Editing the Fed

I’ve been so bold as to edit Prince Charles and the pope, so why not the Cleveland Federal Reserve Bank?

Consider the Fed’s analysis of Canadian vs. American housing and lending trends.

Why Canada might be “a country that got things right”

The report led off well enough:

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.

It’s written in easily-understood prose and comes to a succinct conclusion. But if you read the report (and re-read once or twice), you’ll agree that my re-write would have been a better approach, not just by virtue of the writing, but also by virtue of the more comprehensive (and candid) conclusion:

Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. This article explores the differences between the two countries’ monetary policies, financial services structure and regulation, and the kinds of mortgage products offered. While the primary culprit behind the American financial services crisis was the rise in subprime loans,  those products, and indeed the housing bubble itself, were enabled by monetary policy and financial services regulation.

Conclusions drive structure

An introduction like this would have led to an entirely different STRUCTURE of the paper, as well.  As written, the Fed meandered through data on housing prices, loan-to-value stats, delinquency rates, central bank target rates, and benchmark mortgage interest rates before getting around to contextualizing them. Most readers’ eyes were glazed over by then.

I would have taken the inverse approach, noting the differences in subprime booms between the countries (and the American bust) and then comparing and contrasting the factors that DROVE those differences, including monetary policy and regulation.  I would also have quoted sociologists on the differences in risk tolerance between us and our “neighbors to the north” as we so often call them.

The Fed is not apolitical, so I guess I should give a nod to the possibility that it was motivated to obfuscate.  Alas, these are the times in which we live.

Private Equity and the Next Credit Crisis

My September Book Lust column included a preview of Josh Kosman’s book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, which was released this month.

Monday I heard Kosman interviewed by Fresh Air’s Terry Gross (on NPR affiliates everywhere).

FASCINATING STUFF, including:

• How interest tax deductibility allows private equity (PE)  firms to dodge about $70b in federal taxes
• Why you can’t buy a two-sided mattress any longer
• Why PE  likes the hospital industry (and what it could mean to you if your local provider is bought by PE)
• PE firms (including the companies they own) are the largest employers in the country; even larger than Walmart (by a mile)
• Four of eight former treasury secretaries now in PE.  John Snow (under G. W.  Bush) is now at Cerberus which finagled bailout funds for its company, GMAC, by turning it into a bank (even though it didn’t have capital reserve requirements of “real” banks)
• Buyouts are facilitated by Collateralized Loan Obligations  (CLOs), the private equity version of the mortgage industry’s Collaterelized Debt Obligations (CDOs)
• Returns to PE  investors are below that of the S&P 500

SCARY STUFF, including:

• The conservative Boston Consulting Group estimates that half the companies owned by PE will default on their loans or go into bankruptcy
• If these companies lay off half their employees (which is reasonable) another 1.9m people will be out of work, which will ripple through the economy in consumer spending, mortgage foreclosures and so forth
• The trillion in bad debt will freeze lending everywhere
• Of the current 11% corporate loan default rate, 50% has PE involvement. Tsunami of defaults has begun

Prescription

Kosman would like to eliminate interest tax deductibility for corporate takeovers. This would make LBOs unprofitable and end the industry.

Why is the end of private equity considered a good thing?  Don’t buyout firms improve companies? According to Kosman,  PE firms only put down about 20% of the purchase price, then use CLOs to fund the remaining 80%. The acquired company has to service the debt out of profits instead of spending that money on R&D and other capital expenditures. PE has a 4-5 year horizon on its exit, so they’re not running companies for the long haul.  Theoretically, everyone’s supposed to win with PE, but the record shows that few do.

The Obama administration is reportedly looking into this.  Paul Volker is charged with considering the whole tax code, including tax deductibility of interest for buyouts.

Writing Prompts for Blogs and Newsletters:

• Here’s your chance to defend PE, and the enabling triumvirate of i-bankers,  hedge funds and ratings agencies!
• Do you work for a pension fund that invested in CLOs? How will you assure participants that YOUR CLOs will perform in spite of the 11% corporate loan default rate Kosman cites?
• GMAC fired its CEO this week. Do you regret giving TARP money to this non-diversified auto lender-cum-bank?
• Do you have a better idea for recouping the estimated $70b in federal taxes lost to PE deals than dis-allowing interest deductibility? Are we in for a national value-added tax or sales tax?

October Book Lust

Options Volatility Trading

I’ve said before how much I enjoy following my virtual friend Jim Gobetz on Twitter (@aiki14).  Jim is the Managing partner and CIO in a family office based in Philadelphia PA and Wilmington DE. He appears on StockTwitsTV for a pre-market show  M-W-F mornings.

Jim tweeted about “Options Volatility Trading” By Adam Warner last week and I asked him to write a review for this month’s Book Lust column.  He graciously agreed:

I guess I should begin by stating my bias up front, Adam was one of the first people I found on StockTwits, and I have found his “short form” writing to be of the highest quality. This “long form” effort enhanced that opinion greatly. I think there is literally something for everyone in the book, whether they are experienced guys from the trading floor or newbies getting their first taste of the world of options.

The book begins with a bit of personal history which I found quite interesting. I love stories of the trading that went on, on the floor, back in the day and Adam brings the perspective of a young guy who thought he had a “legacy pass,” and from that starting point does a great job of laying out the workings of the options market and the thinking of the insiders.

He then moves on to the meat and potatoes first of the options themselves, and then the concepts of volatility, and it’s measure, and how traders use these metrics to gain an edge. His chapter on trading the VIX is particularly valuable in this day and age where the popular media feeds the public with constant heaps of this piece of data, without the least interest in whether that public has a clue to it’s limitations. Adam gives the reader a nice dose of reality in Ch. 11 where he addresses some of the popular conceptions and where they diverge from the truth.

The last quarter of the books gives the reader actionable strategies that put the prior chapters information into workable plays , charting concepts for derivatives, and finally a look at some of the rules that have changed and the consequences of these changes.

What I found most interesting was Adam displays an ability to take very technical subject matter and present it in a way that will satisfy the options technophile and not overwhelm the newly initiated.

I would recommend the book to anyone I thought was ready to made the move into options trading, and to all my friends and colleagues who trade them every day.

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash

Barrie Abalard

Another StockTwits friend is  @Barrie Abalard, who conceals her identity with this  pseudonym.  Barrie’s a technical writer who worked in the financial and funds transfer software industry for fourteen years. She currently supports herself by trading stocks and writing. She is a fellow regular contributor to the Die Broke Blog.

As fellow writers, Barrie and I trade book recommendations, and one of hers to me was The Trillion Dollar Meltdown by Charles R. Morris. Her review follows:

I first read this book in May, 2008 and, despite the occasional jargon and complex explanations of arcane financial instruments, found it compelling. I’ve since read it a second time. Morris has been scarily accurate concerning much of what transpired to create the economic crash of 2008. (Keep in mind that Morris wrote the book in 2007 for a February, 2008, publication date.)

The author contends that the 2008 crash has its roots in what transpired after the last big economic crisis, which ended in 1982. He details how we progressed from leveraged buyouts of banks in the Eighties to the stock market crash of 1987 to the LTCM (Long-Term Capital Management) debacle of the Nineties, all in the first couple of chapters. Chapter 3, “A Tsunami of Dollars,” explains how the Fed’s “years of working the liquidity pump” flooded the world with dollars, artificially keeping markets afloat. Chapter 4 is about what he calls “The Great Unwinding,” accurately predicting what happened to the credit markets in 2008 and to our economy. Morris lays fault upon the ratings agencies as well, and anticipates the crash of the monoline insurers Ambac and MBIA. I’ll leave it to you to read the book and discover his predictions regarding what will happen (and is happening) to the USA post-crash.

I should note that Morris is cool to the concept of “free markets,” but that’s largely because he equates free markets with little to no regulation. (Even a free market, in my opinion, needs some regulation to restrain fraud and the darker side of self-interest.) Otherwise, I have little quibble with the underpinnings of the book.

Do not be fooled by the slimness of this volume—Morris covers everything in 160 succinct pages. Densely packed with explanatory material, it includes detailed descriptions of CDOs (collateralized debt obligations), CDSs (credit default swaps), and MBSs (mortgage-backed securities), as well as how mark-to-market works and its role in the credit crisis. If you want to understand the events leading up to the 2008 stock market crash and recession but don’t have a degree in economics or finance, I urge you to read The Trillion Dollar Meltdown.

Justice: What’s the Right Thing to Do?

I heard the author, Harvard government professor Michael J Sander interviewed on The Diane Rheme Show a couple of weeks ago and wish I had time to read this book.

This review from Publisher’s Weekly: Harvard government professor Sandel (Public Philosophy) dazzles in this sweeping survey of hot topics—the recent government bailouts, the draft, surrogate pregnancies, same-sex marriage, immigration reform and reparations for slavery—that situates various sides in the debates in the context of timeless philosophical questions and movements. Sandel takes utilitarianism, Kant’s categorical imperative and Rawls’s theory of justice out of the classroom, dusts them off and reveals how crucial these theories have been in the construction of Western societies—and how they inform almost every issue at the center of our modern-day polis. The content is dense but elegantly presented, and Sandel has a rare gift for making complex issues comprehensible, even entertaining (see his sections entitled “Shakespeare versus the Simpsons and “What Ethics Can Learn from Jack Benny and Miss Manners”), without compromising their gravity. With exegeses of Winnie the Pooh, transcripts of Bill Clinton’s impeachment hearing and the works of almost every major political philosopher, Sandel reveals how even our most knee-jerk responses bespeak our personal conceptions of the rights and obligations of the individual and society at large. Erudite, conversational and deeply humane, this is truly transformative reading. 

Buddha’s Brain: The Practical Neuroscience of Happiness, Love and Wisdom

Rick Hanson, PhD, wrote this with Richard Mendius. Hanson is a psychologist and teacher of contemplative neuroscience. He cofounded the Wellspring Institute for Neuroscience and Contemplative Wisdom,and has been a board member of Spirit Rock Meditation Center.

Publisher’s Weekly review: The brain physiology associated with spiritual states has been fertile ground for researchers and writers alike. Neuropsychologist and meditation teacher Hanson suggests that an understanding of the brain in conjunction with 2,500-year-old Buddhist teachings can help readers achieve more happiness. He explains how the brain evolved to keep humans safe from external threats; the resulting “built-in negativity bias” creates suffering in modern individuals. Citing psychologist Donald Hebb’s conclusion that “when neurons fire together, they wire together,” Hanson argues that the brain’s functioning can be affected by simple practices and meditation to foster well-being. Classic Buddhist concepts such as the “three trainings”—mindfulness, virtuous action and wisdom—frame Hanson’s approach. Written with neurologist Mendius, the book includes descriptions and diagrams of brain functioning. Clear instructions guide the reader toward more positive thoughts and feelings. While the author doesn’t always succeed at clarifying complex physiology, this gently encouraging “practical guide to your brain” offers helpful information supported by research as well as steps to change instinctive patterns through the Buddhist path.

Conquering Fear: Living Boldly in an Uncertain World

Library Journal: Rabbi Kushner, author of the international best seller When Bad Things Happen to Good People, now focuses on specific fears that impact our lives—terrorism, natural disasters, aging, job loss, death, change, and the destruction of humanity. Some may say that these events are brought on by sinful acts; however, Kushner, who does not believe in a vengeful God, points out that the words “do not be afraid” are mentioned in the Old and the New Testament more than 80 times. Kushner writes that fear can paralyze us, make us tense, and often keep us from taking action. He explains that a small dose of fear is healthy and that we can gain mastery by recognizing legitimate fears, dismissing exaggerated ones, and avoiding letting it keep us from activity. Prayer, meditation, and helping others are the keys to alleviating excessive fear. VERDICT: A short, easy-to-read book filled with a great deal of wisdom and words of hope along with some practical measures for reducing fear. Kushner’s message is inspirational and transcends all religious creeds and spiritualities.

The Surprising Solution: Creating Possibility in a Swift and Severe World

Written by Bruce Piasecki, this review from Publisher’s Weekly: Piasecki (In Search of Environmental Excellence) updates his 2007 book (formerly titled World, Inc.) to address the current economic crisis and further explore the new frontier of sustainability, innovation and corporate social responsibility.

The underlying theme of this thought-provoking work is that big businesses have overtaken governments in terms of political and economic power—51 of the 100 largest economies in the world are now corporations; 300 multinational businesses control 25% of the world’s assets, and as much as 40% of world trade now occurs within these top multinationals. With their disproportionate power, big businesses now wield a tremendous ability to shape our social landscape, and the author impresses the importance of “Social Response Capitalism,” an approach that emphasizes a business’s “social brand” as well as the price and quality of their product or service. While the concepts are fascinating, the shifts in tone from academic to more casual create a jarring inconsistency. Still, for any reader who is a student of innovation and who seeks to understand the role of corporations in addressing global problems in the future, this is a treasure trove of provocative ideas.

High Frequency Trading in Jobless Recovery

I follow an outstanding lineup of financial professionals and traders on Twitter. I learned about some of them through Stocktwits, which describes itself as “a social, stock microblogging service.” Stocktwits now offers a free desktop with more functionality than TweetDeck.

StockTwits is an open, community-powered idea and information service for investments. Users can eavesdrop on traders and investors, or contribute to the conversation and build their reputation as savvy market wizards. The service takes financial related data – using Twitter as the content production platform – and structures it by stock, user, reputation, etc.

While I’m not a trader or active investor, I enjoy the intelligent conversation of Stocktwits gurus like @aiki14 @Dasan @iron100 @ekanters @gregormacdonald @nelderini and others from around the world.  They’re quick to extrapolate from a world event to its effects on global economies, individual sectors and stocks.  (Note: follow Charlotte hometown favorite @kevinmhughes as he gains national notoriety).

Truckers and retirees now stock jockeys?

I thought my world view was skewed by my Stocktwits exposure to trading, where lots of folks new to trading and investing subscribe to the charts and advice of experts.  But then I saw an article on un-employed and un-retired people going into trading for the lack of other employment opportunities.   The next day The Daily Show ran a segment on the topic. Hmmm, something’s afoot.

I appreciate that there’s money to be made trading. But all the trading in the world doesn’t feed people, clean the environment or find a cure for cancer. And, as Samantha Bee points out in this piece, it’s not as easy as promoters would have us believe.

Writing prompts for financial professionals

• What tax considerations to high frequency traders & rookies overlook?
• If you’re a financial advisor, how do you advise would-be traders to allocate their overall portfolio in consideration of high frequency trade risks and returns?
• Review the different software products needed to pursue a career as a trader.
• How long does it take and how much do you need to lose before you figure out whether this career is a good fit for you? What’s the total investment, considering hardware, software and mentoring services?

Jon Stewart and the Gerund

English teachers the world over must’ve loved the way Jon Stewart taught us the gerund.

Commemorating the first anniversary of the Lehman Brothers collapse, Stewart riffed on this clip of President Obama’s speech to Wall Street.

Obama: “We’re proposing the most ambitious overhaul of the financial regulatory system since the Great Depression…”

Stewart: “Proposing?  Gerund?  Proposing?  Haven’t done it yet?”

Thanks, Jon. You’re a faux-news guy who jokes like an English Major.

The Road to Success is Paved With…

lots of detours and false starts, from the looks of things.

I’m already on record as a fan of FlowingData, whose blog I subscribe to.  This morning Nathan posted an evergreen allegorical cartoon, originally published in 1913, that blows me away. If you want to study it closer, click to get it in another browser window by itself, then zoom in.  (UPDATE 1-31-62 I just learned the company with the copyright produces great reprints and Tshirts).

Scroll past the poster for my thoughts on success and wisdom from the Buddha on healthcare, entitlements and financial reforms.

Macro events on micro successes

This allegorical poster works well across the range of arenas in which people strive to succeed, whether it be spiritual enlightenment, gaining the esteem of family and neighbors, building a thriving business enterprise or artistic mastery.  When you think about it, there are really several mountains of success we climb in this life: family member, citizen, profession, avocation, seeker…everyone’s list varies.  And none of us is at the pinnacle of all life’s mountains at the same time. Life is full of trade-offs.

The one thing the poster doesn’t account for, however, is the role of macro events in our micro lives. For example, let’s say you created the world’s most precise wristwatch and fashioned it into a gorgeous piece of jewelry at a time when mobile phones have essentially replaced the need for a separate timekeeping device.  Your company goes bust, taking down the family and friends who invested in your vision. Does that make you unsuccessful? Depends upon your definition of success, doesn’t it? I had a similar experience, touched upon lightly in this essay published in Charlotte Magazine, Breathe In, Breathe Out.

One thing I hope we’re all learning in this Great Recession, is how interdependent we are. Investors in now-failed enterprises run by managers with the highest moral fiber have suffered alongside those who placed their life savings in Ponzi schemes.  And now investors of all stripes are suffering alongside those now unemployed by the companies crumbling around them.

Here’s a story about some Madoff investors now marooned in a RV park in Arizona, because they can’t afford the $2500 to drive home to NY. He was a New York City Department of Corrections officer and she, a computer analyst; hardly the glitterati we associate with Madoff’s victims.

It’s a compelling interview, including this quote by the prison guard, “We have our money in a viable institution and nobody was there to check. I mean, if I went to work every day at the Department of Correction and just left the door open and let the inmates out…. That’s my job to keep them in line, keep them behind the gate. Did anybody do that at the SEC? Absolutely not.”

A third way — between unfettered capitalism and outright socialism

I’m growing deaf listening to the various screaming matches on financial reform and fixing healthcare/entitlements.

To hear those on the far right, Fascists monsters are lurking under our collective bed, waiting for us to fall asleep so they can nationalize all industries and make the US unattractive to capital, thereby plunging this great country into the abyss alongside other empires on which the sun has long ago set. The left sees virtue in centrally coordinated systems that make the quality of life in America less dependent on highly variable, state-based programs.  In this vision, we’ll provide for the common weal and wipe out blood money-derived profits, but unless we take swift and broad-sweeping measures to centralize federal control immediately, we’ll be swept into the dustbin of history as another fallen giant.

Interesting that no matter the side, both meet in the middle with their conclusion that we’re headed down the road to ruin.

Look, the desire to organize society around an enforceable ethical code and to take care of the poor, old and infirmed are goals as ancient as the human race. These aspirations separate us from the beasts of the field. Our approach to these goals differs as society matures and technical advances enable us to try new things.  So let’s all take a deep breath and look under the bed. With a flashlight.

I’m a fan of Buddhist monk Pema Chodron’s book When Things Fall Apart and think her work provides a useful frame of reference for the dread we feel about the changes now upon us. “We think that the point is to pass the test or to overcome the problem, but the truth is that things don’t really get solved. They come together and they fall apart. Then they come together again and fall apart again.”

When we can accept the falling apart and coming together of all things in life, starting at our personal lives and including our entire world, we might approach financial reform, health care and entitlements with less dread, hysteria and finger pointing.

All these systems met needs pretty well for a time as originally designed and implemented; things came together at those points in time. Times have changed and new tools and social conditions have come on the scene since then; things have fallen apart.

Two examples:

1. Things fell apart during the Depression, so we implemented entitlement programs and erected new regulatory bodies.  Things came together. I argue that the only reason we’re not in another Great Depression today is the post-Depression social safety nets that now provide unemployment insurance and a baseline of health insurance to our elderly and most financially vulnerable citizens. But since we essentially dismantled Glass-Steagall, and financial mathematicians developed products that were unforeseen by jazz era regulators anyway, we produced fake wealth and things fell apart again.
2. Employer-provided health insurance came into being in a different age, too, beginning in the 1930s and quickly expanding as an employee fringe benefit when wage and price controls were implemented during the Second World War. Breathe in. Time for an update — we don’t even drive vintage 1960′s automobiles anymore, so why a ’60′s era healthcare system? Breathe out.

Now let’s all chant Om and get on with finding third-way solutions to financial and social services reforms that work for all of us.

August Book Lust

If anyone’s read these, please write a review.  My appetite for books far exceeds the time I can devote to them.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street

Excerpts from The Washington Post’s review
Fox, a business columnist for Time, spins a fascinating historical narrative, beginning with economist Irving Fisher’s paean to markets in, alas, 1929. Postwar economists such as Paul Samuelson noticed that most investment pros do not beat the averages. This led to the one positive contribution of the efficient-market hypothesis: Jack Bogle’s invention of index funds, which mimic the performance of the stock market as a whole and keep ordinary people from wasting their money trying to beat it. Fox recognizes that true believers in the market’s efficiency suffered from a “blinkered” mindset and “tunnel vision.” Yet I think he lets them off too easily. He laments (as if it were necessary) the lack of any alternative “grand new theory” and finds that the debate has resulted in a “muddle.”

Fox concludes, “If you do come up with an idea for beating the market, you need a model that explains why everybody else isn’t already doing the same thing.” Not necessarily. Markets aren’t physics. Maybe no one model explains them. The emerging school of behavioral finance fills in many of the gaps left by the efficient marketers. Behavioral finance, which Fox discusses at length, holds that financial man — far from the perfect, mechanical trader depicted in textbooks — is a rather neurotic fellow. He follows the crowd, fails to plan ahead and often makes mistakes. To think that his every price is perfect is a remarkable error indeed.

The Ascent of Money:  A Financial History of the World

Excerpts from The Washington Post’s review

The pleasure of reading Ferguson’s treatment comes partly from the clarity of his explanations of financial concepts but mostly from his pen portraits of the extravagantly gifted and flawed characters who have led money’s long rise. He shows us how far we have come since Mesopotamian moneylenders developed rudimentary accounting around 1,000 B.C. and the Medici created elements of modern banking in 14th- and 15th-century Florence. But he also weaves a long series of manias, panics and crashes into his tale. The Medici family’s surviving papers, he notes, bear scorch marks from the vengeful reformist Savonarola, who set up a Bonfire of the Vanities to destroy sinful goods and sent the Medici packing in one of the periodic reversals of fortune to hit financial leaders over the centuries.

Ferguson sketches the rollicking career of John Law: Scottish con man, killer, genius, lover and creator, in 1719-20, of one of history’s great stock market bubbles. Law effectively took control of the French national debt, substituted paper currency for gold and sold shares in the company that controlled French Louisiana. As the shares rose in price and investors borrowed against them, the volume of paper money doubled in a year, breeding inflation, speculation and the new term “millionaire” before Law’s system collapsed. From that day on, Ferguson writes, all bubbles have followed five stages:

1) Displacement, as economic change brings a chance for extraordinary profits; 2) Euphoria, as investors take advantage of the opportunity, 3) Mania, as novices, crowds and swindlers rush in; 4) Distress, as insiders see their prospects for profit declining because of the mania and start selling; and 5) Revulsion, as all stampede for the exits.

Guts:  Combat, Hellraising, Cancer,  Business Start-ups, and Undying Love: One American Guy’s Reckless, Lucky Life

From Publishers Weekly
Vietnam vet, cofounder of New England Monthly and a media consultant, Nylen, who died last year, shares with punchy humor and tremendous grace his tough approach to taking risks and staring down exacting bosses as well as cancer.

Cherishing such stoical role models as Don Quixote and Ulysses S. Grant (as well as his own father, who spent his prime years as a DuPont executive before a traumatic fall altered his life permanently), Nylen celebrates America’s admiration with gutsiness, and his own lifetime attempts (frequently foolish) to make the Cool Guys Hall of Fame.

The bulk of this memoir is Nylen’s facetious though moving account of his stint as an infantry officer in Vietnam in 1968, and the men he loved and lost—the ghastly experience, he assures readers, was never accurately depicted in popular movies. Shell-shocked, married after release from the army, simulating a normal person and appearing unemployable, he began his accidental career as a media ad salesman starting at Look magazine, dealing with tough bosses like Bill Dunn at U.S. News and World Report and Mike Levy at Texas Monthly before embarking on his own.

Diagnosed with colorectal cancer stage III when he was 60, he endured treatments, surgeries, pain and frequent accidents of his own making, but preserves his cheerful, frank, optimistic and ever competitive spirit in the face of mortal adversity.

*Notes:  The review doesn’t mention that Nylen founded BeliefNet.com.  And yes, I believe that is a set of brass balls on the cover.

Habit: The 95% of Behavior Marketers Ignore

In his first book, communications consultant-to-the-stars (Sprint, Nextel, Cisco, Nortel, TI, Motorola) and “expert in consumer behavior” Martin uses ideas from the worlds of science, technology, psychology, history, philosophy and business to demonstrate how a consumer’s unconscious controls most of his or her behavior. As a result, Martin argues, companies large and small are wasting money and energy engaging the wrong part of the brain (my emphasis added) -rather than worrying over expected behavior or ultimate satisfaction, marketers should focus on how buying habits form through simple, time-tested methods like reward and repetition.

How else would brands like Microsoft-infamously frustrating but ingrained in the culture-and Starbucks coffee-overpriced but ubiquitous (and literally addictive)-make it? In a reportorial style fit for both marketing executives and savvy consumers, Martin presents interviews with marketers, researchers and scientists that outline the principles supporting his method, delineating the executive mind from the habitual (unconscious) mind, exploring how an ideal product like the iPod targets both minds, and providing a blueprint for creating habitual buyers. Martin’s argument requires readers to suspend some long-held beliefs about consumers, but rewards them with some eye-opening perspective.

Update

A Twitter friend  alerted me to this video after I tweeted the url

Another Tweep told me about Paul Krugman’s review of the book in NYT.

Papal White Paper

Papal  encyclicals don’t normally hit my radar.  But this summer, when the Vatican released what some called a papal white paper on globalization and ethics, I took note for two reasons.  First, the subject is one of my favorites, and second, because so many people ask me “What’s a white paper?”

Since so few white papers garner any publicity, I’m commenting on this one, timed perfectly to coincide with the G8 meeting in Italy.

Please note that my comments intend no disrespect to the church — centuries of papal correspondence dictate the form this encyclical takes.  My intent is educating business communicators on the places where a business white paper will align and diverge from the style perpetuated by Pope Benedict XVI.

Telegraph with a great title

The official title of the work is Latin, CARITAS IN VERITATE (“Charity in Truth”).  I can’t criticize the church for using its official language, but I can advise business communicators to go with something catchier.

Define the audience and focus on its needs

The pope addressed this message to “the bishops, priests and deacons, men and women religious, the lay faithful and all people of good will.”

Business communicators, don’t ever try to write this broadly.  If you want to reach everyone from Bible scholars to faithful illiterates, do so with different versions for each audience.

State your objective and stick to it

Straightaway, the pope diffuses any notions or potential criticisms of interfering in politics while staking a claim in perpetuating the “mission of truth.”  I’d grade this objective a solid C+:

The Church does not have technical solutions to offer and does not claim “to interfere in any way in the politics of States.”  She does, however, have a mission of truth to accomplish, in every time and circumstance, for a society that is attuned to man, to his dignity, to his vocation.

More clearly stated, I might suggest: The Church maintains its distance from the politics of States (“Render unto Caesar that which is Caesar’s).  At the same time, She speaks directly to individuals in all walks of life,  including statecraft, to apply Christ’s teachings to their daily lives and decisions in all matters, including business, economics and the proper use of modern technologies.

Follow a logical outline

In Chapter One we learn that CARITAS IN VERITATE is an update of a forty-year-old encyclical by Pope Paul VI and we get a recap of that earlier work .

Chapter Two’s first paragraph tells us why the world needs an update:

The economic development that Paul VI hoped to see was meant to produce real growth, of benefit to everyone and genuinely sustainable. It is true that growth has taken place, and it continues to be a positive factor that has lifted billions of people out of misery — recently it has given many countries the possibility of becoming effective players in international politics. Yet it must be acknowledged that this same economic growth has been and continues to be weighed down by malfunctions and dramatic problems, highlighted even further by the current crisis.

Chapter Three diffuses mis-perceptions about “moral interference” with the economy:

(T)he conviction that the economy must be autonomous, that it must be shielded from “influences” of a moral character, has led man to abuse the economic process in a thoroughly destructive way. In the long term, these convictions have led to economic, social and political systems that trample upon personal and social freedom, and are therefore unable to deliver the justice that they promise.

Chapter Four brings it home to individuals with:

Many people today would claim that they owe nothing to anyone, except to themselves. They are concerned only with their rights, and they often have great difficulty in taking responsibility for their own and other people’s integral development. Hence it is important to call for a renewed reflection on how rights presuppose duties, if they are not to become mere licence.

Chapter Five works its way up from the individual to the family and finally, to the entire race:

The development of peoples depends, above all, on a recognition that the human race is a single family working together in true communion, not simply a group of subjects who happen to live side by side.

Chapter Six discusses the proper use of technology, from financial to communications and bioethics:

By analogy, the development of peoples goes awry if humanity thinks it can re-create itself through the “wonders” of technology, just as economic development is exposed as a destructive sham if it relies on the “wonders” of finance in order to sustain unnatural and consumerist growth.

The Conclusion states:

Development needs Christians with their arms raised towards God in prayer, Christians moved by the knowledge that truth-filled love, caritas in veritate, from which authentic development proceeds, is not produced by us, but given to us.

Grade for following a logical outline: A+.

Research & interviews

White papers are not editorials or essays.  You must back your claims with research and quotes.

In the church’s case, the pope handled that through scripture and footnotes of earlier papal works.

Business writers need to be careful that the sources they cite are credible to the intended audience of the piece.  For example, when I write for financial clients, I won’t include a news story from USAToday when I can find it in the WSJ.

Hone and polish

Again, centuries of custom allow (perhaps even dictate)  using passive voice, but centuries of custom don’t make the papal white paper easy to understand. Business communicators, place your subjects and verbs as close to each other as possible.  Visual cues like bulleted lists and call-out boxes are a godsend (couldn’t resist that).

As I said in another post, good writing requires that you “kill your darlings“  and I have to grade the Vatican harshly on this point.  By including too broad an audience, the encyclical went waaaaay over the heads of most everyone but the scholars faaaaaar too often.

Focus, writers, focus!

Green Tax Code?

Thanks to The Atlantic’s July-August edition, I took a brief walk through the US political-environmental history of my adult life.

For me, it started with President Carter’s much-derided “sweater address” to the nation, in which he suggested we lower our thermostats.  I recall vaguely the buzz about the White House’s unsightly solar panels. Even as a high schooler I paid attention to the news.

What I didn’t understand at the time was how much reliance this country puts on the tax code to affect behavior — individual,  corporate and regulatory.   Hence today’s post and writing prompts for bloggers & newsletter publishers.

Saw-blade growth

Quoting the article: “Plotted on a graph, the history of clean-energy production in the United States resembles the blade of a saw, rising and falling each time subsidies came and went. Japan, Germany, Spain, and Denmark show smooth, upward-sloping yield curves, a reflection of consistent government policy.”

Reliance on venture capital

Long excerpt:

The nature of venture-capital investing, which involves placing many bets in the hope that a few pay off, helped create today’s array of clean technologies. But venture capitalists have been unable to replicate the explosion of growth in the Internet sector, because they aren’t big enough to compete in the $5 trillion U.S. energy market. Google required only $25 million in venture capital to become the company it is today. A large wind or solar facility can cost upwards of $500 million just to get started. “When you’re talking power infrastructure, you’re talking thousands of tons of steel and glass and giant turbines,” says Peter Le Lièvre, the co-founder of Ausra. “All the investors in Silicon Valley combined cannot put $500 million into a project.”

This poses a problem. Venture capitalists can bring an idea from the lab to pilot scale. But sooner or later the limitations of their balance sheets kick in. Many start-ups have made it this far only to die searching for additional financing. Venture capitalists have a term for this. They call it the “Valley of Death.”

The nut of the problem traces all the way back to Jimmy Carter’s choice of tax credits as the vehicle for subsidizing renewable energy. Direct grants would have been simpler. But Congress had recently changed the federal-budget process to keep closer track of how much money was being spent. It suddenly became easier to spend indirectly, by manipulating the tax code. Although no one realized it at the time, Carter’s decision to use tax credits lit the very long fuse on a bomb that detonated last fall and nearly took down the entire renewable-energy industry in America.

The trouble with tax credits (my emphasis added) is that in order to make use of them, you must owe taxes, and most start-ups struggling toward profitability do not. So while a company looking to build a wind or solar facility would qualify for valuable benefits, it had no means of realizing this “tax equity.” The work-around was to partner with someone who did, someone large enough to finance a $500 million facility and profitable enough to incur a large tax bill. Having witnessed two decades of busts and bankruptcies, traditional U.S. banks wanted no part of this. European banks, going by their more positive experience, were comfortable funding large renewable projects, but didn’t qualify for U.S. tax credits. The perversity of the government’s incentives demanded a big balance sheet, huge profits, and an indifference to risk. Enter Wall Street.

Investment banks and hedge funds stepped in to fill the void, engineering tax-equity vehicles with suspiciously complicated-sounding names, like “partnership flip structure” and “inverted passthrough lease,” to exploit the tax benefits. These deals amounted to financing agreements for large infrastructure projects, given in exchange for tax credits, often worth hundreds of millions of dollars, that could be applied against profits earned primarily on other investments (like mortgage-backed securities). For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project. Companies like Lehman Brothers, Wachovia, and AIG became an integral part—even the integral part—of the renewables industry, because the utility-scale projects they financed produce the overwhelming majority of clean energy in the United States.

Basing the entire system of federal incentives on tax equity had two weaknesses, one that has always been clear and another that became clear only recently. Forcing renewables companies to route government support through Wall Street, thereby sacrificing a portion of it, was needless and inefficient. But it also tied the industry’s fate to that of the financial world’s most aggressive players. Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death.

Financial and Environmental Writing Prompts

• Do you agree with Raj Atluru, managing director of the venture-capital firm Draper Fisher Jurvetson, when he claims that the stimulus bill save renewables?  Here’s The Atlantic:

“To fill the tax-equity gap, the stimulus provides $32.7 billion in direct grants and another $134 billion in loan guarantees to attract new investors to large projects. To impose stability, it extends a variety of tax credits by anywhere from three to eight years. Most striking of all, it instructs the Department of Energy to invest directly in promising cleantech companies (though the payoff comes in jobs and environmental gains, not equity). By a stroke of his pen, President Obama made a federal agency the world’s largest venture capitalist. When the official in charge of the program appeared at a Santa Barbara energy conference in March, he was mobbed by eager CEOs.”

• Is it inefficient to force renewable companies to route government support through Wall St?
• What do you think about the Department of Energy now essentially becoming the world’s largest venture capitalist?
• Comment on this claim: “American capitalism—even when it’s working—is not without its limitations, one being that promising ideas rarely get funding if their commercial potential lies beyond venture capitalists’ 10-year investment horizon.”
• Do you agree that The Energy Department research budget has never recovered from Reagan’s cuts?
• Do you have statistics to back up or dispute this claim? “People in cleantech circles often point out that the electric utilities spend a smaller portion of revenue on research and development than pet-food companies do. “

Greenfinger?

Gas the Planet Strategy

With the G8 coming to agreement on climate change, The Atlantic’s article “Moving Heaven and Earth” is timely.  In it, I learned a new vocab word, “Anthropocene,” coined in 2000 to describe the period of time when humans began changing the world’s climate and ecosystems.

I also learned about large-scale projects that are designed to “deform the Earth intentionally, as a way to engineer the planet either back to its pre-industrial state, or to some improved third state.”  These projects fall under the term “geo-engineering”and give me the creeps.

Following is a brief overview of the strategies followed by writing prompts for bloggers and newsletter publishers (but they can also be used for conversation starters at the neighborhood pool party).

Gas the planet

For those who saw Blade Runner, the red skies envisioned by this strategy will be familiar.  Imagine factories whose sole occupation is pumping out sulfur dioxide.  During the day all that aerosolized pollutant would shield the planet from the full blast of the sun and would often redden the sunsets.  Cost estimate: $100billion compared to an estimated annual $1t to cut carbon emissions through traditional means.

Churn the seas

The National Center for Atmospheric Research’s plan calls for a fleet of 1500 ships constantly churning sea water and spraying it high enough for the wind to carry it to the clouds, making them whiter and fluffier, which in turn enables them to better reflect the sunlight. Cost: $600m up front plus $100m annually.

Frisbees

An astronomy and optics professor at the University of Arizona proposes shooting Frisbee-sized ceramic disks at the gravitational midpoint between Earth and Sun to provide a huge sunshade and keep the planet in a perpetual state of annular eclipse.  Cost: Several trillion (the technology doesn’t exist).

No international treaty needed

The trouble with treaties is the incentive to cheat, but with geo-engineering any one country could act alone.  “Instead of a situation where any one country can foil efforts to curb global warming, any one country can curb global warming on its own.  Pumping sulfur into the amosphere is a lot easier than trying to orchestrate the actions of 200 countries  — or for that matter, 7 billion individuals…”

The article contemplates a possible “Greenfinger” who might implement geo-engineering with the single minded focus of  the James Bond villain, Goldfinger. “There are now 38 people in the world with $10b or more in private assets…theoretically, one of these people could reverse climate change all alone.”  Even a poor country like Bangladesh could afford to take unilateral action to reduce the chance their low-elevation coastal zones would wash away in global-warming-induced rising seas by pumping out sulfur dioxide.

Cut carbon emissions

There is almost universal agreement by climate scientists that we’re better off reducing carbon emissions than going into geo-engineering.  Lots of ideas there too, including capturing emissions in giant cooling towers, but the problem is where to put all that captured carbon.  One idea is to inject it into the “right kind of geological structure” that would be deep enough to keep it there.

Another reduction strategy for reducing the carbon dioxide we currently produce is blooming plankton, which thrives on it.  Some envision offshore plankton forests to replace those no longer on land.  Problem is, the dead algae would produce methane, a greenhouse gas that’s 20 times stronger than carbon dioxide.

The article concludes with the suggestion that we “keep investigating geo-engineering solutions but make quite clear to the public that most of them are so dreadful that they should scare the living daylights out of even a Greenfinger.”

A note on language

As I wrote in May, people don’t respond as well to negative as they do positive language.  For example, the founder of ecoAmerica observed “When someone thinks of global warming, they think of a politicized, polarized argument. When you say ‘global warming,’ a certain group of Americans think that’s a code word for progressive liberals, gay marriage and other such issues.”

Further, in another Atlantic Monthly article by Yale psychologist Paul Bloom, “Although it might be hard to think about the person who will occupy your body tomorrow morning as someone other than you, it is not hard at all to think that way about the person who will occupy your body 20 years from now. This may be one reason why many young people are indifferent about saving for retirement; they feel as if they would be giving up their money to an elderly stranger.”

Bottom line for environmental communicators: find a way to couch messages in positive language; ground them firmly in the present.

Environmental and Financial Writing Prompts

• If you have working knowledge of these or other geo-engineering strategies, please leave a comment with links.  You might consider comparing and contrasting those you know with those in The Atlantic’s article.
• Refer to the post I wrote about Prince Charles’ Rainforest Bond proposal. Given what one rogue nation could do to gas the planet with sulfur dioxide, perhaps it makes sense to pay rainforest countries for the services their natural resources offer to the health of the planet and every living being.
• Given the state of venture capital, by what means can environmental entrepreneurs fund their work?  Is there something between governmental support and venture capital?  With so many unemployed financial mathemeticians looking for something to do, this seems a worthwhile problem to ponder.
• How can funding and regulation work together to protect the entire world from a Greenfinger or rogue state?

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