Key Players

There is no magic bullet for creating a stable durable financial system. The discussion in this book can only begin the process to frame the final debate and offer suggestions on the more critical elements that need to be considered. In that light the respective roles of the various entities need to be discussed. The entities themselves are arguable but there has to be some limits placed on who are the major players that need to be involved in order to have a meaningful discussion and understand the issues with sufficient insight, perspective and knowledge.
I offer my perspective for the respective roles that should be played as a “straw-man”. There may not be a great deal of conviction behind the way that issues are assigned to the various entities but the key point is to limit the players otherwise nothing gets accomplished with too many players involved in a discussion. So the way that these are determined is with respect to who I feel are the major players.

Government

Government is a collection of people that act to create laws & regulations and enforce them to create a civil society. The role of government has literally been under act particularly by the Republican Party in the U.S. for the past decades. But it is a fair debate to try to define what role government should play in any society. Too little government can lead to anarchy giving it the environment of the Wild West. Too much government yields a draconian authoritarian state that pervades every aspect of our lives. The quest therefore is to find the right balance for how much a government should be involved. We can address this question from either direction – a government that is involved in everything or a government involved in nothing. Since I feel that government should only be involved in as little as necessary, that is the direction from which I would like to address the issue. By the way, this is what I believe the Libertarian Party should be all about. Regardless, the object is to define in narrow terms a meaningful role for government. Keep in mind that the discussion is now at a level where the “means” are being addressed. The “means” assumes that we accept the “ends” and The “Principles” presented earlier. I mention this now because it is too easy to loose sight of the goals and get side-tracked by our own prejudices and belief system.

Political Process

A political process is a forum for debating the merits of solutions to various issues that affect the general society. In this section we are only concerned with the political process relative to the role of government. Let’s accept two notions. There is a significant and valuable Role for Government and the Political Process is a healthy way for defining that role. I am desperately trying to find common ground here so we can have a constructive discussion. But I can already hear the rancor and heated feelings being expressed about this one issue. Please people, put these feelings aside while you read this book and try to keep the goal in clear focus. Further if one issue creates black holes for our thinking then we will get stuck forever and never make any progress. The consequence to this quagmire is that the odds of us getting sucked in and destroyed increases dramatically.
In the U.S. the Democratic Party represents a group of people that believe a central government is the solution to most of our social responsibilities. The current Republican Party believes that a central government there to create a society of strict morality by the standards of the Christian Faith. If you are like me at all, then these two positions must create a huge conflict in your mind as it does mine. The Christian Faith should be very charitable, forgiving and turn the other cheek. If that is true then both parties would act the same. The stated agenda for a Party is not necessarily the hidden agenda of that Party.
I come from the grass roots level of the Republican Party. The people I met at that level were the salt of the earth to me. This means they were people of character, thoughtful, generous and caring. My disillusionment occurred first with the Politicians. They got morally corrupted as soon as they got elected. The debts they owed to get elected and the vestiges of power quickly altered their thinking. In fairness this applied to most politicians. The second disillusionment was the hijacking of the Party by the Religious Right. Abortion was raised from a private issue to a National issue. Big government was ok if it meant creating a large military, policing morality, creating an authoritarian state. The height of hypocrisy is that we are now fighting a war with groups like the Taliban that believe in their own flavor of an authoritarian statehood. Theirs would be based on Fundamental Islamic principles. The Religious Right believes that the principles should be fundamental Christian principles but also believe in the mixing of religion with government and more. Both would go to war to spread their brand of religious based principles. Our current conflicts are nothing more than holy wars of the past like the Crusades centuries ago. The direction is the same – mix religion with government, create an authoritarian state that does whatever is necessary to police morality internally and spread their brand of morality around the world even if that means war. These were first hand observations. Killing people is an extraordinary event. Going to war is a way to justify murder and throw out all civil rules. Just as bad, this is symbolic of a political process that is failing.
Since I was not involved in the Democratic Party to the same degree, I will admit that limitation and refer to my experience as second hand observations. In this light, the Democratic Party’s greatest dilemma is the fact that it is made up of special interest groups that individually focus on too narrow an issue. They internally fight to get their pet projects addressed and funded. Further, they do not consider the actual aggregate cost of these projects as their responsibility. In other words, there is no fiduciary responsibility. The mantra for the Party may as well be reallocate wealth, any way possible; people have no individual responsibility; and create the government agency then worry about how to pay for it later (which never happens). I do have a related first hand experience from the state of Florida where I currently live. A perfect illustration of the situation just described has to do with housing laws and rules. I went through the exercise of being on a Homeowners Association (HOA) Board and even took classes and got certified as a Community Association Manager (CAM). I saw major abuses that were perpetuated by this and other HOA Boards and looked for recourse on how to address these abuses. At the end of the day it was clear that the state government passed all kinds of laws and statues but they had no teeth to enforce them and the enforcement area was grossly underfunded, even in good times. The point is, it does no good to create a government entity then not fund it properly. There is no free lunch. Empty promises are the same as lying. Again this is symbolic of a political process that is failing.
It is laughable to hear people refer to the American political system as the best in the world. I am sure the Romans and every other empire in history felt the same way at the height of their empire and for years afterwards during their decline. If we believe in the American Dream and want to protect it then we better wake up and recognize what is working and what is not then try to fix it. We have major flaws in the current American political process particularly since we are dominated by two Parties that are fundamentally, systemically corrupted as illustrated above. Other people under different political processes should also self examine their own political processes and determine for themselves what they need to improve their own situation but in the same regard as discussed here using the U.S. situation as an example of the challenges that confront us all.
The comments made above are not to criticize any individuals or any one organization but to learn from them so we can more clearly understand the practical issues that are part of the reality. This understanding is necessary for us to identify a viable Role for Government. What have we learned about the political process in this regard? We need better unadulterated information. The political parties are self serving groups that make poor sources for the information we need, if we are to vote on solutions for issues and/or elect qualified honest sincere representatives for us.
Information
The first factor for the process is to get the best, most timely information possible about all issues. Having more information does not necessarily translate into better information. Too much raw data is confusing until it is packaged in an organized way to create real useful information. This was discussed earlier. The process of gathering information, packaging and interpreting information is complex and an art. Think of all the investors that are out there trying to look at all the general economic and more specific information about a fund or company. Despite the about of information that is available today it is never enough and the final quality is always suspect. So the point here is that having information is part of the answer but not all of it. Experience and talent have a lot to do with how information is ultimately used.

Role of a Representative

I ran as the student council president in college. An interesting issue came up during that campaign that is still relevant today. What is the role for any representative? Is a representative supposed to vote the will of the people they represent? Or are they suppose to vote what they think is in the best interest of those same people and the organization that they are now a part of as a representative. If you believe in the people as well informed and you want to get re-elected then it would seem that a representative should vote the will of the people. If you believe that the people are either ill-informed or you were elected because they trusted your judgment then you would not worry about what the people think. This is such a fundamental issue but it does affect how a representative may act or vote, even how they feel about their own electorate.
As a practical matter there are many decisions that a representative needs to make over their tenure. The largest decision should be done with the full knowledge and consent of the electorate. The other more minor issues, we will just have to hope that the representative is using honest and good judgment.
Transparency
Without a doubt there is information that is sensitive, personal (private) and/or creates security risks. The availability of information should be paramount to a free society. The unfortunate reality is that there are bad people that use information in nefarious ways to hurt and steal things from other people. We are living in an age where the availability of information is technically enormous. People that enter public service have a responsibility to ensure their good faith and capability to the people that they represent. Further they should always provide their voting record in public records. There are exceptions to every rule but again they should be rare and where an analysis is made of the good that they provide being transparent verses the risks that are imposed by the disclosure. Again the reality is that representatives are the targets of being corrupted, there are enormous opportunities to be corrupted and they have taken on a public trust. The reputation of the organization is enormously important. If we loose faith in an organization like the government then we are admitting that anarchy is justified. A civil society lives on its reputation. Enormous numbers of people are seriously hurt if a civil servant does not perform their job as they should or worse yet are corrupted and deliberately abuse the system. This is why it is so important that information is transparent.
Accountability
Accountability has two dimensions: Understanding how someone has acted (and voted); the other is appropriate punishment for an offense. This is a particularly contentious issue. The people with the power control the ability of the electorate to know what they are doing. There may be a host of reasons why they would want to withhold information about the way they acted. It seems to be that the one area that we suffer from the most is this one. It is very difficult to identify the representatives that have acted inappropriately and worse yet, the ones that are prosecuted are handed down sentences that far more lenient than crimes by people that commit lesser crimes. A person smoking pot can get more of a sentence then a representative that takes a bribe and votes for a bill that enriches a company and costs the American people billions. A completely independent watch-dog group needs to have the authority to over-see the actions of public servants. Further public servants must be held to a higher standard and given sentences to discourage activities that violate the public trust. The reputation and survivability of our way of life is at stake. We have to take this issue seriously, where now it is almost a joke.
It may never be proven, but there had to be government culpability in the financial crisis of 2008. The government deregulated the separation of banks, insurance companies and brokerages. The government knew for years about the abuses and losses at Fannie Mae and Freddie Mac and did nothing. The Savings and Loan debacle of the 80’s was quickly forgotten and banks were allowed to over leverage and take huge risks in real estate during the current crisis. Still not one representative will be held responsible for the trillions lost across the globe due to their malfeasance. Another example is Bernie Madoff and other con artists out there. The clients of Bernie Madoff were destroyed and the agency that had every opportunity to catch him completely shirked their responsibilities. They are as culpable as Madoff when the people responsible do not act after being informed. There are two entities responsible here, the SEC should have acted. The other part is the Executive branch and Congress. They created an atmosphere of “hands-off” financial institutions. Financial institutions were driving the growth of the economy and purportedly made them look good. Abuses of the system were deemed to be minor compared to the good generated by a robust economy. The fallacy of this philosophy is that an over stimulated economy based on artificial stimuli creates a bubble and bubbles tend to bust. This bubble was allowed to get so large the busting destroyed the economies of countries. Is someone that orders a hit to kill someone as culpable as the person pulling the trigger? You may not like this comparison but ask the people how they feel that lost everything while others got wealthy.

Term Limits

A desperate act to minimize the problem of representatives getting corrupted is to place term limits on them. There may be many honest well meaning representatives in government. We would hate to loose their talent and diminish their good work by telling them they need to leave when we could use their help now more then ever. On the other hand fresh ideas and more people would be inclined to serve if they believed that the good-ole-boy network was dismantled. In balance, term limits force a systemic turnover of people. If we believe in the reputation of an institution is more important then the individuals that serve it than term limits is important part of the answer, especially when other ways of ensuring their integrity is so difficult.
Metrics
A government is functioning well when it is efficiently executing the primary and secondary functions. The challenge for most government is the proper assignment of responsibilities. For argument sake let’s assume there are only three levels – federal, state and local. There can actually be many more levels to government but now is not the time to diagnose how many levels are actually needed. If responsibilities are not properly allocated then the taxes needed to support these programs are not commensurate with the demand and cost of that program. So before we arbitrarily discuss the metric of success for government performance we have to first understand if it is set up to fail before it even gets started. The federal government has been in the habit of passing healthcare, education and security laws that mandate the states to pay for the cost of these programs, at least partially. These are referred to “unfunded mandates”. Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Roe Institute for Economic Policy Studies at The Heritage Foundation argued that the states want unfettered control over the $400 billion they receive annually from the federal government. “True, states are still burdened by pre-1996 unfunded mandates. The largest and least fair is Medicaid, whose $200 billion annual cost is only half-funded by Washington. Yet states aren’t blameless either, as 60 percent of Medicaid spending is for populations and treatments that states voluntarily added to their own Medicaid programs.” So our take away from this issue is that the answer of who is causing what cost requires a fair bit of research into the issue before we can assign responsibility or blame.
The bigger question is who should bare the responsibility for funding and who will be most effective in administering it.

Balanced Budget

Financials are always a good metric for success. They highlight the capability of the people that create operational programs and projects to understand the relative ongoing and one time costs. Taxes are always a drag on everyone. One perspective is that these are investments that individuals and companies could not afford on their own. So if this is money that would have been spent otherwise then we should stop denigrating the fact that we rely on the government to do things that we need.
One case in point, from personal experience is that we were going to renew a bulk cable television contract for a HOA that I live within. The same companies also provide high speed internet access. Individually, people were paying $30-$60/month for that service. We have 2000 units in our HOA. I recommended negotiating a bulk rate for the entire association and we got it for $22/unit per month. The net result would be a savings to all members of the association is over $500,000/year and $5MM of the 10 year life of the contract. The association is now paying for this service direct like a government agency and the members still need to pay for it through their maintenance fees. Still the unit owners derive the benefit of a bulk rate. The HOA must include this cost in their budget. This is a good example of how a government can use its size to get deep discounted rates. Success in this case is the savings derived and the HOA properly budgeting for it. Granted this is an easy exercise to calculate the cost of this service the rate every year is a formula and the number of units will stay the same for the ten years. Many other government programs do not have such predictable factors. But two points are worth noting from this example – government can effectively play an important role in providing a service at deep discounted rates and that service can be paid for in a responsible way.
This is one of the most general metrics that can be made. The financials have aggregate numbers and detailed line items. Actual numbers are compared to Budgeted numbers at both the detail and aggregate levels. So the performance of individual departments and programs can be monitored and evaluated. New programs typically have startup costs that should be budgeted as well. These are one time costs in addition to construction costs. So financial performance can be evaluated in some detail and individual responsible for those areas can be held accountable for both their ability to control their respective areas and their ability to plan their operating and capital costs.

Program Performance

Individual services provided by the government can and should be evaluated based on the service objectives. For clarity this performance criteria is independent of the financial consideration that were dealt with separately. Let’s take a few federal programs as examples.

Example 1 – Postal Service:
The some performance metrics for the postal service could be the accuracy of delivery, security, customer service and the time it takes to deliver a letter or parcel given the promised delivery time. In these terms the USPS has had an incredible performance record for a very long time. The bad press about the postal service is the relative cost efficiencies and their budget overruns. In assigning blame for these overruns, it is beyond the control of that department to change Saturday delivery or shutdown very low volume post office facilities. This highlights another performance issue for the USPS – convenience. At some considerable cost, the post office is very convenient, maybe excessively so. Bottom-line, the USPS does an excellent job based on standard program performance but they are very limited in their ability to not be used as a political football. Simply put they operate under an excessive overhead cost structure and their high unionized labor costs. Facilities and labor are killing them especially as demand for this service has plummeted with the advent of electronic mail and e-billing. Could this situation be fixed? I believe it could if we de-politicize this agency. This serves as a good example of a symptomatic problem that government run program suffer. They can run very effectively, we just need to have the political will to force the issue.

Example 2 – the Military:

War and militaries have shared one common theme the vast need for money to support it. Countries choose how strong they want their military to be then figure out how to pay for it. Contrast this is a country that lives under the protection of another country.
Deterrence is a valid reason to have a strong military for any country. Hopefully other countries or individually will think twice before taking on a strong military protected country. This would seem to have worked for using nuclear weapons in the past given the MAD theory (mutual annihilation deterrence). Conversely it has worked so well those other countries that previously did not possess this technology now wants it and wants the same benefit. Eventually someone that does not think rationally is going to use it not as a deterrent, rather as an offensive weapon. The U.S. prided itself on destroying the USSR by basically bankrupting it. The arms race that both countries engaged in to win the Cold War certainly created huge deficits for both countries – one that collapsed under its weight and the other that is still running huge deficits because of it. The worst issue is that those same resources could have been used to support research into other things that would have enhanced the lives of many people and made us a stronger country in other ways such as healthcare, education, energy saving, building and maintaining infrastructure and producing new technologies. It might be said that the other industrialized countries did better economically while we defended them and allowed them to allocate less money towards their military in the process. Similar to the Postal Service example above, the military have served as a good deterrent on the nuclear front as a performance metric but the grade is not an A when we translate it too other areas.
Another job for the military is to be able to conduct war is multi-regions/countries at the same time. We have experienced the Vietnam conflict then Iraq and now Afghanistan. Our ability to project our influence over other countries seems to be highly overrated given our track record in the last four decades. Only the most limited engagements seem to have had a positive affect. The best example was Kuwait. We were able to expel the Iraq forces from Kuwait. However, when we went in a second time into Iraq we got caught in a sectarian civil war and upset the balance of power between Iraq and Iran. Our interference in Iraq may some day be understood to have embolden the Iranian and given them the opportunity to acquire nuclear weapons. If we were worried about national security then we should have looked at where the terrorist came from – Saudi Arabia and the countries that has been promoting terrorism in the regions for many years – Iran and Syria. Two things seem to be self evident from this situation – we have not been very effective at changing the dynamics of that situation by attacking the “source”; we have not been effective at conducting military activities in multiple regions at the same time; we have not had a good exit strategy and we are not stronger in the perception of the world view (rather much weaker and ineffective) as we continue to loose support for our causes abroad. So we are spending a huge amount of money preparing for and maintaining a military for this kind of war/conflict and the evidence does not indicate we have been very effective in the limited conflicts we are now involved.
There are three aspects to the military like any other corporation – strategy, tactics and operations. I want to make sure I don’t leave the impression that I am anti-military, quite the contrary. The selection of “use of force” (the military) to solve a problem is the choice of the government – the executive branch in consultation with the Congress. This is the first decision of strategy with regard to how to use power. The type of actions and parts of the military to use, how much, where and when is the tactics. The execution of the plans is left to the soldiers, the brave young men and women of the military. This is the operations. This last group has performed amazing well under the circumstances that they were given. The real question is the choices made during the strategy development and then to a smaller degree – in the formation of the tactics. Strategy also addresses the kinds of conflicts that the military has to respond to in the future. Weapons and allocation of funds for research and development are made to anticipate the kinds of conflicts we will face. The locations for bases, the types of transport vehicles, the training, the number and types of weapons all comprise the strategy before a conflict begins. Our preparedness and survival depends on good planning. Unfortunately, politics has played too much of a role in these decisions and we have been making fatal mistakes in how we squander and waste money in this area. We can loose our ability to determine our own future if we depend too much on other countries for providing vital resources or if we need them to float our debt. If we continue to spend too much on ineffective parts of our military and not work on securing resources and strengthen our financial base then we will continue to weaken our position relative to other countries that do not like us. This situation is as vital to our country as a potential military conflict. As we have seen with the Soviet Union, we did not have to have an actual war with them to have a looser and winner.
Minor Regional / Limited area War or Conflicts Even in some of the smallest areas like Somalia, we can go in the most sophisticated arms and we will not prevail. We have not been able to effectuate a change in the Middle East region between the Israel’s and Palestinians. Ethnic conflicts are not things that will go away. Even after thousands of years it seems so sad that this is the way of the world. Reality is reality and it has no logical rationale. Every country has its ethnic groups and they are bound and determined to find reasons to hate other groups. These conflicts can be based on territories, religions, resources, political beliefs and just plain greed or desire for power. The performance metric of success in this area is how well we resolve the conflicts between various groups. Is there a mechanism for bringing stability to an area when conflicts arise? Economic stability only works if there is security. Security takes precedence over all financial objectives, plans, policies and performance.
Our financial system today depends on Internet based transactions between all parts of the economy. Attacks over the Internet can be just as devastating as a physical attack. A branch of the military is recognizing this and they recognize that power grids, communication devices and industrial production can be shutdown with an attack launched from a computer located anywhere in the world. And this could happen in a matter of seconds. Given the amount of viruses that have already had a major impact on our systems, it is obvious that we are open to these attacks and we do not have adequate safeguards.
Terrorism takes many forms. The worse aspect about terrorism is the amount of devastation that a very small group of people can have on an entire economy. Consider that a few hijacked planes, an operation that cost no more that a couple hundred thousand dollars cost the U.S. hundreds of billions of dollars, if not more. We went to war in Iraq and Afghanistan because of this one attack on 9/11. Are we really prepared to combat terrorism in this country? This is not a new phenomenon. Israel has been subjected to even a worse form for decades, with rockets launched on schools and car bombing of school buses. Gangs in this country are terrorists to the people that live in those neighborhoods. Innocent people are shot; property values and neighborhoods are destroyed. Another form is when executives are allowed to rape a company by excessive executive pay, saddling a company with huge debts with a leveraged buy-out, raiding pension funds or devastating a labor force through indiscriminate outsourcing. Whole cities are destroyed this way. Obviously the military does not get involved in some forms of terrorism but that is a choice of government. Things that are allowed in this country are controlled by the military in others. The formation of the Homeland Security Department recognized that there was no accountability, significant overlap and sometimes no communications between agencies that share responsibility for security. The take-away from this discussion is that we have a real and present danger to our countries from the various forms of terrorism that surround us. Some forms may have been minor and inconsequential in the greater set of priorities but that has changed with the advent of technology, power of easily accessible weapons and the degree of devastation a few people can have on so many in the name of a dogma.
There has been considerable emphasis put on even outsourcing the military. I would like to know how cost effective this has been. Unfortunately, that information is classified. We do know that Blackwater is a major contractor in Iraq. We also know that their personal costs the American citizens over $100,000 person in straight salary and then there are the administrative fees on top of that and the inflated materials costs that are passed onto us also. Just as bad we have found that they do not have to abide by the same rules of engagement that our military personnel have to live under. The loss of our credibility and standing in the world from the abuses perpetuated by this company has hurt our alliances with other countries and leaves us baring more of the cost for being in Iraq and Afghanistan. I learned this earlier about outsourcing. You loose control of quality and management when services are outsourced. It is not until the company recognizes how serious their reputation is hurt do they go back and pout in the controls to ensure the quality and management they should have had in the beginning. When that is done the savings from outsourcing can virtually disappear.
Border Security and Natural Disasters These are two other areas that the military has been used to control and mitigate a problem. We do have to ask why our borders are so easily breached and why was the devastation in New Orleans handled so poorly after Katrina? Is this the fault of the military? Or should they take a more active role. If not who should help solve the problems we have seen with our borders and with natural disasters? In either event someone or group has got to take ultimate responsibility when we see such poor performance on such vital areas. We spend an enormous amount of money on security and yet we see so little real performance in the areas described. Most of it rests in the hands of the politicians that have not been doing their jobs.
The Intelligence function is last area to be mentioned relative to military functions and performance. We may never know how good a job they do but it goes without saying that we need intelligence about our enemies, who ever they are. That may be the hardest part. If we grow the number of people that hate us then the numbers will be against us to find out about all the things that they would do to hurt us. There is a balance between how much intelligence we need and how many friends we really have.

To summarize this section it is important to keep in perspective the relationship between security and a solid financial system. This can not be under emphasized. They are co-dependent. An effective military needs substantial funds to effectively function. Conversely you can not have a stable financial system unless the military is effective. The demands on the military are not getting any less, there are more areas for them to police and the areas they currently control are growing. We need a valued balanced approach to allocating funds and ensuring that the money is spent wisely.