Characteristics of a free thinking capitalistic society

Diversity of thought? Contrary ideas? and just plain argumentative? These are characteristics of a free thinking capitalistic society. The US is supposed to be one. But unfortunately, what led to the current economic situation is too few applications of these three vital attributes. I can’t say it better than James Surowiecki so I’ll post an excerpt from his recent writing in The New Yorker called Greasing the Slide:

But the madness of crowds wasn’t the whole story.
In a healthy market, there are countercyclical forces—mechanisms and
institutions that go against the general market trend and encourage
diversity of thinking—that make it harder for feedback loops and
vicious cycles to take hold. Lately, though, many of these institutions
and mechanisms have become procyclical: instead of countering trends,
they amplify them.

Take, for instance, the credit rating
agencies, which investors rely upon for evaluations of companies’
creditworthiness and general financial well-being. They are supposed to
be a kind of early-warning system for investors, evaluating the health
of companies in a way that’s insulated from prevailing market trends.
Yet many studies have found that rating agencies are more likely to
upgrade companies when investors are bullish and downgrade them when
investors are bearish. This makes rating changes less useful to
investors and also means that they push the market in the direction
it’s already going. On October 9th, Standard & Poor’s announced,
late in the day, that it was considering downgrading G.M. That helped
an already shaky market fall four per cent in the final hour of trading.

Street analysts have also been good at pouring gasoline on a raging
fire. Analysts’ ability to take the long view and scrutinize company
fundamentals should make them a counterweight whenever investors get
too giddy or too gloomy. And sometimes it works that way: last fall,
when investors were still relatively optimistic about banks,
Oppenheimer’s Meredith Whitney correctly forecast serious trouble for
the industry. More often, though, we see what the U.C.L.A. finance
professor Bradford Cornell calls “positive feedback between stock price
movements and analyst recommendations.” In other words, analysts often
end up following the market, rather than leading it. In the case of a
sell-off, this tends to make a bad situation worse. Earlier this month,
Goldman Sachs downgraded steel companies like AK Steel. A bold call,
you might think, except that it came only after AK Steel’s stock had
fallen nearly seventy-five per cent in two months.

agencies and Wall Street analysts are always with us. But the most
destructive procyclical force in today’s market is relatively new—hedge
funds. There’s an irony here: hedge funds have been touted as a great
countercyclical force. Because hedge-fund investors, unlike mutual-fund
investors, usually can’t pull their money out on a daily basis, the
funds were supposed to be able to take a longer-term view and pursue
contrarian strategies (like the hedge-fund manager John Paulson’s huge
bets against the subprime bubble). Because they can follow myriad
investment strategies—selling short as well as going long, trading
derivatives, and so on—they were supposed to add diversity to the
market. And the growing influence of hedge funds did indeed coincide
with a decline in market volatility. A study by the Federal Reserve
Bank of Cleveland showed that hedge funds generally made markets more

I like the identification of countercycle and procycle forces in economics. And even though Surowiecki doesn’t mention it, there were a lot of people that were placing countercycle arguments. They just weren’t saying it too loudly. And no one wanted to listen i.e. the number of credit default swaps placed against subprime packaged securities had to be an alarm for someone? I guess now the countercycle force is straight cash. Is there such a thing as a cash bubble?

For Some People Climbing the Corporate Ladder is the Goal

Some people like their job so much that they don’t look for other jobs. A good example of these people are teachers. But these same people exist in the corporate world as well. There is something to be said for doing a good job and going home around 5:00.

But for some people climbing the corporate ladder is the goal. MSN Careers ran a story called 10 Reasons You aren’t Getting Promoted. Tag and Catherine Goulet, wrote it and it is very succinct. Here are a few:

Promotion Killer No. 1: You’re a slacker
what if you sometimes arrive late to work, are the first one out the
door at the end of the day, and tend to call in sick on Mondays and
Fridays? And it’s not your fault you’ve missed a few deadlines — you
had computer trouble… the instructions weren’t clear… you didn’t
get the help you needed… (insert most recent excuse here)…

Promotion Killer No. 2: You’re doing “fine”
no slacker. You show up on time and do a fair day’s work for a fair
day’s pay. And that’s the problem. Doing work that is “fair,” “OK,”
“adequate,” “acceptable” or “fine” may be enough to keep a job, but
it’s usually not enough to be promoted to a job with more
responsibility. If you don’t go the extra mile for your employer, don’t
be surprised if your employer doesn’t go the extra mile for you.

Promotion Killer No. 3: You’re not visible enough
not enough to do a good job; people need to know you have leadership
potential. So do what you can to get noticed by the people who have the
power to promote you. When something you’ve worked on goes
exceptionally well, write a memo to management praising the team you
worked with. You’ll get your name out there and be seen as a leader.
Make sure you’re visible in other ways too, such as volunteering to
lead committees, contributing articles to the employee newsletter,
coaching the softball team or chairing a volunteer project in your
company. You can help your company, your community and your career at
the same time.

Promotion Killer No. 4: You’re a difficult person

Promotion Killer No. 5: You haven’t mastered the job you’re in

Promotion Killer No. 6: Your boss needs you in the job you’re in

Promotion Killer No. 7: You don’t have the right image

Promotion Killer No. 8: You have enemies

Promotion Killer No. 9: You’re competing with superstars
some industries the reality is that there are far more star employees
than positions at the top. If you’re in a highly competitive career,
you’ll need to do an extraordinary job instead of merely an excellent
one. Also, be prepared to do more of the other things mentioned in this
article to stand out in the crowd and show that you’re management
Promotion Killer No. 10: Your company isn’t in a position to promote you
you work for a company with a tight budget or low turnover,
opportunities to move up may be limited. If a bigger paycheck isn’t a
possibility, consider asking your boss to acknowledge your work in
other ways. For example, a new job title might cost the company nothing
more than new business cards, or you may be able to get other benefits
such as access to a company parking spot, a larger workspace, a day
off, a mentor, educational opportunities or other perks. Be creative
and ask for what you want. You might be pleasantly surprised with the


Bailouts only disarm those that benefit from it

Thomas Friedman is such a good writer. In Sunday’s NY Times he presents a situation that is very plausible… and a conflict of interest. Here is what he writes in piece called If Larry and Sergey Asked for a Loan …

Let’s imagine this scene: You are the president of one of these banks in which the government
has taken a position. One day two young Stanford grads walk in your
door. One is named Larry, and the other is named Sergey. They each are
wearing jeans and a T-shirt. They tell you that they have this thing
called a “search engine,” and they are naming it — get this — “Google.” They tell you to type in any word in this box on a computer screen and — get this
— hit a button labeled “I’m Feeling Lucky.” Up comes a bunch of Web
sites related to that word. Their start-up, which they are operating
out of their dorm room, has exhausted its venture capital. They need a

What are you going to say to Larry and Sergey as the
president of the bank? “Boys, this is very interesting. But I have the
U.S. Treasury as my biggest shareholder today, and if you think I’m
going to put money into something called ‘Google,’ with a key called
‘I’m Feeling Lucky,’ you’re fresh outta luck. Can you imagine me
explaining that to a Congressional committee if you guys go bust?”

then what happens if the next day the congressman from Palo Alto, who
happens to be on the House banking committee, calls you, the bank
president, and says: “I understand you turned down my boys, Larry and
Sergey. Maybe you haven’t been told, but I am one of your shareholders
— and right now, I’m not feeling very lucky. You get my drift?”

Maybe nothing like this will ever happen. Maybe it’s just my imagination. But maybe not …

But the part of the column that really gets me is this quote of David Smick who wrote The World is Curved: Hidden Dangers of the Global Economy:

“Government bailouts and guarantees, while at times needed, always come
with unintended consequences,” notes the financial strategist David
Smick. “The winners: the strong, the big, the established, the domestic
and the safe — the folks who, relatively speaking, don’t need the
money. The losers: the new, the small, the foreign and the risky —
emerging markets, entrepreneurs and small businesses not politically
connected. After all, what banker in a Capitol Hill hearing now would
want to defend a loan to an emerging market? Yet emerging economies are
the big markets for American exports.”

The losers as he notes are usually small or new or not quite established. And he is right, except for the time horizon. The winners in this case often eventually fail because they miss opportunities, niche customers, and don’t have that edge that is needed to succeed. There is something so vital to the economy that tears it down and builds it back up again – competition. And bailouts only disarm those that benefit from it.

Paul Krugman on Charlie Rose

I really like reading Paul Krugman. An example of how he has changed my opinion is my entry from 9/19/07 called Paul Krugman: The Conscience of a Liberal. So I was pleased to see he won a Nobel prize for economics. Charlie Rose had him on the other day and here is a link to it.

Privilege is a distinction that each of us can decide to enjoy or not is a HR site for both recruiters and job seekers. They offer an email newsletter that I subscribe to (its free) and the October 15th, 2008 edition made me think. The feature is: The Rise of the Privileged Worker and I think it is relevant during times of increasing unemployment and stagnant wages. People need to look in the mirror and ask how am I unique? What do I do that this company can’t afford to lose? Here are some excerpts:

Look around at the increasing rate of
unemployment, and it may seem like an odd time to be talking about
“privileged workers.” The conventional wisdom, of course, is that,
other than overpaid CEOs, there are few people today who would qualify
for such a title. And, I would respectfully suggest that exactly the
opposite is true. At this very moment, U.S. employers are starved for
certain kinds of talent, and their desperation has created a new class
of workers in this country, a class that enjoys a uniquely privileged
position in the workplace.

Who are these workers? This privileged class includes two kinds of people:

  • Those
    who have hard-to-find skills that are critical to the effective
    operation of either the modern enterprise or our modern society. These
    skills range from forensic accounting through engineering and nursing
    to java programming and veterinary medicine.

  • Those
    who are superior performers. These individuals can be counted on not
    only to sustain a high level of contribution in their own work, but
    also to encourage and often enable the same high level of output by
    their coworkers. Regardless of their profession, craft or trade, they
    bring excellence to the workplace every single day.

Privilege is a distinction that each of us can decide to enjoy or not, depending on how we manage our own careers.

of course, that wasn’t the case. Until the turn of this century, it was
our employers that determined where and how far we went in our careers.
We had no option but to scale career ladders they created and to
receive only the privileges they pegged to each rung on those ladders.
Whether it was the size of our office or our paycheck, whether it was
the quality of our training opportunities at work or how near our
parking space was to the door, we were only as privileged as our
employers said we could be.

They could get away with that kind of behavior because in the 20th Century:

  • There was much less competition in the marketplace so they were able to succeed with a lower performing workforce. and
  • There
    was much less technology and complexity in the workplace so they didn’t
    need a workforce with highly specialized skills

Today, however, neither of those situations still exists.

The Next Stimulus Package Must be a Job Creator

Yesterday Ben Bernancke suggested that another stimulus package be offered by Congress. The focus of this second package is debatable, but two main areas are to extend unemployment insurance (a large population of people are about to expire their benefits) and infrastructure. A good overview of the situation is provided here in an article on called Here comes stimulus – question is how.

But I really like what the Economic Policy Institute (EPI) put together. Check out this Economic stimulus essentials page of theirs for an overview. Also check out this post I wrote on January 22nd, 2008 called To Keep Economy Growing, President Bush to Push for Tax Rebates, Breaks for Businesses, and Foolishness. Here is an excerpt:

What the EPI wants is to fill the working void by employing thousands
of people related to construction work and craft work (plumbing,
painting, carpentry, tiling, and etc). This makes sense for two
reasons. The first is the housing slow down has left many construction
workers waiting for the next uptick in the housing market. These
workers are readily available. The second is that the type of work the
EPI envisions for them is infrastructure based. This is where I think
the EPI really hits a home run. The US infrastructure is neglected. As
I’ve wrote in other posts (Big Prizes, Risk Aversion, and Why No Changes),
US businesses are avoiding high risk, high reward projects because of
the complication of the infrastructure. Much of what happens now is the
repackaging of tried and true ideas. It is only incremental innovation.
No leaps. As the EPI writes, an update to the infrastructure of the US,
whether it is repairing bridges, utilities, roads, or school projects,
serves two ends. It gets many people back to working and it
accomplishes work that needs to happen anyway. This will prompt more
business development than a tax break.

The one area I wish the
EPI focused on was the prodding of innovative business projects. With
some of the funding allocated, the US government should provide
interest free loans or incentives to businesses that launch green
projects within the next six months. There is a backlog of projects
ready to go, they just need the funding or the ability to get past the
economies of scale barrier. These projects would spur the next wave of
productivity in the US. Otherwise we pass this slow period and exit it
into… what? What is the next breakthrough?

So When Did the Recession Start?

The definition of a recession is a significant decline in economic activity spread
across the economy, lasting more than a few months, normally visible in
real G.D.P., real income, employment, industrial production, and
wholesale-retail sales.

So when did the recession start?

I started predicting a recession almost one year ago. Here is what I said in my Peanut Butter and Pasta post on October 24th, 2007:

So where do you look first for a downturn in the economy? Do you look
to the stock market? No. Do you look to the Federal Reserve? No. Do you
look to surveys? No. You look to PB&J. You look to spaghetti. The
economy takes root in spending. If people start adjusting their
spending en mass, then you know they know something you don’t know.

I don’t even think this is a short term slow down either. I think this is a shift. As I noted in my Paul Krugman entry, the middle class is getting squeezed between the haves and haves nots. College costs are up to the point where reevaluating the benefit is now a consideration. And Alex Rodriguez, who didn’t go to college, is about to get a contact of 10 years for something around $30 million a year.

what is amazing is that this isn’t necessarily a bad thing. Values are
changing – at least in the US. There is a push to get more green, be
more socially conscience, and to rediscover the family. None of these
things requires a rich man.

It is important to know when a recession starts because the last few recorded recessions were brief (less than a year) and only two were longer than that (’73-’75 and ’81-’82). Many more interesting recession facts are within a Floyd Norris blog called First Birthday for the Recession.
Many people are talking about this being a lengthy downturn, maybe not deep, but drawn out. I see it as the opposite. I see jobs cuts to accelerate and the retail economy to really sink. But the deep bottom will clear out and a spike back the other way will happen relatively quickly. I see positive signs one year from now with Q1 of 2010 being a start of the next great economic run. If I’m write, that would be about 24 months of recessionary economics. That is longer than most downturns as it is.

Another background entry of mine:
It’s Not a Recession, But It Sure Feels Like It

It’s Not a Recession, But It Sure Feels Like It – Stats

A Few Noteworthy Recent Economic Writings

Some writings I’ve enjoyed over the past few days:

Buy American. I am. by Warren E. Buffett – It doesn’t get any better than this quote – “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” And I also love this bit: Over the long term, the stock market news will be good. In the 20th
century, the United States endured two world wars and other traumatic
and expensive military conflicts; the Depression; a dozen or so
recessions and financial panics; oil shocks; a flu epidemic; and the
resignation of a disgraced president. Yet the Dow rose from 66 to

The Trust Crunch by James Surowiecki – This piece revolves around the need for relationships in banking. The failings we are seeing now is because no one wanted to look behind the curtain. Whereas in the past there wasn’t a curtain to begin with.

The Economy Really is Fundamentally Strong by Justin Fox – The writer concentrates on Productivity numbers. And I’m a little surprised more people aren’t talking about Productivity on the whole. But the part I agree with is this: The country’s other most prominent productivity guru, Harvard’s
Dale Jorgenson, is more sanguine. He sees large swaths of the economy —
health care, education, government — still waiting to be transformed by
information technology and expects that to bring us another decade of
high productivity growth. We’ll have to wait and see who’s right. In
the meantime, if we average their latest projections, we get
productivity growth of just over 2%, which isn’t bad at all.
And here is a follow up Justin Fox did called Unpacking Casey Mulligan’s argument about Strong Fundamentals

Wall Street and the Real Economy by Steve Coll – This writing highlights the seemingly unknown path economic fortunes take, like a hurricane. But the I.M.F. studied many financial situations over the past century has come to the conclusion that a the recent Wall St situation isn’t isolated. A recession is likely and severe. And I agree with most of it, except…

Big Hole by Martin Hutchinson – This entry focuses in on some recent economic data (factory orders, home construction starts, retail, and inflation) to say the inevitable recession is going to be deep and prolonged. But I think he only gets it half right. It will be deep. It has to to clear out much of the excess and to change behavior. But it won’t be prolonged. (Q1 of 2010 times will be positive again). Part of the reason I say that is because the cuts are going to be deep and the changes are already underway and are going to be swift.

Some executives have been waiting for this opportunity to justify shifts in the corporations. And fortunately, people clearly know what they need versus what they want. Also, the slowdown after the internet bubble resulted in a wageless/jobless recovery, so many workers are already mentally ready for this oncoming period. Does that mean people aren’t worried? No. But it does mean people aren’t naive anymore. The world is flat and I believe many advantages will come back to the US as a result of this global down period. But the typical American will be much more prepared for the benefits this time.

Americans will make a change and then get bored of doom and gloom

“Markets are about traveling, not arriving,” the banker said, mysteriously. So let us travel through time. “In the past, in difficult times, Americans just worked harder,” he went on. “But there aren’t enough hours in the day, or enough incentives to work harder, and there’s nothing to work on. People, in the end, will find a way to work their way out of it. They’ll pay down their debts. They’ll have to. And then everyone will get bored with doom and gloom and dip their toes in again.

I did this a few entries ago. I found someone that agrees with what I’m saying and highlighted it. But this excerpt by Nick Paumgarten in a piece in The New Yorker called Freeze! is dead on. I wrote something similar yesterday about people refusing to wait in lines, implying that the alternative is psychologically easier to deal with than standing in lines. But this is much more concise and nails it on several levels:

  • In the past Americans just worked harder by dialing up the amount of time worked – This doesn’t work as much now because the quantity/quality work ratio is tilting towards quality work. And what I mean by quality is intellectual, problem solving type work. So now you have to rely on education, creativity, and some motivation to tie them together. The downturn is that motivation.
  • People will pay down their debts – There is a satisfaction with paying off debt. There is a lot to be said for well orchestrated discipline. It really frees the mind of stress and that is a catalyst for creativity and innovation.
  • And then everyone will get bored with doom and gloom and dip their toes in again. – Impatience, hype, and following the crowd is what got the US into this situation. And these three behaviors will get the US out of the situation… but after some significant habitual changes are in place i.e. paid off some debt.

So if you get a chance, check out the article and think about what you would do.

Waiting in Line will Prevent another Great Depression

Here are a few images from the Great Depression

The line forms and people wait to get bread…

Another line…

And finally another line.

And these images are why we will never see a Great Depression again. Why? Because today’s society only waits in lines for three things – a concert, a sporting event, and the DMV. And each one of these occurrences is not a daily event. People today simply have too many options to get creative and innovated with their time. They don’t have patience for lines. I know this sounds ridiculous, but think about it. How long would you wait in a line before you realized you had certain skills that better served your time?