Tuesday, July 31, 2012

“The Moral Case for Capitalism”

Sydney M. Williams

Thought of the Day
“The Moral Case for Capitalism”
July 31, 2012

In 1978, Alexander Solzhenitsyn wrote in National Review: “It is almost universally recognized that the West shows all the world a way to successful economic development.” He then added a cautionary note: “Many people living in the West are dissatisfied with their own society.” A statement, sad but seemingly true. The question is: Why?

Charles Murray, in this past weekend’s issue of the Wall Street Journal (“Why Capitalism Has An Image Problem,”) noted an empirical truth – that from the dawn of history until the 18th Century the world was impoverished, with only a thin veneer of wealth on the top. The Industrial Revolution and the emergence of capitalism changed everything. National wealth began to increase and poverty began to recede. In those parts of the world where capitalism did not take root, poverty persisted.

The rise of capitalism, which was concomitant with the Industrial Revolution that began in England around 1750, has been remarkable. James R. Otteson, a professor of economics and philosophy at Yeshiva University, wrote recently for the Manhattan Institute: “Since 1800 the world’s population has increased six-fold; yet despite this enormous increase, real income has increased 16-fold.” In America, he added: “Even while the population increased 58-fold [since 1800], our life expectancy doubled, and our GDP increased almost 36-fold. Such growth is unprecedented in the history of humankind.” That phenomenal growth over two centuries is a manifestation of the positive impact of free enterprise system. While it is true that some benefit more than others, all benefit.

Yet the term capitalism has taken on negative connotations. There are those, like many West Europeans, who agree that capitalism delivers the goods, but argue that Socialism is morally superior. These people point out that capitalism generates inequality, in allowing some to become wealthier than others, and that it threatens social solidarity, as it permits individuals priority over their communities. Guilty, on both counts. In every society, there will be winners and losers. What makes a free society different is that dissenters can be vocal in their disagreements. In the United States, while we are born equal in terms of our rights within the State, none of us is equal in terms of intelligence, physical aspects, or aspiration. With globalization, the term “community” has assumed a new definition. In the “community of markets” it may define anyone with whom one trades. And globalization has increased the level of competition. Europeans remain mired in their own version of regional nationalism.

Arthur Brooks, President of the American Enterprise Institute, has laid out what he feels to be the three principles for the moral case for capitalism: Free enterprise safeguards lasting happiness; it promotes real fairness, and it does the most good for the most vulnerable. He argues that earned success, not money, is the foundation of happiness. Examples of “earned success” can vary from owning one’s own business to raising children. “Earned success,” Mr. Brooks writes, “is the belief you are creating value in your life and in the lives of others.”. In terms of fairness, Mr. Brooks uses the example of school report cards. Should school grades be distributed equally, regardless of performance? Students who work hard and do well inevitably say, no. Why, then, should wealth be any different? In terms of doing good, since 1970, the percentage of the Earth’s population that lives on less than $1 a day has declined by 80%. That improvement was not a result of foreign aid (which too often ends up in the pockets of the country’s leaders); it was due to globalization and the increase in free trade, “fundamental aspects of free enterprise,” as Mr. Brooks points out.

Liberty and capitalism are inextricably intertwined, each dependent on the other. “Excessive government and economic control,” writes John Taylor in First Principles, “will tend to constrain people’s freedom to speak out…” Without private ownership of capital, businesses would become dependent on indulgences from government. “We understand instinctively,” wrote John Hayward, staff writer for “Human Events”, “that the suppression of free speech indicates a dangerous lack of respect for individuals by the State, but we have been conditioned to forget that a lack of respect for property is at least as disturbing.” The constant condemnation by the President of “millionaires and billionaires” is not only divisive; it is anti-capitalist, and therefore alien to our history. Contrary to the President’s admonitions, the progressive nature of our tax code had, as of 2009, the bottom 50% earning 13% of all income, but paying only two percent of all Federal taxes. In contrast, the top one percent of income filers earned 17% of all income, yet paid 37% of all Federal income taxes.

A problem with a successful democratic capitalist system is that it sows the seeds of its own destruction. The wealth that a democratic capitalist society generates permits government to transfer income, thereby increasing dependency on a growing percentage of the populace. The Scottish history professor, Alexander Tyler (1747-1813) purportedly once wrote: “A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.” From that moment on, Professor Tyler allegedly predicted, democracies collapse over fiscal policies. We are frighteningly close to that point.

Every society produces winners and losers. In a totalitarian, or an allegedly Socialist system, the wealth is controlled by a thin wedge at the top of the societal pyramid. A democratic system provides dissenters a platform from which they can vent their feelings, as we have seen throughout this nation’s history, as we saw a year ago with the Occupy Wall Street movement in Zuccotti Park, and, in fact, as we now see with the President’s demonization of capitalism. Throughout history Utopian societies have promised that men and women can live peacefully and equitably in an Eden-like place. However, they are generally promoted to justify iniquities. Max Eastman (1883-1969), a Socialist who became an advocate of free markets, once wrote: “The notion of an earthly paradise in which men shall dwell together in millennial brotherhood is used to justify crimes and depravities surpassing anything the modern world has seen.” Some of the best examples occurred in the last century and arose from civilized countries with long histories of art, music and literature – Nazism in Germany, Fascism in Spain and Italy and Communism in Russia, China and a host of smaller nations. Today, we see similar signs in places like Venezuela, North Korea and in Islamic nations where political parties like the Muslim Brotherhood promises Shangri-la, but practices hatred and exclusion.

When the President says, that they [Republicans] tell us the market will take care of everything, he is either, nicely, using hyperbole to make a point, or, more likely, simply lying. No one believes that the “market” is the sole answer. A capitalist system can only function under a rule of law, and that can only happen with a popularly elected (and respected) government. Among its many requirements, capitalism requires a strong, but limited, central government that enforces property laws and protects consumers, but denies irrational liability laws. It needs a defense system that can ensure the exchange of international commerce. It needs to implement simple, understandable, predictable regulations and then enforce them. And, it needs to provide fiscal and monetary policies that are conducive to economic growth, including a flatter, broader tax rate that does not favor one industry, or one individual, over another. There will always be those who steal, or in some way take advantage of the system, which is why rules should be known and enforced. Fairness demands it. “Capitalism is not perfect,” James Otteson wrote two months ago. “But no system created by humans is, or ever will be, perfect…The benefits of the free-enterprise society are enormous and unprecedented; they have meant the difference between life and death for hundreds and millions of people…We should wish to extend those benefits rather than to curtail them.”

The moral case for capitalism has always been difficult to explain because it requires an acceptance that outcomes will never be equal. It means that everyone, no matter how small their income, should make some contribution to the national purse. Politicians have long known that people, naturally, prefer to receive, not give, so they play to those behavioral instincts. And, it relies on an understanding of history, a subject too often neglected in our schools.

The alternative to capitalism is the “Road to Serfdom” immortalized by Friedrich Hayek in 1943, who saw first hand what was happening in so-called “civilized” States in Europe. The flip side of Arthur Brooks’ “earned success” is “learned helplessness,” which is what our culture of dependency is creating. To equate “fairness” with redistribution, as the President does, is unfair if one believes success should be rewarded, whether it is a student in class, a hedge fund manager, an Olympian in competition, or a candidate in a Presidential race. The decline in poverty over the past two hundred years – while not by any means complete – is the living manifestation of the virtues of capitalism and why its cessation would doom millions. It is capitalism that has paid for children’s schools in China and for Aid’s victims in Africa.

Faith in capitalism does not demand a blind allegiance to a draconian selfish system, but a belief in the collective wisdom of markets. And markets are comprised of people. The lackluster recovery of our economy has not been because of the “depth of the hole” that Mr. Obama inherited. It is because he has an innate distrust of free markets. He believes that investment decisions are best left to government, rather than individuals and businesses. There is a fundamental difference between the President and Mr. Romney. The President’s way – interventionism, increased regulation, higher taxes on a host of services – has not worked. Despite the fact that GDP has risen – very nominally – for twelve consecutive quarters, there are fewer people working today than when he took office.

Charles Murray ends his note with a reminder to the most successful among us: It is that your “principled stewardship can nurture and restore our heritage of liberty. [Your] indifference to that heritage can destroy it.” Amen.

Monday, July 30, 2012

“The Olympics – The Good, the Bad and the Ugly”

Sydney M. Williams

Thought of the Day
“The Olympics – The Good, the Bad and the Ugly”
July 30, 2012

The Games have begun, in more ways than one. The opening ceremonies were broadcast on Friday evening. They began with forty-minutes of a British extravaganza that included dancing, fireworks and Mary Poppins (along with the Queen) dropping from the sky. Earlier, the U.S. women’s soccer team beat France in one of the preliminary rounds. Elsewhere, Mitt Romney’s faux pas about London’s readiness for the games served as gruel for a grinning New York Times and Washington Post. No moment of silence was provided to honor the eleven Israeli Olympians who were executed by PLO terrorists forty years ago in Munich. Yet 23 year-old Voula Papachristou was banned from participating for an insensitive, but relatively harmless Tweet that had nothing to do with the Olympics.

Several commentators noted the difference between London of today and the city of 64 years ago, the last time the Olympics were held here. At the time, all of Europe (as well as Asia) was still in the early stages of a recovery that that had left a good part of the world devastated, impoverished, with over 100 million dead. It was pointed out by the New York Times that athletes in 1948 were housed in Quonset huts and that they had to bring their own towels. Roger Bannister, the first person to break the four minute mile, had to break into a car to get a Union Jack for the opening parade. The total cost was estimated at £750 thousand. This time, the opening ceremony alone cost £43 million.

The first modern Olympics were held in 1896, in Athens, home of the ancient Olympics. The highlight was the marathon, a race which commemorated the defeat of Persia at the battle of Marathon in 490 BC. Pheidippides ran the roughly 26 miles to bring word of victory to the citizens of Athens, supposedly collapsing and dying after delivering the message. Two thousand three hundred and eight-six years later, Spyridon Louis, a Greek shepherd, won the first modern marathon. Curiously, the very first Gold awarded at those first Olympics went to an American, James Connolly, who won the triple jump, the same event in which Ms. Papachristou will not be able to compete. (Incidentally, Mr. Connolly had to pay his own transportation.)

From the beginning, the modern Olympics carried a social message. In 1896, as a symbol of peace, doves were released; they still are today. In total disregard to the doves, those first games ushered in the bloodiest century the world has yet known. That same year the motto, Citius, Altius, Fortius (Faster, Higher, Stronger) was adopted. It meant that the emphasis should be on bettering one’s own achievements, as opposed to winning. Fat chance of that happening in today’s environment of competition in all things. Over time the Olympics morphed into contradictory spectacles of political correctness, such as sanctimonious speeches about universal ideals, while sacrificing an individual athlete, but with no need to honor dead Israeli Olympians, lest it offend the sensitivities of insensitive, anti-Semitic Arab states.

Voula Papachristou, a Greek triple jumper who was expected to medal, has been banned for her tasteless transgression. Her Tweet read: “With so many Africans in Greece, the West Nile mosquitoes will be getting home food!!!” Not nice, but hardly of the stuff to cause an international incident. The International Olympic Committee (IOC) should keep in mind that Africa is a large diverse continent comprised of 54 separate countries. Three factors, while not condoning what Ms. Papachristou wrote, should be understood as to why she may have written what she did. First, Greece, like other Mediterranean nations, has been the destination of a growing number of illegal African immigrants. Second, West Nile disease, first identified in Uganda in 1937, has been an increasing presence in southeastern Europe. Last September, the UK’s National Blood Service noted about West Nile disease: “In [2010] there have been significant outbreaks in Greece, Romania, Albania…” And, third, West Nile disease, in its worst manifestation, can be fatal, so cannot be taken lightly. None of this is meant to excuse her actions, but it at least puts them into context. This is a young woman, keep in mind, who has devoted most of her time over the past several years for a few moments of glory that will likely never come her way again.

The Olympics should be about the athletes – the best in the world in their respective fields. And most of the coverage does this well. These athletes are endowed with extraordinary talents. Friday’s Wall Street Journal had a fascinating article on the physical differences between average men and women and Olympic competitors. There is no question the gifts one is given at birth are critical, but that is never enough. The individual must have the desire to win. He or she must train hard, persevere when discouraged and never quit. But they are also human, and many are very young. They make mistakes, as most of us do. Ms. Papachristou sent an irresponsible and insensitive Tweet, but she did nothing evil. And she has publically apologized for her words. I am all for holding people accountable for their actions, but in this case, in my opinion, both the Hellenic Delegations’ Administrations Board and the IOC have overreacted and destroyed the dream of a talented, hardworking competitor, in order to satisfy their own perverted definition of morality and correctness.

It turns out that Ms. Papachristou has sympathetic leanings toward Golden Dawn, which is generally considered a right-wing extremist political party in Greece, a factor, I feel sure, in her being expelled so quickly. The Games are supposed to be above politics. Athletes from both left and right wing autocracies will be present in London. Ten Syrian athletes have been registered for the London games, as have 69 from Venezuela, along with athletes from Iran, North Korea and Cuba. Nobody has precluded their participation, nor should they, but Ms. Papachristou should be there as well.

In 1936, there was a movement in the United States to boycott the Olympics in Hitler’s Germany. Hitler had been Chancellor for three years, and his anti-Semitism was well known. Avery Brundage, then president of the American Olympic Committee, led the fight to beat back the boycott. Arguing that the United States should participate in Berlin, he oddly and ironically said, “The very foundation of the modern Olympic revival will be undermined if individual countries are allowed to restrict participation by reason of class, creed or race.” Nevertheless, in complete contradiction to Mr. Brundage’s words, Germany did forbid Jews from participating in Berlin, with one exception. They declared that one “designated Jew” could participate. Helene Mayer, a fencer and winner of the Gold in the 1928 Olympics, was that person. She won Silver in Berlin. Controversy still surrounds the United States’ last minute decision to replace two Jewish runners, Marty Glickman and Sam Stoller, with Jesse Owens and Ralph Metcalfe in the 4X100 relay race. Some claim that Mr. Brundage did so to appease Herr Hitler, because of the likelihood they would be awarded Gold.

Jesse Owens, representing the United States as well as a race that Nazis deemed inferior, won four Gold Medals. While he was snubbed by Hitler, the German people, to their credit, gave him a rousing cheer.

“The concept of virtue,” writes Charles Murray, author and scholar at the American Enterprise Institute, “requires that you believe some ways of behaving are right and others are wrong, always and everywhere.” In moral relativism there are no absolutes in terms of right and wrong. Kenan Malik, an author and BBC radio commentator writes on his blog, Pandaemonium, that over the past three decades cities have won the games by promising to “use them as instruments of social good.” Yet, Mr. Malik adds: “No modern Games have produced a legacy of regeneration. No independent academic study has shown a link between the hosting of sports tournements and economic development.” In essence, the IOC, in their desire to do social good, is confusing the distinction between sports administrators, government bureaucrats and entrepreneurs. Worst of all, they have demonstrated an absence of moral absolutism. In the meantime, outstanding individual athletes keep shattering world records.

Sports administrators should be focused on the athletes, their needs and venues, where and when they will participate. “Social good” is a role for government, as determined by the electorate. Economic development is almost always most efficiently the province of private enterprise. The message that athletes send to the young is a positive one; it is unnecessary for officials to add their pious platitudes. The Games provide a venue for the competition among individuals and teams; that is all, but it is a lot. The bad and the ugly of the Games should not distract from the enormous good they do. May those who are the swiftest, who can leap the highest and, with strength and determination, demonstrate the most grit win the Gold.

Thursday, July 26, 2012

“Words Matter”

Sydney M. Williams

Thought of the Day
“Words Matter”
July 27, 2012

Words do matter. They can be used to praise or hurt. They can be used to lie or to tell the truth. They can be used eloquently, or they can be mumbled. In our youth, we were taught to think before we speak – a lesson most of us chose to ignore.

In February 2008, while campaigning in Wisconsin, then candidate Barack Obama spoke of how words matter. In a speech, applauded by many as his most eloquent to date, he quoted The Declaration of Independence, FDR and Jack Kennedy – none of whom used teleprompters. Unfortunately, when he signed the 2300 page Dodd-Frank bill, he predicted it would “lift our economy,” provide “certainty to everybody” and end “too-big-to-fail banks.” Two years later, we remain stuck in the slowest recovery in the post-war period. There is no certainty, other than that we are facing a financial cliff, and banks have become bigger and more dangerous than ever. A few weeks ago, the President told entrepreneurs that their success was due to the State, not because of their initiative or the risks they took. You-Tube and the internet provide a service in keeping people honest about the words they have used. They can run, but they cannot hide. History cannot be re-written or re-spoken.

What is it about politics that so often takes an intelligent person and turns their brains to mush? When Nancy Pelosi tells people, “trust me, we have to pass it (the healthcare bill) to find what’s in it;” or when the biggest liar of them all, Elizabeth Warren, tells people that she is Cherokee, and she knows it because one of her grandparents had “high Cheek bones”, they are insulting the intelligence of the American people. They make jokes of themselves, and Ms. Warren affronted the Cherokee Nation.

Sandy Weill made hundreds of millions of dollars merging Travelers Insurance Company, of which he was then CEO and which owned Salomon Smith Barney, with Citibank to create Citigroup. In doing so, he violated the intent of Glass-Steagall, so placed calls to Washington to get approval. With the support of a Republican Congress and Treasury Secretary Robert Rubin, he got President Clinton to sign legislation repealing Glass-Steagall, an event hailed at the time by the New York Times. Ten years later, Citigroup’s survival depended on taxpayers anteing up billions of dollars, and the banks subsequent success (if one can call it that) has depended on the Federal Reserve fixing interest rates at extraordinary low levels – again, at a cost that has become the responsibility of taxpayers because of the addition to our national debt, and ultimately will become a cost to be borne by all Americans, in terms of higher inflation. A few days ago, on CNBC, in words that bring new meaning to the word hypocrisy, Mr. Weill told his hosts and audience: “I am suggesting that [big banks] be broken up, so that tax payers will never be at risk.” So, now you tell us, Mr. Weill!

On March 27, 2011, Secretary of State Hillary Clinton spoke about Syria, and its President, Bashar al-Assad: “There is a different leader in Syria now. Many of the members of Congress of both parties who have gone to Syria in recent months have said they believe he is a reformer.” (Senator John Kerry was by far the most frequent visitor to the dictator and killer.) Two days later, Ms. Clinton backpedaled her remarks, but they were out there for all to hear and read.

After removing personal choice from New Yorkers in terms of what size drinks they can buy, Mayor Bloomberg has now taken another step into the netherworld of political idiocy. On CNN’s Big Story with Piers Morgan, in response to the shootings in Aurora, he said: “Well I would take it one step further. I don’t understand why the police officers of this country don’t stand up collectively and say, ‘We’re going on strike. We’re not going to protect you unless you, the public, through your legislature do what’s required to keep us safe’ (i.e. more gun control.) After all, police officers want to go home to their families.”

The Police Code of Conduct, issued by the International Association of Chiefs of Police, is quite clear in what they state are the fundamental duties of a police officer; “…serving the community, safeguarding lives and property, protecting the innocent, keeping the peace and ensuring the rights of all to liberty, equality and justice.” It says nothing about going on strike if legal weapons are still allowed to be carried by the citizenry. His irresponsible words, along with his disallowance of sugary drinks, help hasten the descent of a culture of responsibility into a miasma of dependency. The Mayor is now pushing back from that statement at a speed that would rival Liam Tancock in the London Olympics, but he said what he said. Words matter.

In regard to encouraging policemen to break the law by going on strike, how much more sensible were the words of then Governor Calvin Coolidge of Massachusetts in 1919, when Boston’s police force went on strike: “There is no right to strike against the public safety by anybody, anywhere, anytime.” Eleven hundred police officers were fired after four days of strikes and 1574 replacements were hired, mostly out-of-work veterans of World War I. Coolidge added that to trust the public safety to “men who have attempted to destroy it would be irresponsible.” Again, words mattered.

There is no American who uses words more than the President. According to CBS, from inauguration through December 31, 2010, the President spoke 883 times, or about 1.3 speeches per day. Of course, that was before he began campaigning for reelection in early 2011! His words matter. Daniel Henninger, in a must-read op-ed in yesterday’s Wall Street Journal, described the two economies competing for America’s future – the public economy and the private one. Mr. Henninger quotes Mr. Obama in a July 9th campaign speech: “What’s holding us back…is a stalemate in this town, in Washington, between two very different views about which direction we should go in as a country.” He is right, and unlike some of his misquotes such as there being 57 states in the union, this time he meant what he said. He wants to take the country in a direction that enriches the public sector, but at the expense of causing the nation to become poorer. Keep in mind, it is only the private sector that generates the income (tax dollars) that allows the public sector to exist. Government, at 24% of GDP, is the highest it has been since World War II, and is 20% above its average over the past four decades. Putting a governor on the productivity of the private sector (which is the consequence of higher taxes and increased government spending) ultimately harms us all – public and private sector workers alike.

Listen carefully and think about what is being said. Words do matter.

Wednesday, July 25, 2012

“Fannie and Freddie – Will They or Won’t They?”

Sydney M. Williams

Thought of the Day
“Fannie and Freddie – Will They or Won’t They?”
July 25, 2012

Go into liquidation that is. The Federal Housing Finance Agency (FHFA), the regulator that overseas the two Government Sponsored Enterprises (GSEs) has hired a consulting firm (at our expense) to create contingency plans for taking the mortgage finance firms – Fannie Mae and Freddie Mac – into receivership, according to Bloomberg News yesterday. Receivership implies that a bankruptcy court will appoint a receiver to manage the businesses, as the assets are sold off.

However, in the years since the credit collapse of September 2008, the private mortgage market has essentially disappeared, so that 90% of all new mortgages are guaranteed by Fannie, Freddie and the FHA, far above historic levels. Liquidation of Fannie and Freddie may have become riskier, both to the housing market and to the economy. The two entities continue to hold about $1.5 trillion in mortgages, many of which are under water, the questions are ones of timing and how – how long will it take and to whom and at what price would the assets (the mortgages) be sold.

In September 2008, both companies went into conservatorship, which essentially meant that they would be operated by a court appointed custodian. The stocks of both companies continued to be traded on the NYSE, but for a fraction of the price they had been trading at. In June 2010, by a directive of their regulator the FHFA, the common and preferred shares of both were delisted. On the news, both stocks dropped another 30%. Both Democrats and Republicans have indicated the ultimate goal of winding down both institutions. The Obama Administration did so in a report to Congress, written by HUD and Treasury in February 2011, and Mitt Romney did so in November, 2011 when he said, in regard to the GSEs, “Let markets work.” While the goal marks an unusual agreement between the two parties, the timing is questionable and the Obama Administration has been acting in a manner contrary to their stated intentions. The Administration has been escalating efforts to ease conditions for homeowners, including those who owe more than their home is worth, which is tantamount to weakening the two GSEs.

In the last half of the 1990s and earlier in the last decade, Fannie Mae and Freddie Mac came to symbolize the unhealthy, symbiotic relationship between government and the private sector – with Congress approving the paying of their executives very richly and with taxpayers footing the bill. In return, politicians accepted political donations of commensurate size from the two firms.

The misuse of taxpayers’ funds was appalling. Franklin Raines, former CEO of Fannie Mae, was accused in December 2006 with manipulating earnings – off of which his bonus was paid – over a six year period. The restatement for the years 1998-2004 amounted to $6.3 billion. During those six years in office (1998-2004) Mr. Raines received total compensation of $91.1 million, including $52.5 million in bonuses. He ended up settling in 2008 for $24.7 million, of which $15.6 million was in options that were worthless. Thus his cash settlement was about $9.1 million. Daniel Mudd, who succeeded Raines as CEO, was paid $14.45 million in 2006 and $12.2 million in 2007, despite reporting a loss for the year 2007 of $2.1 billion. In 2009, the year after the two firms were put into conservatorship but when they were still costing taxpayers billions of dollars, Fannie Mae and Freddie Mac reported that their CEOs were eligible for compensation of $6 million each. “Compensation must be sufficiently high to ‘attract and retain’ top talent, their regulator, the FHFA, said in a statement,” as reported by Bloomberg on December 24, 2009. Would losses have been any greater with less talented management? In the three and a half years since the government rescued the firms, taxpayers have advanced $50 million in legal payments to defend former executives of Fannie and Freddie – an unconscionable indictment of the whole system!

During the years 1989-2008 political contributions from Fannie Mae and Freddie Mac totaled $4,844,572. Senator Chris Dodd of Connecticut and Chairman of the Senate Banking Committee was the number one recipient with $165,400. Number two was a new comer to the Senate. Despite only having been in the Senate two years, Barack Obama received $126,349 from the two GSEs.

Problems for these GSEs have been building for sometime, but were ignored by Congress for years. Greed and taxpayer abuse are the root cause. The Community Reinvestment Act (CRA) was originally passed in 1977. It mandated banks to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining. Banks were encouraged to meet the credit needs of the communities in which they were chartered. In 1995, the Act was amended to conform to President Clinton’s desire to deal with the problems of the inner city and distressed rural communities. Credit, according to then Secretary of the Treasury, Lloyd Bentsen should not depend on where you live, but “whether or not you can pay it back.” Unfortunately the latter requirement was ignored. The consequences were to encourage people to borrow more than they could afford on the expectation that housing prices would move ever higher.

The expansion of home ownership was a policy that was promoted by President Bush as well. Though, in Bush’s favor, he attempted to reform the GSE’s, but was unable to get anything through Congress. In 2001, the Administration’s budget declared that the size of Fannie Mae and Freddie Mac represent a “potential problem because financial trouble of a large GSE could cause strong repercussions in financial markets.” In May 2002, President Bush called for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility be applied to Fannie Mae and Freddie Mac. Nothing was done and a year and a half later Freddie Mac had to restate its financial results for the previous six years. In June 2004, Deputy Secretary of the Treasury Samuel Bodman, testifying before Congress, said “We do not have a world-class system of supervision of the housing government sponsored enterprises.” He called for a new regulatory supervisor. Attempts at reform were rejected by Congress.

The point is that these entities, whose original intent and purpose was to provide easier financing to middle class working people aspiring to homeownership, became political feedstock for furthering political agendas and feathering campaign chests, while enriching management. They remind me of a line from one of John Kenneth Galbraith’s very few novels, A Tenured Professor published in 1990. One of his characters describes Texas banks of the early 1980s, which, in those day had the bulk of their liabilities insured by the FDIC: “Free enterprise, but with the ultimate and benign support of socialism.” Similarly, the GSEs became perfect examples of cronyism, with profits accruing to management, and through them to politicians, while losses became socialized with taxpayers picking up the pieces.

There is no doubt in my mind that the current entities should vanish (taxpayers have anted up $190 billion since the fall of 2008), but timing is critical and, while Mr. Obama says he wants them to go, instead of weaning homeowners from dependency on them, he has been pressuring them to ease conditions for those with underwater mortgages. It is a problem, getting worse, and without a visible solution. Price fixing, whether it’s gold, oil or interest rate, never works in the long run.

The lead editorial in yesterday’s Wall Street Journal dealt with the growing problem of student loan bankruptcies. The last sentence could apply as well to the mortgage companies: “But wouldn’t it be easier merely to encourage job creation rather than try to anticipate and make taxpayers pay for every consequence of joblessness?”

Tuesday, July 24, 2012

“Violence and Tragedy in Aurora”

Sydney M. Williams

Thought of the Day
“Violence and Tragedy in Aurora”
July 24, 2012

Any untimely death is tragic. “The world,” as Ernest Hemingway wrote in A Farewell to Arms, “kills the very good and the very gentle and the very brave impartially.” Most of the 2.5 million Americans who die each year, succumb to disease, with heart disease and cancer being the biggest killers, accounting for more than a million deaths. Accidents take about 118,000 lives each year, with poisoning, automobile accidents and falls being the most common. Suicides are responsible for about 37,000 deaths each year. Approximately 14,500 people are murdered every year, roughly two thirds with firearms.

Most deaths go unnoted other than by the immediate families and friends of those who died. For example, in the first eighteen days of July there were 27 homicides in President Obama’s home city of Chicago, none of which made the national news. No matter, the families of those victims grieved every bit as much as the ones did this past Friday in Colorado, but they did it alone. But when an atrocious and senseless killing takes place, as it did at the Century 16 Theater in Aurora, the entire nation responds, drawn by both a ghoulish curiosity yet real compassion to the random but horrific nature of a young man dressed in body armor, carrying an assault rifle and two handguns, firing on innocent and unsuspecting victims.

Out of respect for the victims (and providing relief for the rest of us!), both the President and Mitt Romney temporarily suspended their campaigns. The President traveled to Aurora to visit with survivors and family members of those killed. While politics may have played a role in his trip, I take him at his word that he went, as he said, “…not so much as a President, as I do as a father and a husband.” Mitt Romney was gracious in saying the President’s trip was “the right thing to do.”

The press, for the most part, responded predictably, with calls for a national conversation about gun violence. “Blood on the hands of Obama, Mitt and NRA!”, screamed the lead editorial from the Daily News. “Aurora Massacre Tied To Gun Culture,” was the headline in the Hartford Courant. “We’ve Seen This Movie Before” was the somewhat insensitive headline over Robert Ebert’s piece in the New York Times. New York City’s Mayor, Michael Bloomberg, weighed in: “Maybe it’s time that the two people who want to be President of the United States stand up and tell us what they’re going to do about it.” One presumes the Mayor, when he refers to “it”, is speaking about gun control. But there are no easy answers. If a mentally unstable person decides to kill people he will find the means and a way of doing so.

Governor John Hickenlooper, in a Sunday interview on NBC asked, rhetorically, the right question: “How are we not able to identify someone like this who’s so deeply, deeply disturbed?” In this case, James Holmes’ mother seemed unsurprised: “You have the right person,” was her alleged and unprompted response when hearing about the killings . The point is not just to identify those who are unstable, but to make sure that the information gets to the proper authorities. But that raises the question as to who is a “proper authority.” One of the advantages of the internet is that it makes access to the kind of information that might prevent such an occurrence simple and quick. A disadvantage is that much of the information may be privileged, as it should be. And, how much freedom are we each willing to surrender in order that we might possibly be safer?

I am not a gun owner. Other than a 200-year old squirrel gun, which is incapable of being fired, I own no weapons. Apart from my time in the U.S. Army – and one other instance when I shot clay pigeons when I was fifteen – I have never fired any type of weapon. I don’t like them. Nevertheless, I am a believer that it is the person, not the weapon that is always at fault when a deliberate, pre-meditated tragedy strikes, as it did early last Friday morning in Colorado.

In 1994, the Clinton Administration passed a ban on Assault Weapons. The ban was lifted in 2004. The number of murders in the U.S. peaked in 1993 at 24,530 and declined to 16,528 in 2003, suggesting the ban may have worked. However, despite the lifting of the ban, the murder rate continued to decline; so that in 2010 there were 14,748 murders; implying that access to assault weapons, as unpleasant and unnecessary as I personally find them, may have little to do with most capital crimes.

In a nation of more than 300 million people there will always be nuts, there will be a few who through anger or inclination choose to kill and there will be those who will die accidentally. “No man is an island,” wrote John Donne in his poem by that name. “Each man’s death diminishes me, for I am involved in mankind.” That is how most of us feel, and it is why so much airtime and ink is devoted to coverage of the event and to seeking answers. Unfortunately, there are no easy answers. We can try to draw broad societal lessons from the wanton murder of a dozen people in Colorado, or last year’s killing spree on Norway’s Utoya Island, which left 77 dead, or from the murders at Columbine High School in 1999 that left 13 dead, but I am not sure we can. Fortunately these random, essentially unpredictable events are rare. That fact does not diminish the gut-wrenching pain of the survivors, but it should not deter us from going to the beach, school, the movies, or from functioning normally in our daily lives.

If there is a lesson to be learned, it has more to do with our educational system and the culture in which we live our lives and raise our children. The cause was not the gun. The cause had to do with a demented personality whose insanity was not uncovered or acknowledged until too late. Did he have unreasonably easy access to weapons and ammunition? It seems to me that perhaps he did. But any stripping of or denial of individual rights, granted to each of us under our Constitution, must be considered with great care. Once gone, government will be very reluctant to return them. Count me as a skeptic.

Personally, banning guns would make no difference in my life, unless they also banned duck hunters who flock to the marsh rivers in front of my house each December, often awakening us with their usual futile shooting. But it would represent a deprivation of individual rights, as we know them; and it would not stop a mad man intent on killing.


                                                                                                                          Sydney M. Williams
                                                                                                                          July 23, 2012

Note from Old Lyme

“Every parting gives a foretaste of death;
every reunion a hint of the Resurrection.”
                                                                                           Arthur Schopenhauer (1788 – 1860)
                                                                                           German philosopher

Seventy-eight descendants of my great-grandparents gathered in New Haven a few weeks ago to learn something about our common ancestors, Henry Lucius Hotchkiss and his wife Jane Fitch Trowbridge, but also to reunite with cousins, some of whom we had not seen in decades, and to meet others we had never known. We ranged in age from the late eighties to under a year. My great grandfather lived to be 87, dying in 1930, while his wife died in 1902 at the age of 52. As the youngest grandchild was about ten when he died, all his grandchildren knew him well. None of them knew their grandmother. My mother and her siblings perhaps knew him best, as they were raised in his house.

Only one grandchild, Gertrude Ely Carter born in 1914, is still alive, but was unable to be at the reunion. Thus, the “old” folk at the reunion were my generation, the great grandchildren. Of those, the oldest to attend was Carl Ely Shedd, born in 1932. The youngest attendees were a great-great-great granddaughter Kenley Elizabeth Dunham and a great-great-great grandson, Charles Vito Cerasuolo, both born in 2011.

Lee Dunham, now living in Belmont, Massachusetts and my second cousin, was the force behind the reunion. He arranged that we meet at the New Haven Museum on Whitney Avenue in late morning. Over lunch we listened to Michelle Cheng, director of education for the museum, give a brief history of the city and the role played by generations of Hotchkisses. The day being pleasant, we then walked the short distance to the historic Grove Street Cemetery where generations of our family lie – including a properly impressive monument marking Noah Webster’s grave. Again, Lee had arranged for a guided tour which proved informative and prevented us from dispersing like spirits among the tombstones.

The Grove Street Cemetery was established in 1796, and was one of the first to consider family plots. The documents establishing the cemetery read that it be “…better arranged for the accommodations of families…” Its wrought iron fence and sandstone Egyptian Revival-style entrance arch were erected in 1845. Among those reposing within its walls are such luminaries as Walter Camp, Charles Goodyear, Glenn Miller , Roger Sherman, Eli Whitney and Noah Webster. Also buried there are former presidents of Yale, including Kingman Brewster and Bart Giamatti.

Leaving the cemetery, we walked up Hillhouse Avenue to the house my great grandfather had bought in 1888. Shortly afterwards he added a wing, which included a ballroom/library, almost doubling the size of the original building. The house had been built in 1859 by Pelatiah Petit, a New York merchant. (Today, the house stands in the midst of the Yale campus, but in the 1880s this would have been a country dwelling.) The description of Hillhouse Avenue as “the most beautiful street in America” has been attributed to both Charles Dickens, who visited New Haven in both 1842 and 1867 and Mark Twain, who lived in Hartford from 1874 to 1891. The house was sold to Yale University in 1931, and was initially used by the Oceanography Department. Described as a Tuscan-style villa, it later became the residence of the Yale Provost. Today, it is known as Horchow Hall and houses the Admissions Office for the School of Management along with faculty offices and seminar rooms. The façade is brick covered in stucco and “features detailed carvings on the capitals, eaves and portico,” according to one description.

Two generations of Hotchkisses grew up in the house – my grandfather and his sisters, from the time he was ten, and my mother and her brothers, until she was twenty. The house is large and sits on generous grounds, a portion of which has now been built upon. The land originally reached back to Whitney Avenue and included a horse stable, which now functions as a garage. The staff, as I heard the story growing up, numbered eighteen, making the house a significant enterprise, although one that consumed rather than generated income.

Henry Lucius Hotchkiss was born in New Haven in 1842, the son of a prosperous merchant. His father Henry Hotchkiss, along with his uncle Lucius, inherited a lumber business from their uncle, Justus Hotchkiss. HLH was the only son of Henry Hotchkiss and his wife Elizabeth Daggett Prescott. (Elizabeth was the great niece by marriage of Roger Sherman, the only Founding Father to sign all basic documents of our republic – the Articles of Association, the Declaration of Independence, the Articles of Confederation and the Constitution.) He was the youngest child among five sisters, four of whom survived into adulthood. A daguerreotype of him at age five shows a willful child staring determinedly at the camera. A later one, taken when he must have been in his twenties, is of a self-confident young man with wavy dark hair, wide-set eyes, a prominent nose and full lips.

HLH’s wife Jane Trowbridge, whom he married on February 25, 1875, was also born in New Haven in 1850. Her father, Henry Trowbridge, had married Mary Southgate, a granddaughter of Noah Webster. She had been raised by the lexicographer, as her mother had died in child birth.

Henry and Jane bore three children: my grandfather Henry Stuart (1878-1947), who married Elizabeth Washington, and who was always known as Stuart; Helen Southgate (1880-1964), who married Elisha Ely Garrison, and Elizabeth Trowbridge (1885-1968), who married Carl Brandes Ely.

Henry Lucius Hotchkiss was short, about 5’ 7”. He succeeded his father in all of his father’s business endeavors, other than the lumber business which had closed in 1850. While he inherited wealth, he increased its value. A photograph, taken in his later years, shows a gentle, kindly looking man with thick, wavy white hair, parted in the middle, and sporting a walrus mustache. A 1918 volume, Modern History of New Haven describes his father who died in 1871: “He was a man who possessed the qualities of leadership in business and financial affairs and was gifted with the exceptional capacity for controlling large enterprises. He displayed notable sagacity and keen insight into business situations, together with the power of coordinating seemingly adverse interests into a complex and unified whole. He figured not only as one of the foremost manufacturers of the state, but also as a prominent factor in many other business lines, being called to the presidency of various corporations.” The principal business interest of Henry Hotchkiss was the L. Candee Company. Around 1843 Henry Hotchkiss and his brother Lucius helped finance Leverett Candee who had acquired the rights to use Charles Goodyear’s vulcanization process to produce rubber boots. By 1852 the business was up and running. Before Goodyear’s discovery, rubber would melt in intense heat and become brittle in extreme cold. The process of vulcanization allowed the product to be used in extreme temperatures. The industrial revolution largely depended on rubber, from machinery parts to tires. For several decades, rubber was perhaps the single most valuable commodity in the world.

In the same volume, his son is described as one who became actively interested in his father’s business interests, beginning in 1860 when he left Williston Academy at the age of seventeen. His first job was as paymaster for the New London Railroad. By the time he was 21 he had become secretary of L. Candee & Co. Shortly afterwards he became treasurer as well, and then succeeded his father as president when the latter died in 1871. Henry Lucius was then 29 years old. At its peak, L. Candee employed 2000 people and was producing 20,000 pair of rubber boots per day. On November 19th 1877 (HLH was then 34) the entire plant was destroyed by fire. His responses are described: “Quick in action and at all times resourceful, Mr. Hotchkiss at once leased temporary factories and immediately began rebuilding on a much larger and finer scale.” Fifteen years later, in 1892, HLH merged L. Candee with half a dozen other rubber companies to form United States Rubber Company of New Jersey. For the first seven years, he served in the office of the chairman and on the executive committee. In 1899, he resigned from those positions to travel around the world, but remained a member of the board of directors.

Henry Lucius Hotchkiss also followed his father as president of the Union Trust Company of New Haven, of which he and his father were both original incorporators. A few years later he became vice president of a consolidated Union and New Haven Trust Company. Additionally, he was president of the New Haven Pin Company and a director of the New Haven Bank and the New Haven and New London Railroad.

HLH lived in the house at 55 Hillhouse for forty-two years, until he died in 1930. When his son (my grandfather, Stuart) married in 1907 he brought his bride to live there. My grandmother, born in Tennessee, at the age of eighteen, became mistress of this large home that employed, as mentioned, a staff of eighteen.

Sometime around the time he moved into 55 Hillhouse, HLH met and employed a coachman named Taylor. Taylor had been born a slave and had grown up around horses. After the Civil War, he traveled to Vermont in the employ of an ex-Union officer. Deciding Vermont was too cold, he went south, as far as New Haven where he got a job in a stable, and it was there that my great grandfather met him. Taylor worked for HLH the rest of his life. By the end of World War I, cars had generally replaced horses, yet my great grandfather persisted in keeping his carriage horses, so that Taylor would always have a job. This was much to my mother’s delight. I have a photograph of her, about 1923, dressed in a white pinafore, wearing a wide-brimmed bonnet, sitting primly in the carriage, with Taylor holding the reins of the two horses. My mother had sweet-talked her grandfather into letting Taylor drive her to dancing lessons about seven miles away in Hamden. She told him the horses could use the exercise.

While I have no letters written by HLH, one can get a sense of the man from letters written to him. In January 1924, my mother, along with her mother and one brother, took a trip through the Panama Canal, aboard the S.S. Kroonland. A letter from my mother and cards from my grandmother, his daughter-in-law, speak of the fondness they had for him. “Dear Grandpa,” begin the letters from my mother. “Dearest Papa,” start those from my grandmother.

He died in May 1930 while watching the boat races aboard the observation train in Derby, Connecticut. With him at the time were friends and his grandson, Joseph Hotchkiss (my mother’s youngest brother), who was ten years old at the time. Joe Hotchkiss’s wife, Hannah Eugenia Whitney, was at the reunion, representing her generation. At the time of his death Henry Lucius Hotchkiss was Commodore of the St. Regis Yacht Club in the Adirondacks, a position held by his great grandson, Carl Shedd sixty-two years later. He is buried, among many of his forebears, in New Haven’s historic Grove Street Cemetery.

The Depression had just begun when Henry Lucius Hotchkiss died. He never knew that his son (my grandfather) would become one of the victims of Ivar Kreuger, the “Swedish Match King”. Kreuger was the largest swindler of his day, only eclipsed by Bernie Madoff. In 1931, the house at 55 Hillhouse was sold and the gilded lifestyle that had been his and his families became but a memory. My grandfather, who had retired in 1929, had to return to work, dying of a heart attack on September 16, 1947 at the age of 68. His wife, my grandmother, who had arrived in New Haven as an eighteen-year old bride from Tennessee in 1907; now widowed, she was forced to sell their summer house in Madison, Connecticut and move into a cottage on the property. Nevertheless, there was never any rancor, no feeling sorry for herself. She always spoke about her husband, my grandfather, in the most loving terms. She died September 8, 1961.

History is always most easily learned when we associate our ancestors with the times in which they lived. For example, we know that Henry Lucius Hotchkiss’s first years in business were during a time when our country was fighting a Civil War for to preserve its union. While he never donned a uniform, or served in the union army, we can assume many of his friends and acquaintances did. Did he ever feel guilty that others went off to war when he did not? We cannot know. We know that severe economic recessions hit the United States in the 1870s and 1890s, and we know that he had to have adapted well, as his business interests continued to expand.

Family reunions remind us, not only of the importance of our immediate families, they reflect what Edward O. Wilson would term “group selection.” It was our relationship to a specific ancestor that drew us together. But a reunion does more than just that. The power of compounded returns not only illustrates how many descendants we each might have in two hundred years, but also from how many people each of us descends. Every hundred years produces roughly three generations. The world’s population a millennium ago has been estimated at 400 million, yet each one of us has descended from about 500 million people going back those same 1000 years. So, mathematically, we know we must all be related.

That sense of interconnectedness reflects a sense of the catholic nature of our lives and common ancestry. Professor Wilson, in his book The Social Conquest of Earth writes in the final chapter: “A recent analysis has shown that the increasing interconnection of people worldwide strengthens their cosmopolitan attitudes. It does so by weakening the relevance of ethnicity, locality and nationhood as sources of identification...Inevitably it will weaken confidence in creation myths and sectarian dogmas.” While it is my guess that differences among people, their cultures and religions, will not be eradicated for many more centuries, ultimately there may well be a realization that, as members of the human race, we are essentially the same, each of us having descended, as sociologists and anthropologists have reminded us, from Homo sapiens who left Africa 60,000 years ago. In time, disparate people and cultures may evolve back into one culture and race. E Pluribus Unum.

There is no greater charge we are given in life than that of being good parents. Children are the greatest legacy any of us can leave. George Bernard Shaw, the acerbic British playwright, once noted: “Perhaps the greatest social service that can be rendered by anybody to this country and to mankind is to bring up a family.” As we gathered just inside the entrance of the New Haven Museum that Saturday in June, and I looked around at people, some of whom I did not know nor had ever heard of, I began to realize the enormity of the responsibility that those of us who choose to have children are given. Genetics determine much of our behavior, but the environment in which we raise them and the lessons they learn from us are equally important.

Not every family can assemble so many descendants of one couple in one place, but if you can, the experience is worth doing; for the sense of history it provides and for the interconnectedness you will feel.

Monday, July 23, 2012

“The Economy Will Grow, If It’s Allowed”

Sydney M. Williams

Thought of the Day
“The Economy Will Grow, If It’s Allowed”
July 23, 2012

Five years ago, conventional wisdom held that the world might have 50 or 60 years worth of gas. Today, with the discovery of shale gas and the technology to extract it, expectations are that we have 200 years or more. That change indicates, first that we should always be suspect of conventional wisdom and, second that we should never underestimate the creativity of the individual.

As the Economist noted in a Special Report on July 14, it is not only America, but countries around the world – some in Europe, China, Argentina, Brazil, Mexico, Canada and some African countries – that are sitting on unknown quantities of natural gas. Technology that allows for deep-water and horizontal drilling and high oil prices have transformed the outlook for energy. It has taken companies and individuals risking their assets and reputations to find alternative sources. What has not been responsible for the abundance of new gas discoveries is government. In fact, the Obama Administration has done what it could to restrict development, yet Mr. Obama has not been shy about taking credit for recent increased production.

Two hundred years of reserves is a long time, but it is a blink in the history of man. Homo sapiens, according to Edward O. Wilson, in his book The Social Conquest of Earth, first walked out of Africa 60,000 years ago to become the ancestors of us all. And, of course, the earth’s history dates back hundreds of millions of years before that. So, unless one assumes that man’s life on earth is coming to an end, at some point we will have to develop renewable sources of energy. The best way for government to help is to encourage and incentivize individual entrepreneurs, but, in the meantime, we have some breathing room.

Peter Diamandis, a futurist and entrepreneur with degrees from Harvard and MIT, recently wrote Abundance: The Future is Better Than You Think. The book was recently reviewed by Doug Hornig of Casey Research. It focuses on technology that is already here, like Aeroponics, which has demonstrated that it is possible to suspend plants in midair and deliver food through a nutrient-rich mist. Farms no longer will have to rely on horizontal fields of rich soil. They can be built vertically. This is not pie-in-the-sky stuff. The technology is almost thirty years old. Nine years ago Dean Kamen, a physicist and entrepreneur who had been working on the problem of getting sterile water to dialysis patients, developed a machine (the Slingshot) the size of a small refrigerator that with a power cord, intake and outflow hoses can produce 250 gallons of water a day. The intake hose can be placed in anything damp, from seawater to latrines. The technology used to purify the water is similar to that used by drug companies and desalinization plants on naval vessels.

Housing, which typically has led us out of recessions, has been a drag this time. But the bloated inventory has been worked down, and with rental rates increasing, housing starts should become a positive contributor to economic growth.

Despite these developments, economic growth has been anemic. The Economic Cycle Research Institute (ECRI) gauge shows the eighth straight week of negative reading. Unemployment is higher than it was four years ago and our debt and deficits are both larger. Interest rates are lower, but that reflects Federal Reserve activity. From a fiscal perspective, what the government has been doing is not working. The stimulus program did not stimulate. You must recall President Obama admitting a year ago last June that shovel-ready projects “were not as shovel-ready as we expected.”

The Administration and Congress have left it to the Federal Reserve to do all the heavy lifting. A few days ago, Senator Chuck Schumer responded to Fed Chairman, Ben Bernanke: “Given the realities of this year’s election, I believe the Fed is the only game in town…So get to work, Mr. Chairman.” What audacity! Senator Schumer should take some of his own advice. He should go to work. The Federal Reserve has been the only game in town. For two years (2009-2010) the Democrats controlled both Houses of Congress, as well as the Presidency. They did nothing to help the economy. During the two years since, gridlock has dominated Washington. Again, nothing has been done to encourage economic growth. While doing nothing to stimulate economic activity, the Administration has increased entitlements and transfer payments. (In June, 80,000 Americans signed on to new jobs, but 85,000 Americans signed on for Social Security disability checks.) They have also maintained annual deficits in excess of a trillion dollars, while adding $5 trillion to our national debt.

What are needed are proactive, business friendly, results-oriented fiscal policies, of the type laid out by John Taylor in his new book, First Principles. He writes of the basic principles that historically have allowed growth – a predictable policy framework, rule of law, incentives that emanate from a reliance on markets, and a limited but purposeful role for government. Specifically, the tax code should be lowered, broadened and greatly simplified. Unfortunately, there are a number of Republicans and Democrats who do not want to see that happen. Accountants and lawyers thrive on the complexity of the code, as do large businesses and sophisticated traders who can take advantage of discrepancies in prices that develop. Tax rates, nevertheless, should be lowered across the board and most deductions eliminated. The benefits of tax deductions accrue primarily to the well-off, as pointed out by Paul Ryan in Friday’s Financial Times, which is why those like Warren Buffett and George Soros would rather have tax rates raised, but ‘don’t touch my deductions.’ Like “Brer Rabbit, they understand the attractiveness of the “Briar Patch.” Concomitantly, regulations should be simplified, so as to be easily understood, and, once implemented, they need to be enforced.

Granted, the economy’s growth over the two decades leading up to the credit crisis was driven, in part, by an increase in personal debt. Deleveraging is necessary and will, other things being equal, act as a brake on growth. It is the optimism of a Ronald Reagan that is missing from Mr. Obama’s discourse. This President views American history as a “series of collective accomplishments”, rather than the personal success of individual’s who took a chance on something in which they believed. “If you’ve got a business, you, you didn’t build that. Somebody else made that happen.” That statement by the President was revealing of his attitude toward free enterprise and individual achievement.

There have been times in the past when popular sentiment failed to anticipate growth yet to come. The historian, Frederick Jackson Turner (1861-1932), believed that the American economy was linked to the American frontier. He saw the end of the 19th century marking the end of western expansion and, therefore, saw that event as a retardant on future growth. He was wrong. While President Carter never used the word “malaise”, the term came to define his term in office. During the late 1970s winters, while wearing a sweater, he spoke to the American people of the necessity of keeping the thermostat turned down, instead of encouraging innovation and more drilling. Again, he was mistaken.

It is true that many inventions have originated inside government. War brings out the need to produce new weapons, medicines and other goods that allow an army to arm, feed and clothe itself. Atomic energy and concentrated frozen orange juice were both products of World War II. A decision by the government to counter the Soviet’s Sputnik in 1958 led to the creation of Defense Advanced Research Project Agency (DARPA) from which many modern inventions ensued, the best known of which (with apologies to Al Gore) was the internet.

But by far most of the comforts we take for granted, the items we use daily from the cars we drive, the food and drink we consume, to the tools we use in our respective trades and how we entertain ourselves are thanks to the creative genius of our fellow men and women and to those financiers who backed them. Economic growth can be ours again, but only if and when government steps aside.

Friday, July 20, 2012

“Small Bites – Title IX, Law of the Sea Treaty, No Moment of Silence”

Sydney M. Williams

Thought of the Day
“Small Bites – Title IX, Law of the Sea Treaty, No Moment of Silence”
July 20, 2012

With little fanfare, the Obama Administration last month took another step toward governmental omnipresence. The Department of Education declared that, following the November elections, Title IX would be applied to math, science and engineering classes for any educational institution that accepts federal funding. Fomenting even more bureaucracy, accurate logs would have to be kept as to the make up of each class. A failure to comply will be dealt with “severely.” While women may not make up the majority of classes in math, science and engineering, a larger percentage of women high school graduates (46%) go to college than do men (36%.) Women also dominate certain careers that require math and science, like tax examiners (74%) and veterinarians (61%.)

Title IX legislation was passed in 1972 and has been tinkered with many times since. It strove for “gender equity” in every educational program that receives federal funding. So one can argue that government is in their right to make any demand they choose, regardless of how needless or stupid their demand may be.

What make this change so idiotic is that it is no longer necessary. When I was in high school, more than half a century ago, rules of this sort were needed. Girls in public schools, beginning in Junior High School, had to take home economics, while boys were required to take “shop.” Home economics taught young women the basics of being a good homemaker. In shop we learned wood working and how to change a carburetor, things I have never done since. While being handy and being a good mother are important to know, it is easy to see why they were categorized as sexist. The world is different today.

When my youngest son was a senior at Bucknell he captained their varsity crew team. The college had 26 varsity sports programs. At the end of his senior year he won an award as the best rower in the school, and he won the Chris Mathewson Award given to the top five athletes in the senior class. Shortly after he graduated men’s rowing was forced to give up their varsity status because of Title IX. How different his college experience would have been without the opportunity to win those awards as a varsity athlete!

One problem with government programs is that bureaucrats are incapable of saying, “Mission Accomplished.” Affirmative action is a perfect example. We have an African-American President and Attorney General It has been 15 years since a white male served as Secretary of State. Since then, there have been two women and two African Americans. The Supreme Court represents most segments of society. The Congressional Black Caucus is comprised of 44 Members, or roughly 10% of the House and Senate membership, slightly below the 13.1% that African-Americans represent of the population. About 60% of all college graduates today are women. Why do we still find it necessary to have affirmative action as official government policy? Isn’t it time we moved on to a system based solely on meritocracy?

The tentacles of an insidious government creeping into our daily lives can have long-lasting and unintended consequences. In the case of Title IX, one can conceive of a college math class with room for twenty students. Fifteen men and five women apply. The class may be reduced to ten, so that men will not outnumber women. How dumb is that! Rules of this nature will increasingly drive those who can afford it away from public institutions toward private schools, thereby driving deeper the wedge that divides our societal fabric.


The President and Senate Democrats are determined to pass the United Nations Law of the Sea Treaty (LOST), something also favored by the US Chamber of Commerce and by environmentalists. Fortunately for all of us, Republicans are equally adamant about denying the passage. Defenders of the bill argue that the pact is key to maintaining peace and order in global hotspots like the Asian-Pacific region, while business groups claim it will help U.S. oil and gas companies explore and drill in deep water. While supporters like Senator Chuck Schumer and John Kerry speak of the benefits from an environmental perspective and its importance in helping poorer nations, guess who would be the principal financier? And guess who would have little say in how the money would be spent? According to the terms of the Treaty, in twelve years, 7% of U.S. government revenues collected from oil and gas companies operating off our shores would be provided to the International Seabed Authority to distribute as they see fit – to such liberal democratic nations as Sudan, Cuba, China and Zimbabwe. The amounts would be in the hundreds of billions of dollars. In determining how the money would be spent, the U.S. would have one vote out of 160.

Opponents also point out that the treaty does nothing to guarantee regional security and they fear an erosion of national sovereignty. They claim that ratification would effectively tie the hands of the U.S. Navy to conduct worldwide operations, because any mission would have to be reviewed and approved by the International Seabed Authority run out of Kingston, Jamaica.

Oceans and seas cover 70% of the earth’s surface. Over the decades and centuries to come, the seabed will become increasingly important as a source of raw materials, from oil and gas to rare metals. Ratifying the treaty will limit the options available to our grandchildren and their grandchildren. If we had a better experience with how the U.N. has handled funds we have provided over the decades, I might feel better about the U.S giving up control, but too many functions of the United Nations have everything to do with taking our money and little or nothing to do with encouraging freedom and human rights. Syria has been killing its people with impunity, in part because of the threat of a veto by China and Russia, in the Security Council, against any military or humanitarian retaliation. The inclusion of Venezuela and Iran on the Commission on Human Rights, for example, tells all one needs to know about the modus operandi of the UN. Subordinating our national sovereignty and interests to the authoritarian dictates of a world body would be akin to giving our executioner the bullets he needs to complete his job.


The London Olympics marks the fortieth anniversary of the Munich Olympics during which PLO terrorists murdered eleven Israeli athletes. There has never been an effort to memorialize the victims during an Olympic ceremony. This year, families of the victims attempted to persuade the International Olympic Committee (IOC) to honor the victims with a moment of silence – a gesture that seemingly would harm no one and should offend no one. Not so. The forty-six Arab and Muslim members of the IOC threatened to boycott the Olympics if such a moment of silence were observed.

The politically correct and cowardly governing body of the IOC acquiesced to the demands of the Muslims. Ankie Spitzer, widow of Andre Spitzer, a fencing master and coach of the 1972 Israeli Olympic team who was murdered that fateful September day, spearheaded the move to have a moment of silence observed at this summer’s Olympics in London. According to Mrs. Spitzer, Jacques Rogge, president of the IOC, told her when they met, that “his hands were tied.” She responded, “My husband’s hands were tied, not yours.” There will be no moment of silence.


Political correctness is undermining our values and culture, and not just “ours”, but those of all civilized societies. The consequences of ignoring them are unknowable. People cannot live in a vacuum of moral relativism. We learn new things; we visit far-off places; we meet new people, but there are universal truths about right and wrong that bind us as civilized people, and that keep us anchored to fundamental truths. We give them up at our peril.

Wednesday, July 18, 2012

“Four Years Later, the World is no Safer”

Sydney M. Williams
Thought of the Day
“Four Years Later, the World is no Safer”

July 18, 2012

President Obama recently claimed that his problem has been that while he got the policy right, he failed to tell the story well. He could not be more wrong. He is a wonderful story teller, but his policies have further divided an already divided nation, he has nudged people toward greater dependency and has created uncertainty in the economy. His foreign policies have produced an increasingly dangerous world. Overseas, our enemies see us as weakened.

Mr. Obama talks all the time. If one adds up the speeches he has given (over 900) and the golf games he has played (over 100), one can account for almost 80% of his time in office. He is also not shy to mention himself. On July 5, 2012, in a speech in Sandusky, Ohio, he used the first-person pronouns “I” and “me” 117 times in a 25 minute speech – once every 13.09 seconds. Following the killing of Osama bin Laden, the same old habit was repeated – “I directed…”, “I determined…”, “…at my direction…”, “I’ve made clear…”, “I’ve repeatedly made clear…” His comments can be contrasted with those of President Bush following the capture of Saddam Hussein: “United States military forces captured…”, “He was found…in a swift raid conducted without casualties.” For Mr. Obama to claim that he didn’t get his story out is impossible to believe. Now, unable to talk of the accomplishments of his Administration, he has chosen to follow his mentor Saul Alinsky’s “Rules for Radicals” – “pick the target, freeze it, personalize it, and polarize it.” The target is Governor Romney, and the President has been relentlessly ruthless. Mr. Romney, raised in a culture with rules of civility, finds it difficult to respond in kind.

Killing Osama bin Laden was definitely a high point in Mr. Obama’s Presidency. It was a very positive development, but in no way marked the end of the terrorist threat. North Korea, Iran, Syria and Venezuela are all countries run by terrorists. One has nuclear weapons; a second is well on its way to getting them; Syria tried, but ran into Israelis who disapproved. Venezuela is the second largest producer of uranium in the world, and is closely allied with Iran and the others. The President and his administration have been unable to enlist Russia and China to dissuade Bashar al-Assad from murdering his own people. A “pragmatic” approach to China has done nothing vis-à-vis Syria, Iran, or to moderate (or counter) China’s expansion into the South China Sea. The “re-set” with Russia has yielded nothing in terms of benefits to Americans or to the safety of Europeans in terms of a missile defense shield.

Early in his Presidency, Mr. Obama gave a speech in Cairo in which he promised a new vision and in which he essentially apologized for his predecessor. It was a promise to improve relations with the Muslim community. Granted, Libya seems to have elected a moderate, pro-Western government, but Tunisia and Morocco have elected Islamist governments. In Egypt, the Muslim Brotherhood, along with even more radical Islamists control 70% of the parliament. The Arab Spring, as Charles Krauthammer writes, is a misnomer, “This is an Islamist ascendance likely to dominate Arab politics for a generation.” Turkey, under Prime Minister Recep Erdoğan, has become increasingly authoritarian.

When we have bowed to international pressure, as President Obama has done in Iran and Syria, disaster has been the result. 15,000 Syrians are dead because of President Assad’s desire to remain in office. No humanitarian “safe zones” have been established on the Syria-Turkish border. No arms have been provided the rebels. We have done nothing to establish a no-fly zone over Syria. Iran is well on its way to developing nuclear capability, because of a refusal to take unilateral action earlier by both President Bush and President Obama. Perhaps no harm will come with Iran’s accession to nuclear weapons, but the risk of proliferation in one of the world’s least stable regions is one hell of a bet.

Can the President argue that relations in the western hemisphere have improved since he took office? Mexican drug lords hold sway south of our border. Illegal immigration has slowed, but credit for that falls on the states and the economy. Jobs aren’t as plentiful here as they had been. Columbia has restored relations with Venezuela, run by a dictator and outspoken enemy of the United States, a man whom Mr. Obama warmly greeted soon after taking office in 2009.

During the 225 years of our republic, there has been no closer ally of the United States than England. The relationship has been tempered by war, twice against them, but more often with them. We share a common language. Our legal system is based on theirs. Their political philosophy and constitutions helped shape ours. Regardless of that “special relationship”, less than a month from assuming office, President Obama upset British diplomats by returning to England a bust of Winston Churchill, loaned to President Bush following the attacks on 9/11.

Russia and China are rising, as we decline. Putin seems determined to restore at least the influence of the old Soviet Union. If he is successful he places in jeopardy millions of East Europeans who placed their lives and fortunes on the line twenty years ago. China has been flexing her muscles in the South China Sea, a trade route imperative to America’s commercial interests, and now has built her first aircraft carrier. In both countries, it is the rule of men, rather than the rule of laws, that governs behavior. “Pivoting to the Pacific” has yielded no benefits. As Michael Ignatieff, writing in a Reuters piece on July 12, put it: “History is not necessarily on the side of these liberal values, but fighting for them remains a moral duty.”

In 1980, Ronald Reagan asked the rhetorical question, “Are you better off today than four years ago?” Last November, President Obama was asked the same question. His response was quite different and reflected more ego than facts: “We are better off than we would have been if I had not taken office.” Perhaps. The question is unanswerable, but Mr. Obama’s response reeks of pomposity. In mid 2008, the country was in recession and was entering a credit crisis. Before George Bush left office, the credit crisis was essentially resolved. The TED spread had shrunk more than 200 basis points and the bond market had begun to rally. Today unemployment remains above 8% and the labor force participation rate at 63.6% is the lowest since 1981. The same question can be asked today as to whether we are safer than four years ago. I don’t think so.

In the campaign speech where he made the fantastic suggestion that people owed their success to government, rather than to their own creativity, their willingness to bet on the future, and their hard work, he made the incredible and perhaps Freudian comment: “We rise and fall together as one nation and as one people, and that’s the reason I’m running for president.” Running for President? He is the President. Is he so intent on distancing himself from his failed policies that he wants to run as the contender? The 19th Century Russian writer, Alexander Herzen, wrote that “history has no libretto.” It follows no predetermined or predestined path. But it is greatly influenced by our nation’s leaders. And we need a leader who will help other nations evolve toward a liberal democratic order. Our safety depends on it. Mr. Obama has not been that man.

Tuesday, July 17, 2012

“Preservation of Income”

Sydney M. Williams

Thought of the Day
“Preservation of Income”
July 17, 2012

Milton Friedman once famously asserted that “inflation is always and everywhere a monetary phenomenon.” While inflation has been notably low in the past few years, unsurprisingly given weak economic numbers both at home and abroad, one cannot reasonably expect that condition to continue forever. The real test for both Federal Reserve Chairman Bernanke and the Treasury Secretary will come when the Treasury will have to reduce issuance to a more normal percentage of GDP and the Fed begins to shrink its balance sheet. Thus far, betting on a return to normalcy in the Treasury market has been a mug’s game. Over the past two years, Treasury Bonds have outperformed both gold and stocks. In the past three and a half months, the Thirty-Year Treasury is up almost 10%, while stocks and gold are lower. But the rubber band has become very taut.

Last year, Treasury issuance was about 8.6% of GDP, more than double the level before the crisis. Of that issuance, the Federal Reserve purchased 61%, compared to a “negligible” amount prior to 2008, according to an article in the Wall Street Journal on March 28 of this year, in which former Treasury official Lawrence Goodman was quoted. U.S. individuals and foreign buyers have decidedly reduced their purchases to roughly 10.5% and 22% respectively.

The consequences are two fold: First, at some point, the Treasury will have to reduce issuance, as a percent of GDP, and the Fed will have to unwind their balance sheet – a euphemism for selling Treasuries. And, second, at some point there must be acknowledgement that rates on U.S. Treasuries are so low that they have been repelling rather than attracting individuals and foreign buyers, a fact confirmed by recent auctions. Current yields, in other words, do not merit the risk. (The risk being one of inflation, of course, as opposed to default.) Will the Fed be able to unwind their purchases without causing interest rates to skyrocket, and will Congress be able to reduce the deficit to ease pressure on Treasury? No one knows, but the latter seems unlikely and the former only a possibility. Also, everyone knows that our monetary base has been expanding, and they know of Mr. Friedman’s assertion about inflation.

For investors, the consequences of these actions present a Hobson’s choice: Either accept a return that is less than the rate of inflation today (and possibly significantly below what it is likely to be) or look for income and return somewhere else. Typically, when fear strikes markets, the initial response is to focus on return of capital, as opposed to return on capital. But when the only secure investment (U.S. Treasuries) pays a return less than the inflation rate, we are looking at returns of capital in a depreciating currency – not a pleasant or attractive alternative.

Perhaps it is my age, but it seems to me, in the current environment, that preservation of income is as important as preservation of capital. It used to be that capital could be preserved while still earning at least a nominal return at or above the rate of inflation. But, as stated above, that is no longer possible. Interest rates are so low on Treasuries that even a whiff of inflation will send prices falling. The Three-Month Treasury Bill provides protection against inflation, but a million dollars provides a mere $250 each quarter, barely enough to refill the liquor cabinet. Safety has become too expensive, unless one expects we are entering a period of prolonged deflation.

Since the early 1950s when the yield on stocks was regularly higher than that of corporate bonds – to compensate for owning assets perceived as riskier than their more senior cousins – stocks have generally yielded less, as they, unlike bonds, have the potential to increase their payouts.

Stock markets have sold off sharply on occasion since the 1950s, but in the early 1980s, while multiples got into the single digits, inflation kept bond yields high. In 2008-2009 many financial stocks had their dividends cut and corporate bonds got beat up as well. The current environment seems quite different. Bond funds have been the beneficiaries of money flows, and low inflation numbers have kept corporate bond yields positive. However, while rising bond prices are producing lower yields, many companies have been increasing their payouts, resulting in higher dividend yields. Regardless of the relative attractiveness, the trend toward bonds and away from stocks could persist. In fact, corporate bond mutual funds continue to see inflows – $121 billion so far in 2012 – while U.S. stock funds have seen $15 billion in withdrawals this year, $7.7 billion in June alone. When will the trend reverse? No one knows, but it will.

The concept of buying dividend-paying stocks is not new. In fact, some would suggest the field is overcrowded. Perhaps it is, but the bull market in Treasuries, which seems to be getting very long in the tooth, has propelled corporate bonds as well; so that the yield on investment grade Corporates is now 3.53% according to FINRA-Bloomberg. Their riskier cousins, according to the same data, are yielding 7.39%. Barclay’s index of corporate bonds hit 3.16% a week ago, the lowest level ever recorded. The rally in corporate bonds has been impressive over the past three and a half years; yields on both investment grade and high yield bonds are less than a third of what they were in late 2008.

Preserving capital should always be foremost in any investor’s mind, but the specter of inflation makes the choice more difficult, and makes the concept of preserving income more attractive. Along the spectrum of volatility, stocks rank high, as their price is a function of hard numbers like earnings and dividends, multiplied by people’s expectations, which are driven by emotion and behavior, a factor known as a multiple. Earnings are volatile, but tend to be less so than stock prices, and dividends are less volatile than earnings. Bonds, generally less volatile than stocks, are subject to both credit concerns and changes in interest rates. Credit concerns remain subject to analysis, but interest rates have moved in one direction – lower – over the past thirty years. Currently, Treasury rates have been kept artificially low as a function of deliberate Federal Reserve policy. When will that end? No one knows, or if they do, they are not telling. Given the potential of a surprise in inflation, the traditional means of protecting principal may not prove as reliable as they have in the recent past.

The biggest hurdle that dividends must overcome is the financial cliff we are facing on January 1, 2013, when the tax rate on dividends is scheduled to rise from 15% to 43.4% for those in the highest income tax brackets. For those in lower tax brackets, dividends will be taxed as ordinary income, plus a 3.8% surcharge to help pay for the Affordable Care Act. No matter one’s tax bracket, taxes on dividends are scheduled to rise significantly, barring some action in Congress. Nothing is certain in the uncertain world of investing, but it wouldn’t be surprising if some companies declared special dividends at the end of this year, before tax rates go up.

Trying to predict Congressional action is another mug’s game. Nevertheless, preserving income looks to be a sensible strategy at a time of extraordinary low Treasury yields.

Monday, July 16, 2012

“The LIBOR Scandal and Regulators Who Knew”

Sydney M. Williams

Thought of the Day
“The LIBOR Scandal and Regulators Who Knew”
July 16, 2012

The headline in Saturday’s New York Times said it all: “New York Fed Knew of False Barclay’s Reports on Rates.” The article quotes a Barclay’s employee telling a New York Federal Reserve official in April 2008 that “we know we’re not posting, um, an honest rate.” Thus far, Barclay’s is the only bank of the nineteen that daily set LIBOR to admit their wrong doing. Three American banks – Bank of America, JP Morgan and Citigroup – are among those who daily submit quotes. Its importance of LIBOR is that, according to Republican Congressman Randy Neugebauer, chairman of the House Financial Services Subcommittee, about $800 trillion in financial products are pegged to its rate.

On a per loan basis the difference of a few basis points is so small as to be negligible, but bank’s proprietary derivative trading is done with enormous leverage, and therein lies the problem. These desks borrow capital all the time, in the market or from themselves, and then leverage it up multiple times. One analysis that I read suggested that manipulated LIBOR rates could have resulted in excess annual compensation for derivative traders, on a per bank basis, of $290 million to $360 million, or an average of $2.9 million to $3.6 million per trader over the same four years.

Certainly, bankers who are deemed guilty of falsifying rate estimates, especially when linked to derivative trades, should be prosecuted, but so should regulators who knew what was going on and did nothing. An editorial, in the same issue of the New York Times, “What They Knew or Should Have Known,” points out that the settlement last month between Barclays and the Department of Justice noted that rates “were too low” and did not reflect the market. They also make clear that when regulators were told of the situation, in early 2008, they did nothing to stop the false reporting. They conclude, somewhat irrationally, by implying that Treasury Secretary Timothy Geithner (then President of the New York Fed) deserves a pass – that he had passed this information on to British authorities who did nothing. Certainly the British Bankers Association and Britain’s Financial Services Authority (FSA) bear the bulk of the responsibility. Nevertheless, three of the banks involved in setting LIBOR fell under Mr. Geithner’s purview. Regulators are supposed to regulate; they need to be held responsible when malfeasance is afoot.

(As an aside, last week watching Parliament’s Treasury Select Committee interview Barclay’s outgoing Chairman, Marcus Agius, I had the distinct impression that Mr. Agius and Members of Parliament were throwing Barclay’s American CEO Robert Diamond under the bus. Mr. Diamond has already resigned and has foregone, or had clawed back, £20,000 in compensation. It is also difficult to believe that Barclay’s was alone among the nineteen banks to fiddle with their LIBOR quotes. On the other hand and in contrast to the U.S., Parliament is scrutinizing the Financial Services Authority, their equivalent of our SEC.)

A similar situation existed when the SEC and the CFTC, which had repeatedly been made aware of suspicious trading at Bernie Madoff’s firm, MF Global and scores of others. Regulators have routinely failed to enforce existing rules. Neglect and/or ineptitude appear to be the culprits in the case of the SEC and the CFTC, though one should not rule out the possibility they were accessories. Our financial system is based on credit and credit relies on trust. When trust disappears, so does credit and when that happens business grinds to a halt. Madoff stole money by falsifying records for years, deceiving those who had entrusted him with their funds. MF Global apparently merged customer and house accounts, which is also known as stealing. Despite warnings, neither firm’s misdeeds were caught until it was too late. There is little doubt in my mind that Corzine should go to jail, but so should the regulators who failed the public with their ineptitude, or worse.

But the problem goes far beyond greedy bankers, and ignorant and/or complicit regulators. Congress made deliberate policy decisions to encourage risky behavior, not only on the part of consumers, but on the part of the government sponsored enterprises (GSEs) for which they had oversight, especially Fannie Mae and Freddie Mac – businesses that developed symbiotic relationships with those politicians charged with their oversight. House Financial Committee Chairman, Barney Frank and Senate Banking Committee Chairman, Chris Dodd are as responsible as anyone for the credit collapse that nearly brought down our financial system. While President George Bush gets most of the blame for the crisis, the fact of the matter is that he tried on numerous occasions to rein in the activity of these run-away GSEs, notably in his first budget in 2001 and as part of a comprehensive GSE reform in 2005, pushed by Republican Senator Richard Shelby, but which failed under a filibuster threat from Senator Dodd. Bush’s reform package was finally passed in 2008, but that was after the two entities had failed. Mr. Frank and Mr. Dodd both chose, wisely, to vacate the scene, but both should be indicted for the harm they did.

The response by Congress and regulators is never to look in the mirror for cause; it is to write new regulations, essentially red herrings, to divert attention from their own cronyism. In the weekend edition of the Wall Street Journal, former Secretary of State George Schultz spoke of Congress’ habit of passing bills thousands of pages long, bills that they have never read, so literally never know what they contain. The response of too many in Congress, to actions they have helped promote, is to promulgate a culture that fails to take personal responsibility for any unintended (or even intended) consequences of those actions. People, right or wrong, do take direction from their leaders. Too many of ours have failed us. Honor, duty, high moral standards remain only gossamer threads of a bygone era.

A failure to take responsibility for one’s actions causes a blurring of the distinction between honest misjudgments on the one hand and deliberate malfeasances on the other. Most people play by the rules. But they need to know two things – what are the rules, expressed as simply as possible, and they must know that rules will be enforced, so that violators will be outed. When the SEC, CFTC and Congress look the other way, for favored constituents, it encourages misbehavior.

Congress has spent hundreds of thousands, if not millions, of man hours producing two new laws filled with thousands of new regulations, yet the regulatory bodies that exist have abysmally failed their responsibilities – not because they did not have teeth, they did, but because regulators chose to look the other way.

Most of the press’s ink spent on recent scandals has focused on greedy, immoral and vacuous bankers. There is little doubt that many of the accused are likely guilty, yet too many go free. Political connections have fostered an unusual level of cronyism. But the press should not overlook the fact that regulators did not regulate, nor should they leave untouched those in Congress and the executive branch who encouraged reckless behavior, on the part of consumers and the GSEs. A restoration of confidence is needed before markets will be able to function normally. At present, there is too much distrust between Wall and Main Streets. Vilifying one while praising the other only deepens the chasm and exacerbates the divide. Placing blame where it lies is the only answer.

This is not rocket science; it’s common sense. The rules are simple. In a partnership, the partners have their capital at risk. In a public company, management has a fiduciary responsibility to the shareholders that own the company. And public employees, no matter where they work in government, have a responsibility to taxpayers to treat their money with respect and care. Before writing new regulation, check out the regulators and check out their Congressional sponsors.