And what happens when the next failed bank has no buyers?

Next time:  “Who’s The FDIC Gonna Call?”

Copyright © 2009 Nancy K. Humphreys

Last weekend the FDIC seized three smaller banks. This makes a total of 98 banks that failed this year. The banks were Jennings State Bank (Spring Grove, MN), Warren Bank (Michigan) and Southern Colorado National Bank (Pueblo).

The FDIC is chief savior when banks fail. It monitors the financial health of banks. Whenever a bank collapses, the FDIC moves in to arrange auctions of their assets and debts to other banks and/or hedge funds.

Having been a customer of two early banking failures last year (a bank and a credit union), I can personally attest the FDIC process works well. But can the FDIC keep up it up?

The FDIC Deposit Insurance Fund

The Federal government requires the FDIC to keep $1.15 cents on hand for every $100 of deposits by its approximately 8,000 member banks. At the end of 2008, FDIC members had approximately $4.8 trillion in deposits. But the FDICs deposit insurance fund fell by $16 billion down to $19 billion. The FDIC quickly levied a hefty emergency assessment on its members this spring.

By June 2009 the amount of money in the FDIC’s deposit insurance fund declined to $10.4 billion; down from $42 billion in the previous June. This is the lowest level since the Savings and Loan crisis of the 1980s. As a result, FDIC’s fund had only 40 cents for every $100 of deposits. That’s well below the statutory minimum required.

But bank failures are continuing to grow. Recently, government officials estimated that bank failures between 2009-2013 would cost the FDIC up to $100 billion. Seeing that it was due to run out of funds before the end of the year, the FDIC is now demanding prepayment of several years in fees from member banks.

This, unfortunately, will be likely to have the effect of hastening the demise of some of its members.

How can the FDIC be so broke so fast? Let’s take an in-depth look at the answer and what it means for our futures.

The True Costs of Bank Failures

The FDIC will spend somewhere around $19 billion from its deposit insurance fund this year, but little of that money is going to depositors. That’s because the FDIC has been fairly successful at getting other banks to take over the deposits of failed banks. It is the assets, e.g. property, loans, investments, etc., of failed banks that are costing the FDIC so much money.

The costs to the FDIC for handling the assets from bank failures are mounting up. The FDIC estimated it would pay $293.3 million out of its insurance fund for the three most recent bank failures last weekend. And these are very small banks.

Why is this total so high? In January of this year, the FDIC began using a tool from the savings and loan crisis days. It’s called “loss sharing.” Loss sharing is basically a subsidy to other banks and private equity sources to take over failed banks. It means that FDIC costs for handling bank failures aren’t just bureaucratic ones. The FDIC is taking on the risk of owning toxic assets that may or may not improve in value in the future.

For example, when Colonial Bank of Alabama went under in August it was the sixth largest bank collapse in U.S. history. The FDIC entered a loss-sharing transaction for $14.3 billion of Colonial’s approximately $22 billion in assets. BB&T, a Southern regional bank, took on the remaining $7.7 billion.

When Colonial failed in August, for the first time ever, the FDIC included a clawback provision. The FDIC has agreed to reimburse BB&T for the 80 percent of its first $5 billion in losses (after which the FDIC is pledged to reimburse 95 percent of losses up to a total of $14.3 billion). The FDIC’s clawback provision says if BB&T’s losses from Colonial are less than the first $5 billion, the FDIC gets some money back. But any return of the FDIC’s funds won’t happen until 2019!

This kind of risk-taking isn’t unusual at the FDIC.

When Corus Bank of Chicago went under in September, the $6.6 billion of its deposits went to another Chicago bank. Regarding the $5 billion in assets (valued now at around $2.5 billion), the FDIC then made a complicated loss sharing deal with a group of private equity companies in a 60-40 split.

The FDIC did ensure that all of the Corus’ debt must be paid off before anyone gets any equity. And the FDIC has an option to take as much as 70 percent of any equity raised from Corus’ assets. Unfortunately, Corus assets were mostly non-performing loans for unfinished building projects.

And here’s the sweetener for the buyers. The winner of the auction for Corus gets a number of goodies from the FDIC. It will get access to $1 billion in interest free loans and a subsidized rate on loans after that. It will also get a revolving line of credit, plus $40 million in management fees.

The FDIC estimates that the Corus Bank collapse will cost its insurance fund around $1.7 billion.

Continue reading →

Trickle down” bailouts aren’t working for smaller banks.

The U.S. government’s efforts have succeeded in keeping large investment banks out of the soup–for now. The big banks are raising capital reserves by issuing bonds. (These are loans that must be paid back by a certain date.)

The bigger banks are investing their new capital reserves in each other’s bonds and socking some of it away at the Fed. They’re also issuing new, risky, derivatives. All this, rather than return to lending on a large scale.

Larger banks have a huge asset. No matter what they do they’ve been deemed “too big to fail.”

Smaller banks have no way to create and sell their own bonds to raise more capital. Meanwhile the chickens of small bank lending and investing practices of the past are coming home to roost. Regional and community banks are folding at alarming rates.

Last year 25 banks failed. Already, with the last quarter of the year yet to come, the number of failed banks is close to 100. This year we could see a 500% or more increase in collapsed banks.

These banks range from small community banks to large regional banks serving multi-state areas. Some of these banks go back to Civil War times. Two regional bank failures in 2009 were among the ten largest failures (in terms of assets) in the history of U.S. banking.

Why are small banks failing?

Some smaller banks that needed ways to invest capital during boom times bought non-government-backed securities called “private issuer” or “private label” securities. They also bought derivatives called CDOs (collateralized debt obligations), and they purchased “trust preferred securities” (a hybrid investment made up of debt and equity.) These types of investments went sour last fall.

Home mortgages went bust too. The rate of sub prime loan defaults is now slowing, but unemployment is pushing up the rate of prime borrower defaults. According to the banking trade association, the Mortgage Bankers Association, nearly 1 out of 12 mortgage holders are at least 90 days behind on their payments. Colonial Bank (Alabama) is the 6th largest banking collapse on record. It failed in mid-July because of its real estate lending in Florida and other states. Colonial is the largest bank failure since Washington Mutual and IndyMac during the current financial crisis.

But smaller banks’ nemesis is commercial property. The Fed is now looking into banks’ exposure to commercial mortgages. Commercial mortgages and derivatives based on these mortgages are dead weight dragging down the banks. For example, Corus Bank (Chicago) failed after half its condo construction loans defaulted in April. These totaled about $2 billion. In mid-August, Guaranty Financial Group, Inc. (Texas), the 10th largest bank to fail in U.S. history, had $3.5 billion in sub-prime securities backed by adjustable-rate mortgages. The write-downs on these securities in just one month put Guaranty Financial up on the chopping block. These write-downs used up all the bank’s capital.

How bad is it?

Things in the mortgage market have become so bad for smaller banks, they’ve banded together to form their own trade associations to lobby on their behalf. Two new associations are The Community Mortgage Lenders of America and the Community Mortgage Banking Project. Consolidation is driving this move. The three biggest banks in the Mortgage Bankers Association, Bank of America, Wells Fargo, and J.P Morgan Chase, have gone from issuing 15% of new mortgages in the early 1990s to 37% in 2007 to over 52% this year. Small banks feel that the Mortgage Bankers Association can’t always represent their interests in Washington without some conflict of interest over what the larger banks’ want it to do.

Small bank failures are not the only grim statistic. The overall number of banks on the FDIC’s “sick list” has risen dramatically. Out of approximately 8,200 banks backed by the FDIC, the number of banks “at risk” rose from 305 to 416 in the second quarter of this year. Assets of these banks total around $300 billion. This month the Institutional Risk Analyst, a bank watchdog, said that its “F-rated” banks have total assets of about $4.5 trillion dollars at risk.

The only ray of light in this bleak picture is a slight resurgence in the market for “toxic” assets like mortgage-backed derivatives. This may mean banks that survive would be able to “write up” some of the value of their distressed assets. For many small banks this is too little too late.

Coming next: FDIC: Rescuer or Rescuee?

Copyright © 2009 Nancy K. Humphreys

http://twitter.com/nancyuno

As a self-employed cookbook indexer I felt obligated to see the movie, Julie & Julia, even though I never cared for Julia Child or French cooking. I mean, Meryl Streep is wonderful, isn’t she?

When the movie suddenly introduced Irma S. Rombauer, author of The Joy of Cooking, I was as stunned and in awe as Julia was. Irma has long been my heroine for producing the culmination of, and antidote to, all those syrupy Betty Crocker-type cookbooks I grew up with. Like Julia in the movie, I listened to Irma’s litany of  big-publisher perfidy with an equal amount of growing horror.

When Irma concluded her ‘plaint by wailing about the ineptness of her publisher’s indexer in putting “Crispy Chicken” under “D” for “Drumstick” rather than “C,” I probably had the biggest smile in the audience.

That said, it’s no secret that audiences of the movie loved the “Julia part” and hated the “Julie part” of the movie. No surprise! A/B structures are fine for writing and songs, but nearly impossible to pull off in a feature-length film.

We were supposed to imagine that the lives of the two women whose names both start with “J” were parallel with each other. That premise was ridiculous! For me the Irma scene was not only a highlight of the movie; it was a reality check about publishing that made the Julie part of the movie not work at all.

After Irma’s litany, any intelligent viewer probably wondered for a second why Julia and her partners persisted in finding a publisher. The answer is, that unless you had a fortune or family connections, like the early twentieth century American poets Gertrude Stein or Amy Lowell, you had to go out and get a big publisher to manufacture and sell your book in Julia’s day.

Julia’s saga in finding a publisher was one most of us over thirty who call ourselves writers have been through in one way or another. During the movie I even had a palpable memory of exactly what Julia was “feeling” when she bundled up her carbon-copied typewritten manuscript to send out to a publisher. But times have changed, and in more ways than one. Many of us no longer sign with, or even seek out, traditional publishers.

Julie was among that number. Julie hadn’t even finished her “book,” whatever it was about, let alone tried to find a publisher or dealt with one, when she began her blog. Her project really wasn’t about writing as much as it was about being enough of a “foodie” to cook every one of Julia’s recipes from Mastering the Art of French Cooking. For that I honor her cooking spirit.

But I can’t honor the Hollywood studio and scriptwriters who turned Julie’s story into a complete fairy tale of becoming a “real” writer with a big book and movie contract. That’s an increasingly elusive happy ending in this century. Fewer authors are picked up by big publishing houses than ever before, and the average total royalties for a book is still around $3,000.

Unlike the beginning of blogging, today a typical self-publisher with a blog still has to take a number of steps to promote her/his book well enough to get a book contract, if that is their intention. Julie’s path to fame, as the movie portrayed it, was a complete fluke, or worse yet, possibly a fake that Hollywood promulgated for its own profit.

In the movie we hear how much Julia got as an advance, and we know from the context it was piddly. But not a word is peeped on what Julie was paid for her book, just a coy intimation of more money than she had. Movie rights aren’t even given a mention.

Did the real Julie get the millions of dollars that the fictional Julie’s boring, stressed-out peers at Cobb Salad lunches got from their work? Given the statistics on writers’ royalties–doubt it!

Julia’s past will shine like a star for a long time. I’ll never love her like I love Irma for her classic Joy of Cooking. (Warts and all, Joy still has the most well-organized, comprehensive, cookbook index I’ve seen—but yes, “Crispy Chicken” is a bit difficult to find…) Still, I respect Julia Child a lot more than I did before seeing this movie.

But Julie? Julie’s recipe for success isn’t one that most writers will be able to follow. More telling, even for her in this movie, it fell flat at the end. Who could believe in the bittersweet ending of this movie? No one with an ounce of brains—poached, scrambled, or sautéed!

If you’re a self-publisher, or a moviemaker, or a small business owner who works with creative people, or any kind of creator, or a community-media organization, be sure to check out David Mathison’s book, Be The Media. You’ll find a lot more to excite you in David’s stories about Internet entrepreneurs than in Julie’s story.

Copyright © 2009 Nancy K. Humphreys

http://www.wordmapsindexing.com                                                                                                                       “The Best Index for Your Book”

Do you think about becoming self-employed? Do the thoughts in your head go something like this, “I hate working because….”

You know those reasons:

“I detest office politics.”
“I don’t get enough money to do this,”
“No one recognizes how special I am.”
“I can’t stand my lazy co-workers one more minute.”
“This is the fifth time I’ve been laid off. I don’t want to go out and job hunt again!”

Have you ever thought, “I should become self-employed!” Is that how self-employment happened, or might happen, to you? Or did you realize there was something very different about you–even when you were just a kid? I mean really different. Like feeling happy to go see your dentist?

Yes, that was me. Little Nancy reaching up to grasp the cool metal bar that opened the door, leaning all my weight on it to open the heavy door, and escaping along with the stale air from the corridor in my junior high school. That was I, feeling pure joy as I heard the “clang of freedom” as the steel door slammed behind me for a couple hours.

Mind you, it wasn’t that I hated education. I loved learning. And I liked my friends in school. And sure my dentist was nice, but I didn’t have a crush on him! No, in any structured place, like a school, I just felt trapped, like a weasel in a box.

My favorite job, and the only one I couldn’t do successfully, was cherry picking. I envied guys who worked on highways, even though I knew I’d be bored out of my mind with such a job. I dreamed of becoming a forest ranger or postman. But I never qualified for an outside job.

I was on time every night to my first job in an electronics factory because someone gave me a ride, and the company docked our pay if we missed even a minute. But left to my own devices I always arrived late to my jobs. As I worked my way up the career hierarchy to more freedom in the workplace, I only felt more and more trapped. Even when I could roam a whole university campus at will, I didn’t want to go to work.

I didn’t realize it, but I was born to be a feral.

Only after a tiny black and white cat came into my life and refused to be confined to human habitation, did I figure that out. Torn or scratched carpets, blinds, and windowsills had to be repaired or replaced for years until I got the message. He’d always come back, but only if I let him go.

So one day I let myself go too.

Yes, I had had some of those negative thoughts I mentioned above too. And you know what? They just went right along with me when I went into business for myself. Now I was muttering:

“I’m not making enough money.”
“I can’t stand that annoying client one more minute.”
“No one even knows what I do, let alone how special I am.”
“How am I going to deal with that other independent contractor who keeps messing up my client’s project?”
” I used to have to job hunt once every few years. Now I have to do it every week. Why oh why did I become self-employed?”

But deep down I didn’t really care. I was a feral worker. I was free.

And I’ve learned some really important lessons through being self-employed. If I worked with someone I didn’t like, I could actually experiment and find a way to deal with it without the risk of having to hit the unemployment line. If I didn’t make enough money, it wasn’t someone else’s fault. It was my responsibility now.

And some things changed for me because I needed them to change. I learned to enjoy selling my services because it enabled me to really connect with people. I was finding out what people needed and telling them I could give it to them. I liked that. And I finally got recognized for my hard work. Many of my clients gave me appreciation my coworkers or bosses didn’t.

And the biggest payoff of all from working feral? I learned I could feel freedom and joy at work…without having to go to the dentist. For that, I’ll be grateful to self-employment [and one fierce little black and white cat] forever.

ferals enjoying a walk

Copyright © 2009 Nancy K. Humphreys

Once upon a time, a professor with a degree from the prestigious London School of Economics offered myself and another librarian extra employment to put together a resource list for his students.

We were thrilled. Then the professor let slip to me that he was also hiring an English professor to edit his workbook. My reaction, as someone who had all but three courses needed for a PhD in English, was to think (a) you didn’t need a PhD to edit, and (b) many English professors had no idea how to edit writing.

Then the economist dropped the real bomb. He told me that he had to pay his English professor buddy twice a much as the other librarian and me.

When I asked why, the economist said, “Because he can get a lot of work editing. But you girls’ opportunity costs for outside work are far less than his.”

I was stunned. I knew what an “opportunity cost” was. It’s the cost of foregoing the “road not taken.” I was outraged at this excuse for paying two women less than a man. When I explained what happened to her, so was the other librarian.

Here’s the thing about economists. Economists tend to draw a rigid line between “work” and leisure.” They learn that wages are payment for “giving up leisure.” To economists, leisure is mainly of interest when studying consumer-buying preferences. That’s not a glamorous part of their field.

So it’s understandable that the economics professor forgot there’s always an alternative to work. That alternative is leisure. One can just say “no” to a low-ball offer of a job.

And that’s exactly what the other librarian and I did. The “smart” professor wound up compiling his resource list in what would otherwise have been his own leisure time, but for no pay.

So, does the economists’ definition of wages as a reward for giving up leisure time mean anything for self-employed people? I think not.

Self-employed people are self-directed. We have the opportunity to mix and match personal and work life at will. For many of us, it can be hard to draw a hard and fast line between work and leisure the way a factory shift or a 9 to 5 schedule at the office does for those who work for a single check from an employer.

And self-employed people do much that is not directly compensated by our clients. To survive, a good chunk of our time has to be spent on thinking about our work and designing better and more efficient ways to do it. No one pays us while we improve our skills. No on pays our benefits like health insurance, and retirement. We have to take care of those kinds of things ourselves.

So, for self-employed people, opportunity cost often boils down to choosing to do one thing over another, period. Something that may seem like leisure or fun may well turn out to be invaluable to our business. And something that may feel like work may be an utter waste of time.

As self-employed people we have to:

Not accept the things we’re used to,
Have the courage to try something new,
And find the wisdom to know when to do what.

Each of our decisions about what we’ll do and what we won’t determines how much we profit from our businesses.

The money we get is not a wage. It is not payment for giving up leisure. It is not even for the work we do. It’s for our talent, expertise, and experience.  Leisure isn’t something we give up. It’s something we gain from putting our talents to better use.

Copyright © 2009 Nancy K. Humphreys

Recently an acquaintance of mine at a California state agency complained about independent contractors at his workplace.

“They come in when they please, sit around, don’t do anything, and I get stuck with all the work. AND they’re falsifying their results to look bad when in fact things aren’t that bad. They’re getting federal monies they shouldn’t so they can keep getting their fat salaries. Oh, did I mention they make a lot more than I do even though I’ve been there for years. What do you think Nan, should I blow the whistle?”

I pointed out to my acquaintance that in spite of so-called protections, most whistleblowers get fired, and if they appeal, they wind up losing. But I missed the real reason why he should be wary of complaining.

Traditionally, independent contractors were white-collar women and blue-collar men hired by private employment agencies such as Manpower or Kelly Girls rather than state employment agencies. These “temps” were hired on a short-term basis to fill-in for regular staff at other companies. Companies paid a lot for these “temporary employees,” but the temps earned below market rates and received no benefits.

With the rise of “Silicon Valley” type companies this changed. These companies needed technical specialists, innovators, and management experts. The independent contractor of the 1990s was often a computer or scientific research consultant with special expertise. These experts weren’t temporary replacements for existing workers. They were brought into a company to solve problems the regular managers and employees of the company couldn’t. Some were even brought in to “reorganize” companies, i.e., layoff employees.

The jig was up at the end of the last century after Microsoft Corporation created “dummy employment agencies” and hired droves of “independent contractors” in lieu of computer-savvy employees at its headquarters in the state of Washington. This put Microsoft in violation of federal employment laws that protected employees. After that, the IRS cracked down hard on private employers who hired independent contractors as a way to avoid paying employee benefits.

During the Bush administration of the past eight years, the use of independent contractors by government agencies escalated dramatically. Often these independent contractors were retired workers on pensions, and the government had the same motives as Microsoft—to save money on salaries by not having to pay worker benefits. In other cases, outsourcing of government jobs was seen as an effective way to bring innovation into the bureaucratic government workplace. More than that, many politicians assumed uncritically that any effort to replace civil servants with private labor would be beneficial. Even your mail deliverer could now be an independent contractor.

Recent scandals at the federal government level have created some doubts about this practice. First, it was revealed that contract workers in Washington, DC had released private records of celebrities and politicians. But the government could not discipline these workers. They could only be fired after the fact. Doubts arose too in cases where private soldiers, not punishable under military law, were accused of killing civilians in foreign countries.

But the biggest issue for everyone, regardless of political philosophy, is why some of these “private civil servants” are being paid more than their government counterparts. How is this reducing the size of government bureaucracy or government costs? And when charges of indiscriminate killing or unethical research falsification are raised, doesn’t it make you wonder what is going on?

My acquaintance went awry when he assumed independent contractors were additional help brought in by his state agency to do the same job as he was at a higher salary. Clearly the “hired guns” were given a different mandate by his managers than he was. Those temporary contract scientists were probably hired because they were willing to “bend their statistics” so the government agency they were at could get more funding. Civil servants with scientific credentials couldn’t have been persuaded to do that at any price.

Highly paid independent contractors are paid more because they have some form of “expertise” that an agency or organization believes its own managers cannot or will not provide. Because of their special talents they have to be compensated for their special abilities at a higher level of salary, and they get additional perks, such as the right to come to work whenever they feel like it.

The main problem with independent contractors is that they allow management to bring in personnel to easily circumvent the publicly accepted goals and rules of an agency or organization for some particular individual or group’s private benefit. This can result in a tremendous, and even dangerous, waste of resources. We all, as taxpayers and donors to charitable organizations, deserve better when we pool our resources so that our government and nonprofit agencies can bring about some kind of “public good.”

And as far as my friend’s dilemma goes, unless he goes to the news media, whistle blowing will rarely be effective while higher management is involved and covering up.

Copyright © 2009 Nancy K. Humphreys

Why I’m Writing this Blog

Most active investors eventually become interested in “economics.” They believe they can see how the economy affects the financial market they are trying to make money in. I’m an investor who is interested the opposite thing. I want most to understand how investing and investments affect the economy, and how in turn the economy affects each of us, especially those who are self-employed.

Even though I have a Masters in Economics from the University of Wisconsin, I’m a babe in the woods when it comes to understanding the connections between investing and economics. But here goes one brief observation and an example.

Forecasters and Fixers

Before you listen to anyone’s “forecasts” about markets or the economy, especially to the rosy ones, think again. There’s no guarantee the United States economy will ever return to what it was. The financial crisis has exacerbated global shifts in wealth. It’s even possible that the economic indicators everyone relies on so much to predict a return to to the way things were may not be accurate anymore.

And before your accept proposals for fixing this or that aspect of government, just recall how little anyone really knows about how these things work. There’s a reason for that. It’s all very complicated and interconnected.

For example, there are those now who want to get the Federal Reserve under more Congressional scrutiny. Could they be people who want to weaken the Fed in order to shrink the size of the federal government? Indeed they could be. Ron Paul is one example.

And then there are those who want to increase the powers of the SEC and other federal regulatory bodies. But stop and ask yourself, aren’t these the same agencies, even the very same people, who just missed the boat? Mary Shapiro, 29th Chair of the SEC, for example, was the one who investigated Bernard Madoff and didn’t smell a whiff of anything wrong.

Besides the fact that the horse is out of the barn already, here’s one core issue I see with all this rage to regulate government agencies right now.

If we have strong congressional oversight of administrative agency officials, then won’t policy for those agencies just keep swinging back and forth every time elections put a new party in power? And what about the immense power of lobbyists who are providing money and pressure in Washington?

I spent about a year in federal civil service. It was all I could stand. Since then, the closest thing I’ve experienced to working in our federal government is working in our state university systems. I spent fifteen years of my life working as a librarian in two of them.

The University of Wisconsin system seemed well organized and fairly rational. But the humungous University of California system, and UC Berkeley in particular, is the most labyrinthine, political, nonprofit “corporation” you could ever imagine.

In the UC system whole departments of study disappear overnight or find themselves relegated to the worst building on campus. Similarly, in Washington, departments, offices, and bureaus of this or that regularly disappear or are eviscerated. Federal and state civil servants may have “security,” but their actual work and working conditions sure don’t.

To me there seems no way to get any kind of stability in a workplace when politics dominates an organization.

So what about letting “the market” run the financial system instead of politics? First off, there isn’t any such thing as “the market.” There are many financial markets not only in the U.S., but also in the world, and they have complicated interrelationships and strong effects on each other and on our government.

Investing, Markets, and Government

In the news you’ll see all kinds of contradictory “forecasts” of where “the market” is going right now. No one can agree on whether “bull” or “bear” is the word. So let’s clarify the issues. When they say “the market” they usually mean equities, and more specifically, they mean corporate stocks.

But we all know there are other kinds of financial markets: bond markets (state, municipal, and corporate), commodity markets (from corn to diamonds), money markets, currency markets, mortgage markets (residential and commercial), and lots of specialty markets like art and auction markets.

In addition, the financial crisis uncovered a whole host of previously little-known  “off-exchange markets” for rich investors. These market investments bypass traditional exchanges for stocks, commodities, and currencies like The New York Stock Exchange, Chicago Board of Trade, or Forex. I’ve been writing about these unregulated off-exchange investments for almost a year now, and I’ll be posting more about them on this blog.

So here’s my example. The news is full of stories about the U.S. government and how it’s handling the financial crisis among the banks.

The first problem for understanding what the news is saying is that there are two kinds of banks: regular “banks” like the ones where most of us make deposits and write checks, and “investment banks.”

The latter type of banks include the ones who spectacularly failed, e.g., Lehman Brothers, or were bought out, e.g., Bear Stearns and Merrill Lynch, or are being raked over the coals for surviving this past year, e.g., Goldman Sachs.

One thing that gets confusing is that both institutions are referred to as “banks” in the news. But they aren’t the same: the rules for each are not the same, and they don’t even serve the same functions or types of customers.

Investment banks do a range of things most regular banks don’t do. One of them is to sell “securitized” loans to “institutional investors.” Institutional investors are big investors such as mutual funds, private pension funds, and public employee retirement plans. Securitized loan investments collapsed during the financial crises.

Likewise many institutional funds’ investments in and based on commercial real estate developments also tanked and are still in the toilet. California’s employee pension fund, Calpers, is a notable example of an institutional fund that got burned badly by the financial crisis.

I suspect that hidden “dark pool” (private exchange) and off-exchange investments sold by investment banks and other large lenders are affecting corporations, the stock market, and the economy much more than what happened with regular banks and their customers.

In short, there are actually two markets when it comes to investing: the institutional-investor market and the individual-investor market. Clearly the biggest force affecting the economy is the institutional-investor market. Investment banks and other “shadow banking” institutions, such as insurance companies and hedge or private equity funds, serve investors in this market.

Thus, to my eye at this point it seems that the FDIC is focused largely on regular banks and their customers. The Treasury Department and the SEC seem to be most focused on the investment banks, insurance companies, and off-exchange investors and their customers.

The Federal Reserve seems to have a finger in every pie, which is perhaps why conservatives are targeting it for reform, so we can all return to an era of smaller government and letting the “the market” rule our economy

I’m keeping an open mind, but right now, to me it seems ridiculous to talk about “the market” as either a solo entity or as something separate from “the government.”

All kinds of financial markets as well as all kinds of government entities that regulate and support those markets heavily influence our economy. Under the word “economy” lays fascinating panoply of investments and government activities that can affect each and every one of us in a major way.

For more examples of how various markets and government actions affect us personally, drop by Brucenomics.com again soon.

Copyright © 2009 Nancy K. Humphreys

A teenage Morgan Stanley intern is ringing bells on London’s version of Wall Street. The teen, Matthew Robson wrote a market study about what his peers like. The word “free” was a prominent note in his piece.

Teens don’t like regular TV or advertising. Nor do they prefer print. They don’t favor Twitter. Forget radio! Forget phones! No!

Their time and money is spent on cinema, concerts, and video game consoles. The latter are used in lieu of computers or phones for texting friends.

“Wait a minute, Nancy. Where do you get the word “free” in all this?”

If you read David Mathison’s new book, Be the Media you’ll see. The theme of David’s book is the battle between traditional media forces and the new Internet media way of doing things. The latter is what Matthew Robson was telling the financial moguls in London about.

In traditional media, the idea is to “hook” consumers with “free” or low-cost “come-ons” to become subscribers. You subscribe because there seems to be little alternative among the big corporations offering you media services. Then you watch in horror as your bill goes up and up and up each month.

Burned by offline giants like Comcast, AT&T and Verizon, you tread carefully on online giants such as Google, MSN, Facebook and other “free” sites, perhaps recalling the furor on MySpace after Rupert Murdoch, owner of Fox News and other mainstream media bought it and began changing its TOS (terms of service).

When it comes to traditional and online mogul media, “free” comes with strings attached. You are going to have to pay in one way or another: more money for less services as your subscription costs rise; less privacy; charges for things you used to get for free; or having your time wasted by advertising, some of which (my last paid email provider as one example) is downright disgusting and/or nauseating

In the new media model, also called the “10,000 fans” or “the long tail,” free stuff, such as music downloads, is given away in order to promote personal services, like concerts or music instruction or other experiences, for which you do pay. The deal is out in the open. You sign on as a fan instead of a subscriber. When you do sign on, you get more when you pay more, not less.

The new media model is described in detail in Mathison’s book, Be The Media, along with all of the new media tools, Internet sites, service providers and community organizations that support it. This is why I have an affiliate link to it. I feel everyone, and especially authors, musicians filmmakers, graphic artists, digital tv and radio shows, and independent news writers, needs to know what’s in this book.

In my view, what Matthew Robson’s peers are doing is going for the free-est versions of media they can find. They like commercial-free radio, films and concerts (where the performers they like do earn a living by charging for tickets or selling branded merchandise), and video consoles where they can chat—on devices their parents no doubt supply them for their birthdays and pay the Internet charges for.

The downside of this is the fact that most teens aren’t going to have a lot of disposable income in the current economic climate. The upside is that they’re managing the money they do have exceedingly well. For “creatives” and small businesspersons who are in the creative and digital production and distribution service fields, this new business model is a boon to earning a living.

But have no fear about this being an easy road.

First, there are the traditional media who are trying desperately to hang onto their best-seller profits through use of what Robert Kiyosaki, author of the Rich Dad, Poor Dad series, calls “business systems.” These systems are government and legally-enforced monopoly rights to ownership through contractual vehicles such as copyrights, royalties, patents, and franchises.

Be The Media is filled with horror stories of how these “rights” have often been used to leave creatives with next-to-nothing while ever-consolidating giant producers and publishers walk off with trillions. These companies will not give up without a fight.

Second, with the collapse of traditional speculative markets, there are risk-loving investors entering the “intellectual property” field. Under the new investment fad of “securitization,” the big money-players are looking to buy up song rights and branded merchandise and other “intellectual property” from mainstream artists and others from whom they plan to profit.

Securitization of intellectual property is different than the act of flipping intellectual property.  “Flipping” traditionally involves a house that is bought at a low price, fixed up and sold at a higher price. But on the Web it means a blog or social network is bought, improved in content, function, and appearance, and then sold for more money.

In this case there is a measurable improvement in the media property being bought and sold. That’s the number of subscribers. Not so in bankers’ and brokers’ securitization markets. Those are the markets that brought us the asset bubbles (e.g., the largely now-defunct SIVs or “structured investment vehicles”) popped by the last economic downturn.

Securitization of intellectual property is a big-money gambling game where there are expectations of huge rewards from “arbitrage,” or price differences, based on everyone’s lack of information about some unknown kind of inherent value underlying the royalty cash flows from media property. In other words, no work is involved: there’s just a “hunch” that prices will go up. Sound familiar?

Personally I think we ought to listen to Matthew Robson and David Mathison’s Be The Media. It looks to me like today’s teens aren’t about to support giant media or big money arbitragers’ hopes for the future.

Copyright © 2009 Nancy K. Humphreys

I don’t know about you, but I feel my money should be working as hard as I do. Right now it’s not. I converted my investments into cash back in early 2008 when I saw the financial crisis coming.  It’s pretty much just sat there since then.

Microinvesting, the practice of supporting the businesses of small entrepreneurs in other countries, sure seems a lot more inviting than investing in anything in the U.S. securities markets these days.

An economist promoting this idea is Dambisa Moyo from Zambia. She’s ruffling white male feathers in Europe and America by suggesting that foreign aid to Africa and other less-developed areas of the world is hindering rather than helping things.

This isn’t a new idea. I proposed it in 1973. But unlike Moyo, I didn’t have a PhD in economics from Oxford and an MBA in Finance from Harvard along with a decade of experience at the World Bank and Goldman Sachs. My 1973 article, “Ethiopia: Trapped by Foreign Aid” in The Nation was merely based on research for my masters thesis awarded at the University of Wisconsin-Madison.  It’s at http://sn.im/ethiopia

My article was a “case study” that supports the theory of Dr. Moyo’s new book, Dead Aid, that aid from foreign governments and the World Bank isn’t helping Africa. It’s at http://sn.im/kqqjp

According to the The Financial Times and others, critics of Dr. Moyo use words like “unscientific,” “reckless,” and “naïve.” Critics say she has no proof foreign aid is not working. But where is the critics’s “proof” that “the hundreds of billions of dollars poured into Africa over decades” by governments of developed countries and the World Bank actually could cause any overall decrease in poverty?

My research indicated the main beneficiaries of aid to Ethiopia were the U.S. military and multi-national corporations. The corporations benefited by displacing masses of indigenous communal farmers so that they could grow and mechanically process coffee on large plantations. As a result, we got something new to drink. The children in Ethiopia got nothing.

The real issue, in my opinion, is the purpose, not the amount of foreign aid.

Foreign aid, by ignoring the needs of the people who live there, also appears to promote dictatorial governments and bloodshed in Africa. As long as economic diversity, self-reliance, and competitiveness in developing nations are stifled by foreign aid, there will not be a reduction of poverty abroad; only a massive wealth transfer via cheap exports and interest payments back to developed countries.

No amount of charity can offset that loss. Microinvesting, as a bottom-up solution may be a drop in the bucket in comparison with foreign aid, but at least the benefits to all parties are equal.

Since the 1970s microlending institutions have sprung up all over the less-developed areas of the world. As little as $25 can be invested through a financial institution in another country to help solo proprietors get on their feet with an idea for a product or service. In return you receive interest on the loans you make to foreign entrepreneurs in support of their dreams.

Some microfinance programs offer support to entrepreneurs by requiring them to sign up for regular meetings with groups of other entrepreneurs in their local geographic area. They all act as mentors for each other as they grow their businesses.

(1) Kiva.org is a well-known group endorsed by Dr. Moyo.
(2) MYC4 at myc4.com is another group established in Africa.

Recently PBS had a special on microcredit projects in India and other countries. Organizational names I pulled from that show include:

The three oldest ones:

(3) ACCION  at www.accion.org
(4) Grameen Bank at www.Grameen-info.org
(5) SKS at www.sksindia.com (guarantees 100% return)

More specific or newer institutions:

(6) Yehu Bank at www.yehu.org (includes 3% men borrowers)
(7) FINCA (Foundation for International Community Assistance) at www.villagebanking.org
(8) Pro Mujer at www.promujer.org

Microcredit Summit lists more microinvesting projects around the world at www.Microcreditsummit.org/microfinance_links/

Check out microlending. If you believe as I do, in the value to society and the world of true entrepreneurship, here is where you may get the best return ever on your funds.

Copyright © 2009 Nancy K. Humphreys

Apple’s ads with Bill and Steve are cute, but oh, how they miss the point!

I began computing on a giant gray metal, wall-sized machine with toggle switches. Then I learned BASIC programming on a dumb terminal at the University Library. As soon as I got a job I bought a politically incorrect PC from IBM. It was a $2,000 PC with 64K of memory, one floppy drive and green monochrome monitor. How I loved that DOS machine!

Or rather how I hated using typewriters. Since jobs for women tended to include them, and I’d taught myself on an electric typewriter when I was 14, I was stuck!

When Windows 3.0 and 3.1x arrived, I did like the graphic interface, but it was downhill from there. In 2008 when my Dell started deteriorating one program at a time, apparently from a problem with a part of the Windows operating called “Winsock,” I began seriously considering a Mac. I didn’t need the commercials. I had over 25 years experience with Microsoft operating systems driving me out the door.

Make no mistake. I knew DOS and Windows. I was a Novell CNE. But each version of Windows got progressively worse, IMHO. Winsock was the last straw.

Here’s what I think the Apple ads should be telling everyone. (1) The MAC Is Fun! (2) The MAC Does Everything You Need It To.

Let’s take each of those two points all together, OK?

I opened up my new Air. It was so cute and light. As soon as it went on for the first time it talked. Yes! It talked. “Hello,” it said, “Would you like me to show you around?” I nearly dropped it in surprise. But then I answered. “Indeed I would,” so it did. The setup was totally simple and flawless.

Then my Air said, “Would you like your picture taken?” I looked up at the screen and there…was me. NOOOOO! I’d never seen my face on a computer screen. I nearly dropped the darned laptop again. Seeing myself up-close and personal was unreal. I tilted the laptop and my head, and sure enough my face tilted. It was a mirror image of me. I decided to be brave. I said, “yes” A light and a timer went on. One. I smiled, big teeth showing. Two. Three. It flashed. And there was a photo. Of me on the screen.

So here’s the thing. The new app on the dock along the bottom of the screen that looks like a Photo Booth takes pictures just like a camera. You drag photos from the Booth to IPhoto, the app with a camera icon. IPhoto asks if you want to name the photo. You click “Name” and an outline of a square and a cartoon caption appear on the screen. You drag the square over the face and type in the name in the caption. That’s the new face recognition feature. You can also input places. It takes IPhoto awhile, especially with baby faces, but eventually it recognizes faces, and it suggests a name. You click the “agree” checkmark or you type in the correct name. Names remain hidden until you want to scan through all your photos of the same person.

But here’s the cool thing! There is an Address Book app with a little @ sign on the tan cover. Along with automatically typing an address (or even bunch of addresses from a group folder) into your emails that you write with Mac Mail (the app that looks like a postage stamp with a flying eagle), your Address Book will also suggest names of people for your photos when you begin typing a name onto a caption in your IPhoto app!

Are you following? NOT ONLY DO MAC APPS  (or “accessories” to you PC users) ACTUALLY WORK—THEY WORK TOGETHER. If your jaw is dropping. I repeat. THE APPS ACTUALLY WORK and THEY WORK TOGETHER.

You wouldn’t believe how much time this saves and how many new things you can do with a MAC that you couldn’t with a Windows PC. In addition, my Air is so smart I feel like it is my Personal Assistant. From the get-go it automatically filled in blanks in forms on the Internet with any information that I gave it about me in the setup and any of its apps. Even the design makes it mine. Click on one of the many app icons down on the dock, and they jump up and down like they’re saying “How high?” Even the teeny printer bounces. The first time an app icon did this, I waved back. I couldn’t help it. I felt immediately it was my little friend.

Yes, MAC apps are friends: not enemies like Windows “accessories” to its monopolistic crimes against users!

Sister and brother Windows sufferers, how much money have you shelled out for expensive software to do what Windows wouldn’t on your PC. Apple has worked with app developers to provide all kinds of things you need, most of them free or low-cost.

For example, a free program called Skitch lets you cut and paste any picture from an email or from the Web. Drop the image you want onto your desktop, and it will automatically turn into a .jpg file. Skitch has a snapshot button that inserts a perpendicular line extending downwards and a horizontal line extending towards the right from wherever you put your cursor. You then drag your cursor diagonally down to resize the photo into any shape you want. Release the cursor to take the picture. Click another button at the bottom of the Skitch box, and you can drag the .jpg anywhere–into an email or your iPhoto albums, or you can just leave it on your desktop or put it in a folder. Using my Air and Skitch, I made a .pdf presentation file with 24 photos and text documents in less than hour!

If you just want to grab a photo “as is,” just click and drag it off the Internet or other source onto to your desktop or an app like Word or an email. The photo turns into a .jpg automatically. Need to find photos (or music)? Try the LimeWire app (the one with the tiny round green cut-open-lime icon). Oh, I could go on and on!

But to return to the very beginning of my relationship with my new Air, here’s also what I liked:  the intelligent design of the whole interface. The desktop wallpaper is a night sky. When you hook up Time Capsule, the automatic backup machine for Macs, the screen shows a series of index cards (each with a dated backup). The cards stretch out through a 3-D universe and then finally vanish into a black hole. A slider lets you navigate back through time.

Another surprising trick is the way when you hit the yellow button to minimize a program; an invisible hand whisks programs away like a magician drawing a handkerchief over his top hat. The minimized program icon sits on the right side of the dock until you click it again. The whole experience is like an entertaining magic show. I don’t dread going to work anymore now that I’m on Air.

Dell just put out a “luxury” laptop, a pricey ultra thin laptop to compete with the Air. The Dell “Adamo” costs more than an Air. It’s ugly, with a stripe down the cover that makes it look like an old two-tone “sixties” family car. And you can bet: it doesn’t have Apps That Work, let alone Apps That Are Fun And Work Together!

Well, yes, a couple of email drafts did vanish when I made an instinctive Windows keyboard command, and we had to use Time Capsule to find them. Apple’s backup system is so easy even I could use it to find and restore a single file in seconds. The hardest thing about switching, if you’ve used a Windows PC, is to learn the different keys and keyboard commands used for the MAC.

So save yourself the heartache, my friends. Check out Apple’s video on switching at http://sn.im/pc2mac.  Then get yourselves a mentor who knows the good stuff to download and all the tricks to transition to using a MAC, and switch today.

[Many thanks to Susan Pomeroy, my MAC mentor, Internet guru, and the friend who kept telling me to try a Mac all these years! My gratitude forever!]

Copyright © 2009 Nancy K. Humphreys

[NOTE: Today's news:  bondholders with derivatives force GM towards bankruptcy. How many more companies might this happen to?]

According to Ira Glass’ “This American Life” program on NPR, the scope of the financial problem is as big as that huge 100 foot wave in the movie, “The Perfect Storm.” The title of the NPR show is “Another Frightening Show about the Economy.”  Included is a terrific section on derivatives, specifically the type of derivatives called credit default swaps (CDSs). [minutes 20-40 of Oct. 3-5 episode 365 on http://www.NPR.org]

Credit default swap derivatives (CDSs) were bought and sold by AIG, the five giant investment banks, other big banks, hedge funds, pension funds, mutual funds, and corporations. Just about every large financial institution had a “derivatives desk.” If you wanted to buy one of these “insurance policies,” you had to have at least $5 million in your accounts.

What is a derivative? For a derivative to exist there first has to be a financial transaction. A financial transaction is an exchange between two people or “parties.” The exchange usually involves one party buying and one party selling something, For example, a company or municipality sells its bonds to a buyer (called a bond shareholder.) A derivative sits on top of that underlying financial transaction. Supposedly it “derives” from the underlying transaction. In the case of many CDSs, that connection was exceedingly remote.

CDSs are legal, but unlike ETFs, they are not sold on the stock exchanges. They are private deals and completely unregulated—because CONGRESS voted not to regulate them. When the SEC head finally asked them to regulate CDSs, Congress essentially said “These rich guys are sophisticated investors and smart. They wouldn’t screw up.”

Amazing as this seems given that CDS derivatives are essentially based on nothing more than the reputation of the company buying or selling them, even some regulators at the SEC and financial reporters didn’t seem to understand the dangers. Whenever credit swaps were discussed in the newspapers they were called “insurance” or a “hedge” against risk.

CDSs did start out as a form of insurance. You went to an insurance company like AIG or a big bank and you bought  “insurance” against one of your investments going bad, say an investment in a company’s bonds. If the bonds went bad, your insurance paid you.

But then people began hedging with CDSs. They went so far as to buy CDS “insurance” on investments they didn’t own! If the investment became shaky, you could sell your “insurance policy” to another buyer for a higher price than you paid for it. If the investment completely defaulted, your “insurance policy” paid you. But if the investment stayed OK, you could still sell your “insurance policy” on it and lose no money. This is how CDS “hedges” were used for speculating.

The problem with CDSs is, that unlike regulated insurance policies, companies that sell CDSs don’t have to have “capital reserves” on hand to cover them. As companies started having credit problems from the mortgage mess, they also started having headaches from the CDSs they sold. With no short term credit available to borrow, AIG just couldn’t pay off the billions it owed on its CDSs.

Financial institutions panicked. When the economy started going badly, banks stopped trusting each other because no one bank knew how many CDSs (and other speculative investments) any other bank was in hock for. So, in reality, derivatives like CDSs didn’t protect against risk. They increased it!

The horror isn’t just that an estimated five trillion dollars worth of CDSs were issued. The horror is that there was “leveraging” (buying and selling investments without having all the money on hand if called on to fulfill their contractual promises to pay). Leveraging caused the total amount of money tied up in CDSs to eventually become $60 trillion! But that’s just part of what the bailout has to deal with.

Add in tens of trillions more for failing “whole” mortgages AND hedging done with CDO derivatives (mortgages mixed up together, then cut up into up investment pieces called tranches), and you get the perfect financial storm.  The ensuing gigantic financial wave coming at us could run as high as 100s of trillions of dollars.

Do we think a little more than just one-half of one trillion dollars for the bail-out can go very far towards de-leveraging or “unwinding” that huge of a “toxic” debt? Not unless Hank Paulson of the Treasury and Ben Bernacke of the Federal Reserve are wizards worthy of a position at Harry Potter’s school! That’s what’s truly scary.

Copyright © 2008 by Nancy K. Humphreys

“What’s this?” I yelled, scattering receipts every whichway off my desk. It was April 15th of my first year in business. I looked at the screen again. I owed a HUGE amount to the IRS. At first I was sure it was a glitch in the new tax software I’d bought. But it wasn’t. I’d just been KO’d by a one-two punch by the IRS—the self-employment tax and the quarterly estimated tax payments.

I went in search of information. Why was the SE tax so high? What was a SE tax? And why did I have to pay estimated taxes up front if I was self-employed.

The quarterly estimated tax question was pretty easy. As an employee I’d had to pay withholding because the IRS wanted to be sure I had the money to pay my tax when it came due. I figured the quarterly estimated tax, which is paid in advance just like withholding tax, was based on the same principle, only for businesses.

But what was that expensive SE tax? I’d ascertained that it had nothing to do with my income tax calculated on Form 1040. In fact, I had to pay the SE tax in addition to my income tax. I finally discovered SE referred to my Self-Employment Social Security and Medicare tax. But why was it so much? I knew employees only paid about 7.5% for Social Security tax. Why did I have to pay nearly twice that?

The answer I found down at a nearby bookstore was mindboggling. The SE tax was so high because now that I was self-employed, I had to pay both the employer and employee portions of Social Security/ Medicare tax of about 15% for me.

This split by IRS accountants of an individual into two parts, employee and employer, seemed “crazy” to me back then. I wasn’t two people. I was just Nancy Humphreys.

I resented the tax. Why should I have to pay twice as much as an employee pays?

This, of course, tells you my mindset. I thought of myself simply as an employee rather than as business owner. The distinction between being self-employed versus being a business owner is something I read about when I came across Robert Kiyosaki’s Rich Dad, Poor Dad 2: The Cash Flow Quadrant. His comments in that book about self-employed people shocked me, and hit a nerve at the same time.

As I read more about owning a business, I came to realize how useful a tool the IRS’ “two-people-in-one” method of looking at self-employment was. I began to use that idea to examine my business in terms of costs and benefits. The IRS’ principle of two hats (employer and employee) helped me examine two problems that I had when I first went into business for myself.

Problem # 1 When calculating how much it would take to go into business for myself, I wore only an “employee hat.” I thought of all the benefits that not going to work would bring. No more lattes and lunches out, no more gasoline or time wasted in commuting, no more closet full of professional clothes, etc. I never even thought of the “employer hat” costs of running a business. As a result I underestimated the true costs of a home business.

Problem # 2 I didn’t have a model for estimating my real business costs. This led me to overestimate my salary as an indexer.  That too led to frustration. I kept feeling I wasn’t really earning enough, and I didn’t know why.

Both of these problems began to seem manageable as soon as I began using the IRS “employee/employer in one person” tool to look at my business.

I was amazed to find out how many costs my employers had borne on my behalf while I was earning a paycheck. Seeing how many “hats” my employers wore was key to seeing my costs, necessary costs apart from doing indexing, that you should think about in relation to your work.

A model for determining how many hats  you wear

As I’ve said, those in business for themselves, even if it’s a solo practice, wear two hats: employee and employer. Employees, whether self-employed or working for others, rarely see the whole extent of the employer benefits we receive.

Employers wear many other hats. Here’s my simple model for how to see yourself as an employer if you’re self-employed OR how to understand the total employer benefits you receive if you’re a salaried employee.

As an example of my model, I’m going to walk you through my last place of employment, a small two-story non-profit that employed about 25 people. You’ll need to follow me through this example, then make up your own way of walking through your memories of a workplace you know well.

In this model, “hats” refers to job titles of employees. I’ve given these job titles an initial capital. You’ll also see the various duties belonging to each job. I’ve underlined and numbered the duties that you need to take care of in order to support your indexing work.

The public face of the organization

At the front door was the Receptionist. We didn’t get a lot of walk-in traffic, so the Receptionist mainly (1) fielded the phones. The Receptionist also (2) ordered supplies for everyone in the building and kept the supply cabinet stocked.

Across from the Receptionist’s desk was the Director (or CEO). The Director was responsible for (3) setting the mission and goals for the organization, (4) the budget, and 5) being the “public face” of the organization to the outside world. The Director also led weekly staff meetings. The Director had four Associate Directors and an administrative staff. The Associates had other functions, but also served as sounding boards when the Director needed feedback.

The rest of the administrative division

Down the front hall and turning to the right was the rest of the administrative division.

The Administrator of this division was mainly concerned with (6) employee benefits. These included disability, health insurance, life insurance, worker’s compensation, and retirement benefits. About thirty percent of our salaries were paid in benefits. The Administrator also supervised the other employees, including the Receptionist, and handled large purchases for the division.

The Accountant and Bookkeeper managed the financial paperwork and worked yearly with an outside CPA to review the books. They handled (7) invoicing and payroll, withholding and other (8) tax forms, and ((9) kept track of the income and expenses along with assets and liabilities of the organization.

The Administrative Assistant supported the rest of the division, and (10) maintained the phone system used by the receptionist and all the employees. This AA also assisted me in (11) maintaining the network of computers, printers, faxes, and other equipment. (Later the Accountant took over that job!)

The information services division

Down the front hall and to the left on the first floor was me, the Library Director. Along with managing the computer network, I also served as an Associate Director who assisted the Director.

I had four employees who worked under my direction: a Librarian; an Administrative Assistant; a Library Aide, and an Indexer.
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In the library, our job was to (12) locate information the other employees needed to do their jobs. We also served groups of people our employees worked with in the outside world. For example, we created a thesaurus and put out an annotated bulletin each month that summarized articles from all the magazines we subscribed to. 13) Besides ordering books and magazines, the library was also the place where supply catalogs and professional reading materials were ordered and organized for all staff.

The line staff of the organization

In the back hallway on the left and on the second floor were all the “line” employees of three main primary divisions of the organization. The line employees performed the primary functions of the organization.

The three main divisions of line staff were: a) local community organizing, b) national media relations [and they also handled (14) marketing for the organization itself], and c) an international pilot project.

Work contracted out

Maintenance was performed weekly by an outside (15) cleaning company.

This model as a model

Now, please don’t misunderstand. I’m not saying the above model is an ideal organizational model. As you might have noticed, several people held positions in two different divisions, an ambiguity that often causes problems in organizations.

In addition, the usual position of  COO (chief operating officer) was left empty. No one had responsibility for (16) coordinating all the support and line functions for the organization, a lack that led to the closure and reorganization of the organization a few years after I’d left it.

Where do indexers fit into this model?

If you are a self-employed indexer, you are a line employee. You produce the product of your organization. If you work as an indexer within an organization, you may be a line employee, a support staff member, or your position may be a hybrid one similar to the indexer who worked  for my library. That indexer produced an annotated magazine database and newsletter which were used both by line employees within and clients outside of the organization.

If you’re a self-employed indexer, you can use this model to see what your employer expenses are and begin to track the amount of time you spend while wearing employer hats. If you’re employed at an organization, you might do this walk-through in your own workplace to uncover all the support staff you benefit from or to find where you need more support to get your work done.

Ok Nancy, I see your point about all the “hats,” but exactly what does this mean for my business?

Using the above model and tracking your time, you can easily calculate your” employer costs” of being self-employed or being an employee.

If you look above, you’ll see that I’ve underlined 16 chief support functions at the place where I used to work. These are your “employer costs” of indexing. That’s true whether you work alone, or you operate a business which hires other employees to index with you, or you work in a large organization as an indexer.

If you work at an organization like the one in my example, consider what the numbers of underlined duties above mean. Over half of the organizational staff in my model were support staff. If you work in an organization, you are actually receiving support from the majority of the support staff at your workplace. You get way more benefits than insurance and retirement from your employer!

On the other hand, if you are a self-employed indexer, or you’re an indexer who employs other indexers, you probably don’t have any support staff. Instead, you’ve got at least 16 employer-hat-duties to take care of by yourself. The duties performed while wearing these hats are ones that do not directly concern your main business of indexing. But these things must be done so you keep on indexing or keep owning your indexing business.

And if you are self-employed, the numbers of employer duties under the hats in the model described above suggest this: at least half of your working time will be spent in support staff functions rather than on indexing itself. Each of these 16 employer duties entails costs! Most importantly, these costs include the amount of time you spend while wearing employer hats.

How many of us actually track all of those “employer costs” when we estimate our worth? If we do track these costs as labor time, how do we price our labor? Do we price it at what we earn as indexers? Do we price it at what we’d pay if we hired someone else to do those tasks? Or…do we price our time spent on employer tasks at zero?

Conclusion

Please do this model exercise and give yourself the benefits of thinking about how much your true business costs are. I believe you’ll be glad you did. Once you know your real costs of doing business, you can begin to control them. You can earn more, keep more of what you earn, and make your life easier. My talk at our annual ASI conference will include ways to do this.

I hope this article will inspire all of you who read it to view your work in light of the bigger picture that your work fits into. And I’m looking forward to meeting those of you who attend my workshop, “How Much Are You Really Worth?” on Friday afternoon, April 24th  at the 2009 Conference in Portland!

Copyright © 2009 by Nancy K. Humphreys