Friday, August 30, 2013

"The President and his Higher-Ed Plan"

Sydney M. Williams

                                                              Thought of the Day
                                               “The President and his Higher-Ed Plan”
August 30, 2013

In the real world, demand affects cost – the higher the price, the fewer the takers. In Mr. Obama’s Washington, there is the belief that government policies – not markets – can better influence price, at least as far as consumers (read: voters) are concerned. In introducing his higher-ed plan last week, Mr. Obama acknowledged – at least in part – the truth of the Bennett Hypothesis : that decades of government subsidies have had the consequence of pushing college costs higher. “It is time,” Mr. Obama said, “to stop subsidizing schools that are not producing good results, and reward schools that deliver for American students and our future.” High-minded words, but, like most things the devil is in the details. The President’s political philosophy sees government as an instrument for good and that spending on public services is essential for middle class prosperity. In other words, he doesn’t want to reduce subsidies, he wants to use the dollars to incentivize better performing schools.

The President’s plan, as outlined over a recent tour of colleges and universities – what Ohio State’s Richard Vedder calls these “isolated enclaves of nonreality,” – is composed of four parts. At the heart of the plan would be a government-run college ranking system. Second, would be a “race to the top,” pitting states against one another. Third, student loans would become eligible for income-based repayment schedules, including forgiveness, after a specified period of time. Four, the plan calls for greater use of MOOCs and other technologies, but leaves in place a regulatory apparatus that gives accrediting agencies a central role.

The problem Mr. Obama inherited has its roots in the Higher Education Act of 1965, which created federal scholarships and low-interest loans. By 1981, annual spending on student loans amounted to $7 billion. Today, we are spending $105 billion a year, with over a trillion dollars in student loans outstanding. Over the same time, grants, such as Pell Grants, have risen from $6.9 billion to $49 billion. The amount of dollars involved and the annual increases suggest a potential, on-coming train wreck. The questions are: Does the President’s proposal address the root cause? Will his plan do anything to make college more affordable? Will its consequences turn out to be perverse, for example discriminating against the very students he is trying to help? Does it consider the question Richard Vedder posed in last weekend’s Wall Street Journal: When only 20% of jobs require college degrees, why are 30% of the college-age population getting degrees?

Let’s look at the four parts of the President’s plan. At its heart is the ranking of colleges, which will require a new government bureaucracy to measure a number of factors: What exactly do fees and tuition cover? How many low income students does a school admit? What are the graduation rates? How much debt is outstanding among the student body and how concentrated is it? What are the transfer statistics? What kind of jobs do graduates find and how much do the pay? In all, it is, as one organization puts it, a “datapalooza.” The answers to these questions raise more questions. For example should starting salaries be considered, or earnings five or ten years out? As Daniel Henninger noted in yesterday’s Wall Street Journal: “Will professors at participating ObamaEd universities become subject to the same cost-containment rules that, say, Medicare imposes on doctors?” Creating another bureaucracy will cost taxpayers.

There are already a number of private ranking systems, such as U.S. World & News Report. They may have flaws, but collectively they are reasonably effective. As in all other aspects of life, markets work, and they work best when government interference and regulation is as minimal as reasonably possible.

A plan to pit states against one another would appear redundant, in an already competitive environment. There are about 4200 private and public colleges and universities, about 3000 of which are four-year colleges. Competition exists. It is hard to imagine that government could improve on the situation. State universities rely on out-of-state students to keep tuitions as low as possible for in-state students. Thus, they aggressively pursue out-of-state students. The only place where colleges have not had to compete has been on price, and that is because of the oversized role played by government. Government would best temper rising tuitions by reducing their support of low-cost loans. University administrators have not had to concern themselves with the price of their product because they know the funds are available at a very low cost to their client-base. Personally, I have less objection to grants, like Pell Grants, as long as they are awarded on meritocracy. The best students, regardless of where they come, are the ones we should all be encouraging, if we want our country to compete effectively in a global environment.

Mr. Obama’s third point – tying repayment schedules (and ease of default) to the type of job one takes could have serious consequences, not all intended. It implicitly assumes that either a government job or work for a non-taxable foundation has more merit than working in the private sector. Why? Public sector jobs pay more than private sector ones and have greater benefits and security. In terms of eleemosynary institutions, questions would be raised as to whether a 501(c)(4) institution is eligible, especially if they support conservative values. Would we trust the IRS to make those decisions? Keep in mind, private sector jobs pay for both public sector jobs as well as those in the tax-free world. They are the engines that run our economy. Second, the taxpayer is already the lender, and this plan will lower the interest he receives and increases the likelihood that the principal will not be repaid. Mr. Obama feels free to promise more spending on the part of taxpayers, because those actually paying federal income tax now represent a minority of the electorate. Alexis de Tocqueville once presciently said: “The American Republic will endure until the day Congress discovers it can bribe the public with the public’s money.” We are there.

MOOCs and their like have been (and will be) the private sector’s response to rising tuition costs. It is a subject I discussed last May 23rd (“MOOCs – Are They Worth It?) My personal conclusion is that they are, but they are not without challenges and consequences. For example, MOOCs could standardize education in a fashion that might be unhealthy for a diversified student body and country. They risk making on-campus studying even more elitist and raise the possibility that smaller, less-endowed colleges may simply disappear. Other than accreditation, government should have no role in MOOCs. Joseph Schumpeter’s principal of creative destruction works in education, as well as in industry. Keep in mind, the key word in Mr. Schumpeter’s adage is the adjective, creative.

The U.S. has the finest higher education system in the world. That is largely because it is mostly private and, in any case, competitive, at least in terms of attracting the best and the brightest. However, since passage of the Higher Education Act of 1965, one major aspect in the business of managing colleges and universities has provided them monopolistic-like powers, and that is that government (through loans) provides tuition, at a nominal charge, to all students who want or need it. Colleges and universities compete for students, but do not have to worry about revenues.

In a sense, the Higher Education Act of 1965, like so many well-intentioned government programs, was a Faustian Bargain. The promise of college and higher incomes were dangled before the credulous eyes of millions of young people. But its promise, in too many cases, has proved to be nothing more than a “castle in the sky.” Reality has meant debt and too few jobs for many of our youth. College is not a right; it is an opportunity. It is true that college graduates, on average, make more money than those with only high school diplomas. However, in terms of incomes there will always be inequality. An obvious example, though unrelated to a discussion on colleges, is major league baseball. In 2007, Alex Rodriguez signed a ten-year contract for $275 million, ten times the average major league baseball player’s salary for that year – 500 times the average household income. In contrast, a single ‘A’ ball player makes about $10,500 a year – one fifth the average household income. The same is true in all endeavors. People are paid based on real or perceived added value. In a business with 200,000 employees, there is only one CEO. In a nation of 320 million people, there is only one President. It cannot be otherwise. People must find the work that suits their training, abilities, temperament and desire.

In all endeavors, one should never underestimate the importance of aspiration, a characteristic not taught in college. In his book, Why Coolidge Matters, Charles C. Johnson quotes the former President: “Nothing in the world can take the place of persistence. Talent will not; nothing is more common that unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is filled with educated derelicts. Persistence and determination alone are omnipotent.” This is not meant to underestimate the importance of education, but only that the subject must be considered in the broader context of our interests, abilities and desires. Government cannot help with those decisions, only we can.

We all have certain inalienable rights as citizens of the United States, but that does not include the “right” to go to college. Nor does it mean we are or ever will be equal in ability or aspiration. We cannot be. Over two million people graduate from American universities every year. More than 80% go directly into the workforce – more people than there is supply of jobs requiring a college education. There is a problem, but the President’s Higher-Ed Plan does not address it.

Our success as a nation has been based on a belief in the individual. It is an understanding that property rights are respected and honored and that the rule of law be enforced. The Declaration of Independence assured us of cardinal moral truths: that we are created equal and endowed with certain inalienable rights, life, liberty and the pursuit of happiness. These rights are not granted by government, but by our maker. Governments are instituted to secure those rights, with power derived from the consent of the governed.

The President, I am sure, is well-intentioned, but furthering a movement toward dependency on government, as his plans for higher education would do – think “The Life of Julia” – will only serve to increase dependency and reduce responsibility. It risks harming most those whom he claims to support. Rising costs may create an elite not dissimilar to what we experienced in the first half of the 20th Century. We should be moving forward, not backwards.

Wednesday, August 28, 2013

“An Unfinished Dream”

Sydney M. Williams

                                                              Thought of the Day
                                                           “An Unfinished Dream”
August 28, 2013

August 28, 1963 was a seminal moment in the lives of those of my generation. That was the day the March on Washington for Jobs and Freedom took place and Martin Luther King Jr gave his iconic “I Have a Dream” speech. It was an event, interestingly, that almost didn’t happen. Neither the Urban League nor the N.A.A.C.P. were willing to provide support. President Kennedy, according to David Brooks in yesterday’s New York Times, argued that the march would hurt chances of passing Civil Rights legislation.

But march they did and speak he did. The Reverend King spoke in front of the Lincoln Memorial, before 250,000 people on a late summer day with the humidity comfortably low. Re-reading the speech a few days ago, one is swept up with the beauty and force of his words. Some of his word choices indicate the passage of time, but his message resonates today, just as it did fifty years ago. That he was a man of God is obvious in his choice of metaphors – “…the manacles of segregation and the chains of discrimination.” “Let us not wallow in the valley of despair.” His words sang with his dreams, with eight paragraphs beginning, “I have a dream.” It was a powerful speech whose words have grown even more compelling over the years.

What followed was a series of civil rights’ legislation. The following August, President Johnson signed the Civil Rights Act of 1964 which gave Federal authorities the right to enforce integration. The following July, the Voting Rights Act of 1965 was signed. Interestingly, according to Thomas Sowell, a higher percentage of Congressional Republicans than Democrats voted for both Acts.

Four years and eight months after the “I Have a Dream” speech, Martin Luther King Jr. was dead at the age of thirty-nine, shot by James Earl Ray, while on the balcony of his room at the Lorraine Motel in Memphis, Tennessee. One week later, on April 11, 1968, President Lyndon Johnson signed the Civil Rights Act of 1968, prohibiting discrimination in the sale, rental and financing of housing.

It was ironic that the Reverend King, who had been an advocate of peaceful resistance, should die in such a violent manner. For in that same speech on the Washington Mall, he had said, “In the process of gaining our rightful place, we must not be guilty of wrongful deeds…We must forever conduct our struggle on the high plane of dignity and discipline…we must rise to the majestic heights of meeting physical force with soul force.” Sadly, that was not to be. For a segment of the population so long deprived of their rights that are embedded in our Constitution, it was too much to expect that change would, or even could, come peacefully.

Nonetheless, there has been progress over the past five decades, which would have pleased Mr. King. “Whites only” signs outside restaurants, motels and hotels no longer exist. Voting is a right that all citizens, regardless of color, enjoy; though spurious questions have arisen recently regarding voter ID cards. Barack Obama sits in the White House. Eric Holder serves as Attorney General. President George W. Bush was served by two African-American Secretaries of State – Colin Powell and Condoleezza Rice. Four years after the March on Washington, President Johnson appointed Thurgood Marshall to the Supreme Court. Today, Clarence Thomas, appointed by George H.W. Bush, sits in the seat formally held by Justice Marshall. Forty-four African-Americans serve in Congress today, compared to just five, fifty years ago. These people, and thousands of others, Republicans and Democrats, owe their success to the bravery and dedication of Martin Luther King Jr. and his followers. While most African-Americans align themselves with the Democrat party, they are an independent group who should not be taken for granted by any Party. Articulate spokesmen, like Thomas Sowell, Alan West, Wayne Dupree, Crystal Wright, Shelby Steele, Star Parker and Walter Williams promote conservative values.

All is not perfect. Affirmative action has helped millions of Black youth attend colleges and universities and has generally been positive. While the population of African-Americans in the U.S. has doubled since 1963, the numbers with bachelor degrees has grown fourteen-fold. But Affirmative Action has also had the result of placing some youths in courses for which they are not prepared – a controversial theory advanced in Richard Sander and Stuart Taylor Jr’s book, Mismatch. Affirmative Action can create and/or raise expectations. It can also cause a sense of personal inadequacy – that admission was due more to color rather than ability. An unintended consequence has been de facto segregation (this time self-imposed), with dorms designated solely for Blacks. According to a recent article in the Los Angeles Times, the University of California at Berkley has “Black” dorms and, like most universities, “African American Theme Programs.” In a meritocratic world, such living conditions and academic majors are, frankly, unfair to African-American students who graduate into a multi-racial, but largely white, world.

Politically correct universities do the same with women, offering majors in “women’s studies.” Instead of color or gender-blind universities, these policies propagate segregation. A study by Russell H. Fazio, an Ohio State professor of psychology, which was referenced in the New York Times four years ago, looked at interracial roommates at Ohio State and Indiana University. The data found that “black freshman who came to college with high standardized test scores got better grades if they had a white roommate – even if the roommate’s test scores were low.” Perhaps, the study speculated, “having a white roommate helps academically prepared black students adjust to a predominantly white university.” One might draw the inference that it might also better prepare them for a work environment that is also dominated by whites. Segregation, no matter the reason, is unhealthy. We are all better off when removed from our comfort zones. Yet we stay in them.

While we think of the Reverend King’s march on Washington as being principally to provide equal access to the nation’s lunch counters, schools and housing, the title of the march mentioned “jobs” before “freedom.” According to an article that appeared in the weekend edition of the Wall Street Journal, 42% of Blacks lived in poverty in 1966; in 2011, 28% did. Nonetheless, unemployment among African-Americans today is twice that of White Americans. While incomes have improved, they still lag that of their White brethren. Additionally, African-Americans are far more likely to be incarcerated than any other racial segment. Most important, they suffer unfairly in terms of education, in that they dominate inner city schools – especially those with the worst academic and highest arrest records. Cancelling the Washington D.C. voucher program in 2009 saw an African-American President throw a kiss to the National Education Association (NEA) and a slap at the 8000 (mostly African-American) students who had entered lotteries that would have allowed 2000 students to receive grants of $7,500 each to attend a private or parochial school. Late last week the Department of Justice sued to block 34 school districts in Louisiana from handing out private-school vouchers, which would have allowed poor, minority children to escape failing public schools. Why would an African-American Attorney General encourage such actions that hurt the very people he claims to support? The only logical explanation is union opposition. Mr. King would he disappointed.

A cultural change has been coursing through our society affecting all of us. The Reverend King would despair to hear the lyrics in songs sung by rappers, like Snoop Dogg and Jay-Z that contain language which is obscene and a message that is explosive. In his speech, Martin Luther King spoke of peaceful protest, and said that he had a dream “that my four little children will one day live in nation where they will not be judged by the color of their skin, but by the content of their character.” That line, in my opinion, was the keystone of his speech. We must ask: would he be happy with the character of those rappers, or with the character of the three teens who murdered an Australian exchange student in Duncan, Oklahoma because they were “bored.” What would he say to the two young men who beat to death an 88-year old World War II veteran in Spokane? In both cases, which occurred within days of one-another last week, the murders were committed by teens – themselves victims of a disturbing trend toward unwed motherhood and single parent homes. And the list goes on.

As an example of the crassness that underlies today’s culture and media, and the election of those like Bob Filner and Eliot Spitzer. The Associated Press each day publishes “10 things to know today.” On Monday, the list included “Miley Cyrus grabs the limelight.” This was in reference to her performance at the MTV Video Music Awards where her provocative song, “We Can’t Stop,” was performed while wearing a “nude” bikini and carrying an over-sized foam finger. Not on that list was the awarding of the Medal of Honor to Staff Sergeant Ty Carter for his heroics in Afghanistan. Another example would be the newly released movie; “The Butler,” directed by Lee Daniels. It tells the story of Cecil Gaines who served seven Presidents as White House butler over thirty-four years. However, Mr. Daniels decided that the real history of Mr. Gaines and his tenure was too tame. It did not have enough prejudice, hate and intimidation; so he made it up. As an artist, such is his right, but as a truth-teller he let down his audience and has provided them with a distorted view of Mr. Gaines’ family and President and Mrs. Reagan.

We cannot commemorate the “I Have a Dream” speech without reflecting on the dreams that remain unrealized. It is the breakdown of families, the failure of urban schools and a moral decay that has permeated our culture that are the Civil Rights challenges for the future. Pressuring government for redress, which seemed to be at the center of last weekend’s march led by Reverend Al Sharpton, neither addresses the problem nor provides a solution. Government must share in the responsibility that some of their policies and ideologies have led to the break-up of families, especially Black families. In 1965, Daniel Patrick Moynihan warned that a “tangle of pathologies” among Black families would hinder their progress. Much of what he predicted has come to pass. Nearly three quarters of Black births are to unwed mothers, versus a quarter in the early 1960s. More than half of Black children live in homes without their biological father. The percentage of Black women, over the age of 18, who are married and living with their husbands is half of what it was in 1963.

Much has been accomplished in the past five decades and for that all Americans owe thanks to Martin Luther King. His words were forged in the same furnace as were President Kennedy’s when he said, “Ask not what your country can do for you; ask what you can do for your country.” According to Courtland Milloy, columnist for the Washington Post, the biggest applause last weekend was received by the Reverend Jamal-Harrison Bryant, pastor of the Empowerment Temple A.M.E. Church in Baltimore when he called out, “We want reparations.” The contrast between his angry cry for more and the magic of Martin Luther King Jr’s dissent against injustice could not be starker.

Monday, August 26, 2013

Threats

Sydney M. Williams

                                                               Thought of the Day
                                                                      “Threats”
August 26, 2013

Armed insurrection, as Egypt is experiencing, is unlikely in America. But there are threats to democracy, many of which are more subtle. As much as anything, the founding fathers feared that too much power might accrue to any one individual or segment of society. They had, as an example, Britain. While the idea of Parliament imposing taxes without representation became a catalyst for revolution, the founders were well aware that, at the same time, England was the most liberal nation in the world. It was a country which upheld property rights and where the rule of law prevailed. Yet, even after the Glorious Revolution of 1688, which strengthened Parliament’s role, they had seen King George III attempt to seize power back from Parliament. To counter the threat of power becoming embedded within one person or one group, the founding fathers composed a government intricate in its complexities, while simple in its fundamental precepts, and deliberately contentious in its function, yet designed for collegiality.

Power is divided between states and federal governments. Each is further divided between three branches – executive, judicial and legislative. And the legislature consists of lower and upper houses – the first, directly representatives of the people; the second (at the federal level) to be [originally] elected by states’ legislatures. Other safeguards included electoral terms that were staggered, to life-time appointments for members of the Supreme Court. The purposes were to provide a democratic republic, while ensuring continuity of society, and, significantly, to make it difficult for one person or one group to amass too much power. It was based on the concept of property rights and that government would always be one of laws, not men.

Certainly external threats, such as Islamic extremists in the form of al Qaeda or the Muslim Brotherhood, are real concerns. After all, protecting its people is the greatest responsibility of any government. With the exception of Israel and possibly Jordan, Saudi Arabia and Dubai, the entire Middle East has descended into a new dark age. Such is the consequence of radical Islamism, with the Muslim Brotherhood as its bullhorn. Further, as our defense spending is being reduced at the fastest rate since the collapse of the Berlin Wall, there is a risk that disputes between China and Japan could escalate, threatening our position in the Pacific. As we dismember our missile defense operations, the ownership of nuclear weapons by rogue nations like Iran and North Korea have become more threatening, In a world of rising Morlocks, we risk becoming a nation of Eloi.

But it is the internal, more subliminal threats that need concern us as well. Dependency, debt and cronyism imperil our nation just as much as terrorists operating in Drone-free zones. That troika of hazards risks rendering the fabric of our democratic republic. It leads, ultimately to a decline in economic strength and, ultimately, to a rise in totalitarianism. With government consuming an ever-larger percent of GDP, economic growth becomes more difficult. Every day we witness signs of executive usurpation in Washington. While care for the poor, the disadvantaged and the elderly is noble (and necessary in many cases), we must be wary that government does not become overly paternalistic; for dependency weakens the moral fiber of society. Debt is insidious; it creeps up on little cat feet, especially in an environment of artificially low interest rates. And cronyism is the consequence of bigness – in government, banks, corporations, media/entertainment and unions. Theirs’ is a symbiotic world, each feeding off the other.

Dependency is dangerous no matter the form it takes; it is antithetical to nature. The protective instinct of new parents gives way to the equally natural instinctive knowledge that long-term survivability depends, in some measure, on self-sufficiency. In the wild, animals understand that survivorship of their species means their off-spring must become self-reliant. Birds nudge fledglings from nests high above the ground. While man is societal, he recognizes his responsibility to himself and those who depend on him. The simplicity of this axiom is manifested in the ancient Chinese adage that says give a man a fish and he will eat for a day, but teach him to fish and he will eat for a lifetime. Yet Western governments are outliers in this regard. They move against nature in encouraging dependency, knowing full well the harm they cause, yet convinced that contented recipients will reciprocate on Election Day. It is a short-sighted view that will end badly.

Debt is addictive, or, rather, it is not debt – which is the consequence – that is addictive, but the spending, which is its cause. We all must live in the present, without being consumed with Epicurean delights. Individually, we must prepare for tomorrow. That goes for the state as well. When government funds today’s consumption with money’s earmarked for tomorrow, we rob our children and grandchildren. When we underfund entitlement programs that is what we are doing. Seventy percent of the federal budget goes to mandatory spending (64%) and interest (6%). Eighty-seven percent of mandatory spending is consumed with Social Security, Medicare and Medicaid benefits. (The balance consists of Veteran’s benefits, Transportation and Food and Agriculture transfers.) Interest costs will almost certainly rise in the years ahead, as interest rates revert to more normal levels – roughly double current rates. Because tax revenues do not cover expenditures, our debt grows each year, today amounting to about $16.7 trillion. Should we experience another attack like 9/11, our response would be conditioned on our ability to borrow even more money. Should banks “too big to fail,” in fact fail, as they threatened in 2008, there is a real question as to whether we could muster the resources today to save the financial system, as we did then. We live in an age in which consumerism rules. It is a condition warned about by Edmund Burke – a danger of collective egoism in which whole generations no longer feel bound by the basic trust which unites past, present and future generations.

Government, abetted by low interest rates, has forgiven millions of Americans of some or all of their mortgage debt and, if proposals are to be believed, of substantial levels of student loan debt as well. This apparent willingness of government to protect borrowers has made consumers less wary of the debilitating effect of debt. The housing crisis that nearly brought the Nation to its knees in 2008 was not solely the fault of banks; though they played an important role. Its genesis began in Washington when the Clinton Administration began easing rules for home-ownership, allowing and encouraging those who could not afford the cost to buy. It was further aggravated by Senator Chris Dodd and Representative Barney Frank and their mutually beneficial relationships with Freddie Mac and Fannie Mae. Yet, the Wall Street Reform and Consumer Protection Act, which has done nothing to reform Wall Street and little to protect consumers, was named after these two members of what Mark Twain so aptly called the only “distinctly American criminal class” – Congress. In the past two years, student loan debt has grown 20%, now topping a trillion dollars. It has distorted the price of college and damaged the precept of living within one’s means. The ease with which it can be dismissed harms the character of the borrower, as well as the pocketbook of the lender – and the taxpayer has become the lender of last resort.

Cronyism is all about us. We see it in the open doors between Washington administrations’ and Congress, and K Street and Wall Street. It incorporates big labor and big business. As an example, Richard Gephardt, after serving 28 years in Congress, formed a lobbying company, Gephardt Government Affairs, reportedly earning him $7 million last year. Harry Truman believed he should never lend himself to any transaction, however respectable, that would commercialize on the prestige and dignity of the office of the President. When we see President Clinton making between $250,000 to $750,000 per speech we know the world has changed – and not for the better. It is not just the revolving doors between the hallways of government and K Street, as detailed in Mark Leibovich’s book, Our Town; it is the too-cozy collegiality that exists between powerful members of government and those whose well-being is dependent on Congressional legislation and administrative regulations. A perfidious example of how far down cronyism reaches is reflected in the decision by U.S. authorities to not charge either Jamie Dimon or Bruno Iksil in the J.P Morgan “Whale” episode. Instead, they charged two junior traders. Are we supposed to believe that senior management was unaware of a trade that cost the bank $6 billion? If they did know, they should be charged with complicity and fired. If they did not, they should be charged with negligence and fired. Taxpayers, as bank’s management surely knows, remain the backstop to their indiscretions. Union members’ dues are used for political gain, with little or no say-so by individual union members. Hollywood has long been a mill for propaganda. During the War years they were overtly patriotic. But more recently, their messages have been more subtle. A pretence of disinterestedness masks underlying political favoritism. I have no problem with a decision to support particular candidates or issues, but I do object to the claim of impartiality. In a world that has become uneducated as to issues, the medium, as Marshall McLuhan warned, has become the message.

The perpetuation of these threats leads to a decline of a moral sense and the possible transformation of a country that has served us and the world well. As Glenn Hubbard and Tim Kane note in their new book, Balance: The Economics of Great Powers, nations and empires rise and fall. It is a risk to which attention must be paid. In promoting dependency, we give up personal responsibility. As a society we encourage consumerism and discourage saving and investment. As Madonna sang, we have come to believe that “the boy with the cold hard cash is always Mister Right.” A cult of hedonism leads to an attitude of carpe diem. In living for today, we assume tomorrow will take care of itself. And cronyism turns the electorate cynical, providing a sense that the system is rigged, making prophetic the headline in Jacob Weisberg’s column two weeks ago in the Financial Times: “They came for the politics, but stay for the money.”

None of the domestic threats enumerated above are wrong when experienced in moderation, not even cronyism; nor, in citing them, do I mean to diminish the threat of Islamic terrorism – America’s and the West’s greatest international challenge. A moral society watches out for those in need, without creating dependency. Debt allows us to enjoy comforts today that we might not otherwise be able to afford. In terms of cronyism, one must expect old friendships to be maintained as people advance through their careers and that new ones will be made. Last Thursday, writing in the New York Times, David Barboza noted that the SEC is investigating the Wall Street practice of hiring children of officials of state-controlled companies [specifically in China]. They are concerned that such hirings “cross a line.” Why not, in addition, investigate the practice of former Congressmen and women who routinely trade on their relationships when starting consultancies, or ex-Presidents who use the fame of their office to make millions in speaking engagements? Like Cincinnatus, retiring politicians should leave politics behind. Good politicians serving the public interest must guard against “influence,” putting the needs of the people above self-interest. Can we revert to such a place? I am sure we can, but will we? The threats are clear and present.

Friday, August 16, 2013

"Re-thinking Criminal Justice"

Sydney M. Williams

                                                               Thought of the Day
                                                       “Re-thinking Criminal Justice”
August 16, 2013

While unrelated, two legal decisions this past Monday have a common heritage. One was Attorney General Eric Holder’s announcement that federal prosecutors will no longer pursue mandatory sentencing “for certain low-level, non-violent drug offenders, without ties to big gangs or cartels.” The other was Federal District Court Judge Shira Scheindlin’s rule that the tactics underlying New York City’s stop-and-frisk program violated the constitutional rights of minority citizens. Both invoke race and neither addresses the root cause of minority crime – the breakdown of the family, and a welfare system that represses individual self-esteem.

Mr. Holder noted that while the population has increased in size by a third since 1980, the federal prison population had grown by 800% , and that in 2010 the cost to American taxpayers was $80 billion. He added that he wants to embrace steps to do away with “shameful” racial disparities in sentencing. He called harsher punishments for “people of color” “unacceptable,” “shameful” and “unworthy.” Judge Scheindlin concluded: “The City’s highest officials have turned a blind eye to the evidence that officers are conducting stops in a racially discriminatory manner.”

At year-end 2009, with 743 jailed adults per 100,000 people (2,229,000 prisoners), the United States had the highest documented incarceration rate in the world. In 2011, with just under seven million people in jail, probation or on parole, almost 3% of the population was under some form of correctional supervision. Additionally, another 71,000 juveniles were in juvenile detention. The increase in prison population is not due to violent crimes, which have been stable or declining over the past few decades. On the other hand, the number of incarcerated drug offenders has increased twelvefold since 1980.

Race is a factor in terms of prison population, in that they represent an inordinate percent of the population. The question is: is it deserved? According to the U.S. Bureau of Justice Statistics, non-Hispanic blacks accounted for 39.4% of the total prison population in 2009, while they make up 13.6% of the U.S. population. Hispanics were 20.6% of the imprisoned population, while representing 16.3% of the population. Nevertheless, black-majority cities have similar crime statistics for African-Americans as do cities where the majority of the population is white. Wikipedia cites white-majority San Diego having a slightly lower crime rate for blacks than does Atlanta, a black-majority city in terms of population and government.

Judge Scheindlin, in her ruling, was clear that she was not striking down the program, but requiring the City to use the tool in a way that does not discriminate against African-Americans and Hispanics. The tragedy, though, is that her ruling is unlikely to affect the upper Eastside, a bastion of Leftism, but could have a negative consequence in what the Wall Street Journal calls the “barrios and housing projects,” where stop-and-frisk has actually helped New York’s most vulnerable citizens. Regardless, should our sympathies lie with the perpetrators or the victims?

In his ruling, Eric Holder front-ran work being done by bi-partisan groups in Congress. The unlikely combination of Senators Patrick Leahy of Vermont and Rand Paul of Kentucky have been working to amend rules requiring mandatory minimum sentences, as have Senators Richard Durbin of Illinois and Mike Lee of Utah. Even though the rules requiring mandatory sentencing originated with legislation in Congress, the Obama Administration feels free to ignore or amend them through executive decree. In an interview with CNN, Michael Mukasey, attorney general under George W. Bush, said, “I generally agree with the goal of getting rid of mandatory minimums. But the way to do that is to pass a law.”

It is the unintended consequences of both decisions that I believe are cause for concern. Decriminalizing possession of small amounts of marijuana, and making it legal to purchase, would serve two purposes: It would lessen the influence and power of drug cartels operating along the U.S. – Mexico border, while reducing the prison population. However, for an Administration that has already invoked executive authority more than any other, to do so again is the height of hubris, as well as dangerous to our concept of democracy. Mr. Mukasey, in this regard and in my opinion, is correct.

As for Judge Scheindlin’s decision, I agree with Mayor Bloomberg. While people do have a right to walk down the street protected by the Fourth Amendment, “people also have a right to walk down the street without being killed or mugged.” The judge’s decision was based on a class-action suit brought by nineteen plaintiffs who were seeking a change in policy, not monetary damages. As the Wall Street Journal noted Tuesday: “If the class-action lawyers chose only 19 out of 4.4 million (the number of “stops” between January 2004 and June 2012) to prove their claims, presumably these incidents were the most egregious.” But, of those 19 “stop and frisks,” five were deemed constitutional both in terms of the “stop” and the “frisk.” In another five, the “stop” was constitutional, but not the “frisk.” To have only ten incidences declared unconstitutional in terms of “stop and frisk” out of 4.4 million is a record of which to be proud – not to be condemned.

The real shame in both stories is that both blamed racism and neither addressed the root causes of crime – broken families and declining self-esteem. Most academic and empirical research suggest a close link between broken homes and crime. A study two years ago of the 27 industrialized countries conducted by the OECD (Organization for Economic Cooperation and Development) found that 25.8% of U.S. children were being raised by a single parent. That compares to 14.9% across the other country members. Seventy-two percent of children in the African-American community are being raised by a single parent, more than twice as high as fifty years ago. A 1994 study by the University of Minnesota showed that the percentage of Black children living with a single parent remained steady at 30% for the eighty years between 1880 and 1960. Mr. Obama would do far more for the African-American community by extolling the success of his own family, rather than providing more hand-outs.

Work and self-respect go together. In the 2012 election, Mitt Romney said, “People from both political parties have long recognized that welfare without work creates negative incentives that lead to permanent poverty. It robs people of self-esteem.” A hundred and fifty years ago, Thomas Carlyle wrote, “Nothing builds self-esteem and self-confidence like accomplishment.” An unemployed, healthy young man picking up a disability check does not create a sense of accomplishment. Admittedly, the employment situation is out of the hands of the impoverished and those most vulnerable to crime or criminality. But, while Congress and the President have been negligent in promoting tax and regulatory reform that would help build business confidence, two years of unemployment insurance and the easier requirements to qualify for disability insurance have lessened the need to seek work. Being on welfare of whatever type does little for one’s self-esteem, provides too much free time, making one more susceptible to criminality. It creates a vicious cycle, from which it becomes increasingly difficult to dismount.

In both judicial instances, it is the failure to address the causes, along with the focus on race that I find troubling. With African-Americans as President and Attorney General, we should be moving toward a post-racial world. Instead, racial tensions have worsened. While Mr. Holder cites statistics suggesting that incarceration rates for African-Americans, at 39.4%, are almost three times their percentage of the population, he fails to mention that 38.3% of all violent crimes in the U.S. were committed by African-Americans. It is the intellectual dishonesty that I find disheartening, along with neglect as to the root causes – declining family structures and a refusal to acknowledge that work is necessary for self-esteem.

Monday, August 12, 2013

"Beating up on Hedge Funds"

Sydney M. Williams

                                                              Thought of the Day
                                                      “Beating Up on Hedge Funds”
August 12, 2013

In common with lemmings and sheep, regulators and the Press, along with many politicians and other undesirables, have a tendency to chase trends. Hedge funds have become one of their targets. As regulations have proliferated and indictments publicized, the sector has become politicians’ and regulators’ favorite target. Many in the Press appear to smile smugly as SEC accusations are tossed out seemingly indiscriminately; most of which are later nullified. Beating up on hedge funds has become a favorite game. Adding to the woes of the industry has been recent poor relative performance compared with long-only funds. But that should not be surprising in a market that is up 150% over the past four years. Hedge funds, after all, do run “hedged” portfolios.

Not many years ago, hedge fund managers were regaled as men and women with a Midas touch. Their performance was such they could command extraordinary fees. Today, some are seen as Lepers – the untouchables of the investor class. While they are frequently cast as a single category, there are as many hedge fund strategies as there are hedge fund managers. Some are active traders; others are long term investors. Some are activists, working with managements to improve operations and returns to shareholders; others act as outsiders, willing to oust management when they feel shareholders’ interests are not being served. Many hedge funds have provided excellent returns for thousands of investors in difficult markets. If we assume that the next four years will be like the last four, perhaps their relative performance may continue to suffer. But history suggests that the last four years will be a difficult act to follow. As prices rise, values diminish.

Additionally, one of the unacknowledged services hedge funds perform is as watchdogs over underperforming and/or crooked managements of public companies. In this regard, in my opinion, they have done a better job than the SEC. It is little wonder that government bureaucracies (like the SEC), and their toadies in the Press, have come to dislike them. Cronyism, whether it is between Washington and Wall Street or between big business, big labor and big government, is one of the principal challenges of our time. Regulated companies can be protected (or penalized) by the very agencies charged with regulating them. And, if government chooses, regulators can shout down businesses it dislikes, regardless of the consequences. Big banks can demand rules that are to their benefit, regardless of the effect on smaller banks. The establishment often gets protected against the encroachment of smaller, more aggressive firms. Hedge funds, because they often operate outside the mainstream and with their ability to short, help keep the system honest and balanced.

Research operates in a grey zone. Professional money managers get paid to perform in a competitive investment environment. They must learn as much as possible about a company before investing. Well compensated investment managers generally have two characteristics: they are good analysts and they have good judgment. A good analyst uses many means of getting information, including, obviously, reading up on the company and interviewing management. They use Wall Street “sell-side” sources and speak to customers and suppliers to the business. He or she asks a lot of questions to gain an edge. Regulation Fair Disclosure is supposed to ensure that “material” information be disclosed to all investors in a public forum so that all receive the data simultaneously. But the definition of “material” can be vague, and what is material to one investor may not be to another. And some analysts are just better. Good analysts build mosaics, gathering small, seemingly innocuous bits of information until they have completed their puzzle. The honest ones are not looking for tomorrow’s headline; they are trying to develop a sense as to what the prospects for the business might be over the next two to three years. Once in possession of the necessary knowledge, they must also have the judgment to use the information intelligently to their and their customer’s benefit.

This is not to say that all hedge funds managers are honest or above board. As in any group, there are the good and the bad. Hedge funds working with investment banks to create securities designed to fail does not strike me as being particularly productive to the economy or to society, however “legal” it might be. Hedge funds that knowingly use inside or privileged information, or deliberately attempt to manipulate the price of a security in which they have a position are in the wrong, as would be any other investor in similar circumstances. While hedge fund fees might seem excessive, it is the net return to investors that is important. For years, the performance of many hedge funds justified the fees they charged. Otherwise, why did money flow into these funds? Unfortunately, like most good things, the proliferation of hedge funds reached their zenith, just as opportunities were lessening. While many navigated the collapse of financial markets in 2008-2009, others, touched by hubris, made large, leveraged bets that turned out bad. As stocks turned up in early 2009, long-only managers, charging less in fees, turned in superior performance.

A consequence of hedge funds coming under greater scrutiny has been that many founders are folding their operations into family offices, where the owners will still function, but under less scrutiny and with significantly lower costs. In an article in the Financial Times, Madison Marriage wrote a week ago, “Single family offices are exempt from Dodd-Frank regulation in the U.S. and the Alternative Investment Fund Managers Directive in Europe.” Ms. Marriage quotes Sean Donovan-Smith of the UK law firm, K&L Gates, “There is a fair bit of creative thinking going on, and it really comes down to the cost of the additional operational procedures and increased liability provisions.” As Jesse Norman writes in his biography, Edmund Burke, the first Conservative, “Government has a right to regulate, but should not become a factor in its own right.” Using a sports analogy, regulators should referee the game, but not be participants. Chasing founders into darkened recesses will do nothing, other than deprive investors of the services of exceptional money managers.

The stock market has and always will attract smart, aspirant people. It also entices scoundrels and con-men. For the former (which is the vast majority), it is the challenge of competing against other intelligent, aggressive people that appeals. The money is a big part of the attraction, but so is the game. For the latter – the unscrupulous and immoral – it is the possibility of easy pickings, of taking advantage of the naive and the gullible. Like it or not, that is the way of Wall Street, and it is not likely to change. Some regulation is always necessary, but people cannot and should not be protected from their own dumb mistakes, nor should they be unfairly penalized when they are successful.

There is a growing need for money management and the businesses that service them. Millions of people must build financial assets. It is a subject I have written about on numerous occasions. Ten thousand people retire each day, most of them with woefully inadequate financial resources. Businesses, over the decades, have moved away from defined benefit plans toward defined contribution ones, like 401Ks. It is inevitable that government workers will have to do something similar. Most government plans are functionally insolvent. Defined contribution plans place the burden of responsibility on the employee. An aging population has great need for a friendly investment environment. The need for investment advisors will continue to grow. It is, however, a business that can attract the ethically challenged. There is an ad that I have heard which is blatantly deceptive. It is about “Michael” who moved “from a park bench to Park Avenue.” He discovered the stock market’s “code,” something “your stockbroker doesn’t want you to know.” But now he is willing to send the answer to you “free.” Having been in this business for over forty-five years, there is no “code” or “secret.” The ad is fraudulent. Diligence, patience and hard work are traits that have gone out of fashion in a politically correct world. The political demand for equality of outcome trumps personal creativity and individual effort.

Not everyone can be in an index fund, nor should they. By definition, index funds are passive, meaning that dollars invested in any one company are based on the weight of that company’s stock in a particular index. There is no regard of management or the economic outlook for the company and its industry. Active managers, not index funds, price stocks in what Warren Buffett has called “Mr. Market.” If active managements did not exist there would be no governor on poor or fraudulent management behavior. In fact, there could not be index funds Arguably, active investors, who do in-depth research and recognize they are in a competitive business, do a better job of searching out frauds and keeping the system honest than regulators in Washington.

There is an element of schadenfreude amongst some who report on the anguish of the hedge fund industry today. Many of its managers operate (or did operate) outside the cozy world of traditional, establishment bankers. They tended to work on the fringe of the investment world, making bets – God, forbid! – in stocks (or other assets) they expected to decline in price. While the first modern hedge fund was established by Alfred Winslow Jones in 1949, the concept of hedging is as old as commerce. The tech/internet bubble that burst in 2000 gave impetus to these funds, as stock priced declined for three years. Consequently, hedge fund assets grew exponentially in the first decade of the 21st Century. The success of David Swenson of Yale in the 1990s legitimized the use of “alternative investments” for institutional investors. Hedge funds went from the quiet backwaters of Wall Street where they had functioned for decades to the forefront of the industry. Money poured into these funds at a rate greater than opportunities for investment. Their very size, and the leverage they deployed, abetted by exceptionally low interest rates, allowed them to invest in myriad derivative products that were created at the same time. Success, in many cases, led to later failure.

However, the hedge fund industry will survive and, in fact thrive. Hedging is too fundamental to investing for it not. Recently Deloitte Consulting published “2013 Hedge Fund Outlook, Some Gains, More Pain.” They noted the fact that hedge fund growth in assets under management (AUM) increased in 2012, for the first time since 2007. The driver of that growth has been institutional investors whose assets into hedge funds have increased five fold in the last ten years. Their participation is putting pressure on fees and demanding greater transparency, both factors that will help propel future growth. The industry in the U.S. today manages about $1.6 trillion, or roughly 3% of the value of total U.S bond and stock markets. Globally, hedge fund assets have surpassed the $2.15 trillion reached in 2007, representing about 1% of global financial assets.

Regulators, in the guise of seeking transparency for the industry, are forcing some of the giants into family offices. But the industry is here to stay. Bloodied, it rises from the mat, providing alternatives to investors, while riding herd on errant managements. Beating up on hedge funds is last year’s fight.

Thursday, August 8, 2013

"Midterm Elections - A Year and More Out"

Sydney M. Williams
                                                         Thought of the Day
                                       “Midterm Elections – A Year and More Out”
August 8, 2012

Nate Silver, the statistician and political polling guru, in a not particularly daring prediction, believes that control of the Senate following the 2014 midterm elections is a toss-up. Mr. Silver estimates that it is “unlikely” that Democrats gain control of the House. We will hear endlessly about the varying districts that will be in play on November 4th, 2014 – 35 Senate and all 435 House seats. The composition of those districts will be sliced and diced into the smallest possible voting blocs, to be analyzed ad nauseam by campaign managers and the Press.

Gerrymandering has created many safe seats, especially in the House. On average, over the past eight midterm elections, less than 6% of seats change Party affiliation each cycle. However, it is worth noting that 2010 saw the largest change in the post-War period, when Democrats lost 63 seats, or 14% of House seats. Issues can make a difference.

The current composition of the two chambers is as follows: The Senate currently has 53 Democrats, 45 Republicans and 2 Independents. The House has 234 Republicans and 200 Democrats, with one vacancy – Edward Markey of Massachusetts, who resigned this year to run successfully for John Kerry’s Senate seat.

Of the thirty-five Senate seats to be determined, eight are being vacated by incumbents – six Democrats and two Republicans. (One seat was vacated when Frank Lautenberg of New Jersey died in June of this year.) In the House, thirteen members are not running for re-election, five Democrats and eight Republicans. Of the thirteen, nine are running for Senate seats (three of them, Republicans, in a primary for Saxby Chambliss’ seat in Georgia.) One is running for Governor and three are retiring, including the controversial Michelle Bachman, who I am personally glad to see go. (Of course, these numbers are likely to change, as the election nears.) As a fan of term limits, I wish a lot more from both chambers and both Parties were retiring. Five of the six retiring Democrat Senators served five or more terms – way too long, in my opinion. The sixth, Tim Johnson of South Dakota, is retiring after his third term. Of the two Republicans, Saxby Chambliss is leaving after two terms and Mike Johanns of Nebraska is leaving after a single term. That’s the way it should be.

Issues will dominate the election. Democrats will do everything possible to ignore the myriad scandals confronting the Administration, but I suspect their efforts will fail. The IRS, Benghazi, Fast & Furious and the Associated Press may disappear from the front pages of the New York Times and the Washington Post, and may be ignored by network news channels. But cable news networks, political blogs, and pundits like me, will keep them alive. These are not “phony” scandals.

Implementation of some of the less savory aspects of the Affordable Care Act have been postponed until after the midterm elections. Nevertheless, a recent IBD/TIPP poll showed that 51% of the people in all age groups would like Obamacare repealed, up from 44% two years ago. However, reflective of the confusion and mixed opinion on the subject, 45% of voters oppose efforts by conservatives to block funding for Obamacare. Unions, generally staunch supporters of Democrats, have become more skeptical about Obamacare. The offering of attractive healthcare plans had always been one of the selling points union leaders used to encourage union membership. From the perspective of management, employer tax exclusions for health coverage meant it was less costly than offering higher wages. Pre-Obama, healthcare was never a concern for union employees or retirees. Obamacare risks upsetting what had been a symbiotic relationship. Union members may now face the possibility of being forced onto exchanges, or, worse, having their hours-worked reduced to less than thirty per week. Additionally, the excise tax on costly plans, aimed at the wealthy, will hurt those union leaders and members who were provided “Cadillac” plans, which is not an insignificant number.

But scandals and Obamacare are not even the largest or most obstreperous obstacles facing Democrats. It is the economy, and specifically jobs. The unemployment number has declined from just under 10% when Mr. Obama took office to 7.4% today. However, the more important number is the labor participation rate. That number, in July, according to the Bureau of Labor Statistics (BLS), is 63.4%, even lower than a year ago. It was 65.8% in February 2009 shortly after Mr. Obama took office. Those 2.4 percentage points represent about three million workers. As Richard Fisher, president of the Dallas Fed, said at a recent speech in Oregon, “…only 76% of the jobs lost during 2008-2009 have been clawed back.” Mr. Fisher also noted that that number does not include the roughly one million people who are added each year to the working-age population.

It has been the inability of Congress, and the Administration, to address the fiscal needs of the economy. As Mr. Fisher said in the same speech, the Federal Reserve has provided the fuel, but the incentives to use that fuel are the purview of Congress. Banks have an estimated $2 trillion of excess reserves and corporations have an estimated unused $1 trillion on their balance sheets. Putting that money to work depends on the confidence of business people that the veil of uncertainty regarding government spending, taxes and regulation will be lifted. Also, for the first time in about a hundred years the United States has the potential to be energy independent, if government will only allow the animal spirits, inherent to our country, to be unleashed.

It isn’t just ideas and issues that determine who gets elected and who has to stay home. It is also the way in which candidates present themselves and the way in which the Press portrays them. Name recognition, no matter the reason, as we can see in New York’s Mayoral and Comptroller races, is important. Catchy phrases and small slips can make or break a candidate. Just think of Ronald Reagan’s put-down of Jimmy Carter in 1980: “There he goes again,” or Lloyd Bentsen in a Vice-Presidential debate with Dan Quayle in 1992 “Senator, You’re no Jack Kennedy.”

Michael Barone, a thoughtful political columnist and scholar at the American Enterprise Institute, writes: “Nothing is free in politics, but there is some question [as to] when you pay the price.” Congress passed and the President signed a healthcare bill, but the bill passed with no bipartisan consultation and without a single Republican vote. The same could not be said for Social Security in 1935, Medicare in 1965, or the Medicare Part D prescription drug bill in 2003. All three included votes from both Parties, and, in all three cases, the minority Party was consulted. Obamacare was handled singularly. Republicans were not consulted and not one Republican voted for it. In an example of hubris gone wild, Nancy Pelosi arrogantly pushed through the bill telling people it would be understood once it was implemented. How naïve and/or complicit she must have considered the Press and how stupid she must have thought the electorate!

A lot can happen over the next fifteen months, and it is impossible to predict all the good and bad things that might happen, especially to the economy. One last observation: By 2014, Democrats will have held the White House for six years, and the Senate for eight years. Republicans, who the mainstream Press tend to relegate to the dust bin of have-beens, have done a better job controlling the House and State governments – interestingly, offices closer to the people. That should be an advantage, unless one expects the election to be decided in the editorials of the New York Times, a lumbering dinosaur in a Twitter-friendly world. One other disadvantage Democrats have is that their “stars” are aging. Hilary Clinton, the youngest of the group, will be 69 in 2016, only eight months younger than Ronald Reagan was when he was elected in 1980. Joe Biden will be turning 74 later that same month. Republicans, in contrast, seem to have a deeper bench of younger leaders. But we shall see. As Bette Davis said, “Hold onto your seats. It’s going to be a bumpy ride.”

It is my opinion that this upcoming election, like all recent ones, is ultimately about the size of government we the people want. Today, in all forms, government consumes almost 45% of our economy. It is axiomatic that the bigger government gets the slower will be economic growth. Either taxes or debt (or both) will act as a retardant. It is a risk that deserves more discussion. Nate Silver’s prediction seems to be a safe one and may well prove accurate. But it appears to me that Republicans have been dealt a strong hand. It now depends on how well they can play.

Tuesday, August 6, 2013

"A Paper Tiger"

Sydney M. Williams Thought of the Day “A Paper Tiger” August 6, 2013 One of life’s first lessons occurs in grade school yards. A primitive, but stratified social order exists, not unlike that in the animal kingdom, with the weak at the bottom. In elementary school, tough guys dominate at recess and after school. When a new student arrives, he (this is more about boys than girls) is tested, often challenged to a fight. How he handles himself determines his place in the hierarchy. As students move on to middle and high school, academic success and other factors play bigger roles in measuring one’s popularity, and that primal sense of order begins to dissipate. Existing world leaders are like school kids. They take measure of new world leaders, especially when a new president moves into the Oval Office – the world’s only superpower. Mr. Obama has been tested and found wanting. His mistake was one of naïveté – he failed to understand the self-serving nature of the global political process. He appeared to expect leaders to put an emphasis on the finer aspects of global leadership, like the Golden Rule – be trusting of others and they will do the same to you. In Cairo, in June 2009, newly elected Barack Obama reached out to the Muslim World, with a promise to move away from the Bush years of intervention towards ones of “reconciliation.” He promised to close the prison at Guantanamo. He would try captive terrorists in civil court –another broken promise. The world is what it is; it is not as one might have wished. But Mr. Obama, in either innocence or deliberateness, has made the situation worse. Major Nidal Malik Hasan shot thirteen military personnel at Fort Hood, in an incident the President characterized as “workplace violence.” Why could he not call the incident what it was: a deliberate attack by Islamic terrorists. To his credit, Mr. Obama did continue Bush’s policy of hunting down terrorists, but now with Drones, not ground troops. Nevertheless, Iraq (Bush’s war) was deemed the “bad” war, while Afghanistan became the “good” war. But terrorism and killings persisted in both countries. Iraq has seen its bloodiest Ramadan since 2007. Our absence has seen an increase in violence. In May 2011, Osama bin Laden met his Waterloo at the hands of U.S. Naval Seals, in his compound in Pakistan. That gave rise to the President’s happy (and erroneous) message: “Osama bin Laden is dead and al-Qaeda is in retreat.” It became a central theme for the 2012 Presidential campaign. In May 2012, Mr. Obama declared the War on Terror over. “We ended the war in Iraq and we’re pulling out of Afghanistan.” The Arab spring of two years ago was seen as a vindication of Mr. Obama’s policies of inclusion and, unfortunately, appeasement. Tens of thousands have been killed in protests across the Muslim world, since that spring two years ago. With enormous irony, within months of taking office, Mr. Obama was given the Nobel Prize for Peace, not for what he had done (for, at that point, he had done nothing), but for he might do. The region is more dangerous today than when he came to office. A travelers’ alert was issued for the month of August, and twenty-eight U.S. Embassies and Consulates, in Muslim countries were shut last Sunday. The ones shut range from Mauritania in the west, to Bangladesh in the east, from Madagascar in the south to Afghanistan in the north. This was done out of an “abundance of caution.” Nineteen will remain shuttered through the week. Representative Ed Royce, Republican chairman of the House Foreign Affairs Committee, said that the closures were linked to threats from al-Qaeda. The general reaction from Democrats and Republicans alike was that such caution was necessary, especially in light of what happened in Benghazi last September. If that is true, then we have allowed our defenses to deteriorate to a level not in keeping with the promise of a free and democratic republic. Retreat can be necessary under certain military conditions, but always in expectation of a future advance. But to retreat from our Embassies and Consulates, which serve as symbols of freedom in unfree lands, suggests terrorism has been victorious – a devastating message to subjected people around the world. If we don’t have the means to defend our embassies, then we have allowed our military to become too weak. It says the terrorists are winning. When Falstaff, in Shakespeare’s Henry IV, Part I, proclaims that discretion is the better part of valor, it is said tongue-in-cheek. While courageous people may be cautious, caution is not the most important characteristic of courage. Josef Joffe, a Stanford professor and Hoover Institute fellow, entitled last Monday’s op-ed in the Wall Street Journal, “Exploiting Obama’s Foreign Policy Retreat.” He poses the question: why do second-rate powers and terrorist groups take on the United States? His answer: They do so “because they can.” He writes, “The nation that invented containment in the Cold War is now playing with self-containment.” Senator Lindsay Graham cautioned against allowing the United States to be driven from the area. “They [al-Qaeda] want to drive the West out of the Mideast and take over those Muslim countries and create an al-Qaeda-type religious entity in the place of what exists today.” It is a sad state of affairs, with the lesson that a weakened United States, without a clear moral compass and unable to protect its own interests, will lose respect from those who would harm us. It almost certainly will have a bad end. That lack of moral behavior gets mimicked everyday across the country in small ways. A few days ago a video went viral of three fifteen-year olds beating up a thirteen-year old on a school bus in Florida. The sixty-four-year-old bus driver has been criticized for not breaking up the fight, which bloodied the boy and broke one of his arms. Perhaps he should have, but the boys were big and the driver was elderly. He was scared. The real question is how have we come to such a place? How have we allowed our society to be run by gangsters? Why do we allow three boys to intimidate younger children and flaunt those in charge, with no respect for authority? Allegedly, the reason for the beating was because the thirteen-year old had refused to buy drugs from the older boys. If so, why were the boys not thrown out of school and tossed off the bus? Will the Press and Leftists tell us of the hopelessness of their lives at home, that they were not responsible for what they did – that the fault lies with the “system?” Or will they be severely punished for the crime they committed? Machiavelli, in "The Prince," wrote: “It is better to be feared than loved.” That may be a little harsh, but certainly without respect there can be no love. Teachers, school bus drivers, parents, even the President of the United States, are neither feared nor loved in this age. If the President does not set a standard of moral conduct, how can we expect the people to behave in a civilized manner? Life in the United States today has more in common with those school yard brawls of our childhood than it does with civilizing influence of simple respect for one’s self and one another. We have, in short, become the paper tiger Mao Tse Tung warned of in 1956 – we have become “spiritually empty.”

Monday, August 5, 2013

The Month That Was - July 2013

Sydney M. Williams

August 5, 2013
                                                             The Month That Was
                                                                      July, 2013

                                       “Republicans believe every day is the Fourth of July,
                                            but Democrats believe every day is April 15.”
Ronald Reagan

This begins what I hope to be a continuing concept – looking back at the previous month to remind ourselves of critical issues and attempting to determine those whose impact may be more than ephemeral. While the idea was suggested by a friend, any errors, or prognostications that prove erroneous, are mine alone.

The above quote by President Reagan may sound unnecessarily partisanly, and I am sure his eyes were twinkling when he said it. But it is a quote I have always liked and has some basis of truth; so, if you find offense, please pardon its inclusion.

Perhaps the most important message about July is what did not happen, or what happened that was in contradiction to what we might have expected, and that was the heady performance of stocks. There was continued turmoil in bond and oil markets; the U.S. Dollar declined 2%; Egypt underwent a revolution, and a hedge fund was hit with criminal charges. Despite all that, stocks rose 4.9% and volatility declined. The VIX, a measure of option pricing, declined 20.2% and the number of days during which the DJIA moved up or down more than 1.5% was exactly none. In terms of the latter, volatility is at the lowest level since the first six months of 2007.

Oil, during the month, was up 8.9%. Between June 21st and July 19th, the price of crude rose 15%. Following suit, gasoline prices rose 3.9%, from $3.49 to $3.63. Gold rose 7.2% for the month, and the U.S. Dollar Index declined from 83.14 to 81.45.

The acquittal of George Zimmerman was a “dog-bites-man” story, garnering headlines because of race, an element that even the prosecutor said had no relevance in the trial. Mr. Obama’s trip to Africa may have a lasting impact, but there has been virtually no follow-up. The Snowden case simply suggests that the wrong re-set button may have been pushed four years ago, and makes the U.S. appear a “paper tiger.” All three stories served as diversions to the simmering scandals that threaten the Administration – Benghazi, the IRS and the alleged intimidation of the Associated Press and Fox News Washington correspondent, James Rosen. The situation in Syria worsened and Iraq had a prison break from Abu Ghraib prison and the greatest spate of violent deaths in years, further proof that al Qaeda has not only not been vanquished, but is gaining strength. The Weiner-Spitzer candidacies, besides providing fodder for the front-page headline writers at the New York Post, showed that unethical behavior remains rampant in the political world – not exactly an eye-opening revelation. The fatal landing of Asiana Flight 214 was a tragedy for those killed and injured and their families. It showed that experience is still important when landing a passenger jet, no matter how sophisticated its computer equipment.

The weather was oppressively hot for a week in mid month, but that made up for what seemed like a cool spring. Changing weather is nothing new (despite observations from those whose fortunes are tied to climate change.) This is especially so for one who grew up in New England, where an old saying goes: if you don’t like the weather, wait five minutes.

The military overthrow of Mohamed Morsi on July 3rd may have severe, destabilizing ramifications for the Middle East. During the last week in July, 80 Morsi supporters were killed, some shot in the back of the head execution style. What is worse for the United States: A country run by members of the anti-American Muslim Brotherhood, or a military dictatorship?

The announcement by the Federal Reserve on June 19th that they would begin walking back from their $85 billion per month purchases of Treasuries and mortgages caused a 60 basis-point back-up in the yield on the Ten-year, over the subsequent two weeks. Since the beginning of May, the yield on the Ten-year has risen 59% to a still historically low 2.59%. It is the trend, however, that is critical. Mr. Bernanke seemed surprised by the reaction and quickly soft-pedaled his announcement. The question becoming: Does this mark a sea change? For the month of July, the yield rose 11 basis points. The delay in the implementation of the Affordable Care Act can only be explained by a government not ready with insurance exchanges, and a growing sense that Obamacare is not the panacea that had been promised. The indictment of SAC should send a shiver up the spines of successful entrepreneurs – that a government, which is unable to find charges to file against management, can still indict a firm. The last time this happened, in 2001, 28,000 employees of Arthur Anderson lost their jobs. The Supreme Court later overturned Mary Jo White’s case – too late to save the firm and its jobs, yet providing enough publicity to give Ms. White the Chairmanship of the S.E.C. this past January.

In the summer issue of “City Journal,” a publication of the Manhattan Institute (and published this past July,) Steve Malanga wrote an article entitled, “The Indebted States of America.” In that essay he suggests that the debt for states and local government is likely far higher than what has been publically expressed. Forensic accounting studies have been initiated by taxpayer groups, elected officials and other researchers over the past couple of years. According to the States Project, a joint undertaking by Harvard and the University of Pennsylvania, instead of total debt being approximately $2.5 trillion, which is the value of the municipal bond and other public debt markets, it appears it could be over $7 trillion. We are a highly indebted nation, a fact about which there seems to be too much complacency. Federal debt equals about $16.4 trillion. Unfunded liabilities for Medicare, Medicaid and Social Security add another $30 to $35 trillion; so that total federal debt is somewhere between $45 and $50 trillion. U.S. mortgages approximate $13 trillion. Student loan, credit card and other miscellaneous debt add another $2 to $3 trillion. There are about 118 million households in the U.S., indicating an average indebtedness of about $570,000. Average household income is less than 10% of that number. The numbers are sobering. Extraordinary low interest rates have obliterated the enormity of that debt.

It is, I contend, impossible to look into the future, but one cannot help wondering if July marked the beginning of an exit off a saucer-based bottom for interest rates – a bottom that has lasted for two years. If that proves correct, in my opinion it will be July’s most important lesson. The decline in rates began over thirty years ago. History provides no reason for stock investors to be fearful of rising interest rates, at least in the first stages. The last major bear market in bonds occurred in the thirty-five years following World War II. In 1945, interest rates on long Treasuries were around 2%. By the end of 1968 they were over 5%. As interest rates were rising (and bond prices falling), the DJIA rose, compounding annually at 8.6% before dividends. It is true, of course, that during that last ten years of the bear market in bonds, when the yield on Ten-year Treasuries went from 6% to 18%, stocks suffered a decade-long decline.

Given the amount of debt washing around the system, it is unsurprising that the thirty-year bull market in bonds may be coming to an end. The most basic lesson in economics is that when a commodity is in surplus, its price goes down. Debt is in surplus. Bond prices have remained high (and rates low) because the Federal Reserve, concerned about jobs and housing, has artificially influenced their direction, preventing, thereby, the market from self-adjusting. It suggests that the Fed’s real concern is what untethered markets might do. How long can this charade go on? Is it coming to an end? No one knows, but markets tend to anticipate rather than reflect events; so, my lesson from July, is that the bond market bears watching, as we enter August and the rest of the year.

Friday, August 2, 2013

“Phony Scandals and Our Dissembling President”

Sydney M. Williams Thought of the Day “Phony Scandals and Our Dissembling President” August 2, 2013 The President considers and portrays himself as an outsider, and he is in a way, but as President he bears responsibility for the country and its government. Mr. Obama was elected President with little practical experience. (He had spent four years as a U.S. Senator and eight years as an Illinois State Senator, and maintained a low profile in each.) The President spends an inordinate amount of time campaigning (and a surprising amount of time playing golf.) As Peggy Noonan wrote recently in the Wall Street Journal, he “seems profoundly disinterested in good governing.” He appears arrogant and dismissive of other’s ideas. He exhibits what Victor Davis Hanson has called an “unchecked hubris.” Most telling, though, he is a man who was mentored by many who disliked and perhaps hated the United States and its Western values – people like the Reverend Jeremiah Wright, his pastor for twenty years. During the 2008 campaign Mr. Obama tried to distance himself from his longtime pastor, condemning his outrageous ravings. Nevertheless, the Reverend Wright did officiate at his wedding and at the baptism of his daughters, and Mr. Obama sat in his pews listening to his sermons for two decades. In Hawaii, Frank Marshall Davis, a former member of the Communist Party, was his mentor on race throughout his adolescent years. At Columbia, Edward Said a spokesperson for Palestinian terrorists was a mentor, as was Derrick Bell of Harvard, an advocate of “critical race theory,” His first campaign for public office kicked off with a fundraiser in the home of Bill Ayers, a former domestic terrorist who had planted bombs in the Pentagon, among other public places. Never before has a man with such a background become President of the United States. Very few people who serve (or have served) in Washington in any capacity have ever come to the capital having had mentors, allies and advisors who so despised the United States. What proved so attractive about the unknown (and uninvestigated) Mr. Obama? Was it his exotic background, yet one with Ivy League credentials? Certainly that appealed to coastal elites. At some point in college he asked people to stop calling him by the more prosaic “Barry” and to call him by the more colorful, “Barack.” He was (and is) articulate, yet carries a sense of mystery. He was someone that appealed to those who feel good about falling in love with someone or something they do not understand. In my opinion, had he not been African-American, he never would have been nominated, let alone elected. His campaign took full advantage of the fear so many have of being deemed politically incorrect. It allowed him to campaign unquestioned. In our PC world, the fear of political incorrectness exceeds the want to be morally right. It is discouraging. The recent scandals are not out of character and are symptomatic of a man who puts ideology above responsibility to the people. It is a belief in the maxim that the end justifies the means. It is a radical philosophy, not uncommon to such political extremes as Communism and Nazism. Modern Presidents, and presumably many who came before, live (or lived) choreographed lives. Their every move and words are pre-determined by acolytes who carry out the wishes of their boss. They are insulated from criticism, especially those on the Left, as mainstream media tends to blindly support them. This President sailed into the White House on waves of adoration from fans and a Press that put adulation above disinterested and skeptical reporting. Were it not for a residual element of goodwill that the people have for the President, the Benghazi scandal and the IRS scandal would have brought his Presidency down. They still might. The lies in both cases were outrageous, and there is little question that they originated in the White House. The shame is that Mr. Obama has tainted many others, not all of whom are culpable, but none of whom seem to have the strength of character to call them for what they are. Mr. Obama has referred to the scandals as “phony,” which they are not. They are real. The attack in Benghazi was not the consequence of a video. Four Americans died, perhaps unnecessarily. The IRS did target conservative groups. News people were intimidated. And, Fast and Furious did end up with American weapons in the hands of drug lords. There is, as of yet, no indication that Mr. Obama was directly involved, but as President he sets the tone for those who work for him. Until the last few moments, Richard Nixon insisted he “was not a crook.” Nevertheless, a little more than two years after the Watergate break-in, President Nixon had resigned. The more we hear as to what happened in Benghazi, the events leading up to it, and subsequent responses by American officials, the worse the whole thing smells. We know four men, including America’s ambassador Chris Stevens, were killed. We know the cause was not a video, and we know that the attack was pre-planned and coordinated. And we also know that when the President, Secretary of State and U.N. Ambassador blamed the cause on a video, they were lying. We know that troops in the area who could have provided aid were asked to “stand down,” as were aircraft that could possibly have provided cover. We do know that one of the wounded, David Ubben, had to wait 20 hours after he had been hit in the leg before he was airlifted from the rooftop of the annex where Tyrone Powers and Glenn Doherty lay dead. We do not know the reasons for the “stand down” orders, who issued them, or why Ubben had to wait so long. We do not know how many personnel were wounded or their names. We know that none of the wounded have testified before Congress, but we do not why. We know that someone has orchestrated a cover-up, but we do not know who or why. We know that while four Americans died in Benghazi and more were wounded, the only award announced thus far will go to former Secretary of State Hilary Clinton. She will be awarded the American Patriot award by the National Defense University Foundation for having “strengthened America’s strategic interests and advanced global security.” Ms. Clinton, remember, was the one who, while standing over the four coffins of those who died in Benghazi, claimed that “what sparked the violence was a very hateful video on the internet.” We also know that Gregory Hicks, Deputy Chief of Mission at the embassy had briefed the Secretary on the night of the attack as to its cause. The award is a disgrace. Government can only survive with funds provided by the people. For the past one hundred years, the IRS has had that responsibility in the United States. Americans, as Peggy Noonan noted recently in the Wall Street Journal, can be “cantankerous” when it comes to their feelings about the agency charged with separating them from their money. She noted that even in more halcyon days, for instance May of 2003, just under a third of all respondents had little or no faith in the agency. In May of this year, that number jumped to 57% in a Fox poll and to 60% in a Gallup poll. Once people lose faith, it takes years to rebuild it. As Benjamin Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” The current scandal regarding the IRS is the biggest since Watergate and, as Ms. Noonan writes, “…the second of only two huge scandals to be visited on the agency in its entire 100-year history.” Like Benghazi, as information has gradually leaked out, this one keeps getting worse. We know that conservative groups were targeted for extra scrutiny. We know that the decision to do so did not originate in Cincinnati. We know that Lois Lerner, former head of the exempt organizations office and the office of the IRS general counsel (one of two Presidential appointees at the IRS) were in intense talks. We know that, since revelations were made public in May, the IRS has been “slow walking” and obstructionist. We know that the IRS has provided only a fraction of the documents requested by the House Oversight Committee. It appears that damage control is more important than determining the truth. Like Benghazi, we do not know if the President had any previous knowledge, but we do know that in 2010 he chastised the Supreme Court before a joint session of Congress and a national TV audience at his State of the Union for their decision on Citizens United, a conservative nonprofit 501(c)(4) group. There had to be IRS employees listening and watching. It is the President who sets the tone. Jesse Norman, in his biography, Edmund Burke: The First Conservative, quotes Burke writing just before the American Revolution: “…in this character of the Americans, a love of freedom is the predominant feature…This fierce spirit of liberty is stronger in the English colonies, probably than in any other people of the earth.” That spirit lives on today. The scandals are not phony; they are real. They reflect an attitude that is alien to all thinking people who have knowledge of history and what happens when political power goes unchecked. Like Nixon, this Administration sees itself above the law. “We’re going to do everything we can, wherever we can, with or without Congress.” “So, where I can act on my own, I’m going to act on my own. I won’t wait for Congress.” Each line was from Mr. Obama in the past week and each, frighteningly, received applause from specially invited guests. It was more reminiscent of a rally before a big high school football game, than a serious political speech. We have a President who finds Congress “inconvenient.” We have a Press that focuses on gridlock within Congress; yet, as Daniel Henninger pointed out in yesterday’s Wall Street Journal, Congress, especially the House, reflects the people. It is the people who are gridlocked. There is a segment of the population – we can call them the Elites, and President Obama is one of them – who feel that government is best run by a small group of well-placed, well-educated (and, frankly, supercilious) people, generally from the coasts. Facing them are millions of “us.” Some of us have a difficult time articulating our concerns. We sense something is going terribly wrong, but finding the right words is hard. We know that our form of government is not efficient. It is supposed to be deliberative, with checks and balances to prevent any one part from assuming too much power. We see a growing centralization of power and it concerns us, and we see our representatives, especially those in the “people’s House,” being trivialized. And we know that ultimate authority resides in the individual, which he exercises by his vote. ‘Phony’ is defined as “not genuine; fraudulent.” The scandals may not rise to impeachable offenses, but they certainly cannot be described as phony. In every case there is more to the story than the Administration has let on. Investigations should proceed and let the chips fall where they may. The President’s favorite offense is “us” versus “them,” with “them” being the leadership. He ignores the fact that, as President, he is “them” – the man in charge and the one responsible.