Money Under the Mattress

document.write(" serif">Why are interest rates so low? Why is spending so low? Why is our infrastructure crumbling? And why, with all this, is there no inflation? In Monday's column, The Diabetic Economy, Paul Krugman tells us about the idea that low rates are like insulin for a diabetic, necessary to manage the symptoms of a chronic disease. That got me thinking about what this chronic disease might look like.

It's true that our infrastructure is crumbling. Both Paul Krugman and Bernie Sanders have been saying we need to spend more. Interest rates are low, which should mean that spending on infrastructure is possible, even desirable. But government (read Congress) doesn't want to spend, because that would mean higher tax rates. And everybody knows that you can't borrow: you have to balance the budget. So what about the little guy? Maybe he could borrow, and get our economy moving again. But how does the little guy borrow? On his credit card, at 21% interest. He borrows only when he is in denial.

If the government is broke, and the little guy is broke, where is all the money? And what is investment? Who is investing? And in what?

We have come to look at investment from the side of the investor, without asking what the invested money does. We ask only how safe is this? and what is the return? Banks used to offer savings accounts which returned interest. Then the banks in turn would make loans to entrepreneurs who wanted to make something happen in the real economy. But as anyone with a bank account knows, that is not how it works today. So what happened?

Enterprises got larger. They issued stock: part ownership of the enterprise. The stock market provided a way to trade stock. It was a means of exchange. But in the last fifty years the financial world has changed. Finance has become “the financial industry”, a purposefully confusing rag-tag of banks, investment banks, venture capital and private equity companies, hedge funds, and insurance companies which issue contracts on wagers.

The underlying motive is of course to make money, but for whom? How is the money made? And what is produced?

The answer is that nothing is produced. The money is made by privatizing the profit and socializing the risk. In other words, by skillfully separating risk from profit. (Fraudulently, in my opinion. See or read The Big Short, the movie made from the novel by Michael Lewis.). And who makes the profit? An ever-smaller cadre of top managers. Fiduciary duty appears to be a thing of the past.

The result is that money is siphoned out of the real economy, the economy that makes the wheels go around. It is siphoned into private coffers, whence it seeks to find “investment” that makes a return for itself. Then that return goes right back into the coffers, without changing a thing in the real world. Is it surprising that this hoard money is having trouble finding a real home?

Through history, what has happened to that other means of exchange – money – when the people doing the trading lose confidence?

Weimar Germany. Inflation. Money loses its value. When people lose confidence in a shared convention, it doesn't work anymore.

We are witnessing a similar phenomenon in the financial world. The “smart people” are manipulating money to produce money for themselves, leaving the real world starving for investment. In this they have been spectacularly successful. (See Bernie Sanders for details.) But the world – the real world – is losing confidence in finance. The vast hordes of cash held by the top 0.1% of individuals (and companies!) have nowhere to go. Chinese money is bidding up real estate in California and Vancouver. North American money is fleeing North America for the tax shelters of the world, or begging countries with stable currencies to take their money at minus 0.8%.

What now? We have to look with fresh eyes at what investment means. Sure, it is return on money we park somewhere. But the real meaning is in what the money does when it is parked. Does it produce something? Does it change our future? Look no further than Elon Musk. He used his stake in PayPal to start Tesla. He hasn't shut down Tesla yet because he wants to make half the cars in America electric by 2020. He used his stake in Tesla to start SpaceX. SpaceX is taking over the work of the Space Shuttle. SpaceX just landed a booster on a barge. And SpaceX is going to colonize Mars. Purpose. Humanity is moving ahead.

Bottom line: money under the mattress serves no one. It is if it didn't exist.

Nothing for Humanity

Our society has made a u-turn. Our democracy has left behind the vision of the Founding Fathers. Our obsession with the moral fibre and hard work of the individual has morphed subtly into a passion for making as much money as possible.

In today’s column, Inequality is a Choice, Nicholas Kristof reports that the Wall Street bonus pool in 2014 was roughly twice the total annual earnings of all Americans working full time at the federal minimum wage.

Perhaps it is time to ask about the purpose of our work. Is it to make as much money as possible? Enough to feed our family? Or should there also be a non-financial component to our work? Should we, as in friendship and love, be thinking about how our work might benefit others?

Oh, I know. I am naive and an idealist. I have enough money to live on, so I have the luxury of having such thoughts. But I have never forgotten how, as a young man, I felt embarrassed and even shamed when a much-respected older friend asked, What is your exit strategy? That's the only way you'll make money out of this.

We were speaking of a venture I had started, and of course he was right. But his cynical realism hadn't appeared overnight. A sickly youth, he had used his time bedridden with rheumatic fever to read the entire library at the British estate where he was put up. He remained an autodidact and became an inventor. He left us many innovations, but as a pilot, what is important to me is that in the late 1920's he successfully flew the first inertial navigation system. The accelerometers were weights and springs. The integrators were vacuum tube circuits.

He never saw a penny from the invention. It was too soon, and nobody understood it. A generation later ICBM's provided the motive power for the idea. There was no other way to steer the missiles.

He made a modest living by designing and building devices which were the spawn of more modest ideas. According to the doctors, he was living on borrowed time because his heart had been damaged by the rheumatic fever. He lived into his nineties. He did sell his company. I believe he had a good death.

I am not the first to point out that Wall Street, which began as a legitimate instrument for capital formation, now produces nothing that benefits society. Nor am I the first to ring alarms when CEO's make four hundred times the average wage at their companies. But perhaps there is method to this madness. Perhaps this Wall Street bonus pool and these CEO salaries are the heroin which blunts the pain of uselessness. These rich folk, for the moment, are in a pleasant haze of denial. But truth settles on us all, sooner or later. Many of them will not have a good death.

Money is the New Religion

The Mall

The upscale mall near us occupies a huge contiguous tract north of the freeway. Its enclosed Main Streets have two levels, open to the non-sky, as if each building had a balcony upstairs connected with its neighbours. At the end of each street is a gussied-up big-box store – two-story of course – opening onto the mall. Stairs, escalators, and flyover bridges connect levels and balconies, so the penitent can wander in wonder through the architecture of the age. Light filters in overhead through cloudy glass. Along the streets and balconies gaudy alcoves harbour treasures and artifacts. Seen from above, the two streets intersect, forming a cross. Soon after it was built, my wife said, That's our Chartres.


The great cathedrals embody all that was noble and profane in the Middle Ages. Although Chartres was built with remarkable speed, it was a product of several generations. Begun in 1194, it was mostly complete in 1250, by which time many of those involved with the heroic effort were second or third-generation. The stained-glass windows, miraculously preserved through centuries of war and weather, are narrative art for a time when few could read.

But there is more: the cathedral was also a free-trade zone outside the purview of the feudal lord. Merchants set up their stalls in the zone and even in the nave itself, although wine-sellers were occasionally banished to the crypt. Taxes on the stalls were payable to the clergy.

So far the activity is merely profane – that is, secular, or not connected to religion. (Profane is from the Latin pro and fanum: before the temple.) But as human custom tends to, the commercial practices proliferated and evolved, until by the late Middle Ages indulgences had become the Wall Street of the twentieth century or the of the twenty-first. The Butter Tower of Rouen Cathedral was capitalized by selling pardons for the use of butter in Lent.


It seems that mystery is the father of faith. The architects and artisans of Chartres responded to the beauty of the world by doing their best to compete with it. Their homage to God was an artifact and a space that educated and inspired wonder and ascribed God as the author of all. The cathedral was the railroad of the nineteenth century and the airline of the twentieth. Man as artisan constructed huge works from technologies on the edge of human understanding. Did the traveller on the Orient Express understand the physics of the steam engine? Does today's passenger understand the physics of flight or inertial navigation? Do the viewers (or the makers) of the film Gravity understand orbital mechanics?

Where am I going with this?

I admit I am groping. But we are again today in an age of indulgences. We know that capitalism and free markets are the foundation of democracy – or at least that's what everyone says. They say that we should bow to the market, should let it decide everything, or else we are threatening freedom and democracy.

Today's received wisdom is the same as is was in the Middle Ages – only the object of faith has been changed. We understand the market about as well as we understand orbital mechanics. We are invited to have faith in matters beyond our understanding. So we bow not only to technology, but also to the market and the almighty dollar.

The Range of Human Endeavour

We humans span the noble and the profane and continue into the ignoble and the self-serving. It happened with religion after Chartres was built. The practice of indulgences took a few centuries to moulder and spread, but it was one of the principal motivations behind Martin Luther's ninety-five theses, nailed to the church door in Wittenberg in 1517. Luther said, Wait a minute – this is not what Jesus meant at all. Thus came the Reformation and more wars and Protestantism and Christianity without profit.

Not much has changed in five hundred years. The noble – the making of art and the building of large, co-operative works – is still followed by the profane – normal commerce. But inevitably – and today is no exception –  the profane is followed by the self-serving, and the whole process is debased. We are once again at a crossroads like the one Luther faced down in 1517.

Inventive mankind has gone from barter to money to lending to banking to capital formation to finance. The average man gropes along behind progress, believing in what he cannot understand. Meanwhile elite MBA's twist the corporation (human co-operative effort) into re-structuring for maximum stakeholder value. (The definition of stakeholder is left to the MBA's). Banks no longer turn savings into investment capital but instead operate for maximum profit and market share, extracting their cut not as interest but as fees. (There is no interest rate connected with fees, so there is no appearance of usury.) Investment banks invent financial products which they peddle to pension funds and then bet against in the market, making huge profits at the expense of their customers.

These shenanigans depend on our faith and our ignorance. They twist the institutions of our society so they work not for mankind but for a small elite.

This small elite no doubt believes in itself. That, too, is human. Like all of us, they construct a world-view. They are smarter and work harder, and deserve their spoils. Their efforts are a natural winnowing.

But that is their world-view, not the Word of God. There is no reason for us to believe it.

I also understand why we believe in money. It is a matter of survival, and is getting more so every day for us, the great unwashed. But let us not worship money. That can only lead us to suckerdom, as P.T. Barnum famously observed. We would do better to open our eyes and learn and not lose the hope of human co-operative effort toward great things. Perhaps we might even tape a thesis to the door of the mall.

As inspiration we can remember Job, centuries before Christ and millennia before today's selfish deeds. Covered with boils and tempted by cynicism, he could still say:

I know that my redeemer liveth;

and that he shall stand at the latter day upon the earth:

and though worms destroy this body,

yet in my flesh shall I see God.


Job 19:25

Rule by Metric


In the grand scheme of things, there is not the slightest doubt that humanity can survive. The peril of the planet and the challenges of leaving it are not beyond our husbandry. But it will not be the market that saves us – it will be ourselves.

To this end, there is a heartening article in today's Sunday Times: Why You Hate Work. The authors have done surveys which, in a nutshell, find that employees (and management, too) are most productive when their needs are met in the workplace. What needs are these? The physical need of rest and renewal. Feeling valued and cared for. Being allowed to focus on the task, and thereby finding purpose and meaning in work. Feeling that their work has made a difference, however small. Surprised?

We are not machines. Our output is not proportional to time spent on the job. Our capacity for creation is huge and unknown, but it is delicate and must be given room to flower.

Our Metrics

Where have we gone astray? It's the metrics, stupid.

By worshipping the market we come to the conclusion that the purpose of enterprise is the bottom line. Managers define productivity as income or profit per employee, or worse, as hours worked per dollar of wages. It is any wonder that the phrase the working poor has made it into our modern vocabulary?

We are using hours and money to measure the value of work. Then we use the market to make our existential decisions for us.

This is not because we are evil. We are human and in trying to grasp our complicated selves we seize what is doable and ready to hand. And as to the larger decisions, we are overwhelmed and beg to be excused. For how often, in our daily lives, are we visited with silence, peace, and courage? It takes all of these to acknowledge the existential decisions that face humanity. Our humanity. Us.

Money is useful. Only by having some – in today's society, at least – can we make a space for thought. Money is a tool, a medium of exchange, and exchange is essential.

Money is also an abstraction, a practical means of evaluating both things and ourselves. But the value of things is debatable (that's why we need money or barter in the first place) and we ourselves are beyond value. And when we cede to the market we are putting our trust in an abstraction of an abstraction, a tool without form.

What Metric?

Let's go back to what is really essential: exchange.

Farmers a century ago did much of their work alone, but building a barn required co-operation. (That's where the phrase barn raising comes from). If I help my neighbour, he will help me in the really big jobs I can't do alone.

Today we have before us a really big job: the survival of humanity. No amount of management or regulation can achieve this. Nor can capital, in the way we think of it. Financial capital will of course be necessary, more than ever before, and the financial world would do well to refocus on its primary purpose. But the other capital – human capital – is more important by far.

Each of us, however poor or simple, has a light within. How can these small flames be kept burning? How can they be nurtured and combined to illuminate and power a larger purpose?

Not by demand. Not by fear. As in all things human, we give ourselves willingly when we feel valued – in fact we give willingly that which did not exist before we felt valued. It is how we treat each other that determines whether our gifts will flower or come to naught.

So it is with work. Our survival depends on each of us doing his best work. What metric will we use to value that?

Mitt the Spider


Watching Landings


You’re at the local airport. You watch landings, because pilots always do. Today, because there is a lot of traffic and you're not pressed for time, you watch for awhile. Twenty, maybe thirty landings go by. What do you see? Fifty percent (this is a flight school strip) touch down halfway down the runway. One or two touch down in the last 1000 feet.

What do you take away from the experience?

Gossip, certainly – if you're standing there with fellow pilots. Comfort, possibly – if you feel you can do better than most of what you're watching. Or perhaps chagrin, if the reverse is true and a recent example of your own work sticks in your craw.

But there is a more important take-away: forming an opinion or evaluation by discerning and comparing.That is the dictionary definition of judgment. And the aviation version of judgment is more practical: if I find myself in this situation, can we do it?

The we in the last paragraph refers to you and your airplane. You learn skills and you memorize your airplane's limitations. You are a team.

The situation is whatever pickle you're going to get into on your next flight. Can I land on a 2000-foot runway?

You look up the Landing Distance Required in your Flight Manual or Pilot Operating Manual. For my N-Model Bonanza I find 1600-2000 feet (no wind, 75°F. or less, 2000 feet pressure altitude or less). So we can do it, right?

Not so fast. The runway at my local airport is just under 4000 feet long. I consistently turn off on the center taxiway, but not without some braking. I have a bit too much speed over the fence and I float too long. So I'm not quite ready for that 2000-foot strip. My airplane is, but I am not.

Here is another clue. My POM also lists Landing Distance Required for a Short Field Landing. Same configuration, but the over-the-fence speed is 5 knots less. Instead of 1600-2000 feet, the required distance is 1200-1400 feet. Add five knots and add five hundred feet! Nope: my energy management – hey, my hands and feet, if you get right down to it – are not good enough yet.

Why not, you may ask? After all, I have been a pilot for 45 years. Well, two things: first, I'm 68 years old; and second, after I retired from airline flying I didn't touch a yoke for six and a half years. So I had to write exams and do a lot of re-learning. Now I'm learning the hands and feet again.

In short, for the moment my airplane is better than I am.

Hours, Experience, and Judgment

How do we discern and compare on the road to developing pilot judgment? First, look at the one or two Bottom Guns who touched down in the last 1000 feet. “Good enough,” they say. I guess so, if their airplane can stop in that distance. Then the fifty percent who touched halfway down. “Plenty of runway left. No sweat.” These guys are like me. Their airplanes are better than they are. It's just a matter of how much better.

What's missing? A path to learning judgment.

Experience is measured in hours. Judgment, theoretically, comes from experience. But it is not automatic. Hours of flight or even hours of practice take you nowhere unless they are accompanied by some discernment and comparison. Neither the Bottom Guns nor the halfway-down-the-runway pilots are safe trying to land on a 2000-foot runway. But do they know that?
Spiders are kind to their own. Well, story except for the kinky Black Widow, who eats her husband after sex.

Spiders are very good at controlling the populations of lesser insects – gnats, for example.

Above all, spiders dine in style. Pheasant under glass has nothing on them. Have you noticed? A fine, strapping exoskeleton gets stuck in a beautiful, geometric web whose strands are stronger than steel. There is no rush, no baring of teeth or ripping of flesh. No blood on the floor.

The spider, epicure and medical professional, injects a magic potion under the shiny shell. The guts and muscle of the beautiful captive are reduced, sautéed and flambéed. Only then does the spider dine – elegantly and unhurriedly.

After the meal the prize remains. The beautiful prey is still there, intact and whole, framed in the skyscraper web. Its value seems undiminished.

But it will move no more, except when the wind pulls at the strands binding it. The soul is long gone.

So too does private equity provide for its own.

What’s in it for Me?

I admire Maureen Dowd and enjoy her columns, but she is off track on this one (Playing Now: Hail to the Chiefs – New York Times, Sunday, September 9, 2012).

She does, however, speak for us.

We live in a market-driven society that has come to expect service. I'm paying. You deliver. We have become puffed up with the importance of our money.

But education doesn't work that way. Good health care doesn't work that way. And – this was the President's point – democratic government doesn't work that way.

Just before the line Ms. Dowd satirizes – the election four years ago wasn't about me. It was about you – the President had the courage and the leadership to remind Americans that “We, the people, recognize that we have responsibilities as well as rights.” He goes as far as to say that “freedom without a commitment to others . . . . is unworthy of our founding ideals.”

President Obama is right. We won't get out of the mess we're in unless each of us can turn to a fellow citizen who has done good work and say, “Welcome home. You did that. You did that.”

We can't demand good work. We can't demand good teaching, good health care, or good government. No matter how much money we have, we can't put the “good” in any of these. Paying is not enough, and the Market is not a leader.

So perhaps Ms. Dowd has done all of us a service by putting a voice to our selfishness. The voice rings hollow in a society largely emptied of respect for good work and of motivations other than money. But perhaps Ms. Dowd was satirizing us and not the President?

Twenty-two Seconds

I remember learning about money and velocity. Apparently money doesn’t do society much good sitting in a pillow. Rather, it should be circulating – invested – enabling the endeavors of man.

For the last decade a mantra has been buzzing in the business background: we're doing it for the shareholders. The buzz, though, is coming from a few well-connected and (now) wealthy top executives, not from the bulk of individual shareholders, whose interests have been poorly represented.

In today's Sunday New York Times Jonathan Haidt has a piece titled Forget the Money, Follow the Sacredness. He writes in the context of the 2012 US presidential election, but his insight deserves wider application. He speaks of tribal and group behaviour, and observes that “the great trick that humans developed at some point in the last few hundred thousand years is the ability to circle around a tree, rock, ancestor, flag, book or god, and then treat that thing as sacred”. We have done that with The Market.

The PBS Newshour of March 15 contains not one but two segments of importance both to the financial world and to the rest of us. The first is a reaction to Greg Smith's Why I am Leaving Goldman Sachs, wherein he speaks of the firm's lack of integrity and disregard – even scorn – for its customers. The second (21:20 to 29:46 in the March 15 Newshour) is an interview with Robert Harris, whose new novel, The Fear Index, came true even as he was writing it. It seems that certain hedge funds have mopped up the scientists who were to work on the Texas Supercollider (before it was cancelled) and got them instead to develop software which scans the news (a digital feed from Bloomberg first and foremost) for anything that could spook the market. The software then makes the appropriate trades. At one such fund author Robert Harris (in real life, in real time) watched a software algorithm make 1.5 million dollars in twenty minutes.

But the most significant and disturbing moment, for me, comes at 25:22 in the March 15 Newshour. It seems that although high-frequency trading firms make up only 2% of the 20,000 trading firms operating today, they make 75% of all trades. And – and here I nearly fell off the couch – the average time a stock investment is held these days is twenty-two seconds.

Remember how money with velocity is good? By that measure we should be doing very well indeed. What happened?

We could ask ourselves Who is this shareholder to whom executives pay lip-service? And Who or what is The Market that we seem to revere and to which politicians kowtow? Is it a Wizard of Oz? Or, as Robert Harris says, is it more like a Frankenstein run amok?

We would do better worshiping a god.

Look Out, World

The city is Athens, not Lexington or Sarajevo. But this shot, too, will be heard around the world. Prime Minister Papandreou has called for a referendum on the bailout.

It is too bad – but the bailout is too little, too late. When lenders get greedy and make dubious loans because they pay 8% or 11% there is an obvious risk, and the risk is the lender's. Germany, France, and the European banks have been slow to recognize this.

The 50% haircut in this deal is a good start. But the deal burdens the Greeks with further austerity measures. Papandreou has seen what Merkel and Sarkozy have not: that an economy is not about money – rather it uses money as a means of exchange. Instead it is about the shared destiny of its people, and citizens have a say in the political process.

True, the Greek economy was and is corrupt. True, a large portion of it was under the table. The Greeks will have to work all that out.

But the world is going to be working out something else: that making high-risk loans can result in a 100% haircut. That privatizing profits and socializing risks is a shell game that can't last. That fancy financial products like Credit Default Swaps are dishonourable and lead to ruin.

Look out, world. We have been living in a fool's paradise. Reality is about to hit the fan.

Finance is Simple

document.write(" serif;">Money makes money. Money in motion makes more money. Money in the mattress molds.

If you have money, you lend it so it will work and make money for you, or you buy something. Either way you take a risk. When you invest your money you balance risk against return.

That’s it. It's not rocket science.

The Street will cry in outrage, and some will be sincere. But the truth is finance is complex only in invention and obfuscation.

All “financial instruments” are a combination of buying something or lending your money. If you lend the money you expect the principal to be protected and the interest to be paid as per the contract. If you buy something you want to enjoy it or watch it appreciate – perhaps both.

But there is always a risk. Your investment can be guaranteed or insured or blue chip. It can be conservative or rock solid. That changes nothing except the odds.

We are hopeful and therein gullible. If we are offered a “financial product” we would prefer to believe that the contract conditions (that 8% interest rate, for example) are guaranteed (or one of the other adjectives above). The reality is anything can happen. Ask the states and municipalities and pension funds about their mortgage-backed securities.

Investment banks and private equity funds and hedge funds have always been about making money for number one. Since September 15, 2008, when the Lehman Brothers bankruptcy ushered in the current downturn, the line between these institutions and regular banks and money managers has blurred. It is time we made our own risk assessments.