We should learn more like CSI

If a massive traffic accident involving dozens of cars kills, maims, injures hundreds of people, there would be a serious inquiry into why it happened, what can be done about it, and maybe even prosecutions laid if someone fell asleep at the wheel or failed to take due diligence.

Why is it that we have no similar response the world’s biggest economic meltdown?

Reading this you are likely a middle class professional much like me. I’ll admit as much as the next reader, life is pretty darn good in Canada. I didn’t buy into the sub prime mortgage, my portfolio is back up, retail spending is back up, so what is there to worry about? What is to worry about is that the systemic issues that caused the original crash hasn’t been fixed and the people and companies responsible for it have not been held to account.

When an airplane crashes, the airline industry doesn’t just say this component failed or scapegoat the pilot. They look at what made the error possible to begin with. Was it the positioning of the landing gear switch next to the flap controls? Was it the language barrier between the control tower and international flight? They take a deep look at it because otherwise there’d be more plane crashes over time.

When it comes to the economy we want to look for the simple proximate answer. Somebody bought a loan they couldn’t repay. Ha! Dumb person for trusting the banks. The fact that many of these investment banks knowingly exploited, lied, repackaged those assets, bet against it, sold it around the world and made billions doing it is ignored. In this situation, you arrest the con man, not the victim.

Jeffery Sachs, a renown economist, in the following video describes the systemic problem with the global economy today. What’s ironic is that

in the following video says, “It’s not a free market; it’s a game” and a rigged one at that.

 

Even if you only follow the cursory headline news, you’d know that banks like Goldman Sachs were bailed out with billions or dollars of tax money all while paying themselves handsome bonuses and lobbying against any form of regulation that would restrict their profligate spending.

But a few things get in the way of understanding. First, it’s hard to hear the reality when our portfolio, our retirement savings, our investments depend on the success of the current system. That trillions of dollars evaporated during the financial crisis because most of the wealth “created” was phantom wealth is of no concern to us… as long as we get our returns.

Second, those that make billions have a vested interested in fighting any sort of regulation or control. Any responsible regulatory measure is fought because it’s against the “free-market” or it’s all about “government interference.” There is nothing “free” or fair in letting the elite players set the rules of the games. And a nation without a government is… well likely to be taken over my private, corporate interests. Hardly the American Dream. Unfortunately, while no one has an interest in letting traffic accidents happen, lots of keen individuals have an interest in keeping the money flowing to the top.

Perhaps the most insidious barrier to understanding would be our tendency to react to the words and not their meaning or implication. The knee-jerk reaction in the States to taxation or regulatory control is often accusations of being communist or anti-free-market. Invoke those words, and you stir the passions of an ideology without any investigation into what they mean and if they are in fact served by those who profess it.

The antidote? I think we should be more like CSI but in life. It’s not that I think we can solve cases in a single day (or look so good doing it). However, I do think the ability to investigate the case, put together the pieces, test stories and theories against evidence despite people actively trying to confuse or delude you… it’s a useful skill.

And we can’t afford not to be curious, not to question our assumptions, or challenge those with formal authority and power. Otherwise, they will be happy to structure our assumptions for us.

Are we financially illiterate?

In this video interview, Jeff O’Rourke points to a statistic from the Payroll Association indicating that “60% of Canadians would have financial difficulties if their paycheque was delayed by one week.” Although the conversation was about financial literacy for low income earners, this stat seems to indicate that Canadians of all income levels could benefit from learning how to manage money.

I’ll let Jeff explain his perspective here:

One point he made that didn’t make this cut was one about how we don’t equip university students to learn how to use credit cards. Furthermore it doesn’t help that credit card companies promote credit cards as if they were giving you money.

I was lucky in that I just followed my parent’s cardinal rule of always paying off the credit card every month. However, I didn’t really understand how loans and interest worked until much later in life.

But isn’t this financial literacy problem a symptom of a much larger problem? Which is that our economic structure is based on spending and debt-financing. Isn’t there an inherent motivation to get people to take out loans and spend with the assumption being that people can pay off the loans with interest?

In a way, it’s kind of like our schooling system. In school, we learn how to conform and obey authority. In economics, we learn how to consume and salivate at the latest product.

Maybe we’re not financially illiterate. Maybe we’re doing exactly what we’ve been trained to do. Now that’s a scary thought.

What If You Didn’t Pay the Banks?

Old Western Bank

Old Western BankFor some reason, when I think of banks back in the “good ol-days” I think of the banks that bandits use to rob in the wild, wild west. And in that small frontier town, what is a bank? Well, it was a place where the community can store and pool their money so it can be loaned out to those who needed the capital. Simple really.

It’s not so simple today when banks are massive institutions dealing in a wide range of investments, loans, mortgages, and other financial instruments that most people do not understand. In becoming too big to fail, they’ve become so complex that they can’t accurately assess the value of the money they are investing… the same money that we have collectively deposited.

What if you decided that the interest you paid to banks didn’t serve the interest of the common good? Might there be a way to stop relying on large complex institutions vulnerable to critical mistakes?

Turns out Rob Sinclair from Conscious Brands came up with one way to do just that with his mortgage. In the following twenty minute presentation he explains how he developed an alternative financial arrangement where the interest payments would go back to his local community.

This may not be the solution for everyone. It also doesn’t guarantee that your interest payment to Uncle Joe is getting used any better. It does however remind us that banks don’t have the monopoly on money matters. While banks make it easy for us to not think about our money and where it goes, it also takes away our responsibility for what we choose to invest in.

I’m pondering diversifying my portfolio these days. What about credit unions? Or loaning a part of my RRSPs to local organic farmers? Or providing micro-loans to local businesses? Because I have this nagging question in my mind: if all of my money is invested in the global economic casino, maybe I should think about following my financial advisor’s advice and not put all of my eggs in one basket.

Three Wheeler Economics

Most mornings in Sri Lanka begin with an adventure derby on a three wheeler taxi. The adrenaline rush is better than coffee sitting in the back with no seat belts weaving between trucks and into oncoming vehicles. If it were an amusement park ride, the price of admission for tourists would be more than justified.

Over the weeks, I think I’ve evolved from a completely naive tourist to a slightly more aware tourist (after narrowly avoiding getting killed by a three wheeler rushing across the street). From the hotel into the city Colombo a three wheeler costs 1000 Rps (Rupees). Go back to the hotel the same distance and you can get a ride for 800 Rps without negotiating. With the help of a local on the other hand, you can get home for 500 Rps. Half of what we normally pay as tourists. Why the price variation?

I’ve mostly gotten over the feelings of being ripped off and accepted what is (as a Buddhist might say). Ultimately paying a little over $9 to get both of us to most places we need to go is a great price for us and a bonus for the drivers.

I am however curious at the economics of it. Drivers waiting near hotels will charge tourist prices because tourists don’t know any better and drivers can always find some other tourist who doesn’t know or care to know. If you walk up the street away from the hotels, you still get tourist rates but you can catch a ride for a couple hundred rupees less. Head out into the less tourist-populated areas and you’re more likely to negotiate a near local price.

It’s a system that relies on clueless tourists. As you get to know the environment, you know how far places really are and you have a sense of the average tourist price so that you can avoid the most flagrant abuses (as much as four times the going rate for a short walk away!). The drivers work together to avoid undercutting each other making it easier to hide the actual price particularly if you don’t speak Sinhalese. Call it a tax on ignorance.

None of us can know everything of course. The driver knows the roads and can navigate the traffic. I value it so I willingly pay for it. At what point, however, does taking advantage of someone’s ignorance become unjust exploitation?

A fortuitous question as I just finished reading Griftopia: Bubble Machines, Vampire Squids, and the Long Con that is Breaking America. A great read which exposes the exploitation of ignorance on a massive scale by Goldman Sachs and other players. Every citizen should get familiar with the bigger story because it’s important not to confuse the three wheeling market and the pyramid scam played the high-rollers.

Imagine a supposed free market economy where the winners get to make the rules, be the referee, and hide that fact from the spectators. We’d call it fraud, and that’s what has led us from one financial crisis to another.

I has become clearer how Goldman Sachs with the help of Alan Greenspan and others have pushed for the removal of financial protections that makes the free market fair. Glass-Steagall was suppose to prevent the concentration of capital in megacompanies to avoid conflicts of interest. It was killed. The Commodity Futures Modernization Act blocked regulation of financial instruments which hid the toxic mortgage waste. All of which allowed a few select companies to gamble away pension funds and people’s savings. Best of all, should anything go wrong, the public tax dollar would bail them out.

This is way more complicated than I can discuss using my vacation brain. What’s interesting is that these facts are not in dispute. What is in dispute is whether elite companies have the right to pursue profit using any means possible. Ethical standards be damned. They made tonnes of money so they must be right in using government as their lapdog and using it to pay their bonuses when they lost everyone’s money. Heck why not get into the arms trade or human trafficking?

Ethical standards have a functional purpose. They prevent an unfair game from being played. What makes a fair and free market compelling is that it allows everyone to compete and push each other to higher levels of achievement. It’s a game that get’s to be played over and over again. It stops being a game however when people start breaking legs or bribing the officials. Pretty soon, no one will want to play the game and you can say goodbye to social stability let alone innovation and creativity.

Ultimately economics is suppose to help us play a much bigger game. Maybe developing a higher quality of life, enhancing our environment for future generations, growing in our understanding of ourselves. Creating a more fragile financial system through bigger mega-institutions, disenfranchising millions of their savings, and taking value rather than creating it is a short-term game that cannot last.

Here, in Sri Lanka, at least there isn’t one three wheeler isn’t sabotaging every other three wheeler, taking tourist money dropping them off in the middle of the desert then shooting them in the foot and leaving them somewhere to die. The three wheelers are creating value which is more than can be said about the vampire squid.

(Don’t know what a vampire squid is? Read this Rolling Stone article for an update.)

Questioning Our Economic Faith

Let me start by saying I don’t hate businesses. I teach small business, I work with them, and I am one myself. It just drives me nuts when business becomes the proverbial hammer for all of our worldly problems.

Business is just one sector of a wide range of human activities that serves society. And it must also, as any sane human being, obey the laws of the natural world.

We’re good at segregating our thoughts. It’s why we can both admire BP’s rapid and pioneering learning in figuring out how to cap the oil well while still be horrified by the damage we are capable of inflicting on the earth.

But we also get stuck in the smaller box and start believing it to be reality. We believe that life is about accumulating material goods or we assume that all things can be measured by a dollar value.

Our economic system is just such a box. In fact, it has officially become our religion. What does a religion do anyway? It tells us what is right and what is wrong. It tells us what is meaningful and what isn’t. It is in essence the standard by which all meaning is judged.

Our economy answers all those questions. Want to be happy? Go shopping. Need some meaning? Purchase a vacation package. See an opportunity? Then make money off of it.

Then reality hits. GDP is sky-rocketing while the oil spill spreads like a cancer across the Gulf. There is more money, but less happiness. The disparity between the wealthy and the poor has become a chasm. Isn’t it obvious that our faith is a little misplaced?

At least with most religions, there is some concern with what happens in the afterlife… some responsibility taken for the generations ahead of us. The economy today tells us not to worry much about that and worry instead about making or spending as much as you can in this lifetime. The future will magically work itself out.

It’s never easy to question the things that make up our identity, but question our faith we must.

Chris Hsiung
U Venture
Better Life… Better Business
uventure.net