More Economic and Investment Woes Ahead

The last 6 months have been appalling for global stock markets and, furthermore, tragic for ordinary people who work and shop for their basic supplies.

I see no room for optimism about the economy, particularly in the United States. The worst economic news is likely still to come.

What commenced as a stock market and housing market correction in the USA now is intensifying into an enormous financial storm, which will likely spread globally.

Most of the fundamental factors remain as I have described them in my blog posts during the past 2 years. This severe financial crisis is the result of a decade of expansive fiscal and monetary policy, which tried to forestall necessary economic adjustments; now we face a gigantic day of reckoning.

Inflation is finally getting some attention, but it is now too late for a quick cure for this pernicious cancer. American monetary policy has been lax for several decades, so a little tightening now will yield very little result. We will get used to “stagflation”, which is economic stagnation combined with inflation.

Global demand for energy and basic materials will outstrip the supply for a while longer, so the litany of high gas prices, rising inflation and disappearing jobs will continue for a long time

I have no favourite investments to recommend in this kind of economic environment. Keeping your money in cash is discouraging, because the value of money is falling due to significant inflation, far more inflation than governments admit.

Governments report statistics for “inflation adjusted for energy, food and other abnormalities”, which means they exclude the things that are costing us more, in order to report a smaller inflation number. Any shopper knows that inflation is worse than reported.

Bonds are not a good investment now since interest rates will soon have to rise, so the prices of bonds will likely fall. Stocks are still dangerous in my view despite having fallen considerably in the past 6 months. So fasten your seatbelts.

The only real and lasting solution to our economic woes will be an ultimate return to economic prudence: by workers, by consumers, by banks, and by governments. We need to stop living on credit cards, bank loans, and government printing of money. We need to save before we spend.

Individuals and companies must return to solid work on good products and services which people can afford. The American economy in particular must face up to living in the real world.

Voters and politicians look for quick solutions and for scapegoats, but there are none available. High energy prices are not due to nasty speculators but rather due to our profligate consumption of disappearing resources.

(“Profligate” means utterly and shamelessly immoral or dissipated; thoroughly dissolute; recklessly prodigal or extravagant.)

No amount of new drilling for oil or new energy technology will enable us to maintain the consumption level we want. We must get used to high gas prices and airlines reducing their routes and charging us far more to fly.

We can, we must, and we will adjust to this harsh new economic reality. We could live on much lower consumption, as our families did successfully in previous generations.

Our choice is whether to reduce our spending quickly and voluntarily now, or to complain loudly, hoping vainly that the government can rescue us. The government does not have the resources to do this, regardless of the promises made during election campaigns.

Outside of the United States, conditions are not quite as dire yet. Canada is still doing OK. That is because the Canadian Government has maintained balanced budgets for a decade and now is enjoying the surplus from increased energy revenues. But most countries are doing worse.

Economies in Asia are still growing somewhat, but watching their biggest markets contract. The Chinese equity market has experienced a dramatic and much needed correction. There is considerable debate whether the rapidly developing countries will be able to escape the worst of the economic storm. Who knows?

Life can still be good in these reduced circumstances. This is a time to return to fiscal prudence and to enjoy the things which don’t cost much money – like friendship, family, nature, music, books and much more.

What is Good Communication?

I have always been fascinated by communication, whether in writing, public speaking, or conversation.

I was asked recently to teach a group of intelligent young bankers from Shanghai about communication in an English language business environment.

English is not their first language and so they make obvious mistakes in our language. I fully sympathize, since I understand perhaps a hundred words in Chinese. My daughter Jenny got her University major in Chinese and has gone to China for further language training, but still considers her skills quite inadequate, compared to native Chinese speakers.

So my teaching challenge was not to improve the English skills of my Chinese friends, which would have taken far too long. This was also unnecessary, since their command of English is already quite good for someone working in Asia. So I focused instead on what makes good communication, apart from expert language skills.

I thought of good and bad communicators I have known: for instance, there was Charlie, a Harvard graduate with a PhD. in economics who had an astounding vocabulary, but unfortunately was still a poor communicator. Then I remembered various immigrants and poorly educated business people who nonetheless became highly effective communicators despite their inadequate English.

After reflection, it became obvious that communication depends on something more fundamental than just language skills. Good communication requires a certain attitude, a willingness to share our inner thoughts and emotions, and to reveal who we truly are beneath our external appearance.

I wrote a previous blog on June 28, 2007 on Social Skills and Relationship Skills, which touched on some of these issues. I said building good relationships – whether in business or in our personal lives – does not depend primarily on charm and dazzling conversation, but rather on integrity, sincerity, empathic listening, and consciously nurturing important relationships.

Communication needs risk-taking, vulnerability, and passion. It requires reaching out to a person, or a whole group, to develop a closer relationship of trust.

Communication should normally be enjoyable to both the speaker and to the listeners. Humour and stories help this.

Good communication requires careful choice of the words we use and also attention to the response that we are receiving. It must be interactive, not a one-sided monologue. We should be brief and concise.

Communication becomes alive when we act out our thoughts and feelings in a spontaneous natural fashion. A formal speaking style inhibits this.

Communicating to a larger audience requires reflection and preparation so that we can get our points across without wasting time. A speech or essay needs a central thesis which is clearly stated with supporting facts, arguments and illustration. These should lead the audience to a reasonable, yet important conclusion. Making things plain, simple and understandable enables success.

Speech and conversation involve our whole person, especially face and eyes. Looking at our audience and trying to interpret their response is essential.

Body posture is also influential. Erect, confident posture inspires a positive reaction. Defensive posture and not looking at our audience detract immeasurably from our message.

I am still struggling with how to communicate better, especially in writing, where live interaction with readers is difficult. Some of you send brief notes with encouragement, criticism or questions, but mostly I write in sort of a vacuum. Meeting with people in person is more satisfying.

However, writing is the best way to communicate important ideas across both space and time. Despite the constant struggle, it is my most creative endeavour.

Business Success should be measured by friendships made and community established

As a young man of 30, I was selected over several older candidates to start up a commercial banking office in Vancouver for ABN AMRO. Although I had enjoyed a good career up to that point, I was struck by this enormous opportunity to build something completely new. What would it look like? What should be the main goal for this new office?

I finally decided that my paramount goal was to build up a business where all employees had the potential to enjoy and fulfill themselves on the job – to build a real workplace community.

My office did become a great place to work and it was also highly successful by any financial measure. It became the largest and most influential foreign bank office of its kind in Western Canada. What I discovered was that happy employees gave their customers superior service, which enabled the office to grow and become profitable.

I was thrilled that many of the employees told me this office was their best workplace ever during their entire career. Many of these employees still meet together to remember the good years we enjoyed as a big happy family (with a few normal squabbles, of course).

I later worked with some of the people from that ABN AMRO office in my other executive assignments. There are several colleagues with whom I have worked with repeatedly over 2 or 3 decades, due to lasting we friendships formed. And after 3 years of retirement, I still correspond frequently with friends that I worked with.

I wish I could say that my business career was an unbroken success story from start to finish – but I would be lying. Few careers really go that way. We all face tumultuous waves of challenge. Economic downturns, organizational chaos within big companies, unhealthy politics, and wrong-headed bosses make survival in any career hazardous, even when your own performance is superior. It is like being a great sailor on a small boat on a stormy ocean. Sometimes just getting home alive is a big accomplishment.

Fortunes of companies depend on countless factors, many of which are beyond management control. However in my experience, the best guarantee for organizational success comes when management is totally dedicated to the interest of all their staff; when it becomes a real community in the work place, a big happy family.

Two of the best run businesses in Western Canada – an airline and a bank – use this formula. All employees are shareholders and receive significant rewards when their organization succeeds. The Canadian Western Bank has had the highest stock price growth for the past 5 years of any bank in North America. The airline – WestJet is a pleasure to fly with as well as decidedly successful financially in a time when making any profit whatsoever seems difficult for the airline industry.

So is working for growth and profit wrong? Absolutely not! Both goals are essential for any company to survive and succeed. But if they are the only objectives, I believe the business will have a lower chance of success and it won’t become a friendly workplace.

Both human values and financial values are immeasurably significant in business. But when these values conflict, I always value people more than money. Business choices which put finances ahead of people rarely succeed in the longer run. But seemingly few companies have embraced this vision yet.

Gambling, Speculation and High Risk Investments

Here are two quick stories of people I knew well.

“Jim” (not his real name) was a close friend of our family. He was a very bright young man from a well-off family. Jim was sharp, persuasive and passionate. Unfortunately, his life didn’t work out for him at all.

Jim missed out on opportunities that should have worked for him. Then he found what seemed to be an easier way. His college instructor introduced Jim to a sure-fire mathematical system to win big money at gambling.

Before long, Jim had lent his new friend all of his money for their mutual gambling experiments. Soon, he had also used up all of his credit cards. He borrowed heavily from his friends, giving every reason but the true one. As he lost the trust of his friends, Jim sank deeper into debt and depression. Getting lucky at the gambling table seemed the only solution to him. Finally, after borrowing money from loan sharks, who beat him up, Jim chose to kill himself with a drug overdose, at the age of 22.

Second story: another young man I know well (“Sam”) inherited lots of money. Sam had an Ivy League college degree. He had several fine cars and spent his money freely. One day, Sam discovered the excitement of day trading. Although he told wonderful stories about his success, he lost everything when the NASDAQ high-tech market collapsed in early 2000. To his surprise, when Sam was broke, he couldn’t even find work at minimum wages because he lacked any recent job history.

What these two tragic young men shared was a mistaken belief that there is a quick, easy way to get rich. Jim and Sam sincerely believed that because they were quite intelligent, they would have the skill (and luck) to make it big outside the mundane world of hard work and patience.

They are not alone. When I watch people gamble away their hard-earned money in risky investments, I cringe. I feel sick in my stomach. It is like watching an approaching collision from a distance, with no way to stop the inevitable wreck.

This kind of irrational behaviour is not confined to the young and inexperienced. I have known many senior citizens, successful business people, and intelligent professionals behaving in a similar fashion and losing their money ever so quickly. Many have done it by simply following the advice of their stock broker or investment adviser.

Let me suggest a few rules to avoid tragic investment losses:

• Any investment that sounds quick and easy is likely to fail quickly.
  
  
• If someone parades impressive credentials or uses complex arguments in trying to sell you an investment, avoid it like the plague. I once invested a in a high tech company because its very distinguished chairman persuaded me that the company had enormous potential, even though I didn’t really understand his business. Within a month, the company was bankrupt.
  
  
• Don’t ever put all or most of your eggs in one basket. Spread out your investments into many parts, so that if one of them fails, you won’t suffer a catastrophe. Stock market indexes and mutual funds provide more diversification of risk than any individual stocks.
  
  
• Don’t expect to make large returns. Warren Buffett, perhaps the greatest American investor, warns against looking for returns greater than 6% to 8%. You may sometimes get lucky with a sound investment when the market is strong and make 15 – 20% on your whole portfolio for a year or two. But those instances will be offset in the longer run by investments that lose money in a bad economy, like the one unfolding at this moment. Long term investment returns rarely average above 10% for even the best people in the investment business.
  
  
• Avoid start-up companies, companies that are claiming a quick turn around, and/or innovative technical concepts which you don’t fully understand. At most, I would put a fraction of 1% of my money in that kind of situation, even if it sounded absolutely wonderful. Statistics don’t favor these kinds of investments.
  
  
• Avoid any investment which claims there are no risks involved. Even US Government bonds and bank deposits have some risk. Most investments have far greater risks; if you can’t see what these risks might be, you don’t understand them yet.
  
  
• Avoid any investments proposals made through the internet, from ads coming in the mail, or by telephone solicitation. They are hard to check out thoroughly.
  
  
• Also, avoid investments recommended to you by your friends. It is too tough to remain objective.
  
  
• All investments, whether in stocks, commodities and bonds can sometimes go down sharply. I have never met anyone yet, even a billionaire, who doesn’t lose money on some of their investment picks. They are lying if they tell you otherwise.
  
  
• Keep most of your money in the bank or in government bonds unless you can afford to take big losses. In the current economy, some of the world’s largest companies are seeing declines of their stocks of 10%, 20% or even 30% within a few months time period. If you believe that you can always tell the good stocks from the bad ones, I would like to recommend psychiatric help for you!
  
  

Gambling is a vice to be avoided, especially gambling with your precious savings on stock market or other investments. Investment is a humbling and risky business. To have long term success you will need to spread out your investments among very well proven assets. Trying to get rich quick is a path to financial disaster. Sound investing is mostly dull.

Postscript

My gloomy outlook on the world economy and financial markets (as expressed in my blogs during the past 18 months) is proving out to be correct. For what it is worth, I believe we are at least one or two years away from the bottom of this massive downturn. Beware!

Fed to the Rescue?

Before today, I had never heard of Professor Nouriel Roubini of New York University’s Stern School of Business, who is reported in the story below from the Financial Times. But readers of my blogs over the past few years will have noticed my similar views about the degenerating American economy. And I have previously mentioned the Financial Times of London, available online at http://www.ft.com/world. This paper, together with The Economist and others, have provided more objective reporting than is available in the mainstream American financial press.

One of my readers has pointed out the sharply declining non-borrowed reserves at the Federal Reserve system. I should warn you that I am a generalist in in economic matters, not a specialist on the banking system. But I have long been aware of the developing credit crunch, which is the result of countless bad loans, as mentioned in my blog of January 21 about the Big Time Debt Crisis.

Very briefly, I want to clarify that I agree that the Fed and the American Government must do whatever is needed to prevent widespread bank failures. However, going beyond that in vainly trying to stave off the necessary contraction of the stock market and housing prices would ultimately lead to a worse outcome (as I pointed out on February 4, 2008).

The banking system and the overall economy need a return to disciplined management, not perpetual bail-outs. The time for adolescent behaviour is past. The government and financial system must grow up and take the necessary medicine. This will not be pleasant, but the alternative is unthinkable. We need a return to sanity and sober economic principles. No government should stand in the way of necessary economic corrections. They provide cleansing for the whole system.

America’s economy risks mother of all meltdowns

By Martin Wolf

Published: February 19 2008 18:21 | Last updated: February 19 2008 18:21

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.” Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor.

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome”**. The characteristics of this scenario are, he argues: “A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe.”

Prof Roubini is even fonder of lists than I am. Here are his 12 – yes, 12 – steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks’ ability to offer credit.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The “credit crunch” would then spread from mortgages to a wide range of consumer credit.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt. Such defaults would spread losses in “credit default swaps”, which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

Step nine would be a meltdown in the “shadow financial system”. Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.

These, then, are 12 steps to meltdown. In all, argues Prof Roubini: “Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.” This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about “decoupling”. If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

*A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008

martin.wolf@ft.com

Copyright The Financial Times Limited 2008

Stop the Press: More Fiscal and Monetary Stimulus won’t fix the ailing American Economy

The traditional response to financial problems by Latin American, African and other third world countries has often been to print more and more money on their printing presses, which then unleashed enormous inflation and devalued their currencies. University of Chicago economist Milton Friedman gained worldwide acclaim by proclaiming that central banks must carefully control the growth of money in every country, or else the economy will suffer and stagnate. The Government of Chile imported his theories and gradually transformed their ailing economy into the most successful economy in South America; other countries later followed this proven model.

Surprisingly now however, the Government of the United States is behaving like a 3rd world country in choosing high monetary growth plus record fiscal deficits, desperately hoping to avoid a looming inflation. I believe these policies are a recipe for disaster.

Imagine a patient who goes to his doctor and says: “I want you to keep me healthy and to make me feel good all of the time. The way I know that I am healthy is by always feeling good. So never let me feel bad.”

The doctor obliges this unreasonable patient and at every visit prescribes more and more pills, but ultimately the patient becomes chronically ill. The patient has also stopped feeling good, a long time ago.

The doctor is the American government (Dr. Bush and Dr. Bernanke) and the patient is the American population who elects their government. The pills are fiscal and monetary stimulus.

This is not a perfect metaphor, but it comes close to the actual situation. The doctor has erroneously come to believe that with increasing doses of pharmaceuticals, no patient should ever get unhealthy or need to feel bad. So the doctor has prescribed these magic pills in ever increasing doses; regrettably, the patient is now looking and feeling just awful.

These expansive economic policies are not entirely new. They started gradually under Doctors Clinton and Greenspan at the beginning of the 1990’s. Since then, America’s trade (or current account) deficit went from a balanced position to an annual deficit of $850 Billion. The American federal deficit widened to over $400 Billion, partly to pay for the Iraq war.

A lot has been written on this distressing topic, particularly in one of my favourite economic newspapers, The Financial Times (http://www.ft.com/home/us). Regrettably, the American press is strangely silent about this potential economic nightmare.

Presidential candidates left and right are rushing to join the Stimulus Parade. The exception is Ron Paul, a little noticed Republican candidate, who seems to better understand this evolving economic crisis.

The real issue is no longer how to avoid a major recession in America – that recession regrettably is already inevitable, and it will be a worse one due to these ignorant doctors. The American population had been lulled into a comatose complacency by the previously escalating stock market and huge increases in house prices, which had made Americans feel rich; that false contentment has now given way to fear as housing prices and stock markets are falling.

Meanwhile, inflation has gained momentum and this unchecked rise of inflation will bedevil the US Government and US Federal Reserve years to come. We should pity the winner of the 2008 election, because he or she may get the worst economy since the one President Roosevelt inherited after the 1932 election.

But how does this all relate to the Big Debt Crisis? Very simply, when so much new money was created during the past 5 years at very low interest rates, lenders felt pressured to find a home, any home, for this ocean of excess liquidity. Credit standards were thrown out the window (e.g. subprime loans), since loans against houses were thought to be always collectible, even if the borrower was unable to pay. Now these bad loans are defaulting in catastrophic amounts and the entire financial system is in deepening danger.

Unfortunately, official government statistics are so distorted (please see my blog of June 9, 2007) that it will take a long while to unravel what has actually happened to the American economy. But at a minimum, the mighty American Dollar has been permanently devalued and de-throned as the world’s leading currency. America is now the world’s largest debtor nation, when a few decades back it was the world’s foremost lender.

Lowering interest rates and decreasing taxes will not stop this economic freefall for more than a brief time. The “doctors” are just printing more money and devaluing their currency still further. A far better course would be to take the painful medicine of an economic correction bravely and then to return to more disciplined economic practices.

Sound economic management would involve strictly controlling monetary growth, as has been done in Europe and elsewhere. It would mean encouraging higher personal saving for Americans, who have long had the lowest savings rate among industrial nations. It would also mean reigning in federal deficits. Balanced budgets these days are only political slogans; government projections always show the deficit disappearing in 5 – 10 years, but every year in fact the deficit continues to worsen.

Finally, the international trade balance really matters a lot. It is not good enough to blame this problem on lower wage counties like China and Mexico. Advanced nations have always needed to compete with poorer nations. America should stop whining and start producing goods and services that the world wants to buy.

There is much more to be said about sound management of an economy, but these are some of the core points. These structural changes could take up to a decade to accomplish. But unlike excessive monetary and fiscal stimulus, they would eventually produce a healthy economy.

(Note to readers outside of the USA: while the American recession will affect the whole world, it will not be nearly as intense in Canada, Europe and other soundly managed economies. But we should wish America well, since we will share some of its pain.)

Big Time Debt Crisis

The financial crisis that swept across America in 2007, and has now worsened in January 2008, seems very confusing. How could these subprime mortgage loans result in such a complete rout of the global stock markets and now also a looming American recession?

I have a special perspective on this financial situation, since my career included 25 years in banking. This emerging crisis began long ago and is the culmination of decades of bad choices by the financial community, particularly in America. The obsessive desire for short term gains to justify inordinate bonuses for CEO’s (and their supporting management) has finally brought us to a Day of Reckoning.

My post-graduate degree was from the “School of Hard Knocks” – on Wall Street in New York. I remember clearly my arrival to this new world. I had just graduated from Harvard University, where there were student demonstrations against the Vietnam War, idealistic concerns about poverty in America, and growing worries about the morality of the American government. Arriving at Wall Street in 1970, my angle of observation abruptly changed.

A crusty old banker gave us new management recruits a hypothetical challenge: we needed to bring in some new loans to increase the revenues at our bank in order to justify our salary. We needed to choose between lending to an unsuccessful businessman of good character, or else lending to a successful businessman who was totally unscrupulous.

It didn’t take long for our banking class to discern the “right answer”. Obviously, we could not get repayment on our loan by lending to an unsuccessful businessman, so damn the moral scruples and make the loan to the immoral client. (In my later banking career, I found out that both choices were equally bad.)

This vignette illustrates how little morality has ever counted on Wall Street. The only commandment they seemed to follow was Thou shalt not get caught! Virtually everyone worked exclusively for advantage to themselves, at the expense of everyone else. If there was a profit to made, that was sufficient justification for almost any conduct.

Despite this moral blind spot, Wall Street was an outstanding place to learn all about finance. People came from every continent to participate in this exciting marketplace. The New York technical expertise was unrivaled. In those days, it was truly the world’s financial Mecca.

However, there was one cloud in this brilliant sky in the 1970’s. It came from making large loans to poor nations (seemingly at a good profit.) I asked my bosses the innocent question of how these poor borrowing countries would ever be able to repay such giant loans. The executives retorted: “these loans will be refinanced, since a sovereign state can not possibly declare bankruptcy”. As it later turned out, my naive skepticism was prescient. When these loans eventually came due, there was indeed no refinancing available. This was the start of the Third World Debt Crisis, which lasted for decades, but which was small compared to the current financial problems.

In such a short space, I must oversimplify the current subprime situation to its central points. The engineers of these subprime loans correctly observed that mortgage loans have been remarkably solid historically in both good times and bad. Furthermore, the houses used as collateral have steadily risen in value, decade after decade. So why not offer these loans to a larger population including those without any credit history, since they would pay a premium rate to offset slightly higher anticipated loan losses?

What was left out of the equation was that the advent of vast sums of new mortgage credit would drive housing prices up sharply, until the housing bubble finally burst. That is what has now transpired. Many borrowers in America find they have mortgages which are bigger than the reduced value of their houses. Many of these people were already financially stretched when they applied for the subprime mortgages. So now the borrowers either walk away from their debt, or else their bankers call the mortgage loans, because the loans have gone into default.

There were other elements to this subprime situation, such as artificially low initial mortgage payments, which then rose sharply after a few years. But the central point is that these loans violated all reasonable credit standards. With the collapse of the housing market, the collateral is now inadequate as well.

Beyond subprime mortgages, creative financial engineering has created many other shaky financial debt structures, which are also collapsing like dominoes now. In aggregate, these additional classes of debt are bigger than the subprime loans. The largest financial institutions in America, and elsewhere, are facing the most severe crisis in confidence since the 1930’s. They are trying to raise new equity from foreign investors to stave off disaster. Who knows where this will all end.

(For those who read my blogs regularly, you may remember that I have been suggesting that a major correction is imminent in a number of my blogs last year, particularly the one entitled “A Hard Rain is A-Gonna Fall” on March 8, 2007)

But this is just half of the story of the Debt Crisis. The American Government had a major role in creating the conditions which brought this crisis about, so they deserve equal blame. I will explain that macro situation in a subsequent blog.

All about Work and All about Money – (An Introduction)

Some of you know that I have been planning for a while to write a book (or two) about work and money. I want to write about how to work well, so that we can become happier and more fulfilled in our work. I want to tell about how to get enough money to live well, and how to save and invest it wisely.

Not everyone will want to read my books, but there not many people who lack interest in work and money. You may rightly ask if there is anything more to be said after so many books have already been written on these subjects. My answer is that many people do not succeed in terms of enjoying their work, even if they earn plenty of money and rise to positions of importance. Few people know enough about their work and money to use it to full advantage in their own life, and also in their family and community. Some people even suspect that money is mostly evil and that work is essentially organized to frustrate you (which is an understandable viewpoint).

You might also ask about my qualifications to write about these big subjects. I could mention a Harvard degree; years spent working in big banks and on Wall Street in New York, in Frankfurt, Germany, in Vancouver, Canada, and elsewhere. Furthermore, I have managed during my career to earn lots of money and to rise through the ranks to become a chief financial officer, a chief operating officer, and a chief executive officer of two public companies in Canada. I have been responsible at various times for managing groups of employees ranging from a dozen, 500 and up to 15,000 people reporting to me, directly or indirectly.

But my biggest qualification to write on these topics comes from a lifetime of survival in the school of hard knocks. Hopefully, by reading what I have experienced, you might avoid some difficulties and achieve your goals and ambitions more quickly.

These books will contain occasional anecdotes about the pinnacles of finance and corporate life but they will be more about the every-day work that most of us do. Right now, in my retirement, my work is gardening, managing a construction project, and cooking meals for those who live here or visit us. My career also began at simple level: working on a farm, and in carpentry, masonry and other basic jobs. In many ways, the most important aspects of our jobs are similar, whatever our job and function.

In the world of work and money we all experience failures, big and small. In recent years I have spent some time helping street people, the homeless, and chronically unemployed people. There seems to be very little I can do for them compared to their enormous needs. But if they had perhaps known the right things about work and money early in their lives, I believe some of these unfortunate people might have avoided extreme poverty and wrenching disappointments.

I am trying to write for a large cross section of people in various types of jobs, those with little or lots of money. The issues and questions are similar, whether we work on a high-up level or in a more “ordinary job”.

Until I get ready to publish my books, there will be no tight outline of the topics – sorry for the disorganization! If you want to correspond with me, please write an email to paul.wagler@gmail.com. I would appreciate your comments, questions and feedback!

Meanwhile, enjoy your work and save some money!

Building Yourself a New House

I have dreamed since childhood – as you may have also – of building a house of my own design. It would incorporate everything I could imagine wanting in a house and it would reflect my unique personality.

Like most childhood dreams, this one got delayed many decades until my wife and I retired. Then, feeling well-off, we embarked on this dream. We hired an inspired architect, gave him our long wish list and eventually got back some exquisite drawings. We didn’t take much time to reflect on these architectural plans since we had planned a 3 week vacation to Egypt and Israel.

When we got back, the new house was just getting started. The first difficulty was digging out the basement. We live at the bottom of a mountain. It turned out that a few feet below the surface of our hillside lay impenetrable bedrock which had to be blasted out. Since there is only one qualified blaster working on the Sunshine Coast of British Columbia, we waited quite a while to start the excavation. We watched endless truckloads of rock and dirt getting hauled away, since our large house also had a large terrace to excavate.

The next surprise was finding out that our house would feature a number of concrete pillars, which looked like small copies of the stone pillars we had seen during our Middle Eastern trip. Being unable to fully comprehend architectural drawings, this important detail had escaped us in our hurry to leave for our vacation. Although the concrete itself was not expensive, the intricate construction of these lovely pillars added considerable expense and delayed the project for several months.

Once the concrete was all poured for the foundation, we finally realized just how big this new house would actually be. Friends joked that it looked like a small shopping mall or perhaps Taj McWagler. Although partly delighted by this immense and lovely edifice, I felt a sharp pain on my right hip where I keep my wallet. The house was far more expensive than we had planned. It does contain a swimming pool, hot tub, spacious bedrooms, a soaring great-room and a perfect kitchen, but the price has reduced our retirement nest egg.

I tell you all these details not only for a laugh at my expense, but because I found that many other people have gone through a similar experience.

So if you ever get tempted to build The Perfect Nest, here are a few pointers:

• Even if you are financially savvy, it will likely cost a lot more than you think (particularly if it is custom designed by an architect.) You could avoid both the agony and the ecstasy by using a standard design where you can change only a few of the design details.
  
  
• Building a house usually takes much longer than you think to finish.
  
  
• Every new wish you incorporate will add substantially to the total price.
  
  
• There are hundreds of decisions to be made in a custom house, which cause a lot of anxiety. Doing it after you retire would be a good idea, since it can become a half-time job or more.
  
  
• This dream project may leave you house-rich and cash-poor.

That said, we have nearly achieved our dream house and will be moving in by the end of this year. For us, it has been a great experience, even though we don’t feel as financially well-off as we did before the house started. However, we look forward to enjoying many happy years together with friends and family in our new home!

Surviving Politics in the Workplace

Although I am now happily retired and can eat my dinner on a sundeck overlooking the Pacific Ocean as a majestic eagle soars overhead, I still occasionally have disquieting dreams at night that remind me of the intense struggles I experienced at work. The most powerful dreams are reminders of the heavy stress from brutal politics during my days as a rising manager and later as a CFO and CEO. Memories of Machiavellian plotting for my downfall come back so vividly that it seems just like yesterday.

These days I sometimes meet with people going through similar struggles in their workplace. Whether you work for a small business, a large corporation, or a government or educational system, the struggles at work are similar. I want to provide encouragement so that you can survive these challenging times and succeed in your career, but not to minimize the intensity of the struggles you may be going through at times.

Every job (with more than one self-employed person) has its politics. People compete at work for pay and promotion. Employees vie for the attention of the boss. There are rumours and intrigues nearly every day in the workplace. There are insiders who seem to be getting ahead and outsiders who are feeling upset and isolated.

Politics operate at every level of the workplace, whether or not you are aware and noticing. (Actually, ignoring the politics most of the time is good idea, if you can do it.) At the higher levels of organizations the politics get even more intense. Some managers are being promoted and their pay is increasing rapidly, while others are losing out for reasons they can barely understand. Ethics are sometimes conspicuous by their absence.

Much of politics has to do with the boss and/or the organizational hierarchy. Aggressive employees are constantly seeking greater authority and pay. They often help topple vulnerable managers. Sometimes it seems like the same behaviour as seen in a wolf pack.

The culture of each workplace is unique; however, each workplace has many elements in common with other organizations. The personality of the CEO or boss determines much of the culture, but there are other influences as well, particularly when there are outside owners or a long history. There are some companies with a relatively good working environment, and other workplaces are so negative that survival seems especially hard; however, most working environments are a mixture of both healthy and less healthy elements.

Other articles have been written on this subject, but I want to give you my observations of how to survive in this world of uncertainties:

• Concentrate on doing your job well above all
  
  
• Never speak disrespectfully about your boss or your organization to anyone, no matter what your private opinion may be. If you have nothing positive that you can articulate, it is better to say nothing about them.
  
  
• Take time to chat with people briefly when they are friendly, but avoid becoming part of a gossip network.
  
  
• Learn to get along with bosses and coworkers with a minimum of conflict
  
  
• Be helpful to everyone to the extent that you can manage it (but beware of people dumping their work on you)
  
  
• Be a friend to everyone you work with, but don’t become particularly friendly with one or two persons (even the boss) at the expense of others
  
  
• Be prepared for lots of ups and downs in your popularity and reputation, even when you are doing a good job
  
  
• Make sure that you maintain a strong emotional life with friends and family outside of your workplace
  
  

• Counter the job stress by eating well, getting enough rest and setting aside time for recreation.
  
  

• Remember that you can influence everyone around you for the better if you conduct yourself well. You will be noticed.

Trying to find a job without any politics will succeed only if there are no humans working there. Politics can become intense and demoralizing at times, but if you try hard, you can succeed and enjoy your work despite the office politics.

The worst of workplace politics usually comes out during times of major organizational change or when there is new leadership. Fortunately, these intense moments do not last long. There are long periods when the politics subside to a minor distraction. During these times the more positive aspects of the workplace are more noticeable.

My waking memories of work are mostly quite positive: office parties, wonderful friendships that have lasted longer than the job, chances to learn and travel, and many other wonderful things that happen at work. I don’t know why my dreams reflect the extreme negative experiences – perhaps it is like war; no matter how long the peacetime, the memories of conflict remain.

Social Skills and Relationship Skills

Our world is mesmerized by appearance: the handsome movie star, the glamorous actress, the one-liner politician, and all of the trendy and beautiful people – they look out at us from every magazine and from every screen. When we meet them occasionally in real life we are tempted to accept them at face value.

In business, social skills seem to mark the highly successful person. We envy someone who can walk into a room, figure out who is important, and is able to make just the right comments instinctively. They can tell stories and jokes with aplomb, they go to the right restaurants and resorts, and they are usually in the know about most popular topics.

But in my long business experience, social skills are often not enough to go the full distance. Obviously, social skills are a real asset in sales and in management. They can facilitate effective presentations for technical experts. But entertainment skills without real substance in building long term relationships don’t work for very long.

Those with the best social skills often burn out early. They often go from one position to another and change employers frequently. They may promise too much and deliver too little. They don’t always wear well. People with social skills alone lose their credibility over time.

The missing ingredient for successfully working with people in the long term is relationship skills: the ability to build and maintain important relationships for many years with the people who matter most, whether inside or outside of an organization. I have worked with highly successful people who were deficient in their social skills, but nonetheless had remarkable relationship skills.

Obviously, having strong technical, financial or other specialized business skills also makes a big difference in building business relationships. But apart from knowledge and expertise, there are other ingredients to building effective relationships:

• Commitment to building relationships People are the most important ingredient in any business, so they must always have first priority. People are more important even than projects or profits, since there are no major accomplishments possible without developing effective relationships. Commitment means spending time with people and regularly calling or visiting key people that you don’t see in the normal course.
  
  
• Integrity In the long run, if you are not trustworthy, your relationships will fail. And if you waste your time developing relationships with others who lack any integrity, you will be disappointed!
  
  
• A long term focus Relationships take lots of time to develop. A powerful presentation without much follow up will never suffice to gain a really important relationship. Tending relationships is like growing plants – they require constant care and attention to flourish. (However, too much attention is invasive and will be unwelcome.)
  
  
• Selectivity You need to choose carefully with whom to invest yourself in relationships, since they require much continuing effort. Obviously, you can have numerous light relationships with a low level of activity and commitment, but key relationships need more focused involvement.
  
  
• Empathic listening Listening attentively to others is the key to understanding them and to ultimately delivering to them what they seek. We all gravitate to those who are sympathetic and understanding of our own needs.
  
  
• Reciprocity Relationships ultimately need to be based on mutual satisfaction, although at times, one party may be delivering much more than the other. If you invest in a relationship, you can eventually make legitimate requests from that person.
  
  
• Focus on others more than self Those with social skills alone usually fail: they are so impressed with themselves that they are not truly impressed with other people; before long this becomes all too apparent.
  
  
• Loyalty People can not be fooled about whether you are loyal and reliable, or just opportunistic and fickle. Maximising short term profits in a business relationship often prevents you from developing a more valuable longer term relationship.
  
  
• Offering value We offer value on both a personal and on a business level. Few customers or associates are fooled about those who manipulate and exploit, rather than delivering solid value.
  
  
• Sincerity and candor Social skills often depend on adopting a persona or image that is not authentic. Real relationships require honesty, vulnerability and self-disclosure.
  
  

Relationship skills obviously apply to other dimensions of our lives beyond business. Strong relationships help develop family and community. The best business environments are those which seem like family or community, where all can share in the success of the enterprise.

A leader with high relationship skills creates powerful morale which ensures the success of their enterprise. A glamorous personality is far less important for long term success. Social skills are only valuable in business when they are employed as a tool for developing lasting relationships.