Brain Drain

techcrunch.com, 3/26/11: friends-don’t-let-friends-get-into-finance


Too Many Top Engineering Grads Go to Wall Street.

"You say you want a revolution......well you know, we all want to change the world." ~ J. Lennon


I am with this Techcrunch guy.



The validity of his point, however, has the danger of leading to quota control instead of market-based controls.

Government-chosen quotas would not be the best idea.



However, you could solve the problem with a market based solution:

1. All commercial banks must divest all of their investment banking operations. Restore the Glass Steagall Act.

2. All investment banks and private equity firms must be capitalized as unlimited partnerships, so that risk activities are risking the capital of the people taking the risk. Crucial! This is how it was before 1970, and it was that way for a reason.

3. A cap of 25% of the value of the stock market could be owned as indexed investments. *



Items #1 and #2 have been mentioned by several unbiased market observers, but due to the campaign contributions of banks & Wall Street, they are DOA in Washington.

Item #3 is one of those "Emperor has no clothes" stories. So many people make so much money this way. It is like kudzu. One introduced to the habitat, it takes over. And, consistent with the author's claim of ongoing exotic financial engineering, more derivative-type indices are being constructed and traded every day.



My Queens history professor, a determined yet respectable liberal, pointed out to me a real flaw of capitalism -- it is regulated by boom-and-bust cycles. I grant that her observation is true, however, insightful financial regulatory oversight can modulate the peaks and valleys. Those are:

the Federal Reserve's management of the money supply and their supervisory role over national banks;

the SEC's supervisory role with investment banks, mutual funds and securities broker-dealers

the Glass-Steagall Act that separated commercial banks and investment banks;

The FDIC and the Comptroller of the Currency who audit banks to determine they are making sound credit decisions.

You may notice that all of these regulatory activities were suffocated under the Bush Administration. If we would just enforce the regulations that we have, that would greatly diminish the boom and bust cycles. Since the Bush Administration failed in this way, I fear that the author's notion of "friends don't let friends go to Wall Street" will get hijacked by some well-intended liberal partisan, or some hack like Pelosi, and artificial restraints will get imposed. I totally agree with the author's plaint -- the brain drain needs to stop. But I sincerely hope we will do it in a way that admits that Govco is not qualified to allocate intellectual capital.










*[You can invest your money in specific stocks and bonds, in specific mutual funds, or you can just invest in an "index" fund that is guaranteed to mimic the value of the index, such as the Dow 30 or the S&P 500. The problem with this is that when markets are volatile, individual investors {"retail" investors in industry parlance} retreat and just put their money with an institutional money manager. Also, volatility causes retail and institutional investors to just give up trying to pick smart investments, and they put their money in "index" funds, being resigned to the belief that nobody can outsmart the market. As the percent of the stock market "held as an indexed investment" increases, this concentrates the investment decisions in the hands of those (usually institutional investors) who still buy and sell securities outright. Sadly, (a) the index investing phenomena and (b) the trend of retail investors giving up and just letting institutional money managers make the buy/sell decisions, stokes the volatility of the market because with fewer people making independent decisions, liquidity in the market is reduced. Liquidity is the presence of many interested buyers and sellers in a marketplace. Low liquidity = high volatility. High volatility = downward pressure on stock prices, since most investors don't know how to profit in volatile markets or don't have the stomach for it.]

Government Spending Tyranny

Would Mecklenburg taxpayers ever DEMAND efficient use of tax dollars?  If so, many of the painful cuts could be avoided.  Obstacles:  1.  The people who do not want the cuts are the people with all the relevant information:  the staff.  Yes, the budget is public record, but no, the insight is not.  2.  Every dollar spent has a passionate or powerful advocate in our community.  What would be required to cut spending is to tell that advocate, “No.”  The Elected Ones would prefer to avoid this conflict:  to get along, go along.  3.  The people protecting spending are sophisticated, organized, and experienced.  The people who want more efficient spending and no tax increases are poorly informed, disorganized, and inexperienced.  The people in the Middle East are demanding an end to despotism.  It must take tyranny to get people to act.  I certainly feel the tyranny of the intractable spending.

Heartless budget cutting?

1. Is the current level of government spending justified? Instead of saying, “Raise taxes,” consider, “Get the waste out.” Demand that money be spent more effectively.

2. Local governments do not aim to allocate resources to efficient producers. Their goal is to maintain a “service level” and this is how they evaluate themselves.

3. The only cost containment device: whether aggregate spending will require a tax increase.

4. A clever government budgeteer can deflect budget cuts with proposals to cut only sacred cows: police, teachers, street repair. The electorate will cry, “Woe is me! Don’t do that! OK, you can raise taxes.”

5. Yes, our society is judged by how we treat our most vulnerable. I hear that line frequently at budget talks, but not so often at talks discussing the humane treatment of prisoners, the indigent elderly, the mentally ill, and children of negligent parents.

Healing our Financial System

http://www.economist.com/node/18013965/comments#comment-814094

Herewith, my two cents on measures needed to heal our financial system.

tiger ticker wrote: Jan 27th 2011 11:27 GMT


It would be fun to set up a villain hierarchy somewhere and have people vote on it. My top villains would be:

  

(1) The human social need that impels "don't rock the boat" thinking: many people would have spoken out if they had known that the messenger would not get shot or ostracized;

  

(2) the common phenomenon that CEOs of financial companies do not know what is under their own roof; these naughty boys do not make it their business to find out because it would annoy the rainmakers; to borrow a Michael Lewisism, the BSDs and gunslingers will not submit to systems of control;

(3) capital allocation schemes in the US that stimulate risky behavior:  reckless banks get government-guaranteed deposits with insurance premia that are not at market rates, the too-big-too-fail doctrine which provides that LTCM or Goldman Sachs or Citibank or FNMA can do absolutely any risky thing with impunity;

  

(4) the harsh reality that regulators cannot keep up with the arcana invented by MIT graduates on Wall Street (eg, synthetic credit default swaps, off-balance sheet SPEs that disguise leverage, CDOs tranched out in 12-dimensional arrays, etc.) and

(5) campaign finance that permits legislators to get ridiculous amounts of money from those they regulate (Frank, Dodd, eg.)

My amateur-hour Rx:

• restore the wall (Glass Steagall) between commercial banks and investment banks;
• require FDIC-insured banks to pay deposit insurance premia that truly reflect their risk rating;
• require investment banks and auditing firms to be full recourse partnerships;
• deconsolidate (AT&T style) the banking industry;
• establish a legal limit on annual consumer debt service (debt amortized fully over 30 years) as a percent of income; and lastly,
• change all campaign financing to public taxpayer funding so that legislators will no longer be for sale.

Obesity Research

Charlotte Observer, Jan. 5, 2011
http://www.charlotteobserver.com/2011/01/05/1956356/weight-loss-ideas-that-work.html

Applause for the efforts to pay attention to early onset obesity. I cannot see the wisdom of a government-based solution, such as taxing sugary drinks. Other ideas:


1. Eliminate child abuse.

2. Give every child two involved, committed parents.

3. Promote parenting skills.

4. Associate fruits and vegetables with physical attractiveness and high energy.

5. Instead of top-down research (testing digital coaching), use the research dollars to observe behaviors of obese children and how their food choices are associated with emotional needs. Identify what percent of their consumption comes from ready-to-eat food and snacks (impulse) vs. prepared food (planned.)

6. Identify any genetic predispositions for compulsive eating, such as slow neural awareness of satiation, sugar craving, or low serotonin levels.



Given the many mental health professionals listed in the phone book, it is amazing that we cannot call obesity what it is – a symptom of emotional suffering.

$50 Billion Facebook?

http://www.economist.com/node/17853336?story_id=17853336&fsrc=nwl

Is Facebook Really Worth $50 billion?

Thank you, Economist, for emphasizing the octopi suction cups characteristic of Goldman Sachs. May I ask why a national bank is permitted to make these investments when they have depositors’ money guaranteed by the US Government’s FDIC?


When I worked on Wall Street, the whizziest of the Whiz Kids were the ones who could figure out how to circumvent regulations that prevented a desired transaction. I remember the NYSE “fully distributed” rule that was the last impediment to a “recapitalization” so in vogue then. The discussion of this problem was so amusing…. we stood around and spoke like the gods on Mt. Olympus, observing that being listed on the NYSE was overrated. Another was a “Section 521 Note Monetization” which was an invention (effective but short-lived) designed to circumvent paying capital gains taxes when divesting low-basis subsidiaries.

The point is that there is no regulator, all of whom make less than $500,000 per year, that can stay one step ahead of the parasites on Wall Street who exist to design transactions that circumvent regulations. No doubt, they are bright boys there at Goldman Sachs. No doubt, Govco cannot compete for the talent Goldman hires out of Stanford, Cal Tech, and MIT.

My thesis: the ONLY way to regulate Wall Street is to require investment banks to be private partnerships funded with the partners’ capital. Otherwise, they are on opium (OPM – other people’s money) and they have no incentive to take prudent risks, especially now that they are too big to fail.

Even if Goldman reverts to a private partnership, take note of their disproportionate influence in halls of government: Hank Paulsen, AIG bailout proceeds, slap-on-the-wrist fines, just to mention a few. Of this, you can be sure: there will be no exposé on Goldman Sachs, not from Hollywood, not from print media, not from blogs, not the SEC, and not the Federal Reserve. The Rolling Stone article and The Big Short merely scratched the surface of the real story. There is no one out there smart enough to get the story AND remain safe from the octopi suction cups. Of those powerful enough to get the story, they are in Goldman’s back pocket.

People used to worry about the military-industrial complex. At least those actors were visible to the press. The average voter has no idea of who Goldman is, and even the educated voters are easily conned by their sophistry. Goldman Sachs is more entrenched than kudzu.

Commodity Prices and Paul Krugman

In today's Charlotte Observer, Krugman’s thesis is that rising global prices for basic commodities is due, not to action by the Federal Reserve Bank, but to increased demand owing to a nascent middle class in emerging countries. Attributing the price pressure to increased demand from developing nations is plausible, but the tone of his article sounds more political than analytical.


He makes the point that the USA is a “price taker” rather than a “market maker” on the global exchange for commodities: oil, gold, cotton, wheat, copper, and so on. Again, a very credible view. However, his underlying purpose seems primarily to discredit anyone who accuses the Federal Reserve Bank of managing the money supply without due concern for the ensuing inflation. I am only mildly sympathetic to his goal of elevating the quality of public discourse – trying to counter non-productive partisan arguments in hopes of illuminating the genuine economic forces at work. My lukewarm feeling stems from the suspicion that the thrust of his argument is to deflect the criticism, thus creating room for the Fed to carry on with the status quo.

He stops short of mentioning substantive factors influencing prices: the crazy quilt of political structures and spheres of influence that impede efficient matching of demand and supply; goals for social justice and sustainable resources; and, the Fed’s monetary and fiscal policies that do influence the foreign exchange value of the dollar. A weak dollar makes dollar-denominated commodity prices higher.

Mr. Krugman, it would please me if you would carry on with commentary that is economic instead of political.

Lord of the Flies Redux?

What is My Response, My Civic/Social Duty?

The crescendo of news on adolescent bullying is hard to ignore.  To respond, several aspects come to mind:

• cultural change over the last 100 years
• how are we as a society using and losing with information technology
• considering the as-yet-immature capacity for judgment that teens hold, are they unable to take a perspective on what they are doing?
• if there were not Internet or cell phones, would the cruelty be prevalent but just in a different channel?
• what is the ache in the hearts of teens that motivates such cruelty?  Is it the same old bullying, just manifest in new channels? 
• are teens feeling greater pressure to get into college because of the global economy evolution, and thus feeling more performance driven than education driven?
• is any of this cruelty a trickle-down of the national mood from the recession?
• has this generation of parents over-functioned for their kids, thus depriving them of opportunities for learning from struggle, learning gratitude from serving others, and learning from consequences?
• are tweens and teens experiencing less supervision that the Internet seems to justify?

Knowing that, over the years, my children have bullied in one form or another, is there something about the home life of children in the 21st century that is deficient, viz. their ability to be nurtured toward emotional maturity?

Has the post-WWII prosperity in the United States affected us in such a way that we are motivated to be more eager consumers, but less of other qualities embraced in our previous mores?

After several years of having automobiles on the road, the body politic decided to prevent teens from driving until they were 16 years old.  Maybe in 20 years, the collective parenting wisdom will hold that the only computers or cell phones allowed for teens will be strictly limited to education or transportation needs until they are in college.

It is striking that, beginning in the 1960's, for the first time at a broad level, children had a manifest contempt for their parents.  For children in adolescence, this attitude is only increasing.  Curious that this occurs simultaneously with the acceleration of infomation technology, for which the kids are typically far more literate than the parents.

A minority of Americans have an active faith practice:  45% from the studies that I have read. 

Another itchy thing that has to go on the table is the issue of certain practices in secondary education classrooms.  Teachers do a great service for students by provoking them to have their own opinions which they can personally justify, rather than just parrot back what their parents say.  This is worthy, however, a casual student could easily interpret that broad, constructive message as encouragement to disregard their parents' opinions and view them as relics of another age.  In my own experience, my children have come home from school and have brought stories of how their teachers portrayed an issue in a very partisan light and often at odds with our family's values.  This is fine, because I should have done a sufficient job in rearing my child to inculcate whatever genuine values I represent.  I applaud teachers that encourage children to be able to examine and defend their beliefs.  Over the years, however, it is hard not to pick up the scent that "if your parents' values are conservative, break free of these blinders and come over to the enlightened side."  There is a difference in promoting original thought and demeaning the office that parents struggle to serve.

The issue of adolescent cruelty, as well as the gradual demise of the institution of marriage, are pernicious omens for American.  Stable families are the ONLY way to impart hope and self-respect in children.  Children without these qualities do not want to do their school work.  I see them daily in the high school where I am an assistant teacher.   That no one cares about the education of these children, other than some administrator compiling statistics, is a profound tragedy, and the number of such children is growing faster than the growth rate of the population as a whole. 

We Americans owe our children the benefit of parenting to adulthood.  We owe them physical, emotional, spiritual, and intellectual nurturance.  Pretending that the government is equipped to supplant the role of non-performing parents is cruel to the children, judging by the apparent fruits of its efforts thus far.  Therefore, the children are taking on the roles of the characters in "Lord of the Flies," which is one of the points made by Golding.  Children need supervision and nurturance, else the animal nature emerges to dominate behavior. 

It is hard to imagine that this adolescent cruelty is happening under the direct supervision of attentive parents.  Which is to say, let's admit that we can't supervise it, admit that it is a moral issue, and acknowledge that change is necessary in the triangle of parent : child : computer/phone if we want to redirect the outcome.