The False Face of Innocence

Before the current economic crisis is over, Ben Bernanke is likely to become one of the most reviled figures in American history. Bernanke’s popularity meltdown is still in the future, and a future administration may well encourage Bernanke to resign before his term expires.

None of this future scorn heaped upon Bernanke will be justified. No, Bernanke is not doing a good job; he should be held accountable for his failures. Yet, if Ben Bernanke was removed from office today, nothing would change. The nature of the problems we face will not change until the systemic conditions that created the problems change. And the systemic conditions that we face are a function of our, not so easily changed, collective beliefs.

A Course in Miracles, a modern statement of the perennial spiritual wisdom, cautions, “Beware of the temptation to perceive yourself unfairly treated.”

The Course goes on to say this about how every ego sees the world:

He is the victim of this “something else,” a thing outside himself, for which he has no reason to be held responsible. He must be innocent because he knows not what he does, but what is done to him. And he cannot escape because its source is seen outside himself.

Now you are being shown you can escape. All that is needed is that you look upon the problem as it is, and not the way you have set it up. How could there be another way to solve a problem that is very simple, but has been obscured by heavy clouds of complication, which were made to keep the problem unresolved?

As a society, we absolutely refuse to “look upon the problem as it is.” The “heavy clouds of complication” are our false beliefs that keep our problems unresolved.

When hurricane Katrina struck, the press and the public were quick to be outraged over Michael Brown’s poor performance as the director of FEMA. To this day, there is little reflection on the basic fact of life that a government bureaucracy is incapable of being a nimble, responsive agency. Those who rise to the top of these agencies rise because of their political connections and not because of their competence. The bureaucracy itself is by nature more interested in serving itself than in serving the public. And so in the case of Katrina, church groups and the Red Cross were far more responsive to the disaster than the government ever was.

If you ever played a sport on a team that lacked mature coaching and whose players were immature, the experience was painful. That team would look for scapegoats and would heap scorn on the player who had a poor performance in a clutch situation. Collectively, we are like drunken sports fans who seek to find one scapegoat rather than reflect on the deeper causes behind poor performances.

Similarly, day after day, pundits tell us that our problems can be solved by somehow stabilizing housing prices or forcing them up again. We are told that those who bought houses that they could not afford are victims. We are told that those who spent their home equity on new SUVs and vacations deserve bailouts. We are told that Wall Street and banks should be insulated from losses. We are told that we should elect a candidate who is illiterate about economics and has no record of accomplishing anything, because he acts presidential and promises hope. We are told that the same government that gave us the disaster of ethanol, can better figure out what will replace fossil fuels than can entrepreneurs. We are told by politicians who place their children in private schools that school choice is a bad thing. We are told that corporations like Wal-Mart, which make the lives of hundreds of millions better off, are evil; and that politicians who create problems and enrich themselves in the process are dedicated public servants.

And because much of the public believes some or all of the above, there is no way out of our current economic crisis. To be precise, there are ways out—just none that the public will consider. The public clearly would like to go on believing, until it no longer can, that it is the innocent victim of a bad economy of which it has no part in creating. And the other belief that goes with claiming innocence, is the belief that politicians who promise more of the same will provide a miracle solution that involves something other than our collective change of heart.

In their insightful and illuminating book Mobs, Messiahs and Markets William Bonner and Lila Rajiva observe:

If there is one thing we know about the sentiment of crowds, it is that they change. Today it is greed. Tomorrow it is fear. But rarely is it doubt. So when mass sentiment goes negative, it goes completely negative. People stop worrying about the return on their money and begin to be concerned about the return of their money.

It has been a long time since that sort of fiery comet has come around and people have forgotten the sense of awe and dread it inspires, as it announced the end of the world. They can’t quite imagine what that may be like. They will have to see it again for themselves. It is only a matter of time.

Even a cursory study of history reveals that most people who have ever walked this earth have experienced that “fiery comet.” Like Americans today most falsely proclaimed themselves as innocent. And like everyone who proclaims themselves as innocent we will seek for those to blame—foreign and domestic enemies that help bury our collective refusal to examine our false beliefs.

Waiting for the Chief

This past weekend we came close to having our home declared an environmental cleanup site. All ended well, but we had the fire department, the police department, an ambulance, and the oil company all converging on our house last Saturday.

Our rural home was built in the 1970s; then most homes, in our area, were built with electric baseboard heat along with a woodstove. We are too far north to need air conditioning, and so we have no duct work for central heat. In the 80s the Japanese invented small, high-tech, and very efficient heaters; one unit can heat up to about 1000 sq ft each. They run off of propane or kerosene which is automatically pumped from a central storage tank. We had our system installed back in 1996 when kerosene was about $.80 a gallon. But no, this is not a piece about energy prices or about ingenious entrepreneurs responding to a need.

Saturday afternoon my wife was working under our deck near our 275 gallon kerosene tank. She began to scream. She had bumped the outflow pipe of the tank with a table and it had broken the pipe off from the tank. Incredibly, she had two very large galvanized steel wash tubs sitting right next to the tank, along with several empty five gallon paint cans. No more than a few drops spilled on the ground before she began to capture the kerosene. But the buckets were filling up and the fire department had not yet responded to our 911 call. My wife and I were trying everything we could do to stem the flow, and in the process kerosene was spraying on us.

We were mere minutes from running out of containers and facing the prospect of having approximately 125 gallons of kerosene empty on the ground when my 13 year old daughter thought of stuffing a rag in the broken pipe; using a screwdriver, we jammed in a rag. The flow slowed to a trickle.

Then the fire department and the police began to arrive. There were five firemen on the scene, and they were bewildered about what to do other than to say, “The Chief will soon be here.”

The Chief arrived and calmly assessed the situation. He was amazed that nothing had spilled on the ground and ordered his team to replace our rag and screwdriver with a whittled stick. The situation was further stabilized, but we still had 125 gallons in the tank and another 30-40 gallons in buckets and tubs. The Chief told us to call our fuel company; he explained that they would have to pump the tank empty before repairing the broken pipe.

Before he left, I asked the Chief how often this type of thing happens; he said that there were six incidents last winter. Given the size of the rural population being served by this fire department, our accident was not an uncommon occurrence.

When the fuel company’s technician arrived, we thankfully learned that there was no need to pump the tank empty. On his truck he had an ingenious gadget that he used to create a vacuum in the tank. With a vacuum in the tank, the pressure outside the tank would prevent kerosene from flowing out; thus allowing him to replace the pipe and valve without any further loss of kerosene. Now this was no high-tech state-of-the-art gadget; rather it appeared to be a low-tech gadget that had been used for quite a few years.

Later that evening when the adrenaline in my body began to subside, I wondered how it was that the Chief and the firemen did not know about this device? This was a trained, professional department; they had come across this type of accident before and will come upon it again. Creating a vacuum in the tank instantly stops the flow of fuel and possibly avoids expensive environmental cleanups. The gadget was clearly not expensive. How, I asked myself, could the fire department not have it as standard equipment?

The oil company’s repairman was equally professional, congenial, and helpful. Yet, when we asked him how we could get the kerosene smell off our bodies, he could offer no suggestions. Ordinary soap and water does little to the smell, and we had kerosene all over us. Yet, a brief search on the internet revealed that lathering inexpensive shampoo on your body would likely do the trick. And amazingly, it instantly did just that. I was again puzzled—how could a repairman who works with this stuff every day not know this remedy.

Now this is not a complaint. I mean that. Everyone acted professionally, and we felt sincere gratitude for their help. Nevertheless, there were important gaps in their knowledge. And let’s not forget the gap in my knowledge as initially my daughter saved the day. The point is that these gaps in knowledge are not failures—they are part of the nature of life.

In “The Use of Knowledge in Society,” perhaps the most important essay written by an economist in the 20^th Century, Nobel laureate Friedrich Hayek wrote: “…the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

When most people reflect on this quote, it seems to them to be a self-evident truth. Yet, although Hayek’s essay was written in 1945, collectively as a society, we have not yet learned his wisdom. We frequently set up our institutions and organizations to “wait for the chief.” Even when highly competent and even having the best of intentions, any “chief” will have huge gaps in his or her knowledge. Waiting for the chief is an expensive and inefficient way to organize.

We are waiting for the chief when we think that McCain, Obama, or Congress can figure out solutions to our energy problems better than the market process can. We are waiting for the chief when we think Ben Bernanke can manage the economy better than the market process can. We are waiting for the chief when we have no idea how to heal our own bodies and run to the doctor with every complaint. Of course, there are countless other ways we are waiting for the chief.

Waiting for the chief will often lead to less than ideal outcomes. But waiting for the chief is an attitude of mind; real solutions begin with changing our mind. Our institutions are failing us, and one reason is that we are waiting for the chief.

Fannie Mae and Freddie Mac: Too Big To Continue

If the public was unaware of Fannie Mae and Freddie Mac, they have received a quick education in the past few days. Unfortunately, the education that they are receiving can be summed up by the hypnotic mantra that has been repeated ad nauseam by politicians and financial commentators alike: Fannie Mae and Freddie Mac are too big to fail.

These comments by Mark Zandi, chief economist at Moody’s Economy.com, are fairly typical:

If the government hadn’t moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous. If Fannie and Freddie were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie’s debt securities.

Zandi’s comments are exactly the opposite of the truth—if the government continues to bailout those who made bad bets on the housing market, the cost to the taxpayers and economy will be catastrophic, not just enormous.

Fannie Mae and Freddie Mac have engaged in fraud, have helped to corrupt the political process, and have helped to raise the price of housing. Their debt holders should not be made immune from the same sharp decline in the value of their securities that their shareholders have already suffered.

First, the fraud and corruption issue: In May 2006, the Office of Federal Housing Enterprise Oversight (OFHEO), released a “Report of the Special Examination of Fannie Mae.” The report covered the years from 1998-2004 and found that top management at Fannie Mae were engaging in fraud: “By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders.”

Fannie Mae is a prolific giver of campaign money to candidates of both political parties. Instead of responding to the serious accusations in the OFHEO report, they had the temerity, according to Bryon York, to lobby “Congress to cut OFHEO’s funds unless it got rid of the top official in charge of investigating Fannie Mae.” Further, they continue to spend much money lobbying Congress. In the first quarter of 2008 alone, Fannie Mae and Freddie Mac spent about $3.5 million on lobbying and hired 42 outside firms in this effort.

And how have they pushed up housing prices? Mish Shedlock looked at the mission of Fannie Mae: “We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.” Mish pointed out:

Fannie Mae exists to expand affordable housing. Clearly Fannie Mae has failed its core mission. All government sponsored corporations fail their mission. The very nature of promoting housing makes prices go up, until the final blowoff top which we are now on the backside of, having reached Peak Credit.

And who is really being protected? London’s Financial Times reported that “Bill Gross, whose Pimco Total Return fund is the world’s largest bond mutual fund, has tripled his bet on mortgage debt, which now comprises about 61 percent of the fund’s assets. ” Gross commented, “Government policy is moving to sanctify the status of the government-sponsored agencies. It became a question of which institutions would be sheltered by the government umbrella.”

In other words, the taxpayer is bailing out the investors in Gross’s bond fund and others who bought securities issued by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are in trouble because they helped finance too many low quality mortgages; and in so doing, they pushed housing prices up to unsustainable levels. Matt Kibbe, president of FreedomWorks, commented, “The prospectus for every GSE (Government Sponsored Enterprise) bond clearly states that it is not backed by the United States government. That’s why investors holding agency bonds already receive a significant risk premium over Treasuries.”

Thus as Harry Long points out: “Any bailout of the GSEs would not be about homeowners. It would be about charity to financial institutions and investors who have not behaved logically and stand to lose terribly due to sloppy decision making. I like to call it affirmative action for the rich and stupid.“ Bill Gross makes more in a year than most taxpayers will make in a lifetime—it is hardly in the interest of taxpayers that they subsidize him.

There are a few politicians in Congress who understand all of this. Just yesterday, during Senate testimony by Ben Bernanke, Senator and Hall of Fame pitcher, Jim Bunning said,

The Fed is asking for more power. But the Fed has proven they cannot be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in…

Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed.

The Fed is not the only institution getting bigger bats—Fannie Mae and Freddie Mac are too, and they are destructive bullies. Giving the bullies bigger weapons will only ensure that the once great American economy will continue to be destroyed.

The “Night of the Living Dead” Economy

Yesterday Ben Bernanke announced that the Fed is “considering” allowing Wall Street firms more time to draw emergency loans. The unprecedented loans to Wall Street began in March when the Fed loaned money to JPMorgan in order to bailout Bear Stearns. On Monday, the Senate advanced a $300 billion dollar housing bailout bill. On Sunday, my family and I hiked our first high peak of the summer season.

Am I mixing my blog posts? What could my hike possibly have to do with the Fed’s loans and housing bailouts?

I have been hiking the White Mountains of New Hampshire for well over 20 years. The peak we hiked this past weekend, Mt. Tecumseh, is one I have hiked perhaps 7 or 8 times. The first time I hiked Tecumseh I was a much younger man; I was literally twice as fast as I was this past weekend. As so often is the case, my physical prowess peaked long before my emotional maturity did. With hiking, emotional maturity means that you understand your limits, you plan appropriate hikes that stretch you safely beyond your current limits, and you have the discipline to commit to the training that is needed to accomplish your goals. With my emotional maturity still growing, I have been able to accomplish hiking goals that I never even thought of when I was younger and much stronger.

On Sunday, at the half-way point, I noticed how comparatively “slow” my wife and I had become. I was at a choice point, I could allow my ego to concoct a story about my declining abilities. I could get lost in my thinking and ruminating about the days when I was faster. Of course, doing so would take me from the present moment, slow me still more, and ruin the enjoyment of the day.

It is easy for the ego to rail against what is; but wisdom lies not in the voice of the ego but in the intelligence that is beyond. I can panic and as a consequence overtrain and risk injury, or I can exercise in prudent ways that will maximize my years on the trails. I can go to the doctor and demand some miracle drug or injection, or I can take time to maintain a healthy lifestyle and a healthy diet. I can overlook my current abilities and plan risky hikes that put me and my family in danger, or I can continue to enjoy the mountains commensurate with my abilities for many years to come. No matter what I do, the stark truth of life is that no measure I take will produce any guarantee.

So what does any of this has to do with the economy? Plenty. Collectively as a society we are like aging hikers who demand that the doctor shoot us up with inappropriate remedies to maintain our youth. When an athlete’s body is artificially maintained, the inevitable decline is even worse. Similarly, when we demand to be bailed out of any losses, which are normally produced by a vibrant free-market economy, we guarantee that we will no longer enjoy the benefits of freedom. And the more we try to stave off loss through artificial means, both the severity and the length of the resulting decline will increase.

Is this hyperbole? Consider the sad case of Argentina. In 1900, Argentina was one of the wealthiest countries in the world; it ranked 12^th in the world in GDP per capita. In little over a century, Argentina has fallen all the way to 72^nd. What happened? The collective will of Argentines turned away from principles that promote prosperity and instead embraced an ongoing series of fascist and socialistic dictators who promised to deliver what is undeliverable—namely, a centrally planned economy that never suffers from declines.

Is Argentina on the road to recovery? Hardly! The current president of Argentina, Cristina Kirchner, recently increased effective taxes on farmers to 75% and limited farm exports. Since a third of the Argentina’s work force is employed in agriculture and half of Argentina’s exports are agricultural, the country is certain to suffer from further devastating declines.

An economy that never suffers from declines is no more possible than a human being that never suffers from a bad mood. In a dualistic world, bad moods and economic declines are inevitable. Both, however, can be “treated” gracefully; and mental and economic health can quickly return. We can learn to recognize thinking patterns that are generated by the ego; we can learn to drop our resulting problematical thinking. This does not require elaborate interventions; it just requires a willingness to do so.

Human beings, due to periodic episodes of collective excessive optimism and misdirected signals caused by Fed policies, create economic cycles. Markets have a self-correcting mechanism, but only if they are allowed to operate. Instead, we are spending enormous amounts of money trying to maintain that which has failed us. In doing so, we postpone our economic recovery and create conditions for even greater declines.

If we demand that we never have bad moods, or that we hike at the same speed in our 50s as we hiked in our 30s, or that we never suffer economic losses, we will choose what is counterproductive. David Whyte in his book The Heart Aroused observes:

It takes tremendous energy to keep up a luminescent front when the interior surface is fading into darkness. In some ways we are constantly preventing our own rebirth into new cycles and greater lives, and instead work twenty-four hours a day keeping a wraithlike image of our former selves alive long after its time has past. This “night of the living dead “syndrome is just as true of an organization as it is of a person.

I know I don’t want to be a “night of the living dead” hiker—a hiker who can no longer enjoy the mountains because he demands that he always gets stronger. But I am afraid we are choosing to have a “night of the living dead” economy—an economy where all failures are outlawed, and as a result, success is nowhere to be found.

Life, Handball, and Justice

Imagine that you are the greatest champion that your sport had ever, or probably ever will produce. Further, imagine that you have to work full-time as a fireman to support yourself and that sometimes you show up at tournaments straight from work, wearing your heavy uniform, soot still on your face. Some might rail at the injustice that life brings: “I should be playing another sport; I should stop playing for peanuts; it is not fair that I need a day job as a fireman to support my family; at least on the day I have a tournament, I should have the day off.” Vic Hershkowitz did no such complaining.

Vic Hershkowitz won 23 amateur national titles in handball. He died this week at the age of 89. Hershkowitz’s greatest handball strengths came from his ability to use either hand with equal power and dexterity, and from his ability to change the pace of his shots. His athletic abilities were compared to those of Willie Mays and Mickey Mantle. Growing up in Brooklyn during the Depression, Hershkowitz couldn’t afford to play any other sport. His sole handball earnings came from $50 a stop, barnstorming clinics during the 1950s when handball was at its peak of popularity. One of his handball rivals, Phil Collins said of Vic: “He was a hall-of-fame human being; a lot of good players didn’t want to teach anybody else or help them with their game. He always did.”

Vic Hershkowitz’s life teaches us much. We live in a society where we are constantly bombarded by judgments of what is unfair. These complaints are endless. Some may complain: “It is unfair that the CEO earns so much, and the teacher earns so little.” While others may judge: “It is unfair that the coal miner earns so little, while the baseball player earns so much.”

We are further told that in a just society something should be done about these types of injustices. But wait, who set the low pay rate for Vic Hershkowitz and the much higher pay rate for Mickey Mantle? Of course, it was simply the tastes of the consuming public. That the pay rate for Vic Hershkowitz bore no relationship to his immense athletic abilities is a sign of a free and vibrant society; it was not the sign of injustice.

My last sentence needs further consideration. Assume for a moment that Hershkowitz and Mantle had equal abilities. To assure the same material outcome, government would have had to treat Hershkowitz and Mantle very differently; Hershkowitz would have had to have been compensated for the fact that there were far fewer fans who cared about handball than fans who cared about baseball.

Of course, using that logic, there is no end to the compensations and interferences that one could demand of government. We would quickly find that government , rather than being the impartial arbiter it is supposed to be, would be treating different people differently in order to correct for something for which no one is to blame. In doing so, government would need to institute all types of coercive controls; and in the process, those government controls would cripple the economy.

There is another equally important lesson to learn from Hershkowitz’s life. By all accounts, Hershkowitz lived a more fulfilling and happier life than did Mickey Mantle. Of course, we will never know what either he or Mantle felt inside; but research on happiness shows that the happiness that you experience bears little relationship to how much money and fame you have. Mantle’s greater riches and fame did not buy him peace of mind. Happiness is truly an inside job.

We are all born into certain circumstances—a unique time, place, and culture. We are all given gifts of potential talents. Our happiness depends on developing our gifts; because as we do, we are allowing the source of those gifts to flow through us. That source of Love and Intelligence lives in each of us, but only to extent that we do not choke it off.

Under different circumstances, Vic Hershkowitz may have been a baseball player. For all we know, that thought never even crossed his mind. I have little doubt he felt fortunate to play handball. He did what his circumstances and his gifts allowed him to do, and he did it full of love for the game that was his calling. In that way, he was a model champion for us all.

We are all better at demanding things from life than we are at listening to what life asks of us. Life asks much of all of us. It asks that we use our gifts; it asks that, over and over again, we extend love and forgiveness; it asks that we stop railing against what is wrong and stop demanding that life conform to our demands. When we do, love, peace, and happiness flow through us. The choice is only the next moment away.