At the beginning of January I quit my job, leaving corporate America. My employer was surprised but I had been working on my escape for quite some time. I had been saving money and acquiring equipment for my next adventure, a coffee house.
A major complaint I had about my employer was a shift to completely bottom line thinking. I decided that my leaving the company should be on the same terms. I submitted my resignation at an inconvenient time for the company with an offer to continue working for some period of time for, effectively, more money. They refused and I left. I won't be requesting a recommendation.
It has now been a couple of months and the results are mixed. In some ways my life has improved. I have been spending more time at the gym. Over the past three or four years my fitness level has plummeted and my weight spiked. Since I quit both my weight and resting heart rate have slowly decreased. I have also moved more toward what I consider my genuine self. I have volunteered time to a local food co-op and even marched in the Martin Luther King day parade.
On the other hand, my stress level has not decreased. The new business is a gamble and progress has been slower than I would like. This has left me with free time that I have not used as productively as I would like. I should be writing more blog posts. I should be playing more music. I should be working more aggressively on some business related activities. I don't always deal with stress in the most productive ways.
Heath care in the US outside of a corporate umbrella is difficult. Assuming we can get any coverage at all it looks like the best I can do is about $450/month with a $10,000 yearly deductible. That means Sarah and I are on our own in any year we spend less than $10,000 out of pocket. On one hand this is what insurance is for, protection against catastrophic loss. On the other hand, the rates seem high for this kind of protection.
A number of years ago one of my swim buddies was irritated with his wife. He likes beer and she sometimes worries that he is drinking too much. She mentioned this in an exam with his doctor. He said that even if he had a problem, his doctor should be the last person to hear about it. If his doctor wrote anything down, it would go into the insurance database and future insurance coverage might either increase in cost or be denied.
Sarah and I ran into a version of this in our insurance application. Before I left my corporate job, we made sure that we had preventive care done. I got my eyes checked (I do this every couple of decades) and Sarah went in for a physical. One of the tests recommended for someone of her age is a bone density scan. The results showed lower density than desired. While this is good to know and treat, on our insurance application it comes up as a potential chronic, expensive condition. By requesting the scan, the physician actually did Sarah a disservice. A possible consequences is that we may be denied coverage for anything related to bone density for one or more years. At worst, our request for insurance may be denied altogether.
Yes, there is a global health database maintained and used by all the major US insurance companies. If you have health insurance, one of the papers you sign is an agreement to disclose everything to the insurance company. That information goes into the shared database. The database is not used to improve your health care, it is used to determine risk and reduce insurance company payouts.
The coffee house is progressing. I am negotiating a space and think I have basically come to terms with the landlord. The location is good and the costs look do-able. The next few months will be really exciting. I expect that all free time will evaporate and just hope I can keep up the gym visits.
Sunday, February 28, 2010
Friday, January 1, 2010
Let's Have Less Security at Airports
After the recent, foiled attempt to bring down an airliner let me, once again, ask for fewer security measures at airports. This seems counter-intuitive, but the current measures are almost completely ineffective and new measures will simply increase the cost without making us safer. Here is how I think terrorists can define success. Spend a couple of thousand dollars to get a guy to burn himself on a plane and the US responds by spending billions of dollars on useless security measures and, as a bonus, slows commerce and communication. The real wounds of terrorism are self inflicted. Every time we clamp down on civil liberties or spend lavishly on additional defense, the terrorists have won.
The recent terrorist failure to bring down an airliner has, predictably, been hailed as a failure of airport security. On the TV, round after round of security experts have been crying for more money and technology to be deployed at airports to protect us. Secondary screenings have been instituted at many places and travel experts are urging travelers to arrive at the airport even earlier and to anticipate even longer delays. In international travel to the US you will be confined to your seat, with no permitted distractions and no ability to go to the bathroom for the last hour of the flight.
If you want to make a bundle over the next few years, invest in the companies that make corporate jets. As travel becomes more costly in terms of time (money) business travel will decrease overall, but more companies will simply buy/lease their own planes to bypass the increasing hassle of commercial flight.
As far as I know, there has never been a hijacking attempt that was thwarted by airport security. None, zero, zip, nada, zilch. There have been thousands of box cutters and pocket knives seized. I am probably pretty typical of the passenger who has a "dangerous weapon" confiscated. I always carry a pocket knife (swiss army tinker). Sometimes I forget to leave it behind and find it in my pocket while waiting in the security line. I have had to throw away at least three pocket knives (and smuggled them through security a half dozen times). Occasionally even a gun is found in a passenger's carry on. This is hardly surprising considering that Florida alone has over half a million concealed carry licenses in force. Let me repeat, security screening has proven to be ineffective. I have not been able to find a single case of hijackers being stopped by airport security. The security could deter terrorists, and it may be best to keep guns off planes, but I doubt the current screening system could pass any kind of cost/benefit analysis.
There are three things that actually increase security on airplanes.
The primary effective security measure is the tracking of extremist individuals and groups long before a member approaches an airport. The failure of tracking is what lead to the latest (pathetic) terrorist attempt.
The second effective air security measure is locks on the cockpit door combined with the assurance that pilots will never allow anyone on board to direct the flight. This means that planes cannot be used as guided missiles. The most a terrorist can dream of is a plane that goes down in an urban area causing a maximum of perhaps five or six hundred dead. Locking the cabin doors was one of the few proper reactions to the September Eleventh bombings.
Given that the worst immediate consequence of an airline hijacking is several hundred dead people, terrorists have better targets elsewhere. In terms of maximum terror, public places are easier and more attractive. The Madrid bombings killed 19 and wounded 1800. The Mumbai attacks killed 173 and wounded abut 300 others. Baghdad bombings in October killed 132 and wounded more than 500. The Oklahoma City bombing killed 168 people and injured about 700.
The final security system is the passengers and crew. Starting with September eleventh itself, passengers came to realize that the best way to survive a terrorist attack is to eliminate any threat that appears. Because of this, it is basically impossible to hijack a plane with a knife or even a gun. Both of the terrorist hijackings since 2001 (Richard Reid and Abdul Farouk Abdulmutallab) were thwarted when passengers took action
The only reason for a terrorist group to attack an airline is to trigger a disproportionate defense response. This is exactly what the current attack is likely to do. The terrorists have won.
A brief history of hijackings since 9/11 shows the current sources of hijacking threats to US citizens - largely drunk or crazy folks. Don't expect that threat to decrease as airline travel becomes even more unpleasant.
---------
This list comes from internet sources including Wikipedia (proves its worth again) plus worldwide news media.
December 2001 - Richard Reid attempts to ignite explosives in his shoe. Passengers prevent this. (terrorist/passengers)
August 2002 - Swedish man (originally Tunisian) arrested for trying to take a gun on board a plane going from Stockholm to London. Caught by racial profiling and security screening. Most of the early reporting turned out to be incorrect. All charges were dropped. Apparently he had simply forgotten to take his gun out of his possessions before heading to the airport. (police mistake)
March 2003 - Turkish Airlines aircraft Ergene on the way from Ankara to Istanbul was hijacked and forced to land in Athens, Greece. The Turkish citizen hijacker surrendered, appears to be mentally unstable. (crazy/surrender)
April 2003 - Cuban passenger plane hijacked. Landed back in Cuba, some passengers released in exchange for food and fuel. Plane flew and landed in Key West. "Second time in two weeks a plane has been hijacked to the US." The man apparently had his wife and child on the plane. (asylum/surrender)
Oct 2006 - A man hijacked a Turkish Airlines Boeing 737 with 107 passengers and six crew on board. He was captured. Hijacker was seeking asylum in Italy, but was returned to Turkey. (asylum/surrender)
December 2006 - Russian plane hijacked. Russian wanted the plane diverted to Cairo. Emergency landing in Prague. Man arrested, no one hurt. Terrorism not a motive. Hijacker claimed to have a bomb. Apparently he was drunk, involved in a fight, then demanded that the plane be diverted. The man was traveling with eight family members, three of them children. (drunk/surrender)
January 2007 - Internal Sudanese flight hijacked. Flight landed in Chad where the hijacker surrendered. Hijacker entered the cockpit with a gun. Passengers were unaware that the plane had been hijacked. Motive was political, to call attention to the conflict in Darfur. (statement/surrender)
February 2007 - Flight from Mauritania to the Canary Islands hijacked by a gun wielding hijacker who wanted political asylum in France. The pilot took the plane to its planned destination and speaking in French (the hijacker did not speak french) warned the passengers and flight crew that he would brake hard on landing. This threw the hijacker off balance and he was subdued and beaten by passengers and crew. (asylum/passengers)
April 2007 - Turkish flight forced to land in Ankara. Security forces overwhelmed the hijacker. Unemployed man tried to approach the cockpit and said he "had something in his belt" and wanted to go to Iran. (??/police)
August 2007 - A Turkish passenger plane heading for Istanbul from northern Cyprus was hijacked and forced to land in southern Turkey, where the 136 passengers escaped or were set free and the hijackers surrendered to authorities. (??/surrender)
August 2008 - Sudanese flight from Darfur - apparently successful attempt to divert the plane. The hijackers wanted to go to Egypt, but ended up in Libya. No injuries. (??/surrender)
April 2009 - Flight from Jamaica to Hallifax hijacked by a gunman. He asked to be taken to Cuba. He allowed passengers to buy their way off the plane. The "mentally challenged" hijacker was captured by a security officer who entered through the cockpit window and pretended to be the copilot. (crazy/police)
September 9, 2009 - Flight out of Cancun Mexico. A crazy guy says he has a bomb and tries to hijack a plane. His demand is to speak to the Mexican president. The plane continued to its destination and landed five minutes early. (crazy/police)
October 2009 - Man attempts to hijack a plane from Istanbul to Cairo using a plastic knife from the meal (US airlines have phased out food and utensils). Marshals overpowered the man and the flight continued. Man may have been drunk and claimed that he wanted to "liberate Jerusalem". (drunk/air marshall)
December 2009 - Northwest Airlines Flight 253 Amsterdam to NY Man on plane to the US attempts to combine materials (hidden in his underwear) for an explosive device. Passengers and flight crew intervene. There is a fire, the terrorist is badly burned and a couple of passengers injured. (terrorist/passengers)
The recent terrorist failure to bring down an airliner has, predictably, been hailed as a failure of airport security. On the TV, round after round of security experts have been crying for more money and technology to be deployed at airports to protect us. Secondary screenings have been instituted at many places and travel experts are urging travelers to arrive at the airport even earlier and to anticipate even longer delays. In international travel to the US you will be confined to your seat, with no permitted distractions and no ability to go to the bathroom for the last hour of the flight.
If you want to make a bundle over the next few years, invest in the companies that make corporate jets. As travel becomes more costly in terms of time (money) business travel will decrease overall, but more companies will simply buy/lease their own planes to bypass the increasing hassle of commercial flight.
As far as I know, there has never been a hijacking attempt that was thwarted by airport security. None, zero, zip, nada, zilch. There have been thousands of box cutters and pocket knives seized. I am probably pretty typical of the passenger who has a "dangerous weapon" confiscated. I always carry a pocket knife (swiss army tinker). Sometimes I forget to leave it behind and find it in my pocket while waiting in the security line. I have had to throw away at least three pocket knives (and smuggled them through security a half dozen times). Occasionally even a gun is found in a passenger's carry on. This is hardly surprising considering that Florida alone has over half a million concealed carry licenses in force. Let me repeat, security screening has proven to be ineffective. I have not been able to find a single case of hijackers being stopped by airport security. The security could deter terrorists, and it may be best to keep guns off planes, but I doubt the current screening system could pass any kind of cost/benefit analysis.
There are three things that actually increase security on airplanes.
The primary effective security measure is the tracking of extremist individuals and groups long before a member approaches an airport. The failure of tracking is what lead to the latest (pathetic) terrorist attempt.
The second effective air security measure is locks on the cockpit door combined with the assurance that pilots will never allow anyone on board to direct the flight. This means that planes cannot be used as guided missiles. The most a terrorist can dream of is a plane that goes down in an urban area causing a maximum of perhaps five or six hundred dead. Locking the cabin doors was one of the few proper reactions to the September Eleventh bombings.
Given that the worst immediate consequence of an airline hijacking is several hundred dead people, terrorists have better targets elsewhere. In terms of maximum terror, public places are easier and more attractive. The Madrid bombings killed 19 and wounded 1800. The Mumbai attacks killed 173 and wounded abut 300 others. Baghdad bombings in October killed 132 and wounded more than 500. The Oklahoma City bombing killed 168 people and injured about 700.
The final security system is the passengers and crew. Starting with September eleventh itself, passengers came to realize that the best way to survive a terrorist attack is to eliminate any threat that appears. Because of this, it is basically impossible to hijack a plane with a knife or even a gun. Both of the terrorist hijackings since 2001 (Richard Reid and Abdul Farouk Abdulmutallab) were thwarted when passengers took action
The only reason for a terrorist group to attack an airline is to trigger a disproportionate defense response. This is exactly what the current attack is likely to do. The terrorists have won.
A brief history of hijackings since 9/11 shows the current sources of hijacking threats to US citizens - largely drunk or crazy folks. Don't expect that threat to decrease as airline travel becomes even more unpleasant.
---------
This list comes from internet sources including Wikipedia (proves its worth again) plus worldwide news media.
December 2001 - Richard Reid attempts to ignite explosives in his shoe. Passengers prevent this. (terrorist/passengers)
August 2002 - Swedish man (originally Tunisian) arrested for trying to take a gun on board a plane going from Stockholm to London. Caught by racial profiling and security screening. Most of the early reporting turned out to be incorrect. All charges were dropped. Apparently he had simply forgotten to take his gun out of his possessions before heading to the airport. (police mistake)
March 2003 - Turkish Airlines aircraft Ergene on the way from Ankara to Istanbul was hijacked and forced to land in Athens, Greece. The Turkish citizen hijacker surrendered, appears to be mentally unstable. (crazy/surrender)
April 2003 - Cuban passenger plane hijacked. Landed back in Cuba, some passengers released in exchange for food and fuel. Plane flew and landed in Key West. "Second time in two weeks a plane has been hijacked to the US." The man apparently had his wife and child on the plane. (asylum/surrender)
Oct 2006 - A man hijacked a Turkish Airlines Boeing 737 with 107 passengers and six crew on board. He was captured. Hijacker was seeking asylum in Italy, but was returned to Turkey. (asylum/surrender)
December 2006 - Russian plane hijacked. Russian wanted the plane diverted to Cairo. Emergency landing in Prague. Man arrested, no one hurt. Terrorism not a motive. Hijacker claimed to have a bomb. Apparently he was drunk, involved in a fight, then demanded that the plane be diverted. The man was traveling with eight family members, three of them children. (drunk/surrender)
January 2007 - Internal Sudanese flight hijacked. Flight landed in Chad where the hijacker surrendered. Hijacker entered the cockpit with a gun. Passengers were unaware that the plane had been hijacked. Motive was political, to call attention to the conflict in Darfur. (statement/surrender)
February 2007 - Flight from Mauritania to the Canary Islands hijacked by a gun wielding hijacker who wanted political asylum in France. The pilot took the plane to its planned destination and speaking in French (the hijacker did not speak french) warned the passengers and flight crew that he would brake hard on landing. This threw the hijacker off balance and he was subdued and beaten by passengers and crew. (asylum/passengers)
April 2007 - Turkish flight forced to land in Ankara. Security forces overwhelmed the hijacker. Unemployed man tried to approach the cockpit and said he "had something in his belt" and wanted to go to Iran. (??/police)
August 2007 - A Turkish passenger plane heading for Istanbul from northern Cyprus was hijacked and forced to land in southern Turkey, where the 136 passengers escaped or were set free and the hijackers surrendered to authorities. (??/surrender)
August 2008 - Sudanese flight from Darfur - apparently successful attempt to divert the plane. The hijackers wanted to go to Egypt, but ended up in Libya. No injuries. (??/surrender)
April 2009 - Flight from Jamaica to Hallifax hijacked by a gunman. He asked to be taken to Cuba. He allowed passengers to buy their way off the plane. The "mentally challenged" hijacker was captured by a security officer who entered through the cockpit window and pretended to be the copilot. (crazy/police)
September 9, 2009 - Flight out of Cancun Mexico. A crazy guy says he has a bomb and tries to hijack a plane. His demand is to speak to the Mexican president. The plane continued to its destination and landed five minutes early. (crazy/police)
October 2009 - Man attempts to hijack a plane from Istanbul to Cairo using a plastic knife from the meal (US airlines have phased out food and utensils). Marshals overpowered the man and the flight continued. Man may have been drunk and claimed that he wanted to "liberate Jerusalem". (drunk/air marshall)
December 2009 - Northwest Airlines Flight 253 Amsterdam to NY Man on plane to the US attempts to combine materials (hidden in his underwear) for an explosive device. Passengers and flight crew intervene. There is a fire, the terrorist is badly burned and a couple of passengers injured. (terrorist/passengers)
Saturday, December 26, 2009
Humor? You be the Judge!
Looking back through my posts, I don't think readers can actually get a sense for who I am as a person. For example, my posts are pretty completely humorless. I think this is more an artifact of the act of writing than a reflection of personality. Apparently I am not a comic writer. I like to believe I'm actually pretty funny, though my humor tends toward puns, the completely stupid, and shaggy dog stories.
As a change of pace I give you two original jokes. I have told each of these numerous times (as anyone in my family will attest). The first has occasionally elicited a small smile. Even I cannot tell the second one properly and I can honestly say no one has ever laughed at it. I throw these out into the universe in the hopes they can find a small home outside my imagination.
At a small Turkish restaurant in Chicago two men often come in for lunch. This is completely unexceptional except that they insist on receiving their bill written on rocks. I mean actual stones. They are good customers and the waiters humor them. Whenever the men come in, the busboy is sent out to find rocks on which to write each of their tabs. However, in the middle of a city there is a limited supply of rocks with flat surfaces suitable for writing. One day the men come in and the busboy can only find one. Since the men pay separately, the waiter has no idea what will happen. He writes both their receipts on the single rock and presents it to the pair. To his joy, they pay without complaint. After they leave, the waiter shouts in joy. "I've done it. I've billed two Kurds with one stone."
Knowing the success of food marketing campaigns that popularize unfamiliar foods (Avocados, Filberts renamed Hazelnuts, Yogurt...) a businessman decides to move the Garbanzo Bean into the mainstream. He buys large quantities of the beans, processing facilities, and a large marketing workforce. One area of interest is the entertainment field so the businessman questions one of of his salesmen. "Do you know how Garbanzos are doing?" The response: "I don't know. Hummus, a few bars."
As a change of pace I give you two original jokes. I have told each of these numerous times (as anyone in my family will attest). The first has occasionally elicited a small smile. Even I cannot tell the second one properly and I can honestly say no one has ever laughed at it. I throw these out into the universe in the hopes they can find a small home outside my imagination.
At a small Turkish restaurant in Chicago two men often come in for lunch. This is completely unexceptional except that they insist on receiving their bill written on rocks. I mean actual stones. They are good customers and the waiters humor them. Whenever the men come in, the busboy is sent out to find rocks on which to write each of their tabs. However, in the middle of a city there is a limited supply of rocks with flat surfaces suitable for writing. One day the men come in and the busboy can only find one. Since the men pay separately, the waiter has no idea what will happen. He writes both their receipts on the single rock and presents it to the pair. To his joy, they pay without complaint. After they leave, the waiter shouts in joy. "I've done it. I've billed two Kurds with one stone."
Knowing the success of food marketing campaigns that popularize unfamiliar foods (Avocados, Filberts renamed Hazelnuts, Yogurt...) a businessman decides to move the Garbanzo Bean into the mainstream. He buys large quantities of the beans, processing facilities, and a large marketing workforce. One area of interest is the entertainment field so the businessman questions one of of his salesmen. "Do you know how Garbanzos are doing?" The response: "I don't know. Hummus, a few bars."
Thursday, December 24, 2009
Losing Contact
Like everyone else, my world view is limited and filtered by my own experience. Like everyone else, when there is no available, reliable research I form opinions based on my particular, atypical experiences.
Based on surveys, I have to accept that about twenty percent of adults in the US smoke. My personal experience says it is about five percent because the group of people I interact with day to day are generally non-smokers and the smokers tend not to smoke around me.
I bring this up because I feel a cultural change, but have only the most personal and anecdotal evidence. It strikes me that, day to day, I have less and less genuine human contact, both physical and emotional. I am sure some of this has to do with time of life, particular circumstance, and the softening effect of memory. Despite this, I feel there is a genuine cultural change for the worse in the United States.
Years ago when our family was smaller and very young, we moved to Oregon. This was to a small city. We arrived with nothing but the names of some friends of friends. During the three years we lived there, we developed a set of close friends and companions. I was trying to work as a musician and formed contacts in that community. We formed bands of convenience and played the local taverns and coffee shops. There were day jobs for money, but we spent as little time as possible there because our real lives were elsewhere. I helped people build additions, move, attended births and birthday parties and do all the other quotidian things without the thought of payment or trading labor. We were just in it together. There were parties and saunas and music and love. I don't remember censoring what I thought or said with these people. I'm sure that some folks were put off and probably pulled away, but there were enough left for a small community.
I contrast that to my current situation. My monetary work takes virtually all of my waking hours. Due perhaps to a poor choice or poor opportunity, my commute is quite long. A typical day involves getting up at 5:10am. By 5:30 I am in a spinning class at the local gym. After that I shower, dress and commute to work. At work there is no real communal area and I typically eat lunch alone at a nearby shopping mall. My day is largely spent in work meetings, large and small. Although I am constantly talking with people, it is all work related. I do not get home until about 7:00pm, quite exhausted.
At work, I do not speak freely. Some time ago I made a small, very bad, joke on an email received by everyone in our office (probably sixty people). Some people in management thought that such a joke might be construed by someone as offensive. As far as I can tell, no one actually complained, but some folks fantasized they might. I read and re-read the message and could find no basis for any rational complaint, but I complied with the request to send an apology saying that such communication had no place in our office.
I am more aloof than most people and I see friendships develop and grow in the workplace but I am guarded. I simply do not trust that the organization has my or my colleagues best interests in mind. As a manager, I try to protect the people who work for me, but the day may come where I am asked to do things that injure them. Most of my bosses seem to accept the notion that the primary purpose of our work is to monetarily advance the organization as a whole. I like the people I work with. I respect them. I think the institutions we have created force us apart rather than bringing us together.
In the past few years sending work off-shore has been a common topic of management discussion in several jobs I have had. It generally occurs as almost a spreadsheet computation: cost of labor versus inefficiencies in communication and the cost of developing requisite skills in people far away. In talks about pay we speak of being competitive. Work benefits are a way keep talented people from defecting to other jobs. There are career development programs and birthday reminders, but I feel the underlying sentiment that we are not dealing with friends or even people, but with labor units. Labor units that should be developed and trained and respected, but the basic notion is economic utility. The purpose of the organization is to earn money for the owners. In my current job, the owners want good economic results so they can cash out by selling the company to someone else.
Frankly, I do not think economics should form the basis for our work lives or any other part of our lives. We require money to live and our lives must make sense economically. Work must make money, but that does not mean that money should form the basis of work. Work can be centered around helping others. It can be centered on a common sense of purpose and making something bigger than one person. It can center on doing things no one has done before or better than anyone has ever done them before. It can provide community and a way to help each other.
My reaction to my work brings me distance rather than closeness to others. This is, of course, my reaction. Others may react differently, but I do not think my experience is uncommon.
I sometimes look at movies as a window onto different times and places. A couple of good examples are the original (1951) "The Day the Earth Stood Still" and "God Grew Tired of Us: The Story of Lost Boys of Sudan".
"The Day the Earth Stood Still" is a good story but mostly I like to contrast the everyday life that is portrayed with current life in the US. A human looking alien is loose in Washington. This apparently well educated and intelligent may chooses to live in a boarding house where he finds good middle class folks. (As a side note, Thomas Jefferson, Jon Marshall and Aaron Burr all lived in boarding houses while in Washington DC.) A single mother and her son (12 years old?) live in the boarding house as well. Within a few days the mother trusts the new boarder well enough to have him look after her son. The son has the run of Washington and is allowed to roam by himself. This setting is not the point of the movie and I do not believe that reviewers of the time commented on the lives portrayed. This was simply the texture of the time.
"God Grew Tired of Us: The Story of Lost Boys of Sudan" is the story of some remarkable Sudanese men. Due to war in Sudan, thousands of children were forced to flee, without any adults, across thousands of miles to refugee camps in Kenya. In Kenya they lived in refugee camps run by the UN where they created their own goverment and were schooled. Their lives were confined to the camps and they developed an extremely close knit society based on personal contact, trust and loyalty. The film introduces us to several of these young men given the opportunity of moving to the US. These are remarkable people. When we meet them they have not only survived their epic flight from Sudan, they are also remarkably well educated. Each speaks at least two or three languages.
For them, the US is a land of opportunity and provides a chance for more education and money that they can send to their community back in Kenya. It is not particularly mentioned in the film, but you see this group of men who completely depended on each other in Kenya become a fragmented group of individuals who share the same apartment, but spend no time together. Their communal life is simply shattered by the reality of contemporary American life. I do not believe that they would choose to go back, but as an observer the tragedy and loss are stark.
It is about time for me to change my life to bring it more closely into line with my values. More on this later.
Based on surveys, I have to accept that about twenty percent of adults in the US smoke. My personal experience says it is about five percent because the group of people I interact with day to day are generally non-smokers and the smokers tend not to smoke around me.
I bring this up because I feel a cultural change, but have only the most personal and anecdotal evidence. It strikes me that, day to day, I have less and less genuine human contact, both physical and emotional. I am sure some of this has to do with time of life, particular circumstance, and the softening effect of memory. Despite this, I feel there is a genuine cultural change for the worse in the United States.
Years ago when our family was smaller and very young, we moved to Oregon. This was to a small city. We arrived with nothing but the names of some friends of friends. During the three years we lived there, we developed a set of close friends and companions. I was trying to work as a musician and formed contacts in that community. We formed bands of convenience and played the local taverns and coffee shops. There were day jobs for money, but we spent as little time as possible there because our real lives were elsewhere. I helped people build additions, move, attended births and birthday parties and do all the other quotidian things without the thought of payment or trading labor. We were just in it together. There were parties and saunas and music and love. I don't remember censoring what I thought or said with these people. I'm sure that some folks were put off and probably pulled away, but there were enough left for a small community.
I contrast that to my current situation. My monetary work takes virtually all of my waking hours. Due perhaps to a poor choice or poor opportunity, my commute is quite long. A typical day involves getting up at 5:10am. By 5:30 I am in a spinning class at the local gym. After that I shower, dress and commute to work. At work there is no real communal area and I typically eat lunch alone at a nearby shopping mall. My day is largely spent in work meetings, large and small. Although I am constantly talking with people, it is all work related. I do not get home until about 7:00pm, quite exhausted.
At work, I do not speak freely. Some time ago I made a small, very bad, joke on an email received by everyone in our office (probably sixty people). Some people in management thought that such a joke might be construed by someone as offensive. As far as I can tell, no one actually complained, but some folks fantasized they might. I read and re-read the message and could find no basis for any rational complaint, but I complied with the request to send an apology saying that such communication had no place in our office.
I am more aloof than most people and I see friendships develop and grow in the workplace but I am guarded. I simply do not trust that the organization has my or my colleagues best interests in mind. As a manager, I try to protect the people who work for me, but the day may come where I am asked to do things that injure them. Most of my bosses seem to accept the notion that the primary purpose of our work is to monetarily advance the organization as a whole. I like the people I work with. I respect them. I think the institutions we have created force us apart rather than bringing us together.
In the past few years sending work off-shore has been a common topic of management discussion in several jobs I have had. It generally occurs as almost a spreadsheet computation: cost of labor versus inefficiencies in communication and the cost of developing requisite skills in people far away. In talks about pay we speak of being competitive. Work benefits are a way keep talented people from defecting to other jobs. There are career development programs and birthday reminders, but I feel the underlying sentiment that we are not dealing with friends or even people, but with labor units. Labor units that should be developed and trained and respected, but the basic notion is economic utility. The purpose of the organization is to earn money for the owners. In my current job, the owners want good economic results so they can cash out by selling the company to someone else.
Frankly, I do not think economics should form the basis for our work lives or any other part of our lives. We require money to live and our lives must make sense economically. Work must make money, but that does not mean that money should form the basis of work. Work can be centered around helping others. It can be centered on a common sense of purpose and making something bigger than one person. It can center on doing things no one has done before or better than anyone has ever done them before. It can provide community and a way to help each other.
My reaction to my work brings me distance rather than closeness to others. This is, of course, my reaction. Others may react differently, but I do not think my experience is uncommon.
I sometimes look at movies as a window onto different times and places. A couple of good examples are the original (1951) "The Day the Earth Stood Still" and "God Grew Tired of Us: The Story of Lost Boys of Sudan".
"The Day the Earth Stood Still" is a good story but mostly I like to contrast the everyday life that is portrayed with current life in the US. A human looking alien is loose in Washington. This apparently well educated and intelligent may chooses to live in a boarding house where he finds good middle class folks. (As a side note, Thomas Jefferson, Jon Marshall and Aaron Burr all lived in boarding houses while in Washington DC.) A single mother and her son (12 years old?) live in the boarding house as well. Within a few days the mother trusts the new boarder well enough to have him look after her son. The son has the run of Washington and is allowed to roam by himself. This setting is not the point of the movie and I do not believe that reviewers of the time commented on the lives portrayed. This was simply the texture of the time.
"God Grew Tired of Us: The Story of Lost Boys of Sudan" is the story of some remarkable Sudanese men. Due to war in Sudan, thousands of children were forced to flee, without any adults, across thousands of miles to refugee camps in Kenya. In Kenya they lived in refugee camps run by the UN where they created their own goverment and were schooled. Their lives were confined to the camps and they developed an extremely close knit society based on personal contact, trust and loyalty. The film introduces us to several of these young men given the opportunity of moving to the US. These are remarkable people. When we meet them they have not only survived their epic flight from Sudan, they are also remarkably well educated. Each speaks at least two or three languages.
For them, the US is a land of opportunity and provides a chance for more education and money that they can send to their community back in Kenya. It is not particularly mentioned in the film, but you see this group of men who completely depended on each other in Kenya become a fragmented group of individuals who share the same apartment, but spend no time together. Their communal life is simply shattered by the reality of contemporary American life. I do not believe that they would choose to go back, but as an observer the tragedy and loss are stark.
It is about time for me to change my life to bring it more closely into line with my values. More on this later.
Saturday, December 12, 2009
Sometimes Common Sense Doesn't Make Sense
Sometimes sensible sounding positions make little sense. Here are two radically different examples. The first is helping birds by keeping your cats inside. The second is using intensive user testing to improve products.
First let's look at bird populations and cats. Many species of birds, particularly songbirds are in trouble Disappearing Common Birds Send Environmental Wake-up Call. It is also true that cats are tremendous predators. By some estimates cats kill hundreds of millions of birds in the US each year. The conjunction of these facts leads to a call that owners should keep their cats indoors Give Birds a Break, Lock up the Cat.
There may be good reasons to keep your cat indoors (though I haven't found one that convinces me), but bird killing is not one of them. It is a sop that makes people feel better without addressing the real problems.
Almost every article that seriously looks at bird loss talks about loss of habitat as the main threat. This includes the Washington Post, the Audobon Society and even Australian scientists.
My city is about seven miles on a side. Inside this area of about fifty square miles, there are essentially no native species. Fifty square miles of prairie grassland was bulldozed and replaced with asphalt, houses, stores, Kentucky Bluegrass and non-native trees. It is a nice enough town, but it does not provide much habitat for native birds.
The range of a cat is on the order of thirty or forty hectares. That is roughly a third of a mile on a side. If my city is a square seven miles on a side, cats extend each side by a maximum of about one third of a mile. The amount of severely disturbed land goes from forty nine square miles to about fifty three square miles. This is less than a ten percent increase. Complaining about bird loss due to urban cats is like killing a deer with your car and worrying about its broken antler.
Suppose that cats were a main cause of bird disappearance. Keeping your cat indoors will still not solve the problem. About one third of all cats are feral. Cats breed prodigiously and feral cats exist because there is an ecological niche for them. Even if all owned cats were kept indoors, the birds would keep dying.
I use cats and birds as an example, but we suffer from an epidemic of glossy arguments that may not stand up to any real scrutiny. A second, less supported, example has to do with product development.
It seems sensible that if you are developing products to meet some consumer need, it would be a good idea to know what those consumers want and how they will react to you product. There are a number of established techniques for this. For example, focus groups. Software organizations, often talk about user centered design.
I have developed products using these techniques. I can honestly say that every in-depth interaction I have had with customers has changed my view of the product I was developing. Sometimes I have found out that my view of the problems and their solutions is quite different from my customer's. Sometimes I have found that users had much less tolerance of complexity than I imagined.
That said, I don't think this kind of external facing, user centered process develops better products.
To support this you need only compare Microsoft and Apple. Both these companies have the time and money to investigate, measure, and improve their product development. Microsoft has a user centered development process. Apple has a completely different, inward focused product development system.
On the whole Microsoft products are, at best, acceptable. Commonly they are a complete mess. Just look at the appalling Microsoft Project. It has done more to ruin project management than any other single tool. Everyone uses Microsoft Word, but I can't think of anyone who actually likes the program. It is larded with obscure, mostly useless, features. Nothing is easy and the resulting documents are extraordinarily difficult to re-purpose.
On the whole, Microsoft follows the market. They re-implement what others have done and often do it worse. This pattern started with the operating system extends through their software products, and includes their hardware.
Apple, in contrast, is known as an innovative company that leads the market. Their customers don't just like the products, they love them. MP3 players with much the same functionality as the iPod existed before the iPod, but the Apple developers came up with a whole ecosystem for music. When the iPhone came out, it erased and replaced peoples ideas of how to interact with a that device in their pocket that sends and receives phone calls.
The problem may be that focusing on the views of potential users directs your attention to those views. Those views are often very restricted because most folks don't really think about what they are doing and what is possible. When you talk to a lot of potential customers, the tendency is to aim for the lowest common denominator. The end result seems to be products that serve a purpose, that most people can use, but that no one really cares about.
Like keeping cats inside to protect birds, asking customers to help develop products seems to make a lot of sense, but may not be sensible.
First let's look at bird populations and cats. Many species of birds, particularly songbirds are in trouble Disappearing Common Birds Send Environmental Wake-up Call. It is also true that cats are tremendous predators. By some estimates cats kill hundreds of millions of birds in the US each year. The conjunction of these facts leads to a call that owners should keep their cats indoors Give Birds a Break, Lock up the Cat.
There may be good reasons to keep your cat indoors (though I haven't found one that convinces me), but bird killing is not one of them. It is a sop that makes people feel better without addressing the real problems.
Almost every article that seriously looks at bird loss talks about loss of habitat as the main threat. This includes the Washington Post, the Audobon Society and even Australian scientists.
My city is about seven miles on a side. Inside this area of about fifty square miles, there are essentially no native species. Fifty square miles of prairie grassland was bulldozed and replaced with asphalt, houses, stores, Kentucky Bluegrass and non-native trees. It is a nice enough town, but it does not provide much habitat for native birds.
The range of a cat is on the order of thirty or forty hectares. That is roughly a third of a mile on a side. If my city is a square seven miles on a side, cats extend each side by a maximum of about one third of a mile. The amount of severely disturbed land goes from forty nine square miles to about fifty three square miles. This is less than a ten percent increase. Complaining about bird loss due to urban cats is like killing a deer with your car and worrying about its broken antler.
Suppose that cats were a main cause of bird disappearance. Keeping your cat indoors will still not solve the problem. About one third of all cats are feral. Cats breed prodigiously and feral cats exist because there is an ecological niche for them. Even if all owned cats were kept indoors, the birds would keep dying.
I use cats and birds as an example, but we suffer from an epidemic of glossy arguments that may not stand up to any real scrutiny. A second, less supported, example has to do with product development.
It seems sensible that if you are developing products to meet some consumer need, it would be a good idea to know what those consumers want and how they will react to you product. There are a number of established techniques for this. For example, focus groups. Software organizations, often talk about user centered design.
I have developed products using these techniques. I can honestly say that every in-depth interaction I have had with customers has changed my view of the product I was developing. Sometimes I have found out that my view of the problems and their solutions is quite different from my customer's. Sometimes I have found that users had much less tolerance of complexity than I imagined.
That said, I don't think this kind of external facing, user centered process develops better products.
To support this you need only compare Microsoft and Apple. Both these companies have the time and money to investigate, measure, and improve their product development. Microsoft has a user centered development process. Apple has a completely different, inward focused product development system.
On the whole Microsoft products are, at best, acceptable. Commonly they are a complete mess. Just look at the appalling Microsoft Project. It has done more to ruin project management than any other single tool. Everyone uses Microsoft Word, but I can't think of anyone who actually likes the program. It is larded with obscure, mostly useless, features. Nothing is easy and the resulting documents are extraordinarily difficult to re-purpose.
On the whole, Microsoft follows the market. They re-implement what others have done and often do it worse. This pattern started with the operating system extends through their software products, and includes their hardware.
Apple, in contrast, is known as an innovative company that leads the market. Their customers don't just like the products, they love them. MP3 players with much the same functionality as the iPod existed before the iPod, but the Apple developers came up with a whole ecosystem for music. When the iPhone came out, it erased and replaced peoples ideas of how to interact with a that device in their pocket that sends and receives phone calls.
The problem may be that focusing on the views of potential users directs your attention to those views. Those views are often very restricted because most folks don't really think about what they are doing and what is possible. When you talk to a lot of potential customers, the tendency is to aim for the lowest common denominator. The end result seems to be products that serve a purpose, that most people can use, but that no one really cares about.
Like keeping cats inside to protect birds, asking customers to help develop products seems to make a lot of sense, but may not be sensible.
Sunday, November 29, 2009
Small Thoughts on Slack
Things vary. Streams flood, temperature drops or rises. Traffic thickens and thins. In human endeavors sometimes there is to much too do, sometimes too little. How an organization responds to these fluctuations tells us a lot about the nature of the events and the organization. There are a range of reactions.
Every city in the United States has firefighters. Firefighters are constantly available even though fires are not that common. The speed and destructiveness of fires makes it worthwhile to keep crews on duty even though most of the time they are not fighting fires.
In an ordinary restaurant there is a predictable fluctuation of customers throughout the day with pulses around meal times. There are also unpredictable surges for particular meals. Restaurant owners typically respond by having a flexible work force and scheduling somewhat more than the expected need. If a rush does not materialize, someone can be sent home. If a rush is large, extra help may be brought in at the last minute. Starting with some excess capacity is less expensive than perhaps losing a customer.
The opposite approach can be seen at an airline counter or telephone call center. A line of waiting people is used to even the load. When there is a rush, the line gets longer. When things calm down, the line shortens. The business goal is to always have some line so workers are constantly occupied. On the surface this is the least expensive from the business point of view. Workers are always busy and staffing is consistent. However, it only works if customers do not have a better alternative or do not value their own time highly.
The "always have a line" business model is a form of cost shifting. The cost of normal fluctuations in business are borne by the consumer who is forced to wait rather than the company paying someone who may not be completely busy.
Hospital emergency rooms have largely gone to the line model. That is, they seem to have little or no excess capacity. They do take the trouble to constantly re-order the waiting line, a process called triage. Occasionally someone dies, but normally the impact is only an excessively long wait for those who are not in dire straits.
Very popular restaurants encourage a line. It makes them seem all the more desirable. It is a way of saying "there is no alternative that can provide what we do". This demand allows the owners to raise prices. For something exclusive, you may pay more. Almost paradoxically, this exclusivity can increase demand. One step further is the doorman with a list. Those on the list are allowed immediate entry. The hoi poloi must wait in line for a chance to rub elbows with the elect.
Humans can be trained to be remarkably tolerant of others wasting their time. An object lesson can be found in the shopping queues of the former Soviet Union. People will wait without complaint for a very long time even when the wait is pointless. One example is the line at the airport for security screening (which does not increase security). Because the alternative to quietly waiting your turn is to miss your flight and perhaps face police questioning, people will wait for as long as it takes with nary a word of complaint.
Slack in financial matters is often the difference between profit and bankruptcy. Businesses must be able to accommodate shifting amounts of money coming in and leaving. This can be a problem of timing. A business may sell enough product to make a profit, but if payments do not arrive soon enough, it may not be able to pay the bills. Of course if the problem is simply one of timing, then there are usually lenders willing to bridge the gap - at a price. One of the major differences between large and small business is the ability to last out temporary changes in circumstance. A large business has two advantages. One is that downturns in one segment can be covered by profits in another. The second is that large businesses find it easier to borrow money to make it through lean times.
Every city in the United States has firefighters. Firefighters are constantly available even though fires are not that common. The speed and destructiveness of fires makes it worthwhile to keep crews on duty even though most of the time they are not fighting fires.
In an ordinary restaurant there is a predictable fluctuation of customers throughout the day with pulses around meal times. There are also unpredictable surges for particular meals. Restaurant owners typically respond by having a flexible work force and scheduling somewhat more than the expected need. If a rush does not materialize, someone can be sent home. If a rush is large, extra help may be brought in at the last minute. Starting with some excess capacity is less expensive than perhaps losing a customer.
The opposite approach can be seen at an airline counter or telephone call center. A line of waiting people is used to even the load. When there is a rush, the line gets longer. When things calm down, the line shortens. The business goal is to always have some line so workers are constantly occupied. On the surface this is the least expensive from the business point of view. Workers are always busy and staffing is consistent. However, it only works if customers do not have a better alternative or do not value their own time highly.
The "always have a line" business model is a form of cost shifting. The cost of normal fluctuations in business are borne by the consumer who is forced to wait rather than the company paying someone who may not be completely busy.
Hospital emergency rooms have largely gone to the line model. That is, they seem to have little or no excess capacity. They do take the trouble to constantly re-order the waiting line, a process called triage. Occasionally someone dies, but normally the impact is only an excessively long wait for those who are not in dire straits.
Very popular restaurants encourage a line. It makes them seem all the more desirable. It is a way of saying "there is no alternative that can provide what we do". This demand allows the owners to raise prices. For something exclusive, you may pay more. Almost paradoxically, this exclusivity can increase demand. One step further is the doorman with a list. Those on the list are allowed immediate entry. The hoi poloi must wait in line for a chance to rub elbows with the elect.
Humans can be trained to be remarkably tolerant of others wasting their time. An object lesson can be found in the shopping queues of the former Soviet Union. People will wait without complaint for a very long time even when the wait is pointless. One example is the line at the airport for security screening (which does not increase security). Because the alternative to quietly waiting your turn is to miss your flight and perhaps face police questioning, people will wait for as long as it takes with nary a word of complaint.
Slack in financial matters is often the difference between profit and bankruptcy. Businesses must be able to accommodate shifting amounts of money coming in and leaving. This can be a problem of timing. A business may sell enough product to make a profit, but if payments do not arrive soon enough, it may not be able to pay the bills. Of course if the problem is simply one of timing, then there are usually lenders willing to bridge the gap - at a price. One of the major differences between large and small business is the ability to last out temporary changes in circumstance. A large business has two advantages. One is that downturns in one segment can be covered by profits in another. The second is that large businesses find it easier to borrow money to make it through lean times.
Sunday, August 30, 2009
Some Thoughts on Debt
I've been thinking some about debt. It seems to be the zeitgeist. There is nothing profound in this post. Mostly, I am just presenting a framework to think about lending and borrowing. The last part gives some of my personal debt rules.
Well, what this post lacks in profundity it makes up in length. Here is a small index.
What is Debt
Hedging the Bet
Different Kinds of Debt
When Waters are Calm
When the Storm Comes
Personal Protection
The other day I was in a shop that was being liquidated. I am always curious why businesses must close, so I spent a little time talking with the owners. One of the questions I asked was whether they had to take on much debt to open the shop. They said no, they used equity (the monetary value of a property or business beyond any amounts owed on it) from their home to finance the venture. For them, debt is defined to be any amount owed that exceeds net worth. That is, if you can sell all your property, and have enough to pay everyone you owe, you are not in debt. Even if this were an accurate definition, the home equity loan payments must have affected their cash flow.
The American Heritage Dictionary defines debt as:
1. Something owed, such as money, goods, or services.
2.
a. An obligation or liability to pay or render something to someone else.
b. The condition of owing: a young family always in debt.
The other side of the debt coin is loan
1.
a. Something lent for temporary use.
b. A sum of money lent at interest.
2. An act of lending; a grant for temporary use: asked for the loan of a garden hose.
3. A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan from the main office.
Loans and debt are all about the future. Both the lender and the borrower envision a future where the debt can be repaid, usually with interest. Ben Stein wrote a column about sales in which he recounted buying a car he wasn't sure he could afford.
In this case, the salesman wanted to sell the car. His financial interests only involved the sale. The loan, its terms, and its collection were someone else's problem. The salesman's projection of the future implied the fulfillment of dreams and faith in the buyer. In this case, I presume the bet was good. Ben got, and enjoyed, his car. The salesman got his commission, and the lender got the money back plus interest.
A different power dynamic occurs when someone wants a loan to start a new business. The borrower is generally the supplicant trying to persuade others that the wish should be granted. The lender usually insists on a business plan that takes into account foreseeable costs, revenue, and risks. The business owner dutifully uses the plan to project a future where the business succeeds and all parties prosper.
Because the future is uncertain, lenders usually hedge the bet. This takes a number of forms.
In a "secured" loan the borrower offers something as collateral. Collateral is property or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default. With a secured loan, the lender is judging that even if the loan is not repaid, the collateral will allow recovery of the money owed. This was the case with the business owners who were liquidating their shop. They put up a portion of their house as a guarantee that they would repay the loan. Even after their shop is gone they must keep up the payments on the business loan or the lender may foreclose on their home to reclaim the remaining balance of the loan (plus interest, fees, the cost of the foreclosure...).
For secured loans, losses are limited to the difference between the amount due on the loan and the value of the property (less any costs for selling).
A standard mortgage is a secured loan where the lender owns the property until the debt is repaid. That is, the property itself serves as a stand in for future payments. The lender can only lose if the property loses value over time. A similar, but more risky, arrangement is used by venture capitalists. In exchange for money, the borrower gives up some portion of company ownership. This includes not only profits, but decision making as well. The business itself serves as collateral. The investors are projecting that if the borrowers cannot repay, the investors can seize the company and make it profitable.
Not all loans are secured. Sometimes the borrower and lender take a leap of faith together about the future. This is usually not a blind leap. Most loans are made with the expectation of profit and a weighing of risk. The amount loaned is balanced against the current situation of the borrower and past history of repayment. At the single loan level the lender generally requires that a trusted person, someone with a history of repaying debts and with current financial means, guarantee the loan. Lenders also vary the interest rate based on projected risk. As uncertainty of repayment increases, so does the interest rate. Over a large number of loans, the lender is assuming a certain percentage of defaults. The interest rate must be high enough to not only cover these bad loans, but to make a profit in addition.
The consolidation of financial information has allowed information about virtually all loans for all people to be tracked and shared. In this way, lenders enter into loans with a reasonably complete history of past borrowing and repayment. Financial models are used to project risk levels, hence the "credit score". In addition, lenders usually require some proof of current income.
The existence of elaborate systems to predict risk gives great comfort to lenders who deceive themselves that they understand the likely future. Unfortunately, the actual future is often unlikely. Every system of prediction devised by humans has failed, often catastrophically.
Debt should not be considered a curse word. Much, if not most, of our built environment would not exist without debt. This includes roads, bridges, buildings, automobiles, computers... Most of the debts incurred to build these objects were incurred in good faith and paid off as expected. For individuals, both homes and cars are usually financed by debt and could not be bought without debt.
Debt is incurred for different reasons. Some of this is embodied in the language we use to describe debt.
One of the terms is "leverage". The term is analogy with mechanical system where a lever allows a small amount of force to move a large object. In the financial case, the lever is the borrowed money. The borrower expects a future where financial gains from the borrowed money exceed the cost of the money.
Suppose I wish to buy a commercial property and have $1,000,000. I could invest all of my money and buy a small property outright. If the property increases in value by 10% and I sell, I make $100,000 profit. Suppose instead that I pay 10% down and take out a loan for $9,000,000. If the property value increases 10% and I sell, I make $1,000,000 (less the interest paid on the loan). With the same amount of my own money, I make roughly nine times as much. That is, I have leveraged my money.
In general, lenders of leverage loans insist on knowing the purpose of the loan and do their own analysis of the financial viability.
Educational loans are a form of leverage. The increase in earnings that come from increased knowledge and skills is expected to justify the risk that incurring a debt implies. Even a car can be thought of as leverage if it allows the buyer to travel in a way that increases income (a job across town).
A second kind of loan is "credit". This term is a strange reversal of meaning. In accounting there are columns for credit and debit. That is, credit is the opposite of debit. In more general parlance, credit is something you earn or have. In the lending industry, you can borrow against your perceived financial credit. That is, you can get a "credit line" which is an amount of money the lender thinks you are likely to repay. This gets shortened to credit.
Parenthetically, another twist of terminology is "debit cards". If you use a debit card, the amount is immediately debited to your bank account. Usually a debit card can only be used if you have the funds to cover the expense. That is "debit cards" do not incur debt.
Because the borrower is judged on general reliability, credit loans are typically "revolving credit". That is, there is not a single loan with a set amount and a fixed number of payments. Instead, the amount of the loan and the size of the payment can vary from month to month. The maximum amount that can owed at any time is fixed. This limits the risk to the lender.
Credit loans are typically unsecured and the lender does not investigate how the money is used. Consumers typically use credit lines for everyday expenses. That is, the money is used in ways that do not increase future income. This makes credit loans more risky and, as a consequence, increases their cost to the borrower. Some of the cost is in higher interest. Another part of the cost comes from fees associated with the account.
There is generally a minimum payment that must be made on a credit account each month. However, the interest and fees associated with maintaining a balance are so large that the minimum payment due may not even cover the monthly interest on the loan. As long as most of the loan will eventually be repaid it is to the lender's advantage for borrowers to have a large outstanding balance.
For example, if a credit card company lends someone $10,000 dollars and that amount is paid off at the end of the month, the card company makes only the amount of the money that the merchant paid to accept the credit card (typically a one to two percent of the bill plus a per transaction fee of between four and twenty five cents). For $10,000 this might be a single payment of $100 from the merchant.
If the borrower does not pay back the loan at the end of the month, the lender starts collecting interest. Currently, credit card annual percentage rates for interest range between ten and twenty five percent. On $10,000 a fifteen percent rate would be $1,500 a year or about $125 per month. In an economy where a five percent rate of return is considered healthy, fifteen percent is very good money. Of course if the borrower defaults on the loan, the lender is out the principal loaned. At fifteen percent, it takes about seven years to collect as much in interest as the original loan.
Lenders who want their borrowers to carry the highest possible level of debt do not have the borrowers best interest in mind. It is very difficult for many people to defer desires. The promise of immediate cash is almost irresistible. Most adults know someone with a large number of credit accounts, many of them "maxed out". They may even be borrowing money from one account to make minimum payments on another. They are literally "borrowing from Peter to pay Paul".
Everyone who has watched "It's a Wonderful Life" knows that the credit system is based on trust. As George Bailey says:
The system is built on debtors paying their loans in an orderly fashion. George Bailey's building and loan acts as a middle man. In George's bank the people lending the money are the depositors. The people borrowing the money are the homeowners. Often the borrowers are also depositors. If the amount of deposits, loan repayments and withdrawals are predictable the bank can have enough cash on hand to satisfy the small number of depositors who wish to withdraw their money.
There are three pillars of stability.
In orderly times (any time when this month looks a lot like last month) the system is resilient and can tolerate a certain number of loans not being repaid. As long as the average rate of default can be predicted the lender can factor that number into the interest rates for loans. The interest rate is not just a return on investment. It also covers losses from the few loans that are not repaid.
This desire toward order can be seen in pre-payment penalties. Some loans have a condition that penalizes the borrower for paying the loan before expected. The lender expects a certain amount of interest to be paid over a set amount of time. When the borrower pays back the loan early, the lender no longer gets interest payments. The pre-payment penalty compensates the lender for this "lost" income. Typically loans are repaid early because the borrower has found a lender with a lower interest rate. The pre-payment penalty keeps borrowers from jumping ship.
Danger comes from disorderly times. Unfortunately, destructive feedback cycles magnify small problems and guarantee that there will be disorderly times.
The economy as a whole is incredibly interconnected with money flowing from person to person and organization to organization. This network does not just involve formal loans, it involves all non-immediate transactions. As an employee you are typically paid for work some time after it is done. This is not a formal loan, but you have loaned your labor with the expectation of a future repayment.
When expected cash stops coming in, the person or organization that expects the money does everything possible to recoup the loss quickly and to reduce the exposure to future problems. The response is typically two sided. One side is trying to replace the lost money, the other side is to reduce expenses so that the losses do not affect payments to others.
To replace lost money, organizations will typically try to be first in line for future repayment. In addition they will add fees and penalties to the amount due. Virtually every business invoice contains a provision for interest to be paid when the amount is past due. Usually there is increased emphasis on finding new customers.
Everyone who has worked for a large organization has seen it protect itself against cash flow problems. The first step is to reduce discretionary spending. The "Tuesday doughnuts" disappear. Training and travel are curtailed or eliminated. Then come hiring freezes, furloughs, and layoffs. When the problems are severe, expenses that are expected to yield future profits are eliminated. First to go is administrative staff followed by research and development. The sales force is a company's most immediate investment in profit. When layoffs hit the sales force it is a sign that the company is close to insolvency. Bankruptcy often follows.
Layoffs extend the problem from the business to individuals and families. Individuals and families protect themselves in much the same way as businesses. They try to increase income by finding new work or starting new businesses. Expenses not directly related to day to day survival are eliminated. Then credit card payments (past expenses) are ignored. Utility and shelter payments are next to go and finally food.
In our interconnected system, problems are infectious. If those who normally give you money pull back, you cannot spend as much with others. Those expecting your spending must, in turn, pull back. When a large portion of the economy is affected it is called a recession or depression. Recession and depressions are an economic infection so large that no single individual or organization can adequately respond.
Not every downturn spreads widely and there are different causes. When a single company fails, the surrounding economy usually replaces the missing goods or services and the workers find jobs in other firms. Some downturns are more widespread but do not affect the whole economy. The mechanization of agriculture causes farm labor needs to plummet while production remains high. Individuals lose their jobs and are forced off the land. When this happens the workers generally move to urban areas with more opportunities. This often leads to an increase in urban population and a large number of unemployed people, sometimes for a generation or more. This is devastating for the individuals, but the economy as a whole is often largely unaffected.
Loans are about hope and the future. Don't discount your potential and your future, but try not to sabotage it either. There may be a time when you make a decision to "go for broke" because you think the potential rewards outweigh the potential risk. This is a good thing, but walk in with your eyes open.
The first step in protecting yourself and your family against financial trouble is to accept that trouble will come along. Someone will lose a job. The car will require expensive repair or replacement.
Temporary setbacks can be smoothed over by a reserve of cash. If the car breaks and you have some extra cash, you simply repair or replace the car. If you lose your job, the cash may see you through until you find another source of income.
Low income families may not be able to create any reserve. These families have no recourse and must respond to events the best they can. There are government programs (food stamps, section 8 housing ...) that may help, but basically you are on your own. When thinking about government aid, just remember:
One of the first responses to financial trouble is to reduce expenses. It is in this area that loans become dangerous. Loans are typically a fixed monthly expense. That is, they are an expense that cannot be reduced without starting a chain of negative repercussions.
Once again the poor get the short end of the stick. If you have no cash reserve but do have access to a line of credit, you can smooth over trouble by borrowing. Long term, this is a losing strategy. Loans always involve fees and interest and short term loans are the most expensive. If you cannot afford to create a cash reserve, you probably cannot afford the fees and interest. However, such loans may be the only recourse available.
Currently I am fortunate. I have sufficient income to cover my expenses and to create some reserve. Part of this is income, part is inherent conservatism. It is in my nature to avoid ongoing expenses.
If you can afford them, I recommend some rules of thumb.
Well, what this post lacks in profundity it makes up in length. Here is a small index.
What is Debt
Hedging the Bet
Different Kinds of Debt
When Waters are Calm
When the Storm Comes
Personal Protection
The other day I was in a shop that was being liquidated. I am always curious why businesses must close, so I spent a little time talking with the owners. One of the questions I asked was whether they had to take on much debt to open the shop. They said no, they used equity (the monetary value of a property or business beyond any amounts owed on it) from their home to finance the venture. For them, debt is defined to be any amount owed that exceeds net worth. That is, if you can sell all your property, and have enough to pay everyone you owe, you are not in debt. Even if this were an accurate definition, the home equity loan payments must have affected their cash flow.
What is Debt
The American Heritage Dictionary defines debt as:
1. Something owed, such as money, goods, or services.
2.
a. An obligation or liability to pay or render something to someone else.
b. The condition of owing: a young family always in debt.
The other side of the debt coin is loan
1.
a. Something lent for temporary use.
b. A sum of money lent at interest.
2. An act of lending; a grant for temporary use: asked for the loan of a garden hose.
3. A temporary transfer to a duty or place away from a regular job: an efficiency expert on loan from the main office.
Loans and debt are all about the future. Both the lender and the borrower envision a future where the debt can be repaid, usually with interest. Ben Stein wrote a column about sales in which he recounted buying a car he wasn't sure he could afford.
In 1976, when I moved to Los Angeles, I desperately wanted a Mercedes 450 SLC, a car that was — even in used form — far more than I deserved or could afford at my entry-level, highly tenuous work as a scriptwriter. My salesman at Mercedes-Benz of Beverly Hills, Larry Anish, listened to my objections and simply asked, “Don’t you believe in your own future?” Of course, I bought the car.
In this case, the salesman wanted to sell the car. His financial interests only involved the sale. The loan, its terms, and its collection were someone else's problem. The salesman's projection of the future implied the fulfillment of dreams and faith in the buyer. In this case, I presume the bet was good. Ben got, and enjoyed, his car. The salesman got his commission, and the lender got the money back plus interest.
A different power dynamic occurs when someone wants a loan to start a new business. The borrower is generally the supplicant trying to persuade others that the wish should be granted. The lender usually insists on a business plan that takes into account foreseeable costs, revenue, and risks. The business owner dutifully uses the plan to project a future where the business succeeds and all parties prosper.
Hedging the Bet
Because the future is uncertain, lenders usually hedge the bet. This takes a number of forms.
In a "secured" loan the borrower offers something as collateral. Collateral is property or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default. With a secured loan, the lender is judging that even if the loan is not repaid, the collateral will allow recovery of the money owed. This was the case with the business owners who were liquidating their shop. They put up a portion of their house as a guarantee that they would repay the loan. Even after their shop is gone they must keep up the payments on the business loan or the lender may foreclose on their home to reclaim the remaining balance of the loan (plus interest, fees, the cost of the foreclosure...).
For secured loans, losses are limited to the difference between the amount due on the loan and the value of the property (less any costs for selling).
A standard mortgage is a secured loan where the lender owns the property until the debt is repaid. That is, the property itself serves as a stand in for future payments. The lender can only lose if the property loses value over time. A similar, but more risky, arrangement is used by venture capitalists. In exchange for money, the borrower gives up some portion of company ownership. This includes not only profits, but decision making as well. The business itself serves as collateral. The investors are projecting that if the borrowers cannot repay, the investors can seize the company and make it profitable.
Not all loans are secured. Sometimes the borrower and lender take a leap of faith together about the future. This is usually not a blind leap. Most loans are made with the expectation of profit and a weighing of risk. The amount loaned is balanced against the current situation of the borrower and past history of repayment. At the single loan level the lender generally requires that a trusted person, someone with a history of repaying debts and with current financial means, guarantee the loan. Lenders also vary the interest rate based on projected risk. As uncertainty of repayment increases, so does the interest rate. Over a large number of loans, the lender is assuming a certain percentage of defaults. The interest rate must be high enough to not only cover these bad loans, but to make a profit in addition.
The consolidation of financial information has allowed information about virtually all loans for all people to be tracked and shared. In this way, lenders enter into loans with a reasonably complete history of past borrowing and repayment. Financial models are used to project risk levels, hence the "credit score". In addition, lenders usually require some proof of current income.
The existence of elaborate systems to predict risk gives great comfort to lenders who deceive themselves that they understand the likely future. Unfortunately, the actual future is often unlikely. Every system of prediction devised by humans has failed, often catastrophically.
Different Kinds of Debt
Debt should not be considered a curse word. Much, if not most, of our built environment would not exist without debt. This includes roads, bridges, buildings, automobiles, computers... Most of the debts incurred to build these objects were incurred in good faith and paid off as expected. For individuals, both homes and cars are usually financed by debt and could not be bought without debt.
Debt is incurred for different reasons. Some of this is embodied in the language we use to describe debt.
One of the terms is "leverage". The term is analogy with mechanical system where a lever allows a small amount of force to move a large object. In the financial case, the lever is the borrowed money. The borrower expects a future where financial gains from the borrowed money exceed the cost of the money.
Suppose I wish to buy a commercial property and have $1,000,000. I could invest all of my money and buy a small property outright. If the property increases in value by 10% and I sell, I make $100,000 profit. Suppose instead that I pay 10% down and take out a loan for $9,000,000. If the property value increases 10% and I sell, I make $1,000,000 (less the interest paid on the loan). With the same amount of my own money, I make roughly nine times as much. That is, I have leveraged my money.
In general, lenders of leverage loans insist on knowing the purpose of the loan and do their own analysis of the financial viability.
Educational loans are a form of leverage. The increase in earnings that come from increased knowledge and skills is expected to justify the risk that incurring a debt implies. Even a car can be thought of as leverage if it allows the buyer to travel in a way that increases income (a job across town).
A second kind of loan is "credit". This term is a strange reversal of meaning. In accounting there are columns for credit and debit. That is, credit is the opposite of debit. In more general parlance, credit is something you earn or have. In the lending industry, you can borrow against your perceived financial credit. That is, you can get a "credit line" which is an amount of money the lender thinks you are likely to repay. This gets shortened to credit.
Parenthetically, another twist of terminology is "debit cards". If you use a debit card, the amount is immediately debited to your bank account. Usually a debit card can only be used if you have the funds to cover the expense. That is "debit cards" do not incur debt.
Because the borrower is judged on general reliability, credit loans are typically "revolving credit". That is, there is not a single loan with a set amount and a fixed number of payments. Instead, the amount of the loan and the size of the payment can vary from month to month. The maximum amount that can owed at any time is fixed. This limits the risk to the lender.
Credit loans are typically unsecured and the lender does not investigate how the money is used. Consumers typically use credit lines for everyday expenses. That is, the money is used in ways that do not increase future income. This makes credit loans more risky and, as a consequence, increases their cost to the borrower. Some of the cost is in higher interest. Another part of the cost comes from fees associated with the account.
There is generally a minimum payment that must be made on a credit account each month. However, the interest and fees associated with maintaining a balance are so large that the minimum payment due may not even cover the monthly interest on the loan. As long as most of the loan will eventually be repaid it is to the lender's advantage for borrowers to have a large outstanding balance.
For example, if a credit card company lends someone $10,000 dollars and that amount is paid off at the end of the month, the card company makes only the amount of the money that the merchant paid to accept the credit card (typically a one to two percent of the bill plus a per transaction fee of between four and twenty five cents). For $10,000 this might be a single payment of $100 from the merchant.
If the borrower does not pay back the loan at the end of the month, the lender starts collecting interest. Currently, credit card annual percentage rates for interest range between ten and twenty five percent. On $10,000 a fifteen percent rate would be $1,500 a year or about $125 per month. In an economy where a five percent rate of return is considered healthy, fifteen percent is very good money. Of course if the borrower defaults on the loan, the lender is out the principal loaned. At fifteen percent, it takes about seven years to collect as much in interest as the original loan.
Lenders who want their borrowers to carry the highest possible level of debt do not have the borrowers best interest in mind. It is very difficult for many people to defer desires. The promise of immediate cash is almost irresistible. Most adults know someone with a large number of credit accounts, many of them "maxed out". They may even be borrowing money from one account to make minimum payments on another. They are literally "borrowing from Peter to pay Paul".
When Waters are Calm
Everyone who has watched "It's a Wonderful Life" knows that the credit system is based on trust. As George Bailey says:
No, but you... you... you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house... (to one of the men)...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
The system is built on debtors paying their loans in an orderly fashion. George Bailey's building and loan acts as a middle man. In George's bank the people lending the money are the depositors. The people borrowing the money are the homeowners. Often the borrowers are also depositors. If the amount of deposits, loan repayments and withdrawals are predictable the bank can have enough cash on hand to satisfy the small number of depositors who wish to withdraw their money.
There are three pillars of stability.
- The vast majority of loans will be repaid.
- Assets that secure loans maintain their value and are liquid (can be sold quickly).
- There is a predictable pace of repayment.
In orderly times (any time when this month looks a lot like last month) the system is resilient and can tolerate a certain number of loans not being repaid. As long as the average rate of default can be predicted the lender can factor that number into the interest rates for loans. The interest rate is not just a return on investment. It also covers losses from the few loans that are not repaid.
This desire toward order can be seen in pre-payment penalties. Some loans have a condition that penalizes the borrower for paying the loan before expected. The lender expects a certain amount of interest to be paid over a set amount of time. When the borrower pays back the loan early, the lender no longer gets interest payments. The pre-payment penalty compensates the lender for this "lost" income. Typically loans are repaid early because the borrower has found a lender with a lower interest rate. The pre-payment penalty keeps borrowers from jumping ship.
When the Storm Comes
Danger comes from disorderly times. Unfortunately, destructive feedback cycles magnify small problems and guarantee that there will be disorderly times.
The economy as a whole is incredibly interconnected with money flowing from person to person and organization to organization. This network does not just involve formal loans, it involves all non-immediate transactions. As an employee you are typically paid for work some time after it is done. This is not a formal loan, but you have loaned your labor with the expectation of a future repayment.
When expected cash stops coming in, the person or organization that expects the money does everything possible to recoup the loss quickly and to reduce the exposure to future problems. The response is typically two sided. One side is trying to replace the lost money, the other side is to reduce expenses so that the losses do not affect payments to others.
To replace lost money, organizations will typically try to be first in line for future repayment. In addition they will add fees and penalties to the amount due. Virtually every business invoice contains a provision for interest to be paid when the amount is past due. Usually there is increased emphasis on finding new customers.
Everyone who has worked for a large organization has seen it protect itself against cash flow problems. The first step is to reduce discretionary spending. The "Tuesday doughnuts" disappear. Training and travel are curtailed or eliminated. Then come hiring freezes, furloughs, and layoffs. When the problems are severe, expenses that are expected to yield future profits are eliminated. First to go is administrative staff followed by research and development. The sales force is a company's most immediate investment in profit. When layoffs hit the sales force it is a sign that the company is close to insolvency. Bankruptcy often follows.
Layoffs extend the problem from the business to individuals and families. Individuals and families protect themselves in much the same way as businesses. They try to increase income by finding new work or starting new businesses. Expenses not directly related to day to day survival are eliminated. Then credit card payments (past expenses) are ignored. Utility and shelter payments are next to go and finally food.
In our interconnected system, problems are infectious. If those who normally give you money pull back, you cannot spend as much with others. Those expecting your spending must, in turn, pull back. When a large portion of the economy is affected it is called a recession or depression. Recession and depressions are an economic infection so large that no single individual or organization can adequately respond.
Not every downturn spreads widely and there are different causes. When a single company fails, the surrounding economy usually replaces the missing goods or services and the workers find jobs in other firms. Some downturns are more widespread but do not affect the whole economy. The mechanization of agriculture causes farm labor needs to plummet while production remains high. Individuals lose their jobs and are forced off the land. When this happens the workers generally move to urban areas with more opportunities. This often leads to an increase in urban population and a large number of unemployed people, sometimes for a generation or more. This is devastating for the individuals, but the economy as a whole is often largely unaffected.
Personal Protection
Loans are about hope and the future. Don't discount your potential and your future, but try not to sabotage it either. There may be a time when you make a decision to "go for broke" because you think the potential rewards outweigh the potential risk. This is a good thing, but walk in with your eyes open.
The first step in protecting yourself and your family against financial trouble is to accept that trouble will come along. Someone will lose a job. The car will require expensive repair or replacement.
Temporary setbacks can be smoothed over by a reserve of cash. If the car breaks and you have some extra cash, you simply repair or replace the car. If you lose your job, the cash may see you through until you find another source of income.
Low income families may not be able to create any reserve. These families have no recourse and must respond to events the best they can. There are government programs (food stamps, section 8 housing ...) that may help, but basically you are on your own. When thinking about government aid, just remember:
The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread. (Anatole France from The Red Lily, 1894)
One of the first responses to financial trouble is to reduce expenses. It is in this area that loans become dangerous. Loans are typically a fixed monthly expense. That is, they are an expense that cannot be reduced without starting a chain of negative repercussions.
Once again the poor get the short end of the stick. If you have no cash reserve but do have access to a line of credit, you can smooth over trouble by borrowing. Long term, this is a losing strategy. Loans always involve fees and interest and short term loans are the most expensive. If you cannot afford to create a cash reserve, you probably cannot afford the fees and interest. However, such loans may be the only recourse available.
Currently I am fortunate. I have sufficient income to cover my expenses and to create some reserve. Part of this is income, part is inherent conservatism. It is in my nature to avoid ongoing expenses.
If you can afford them, I recommend some rules of thumb.
- Never use a credit line except to consolidate payment. I use a cash-back card for many purchases but I pay the balance in full every month without dipping into cash reserves. In fact, I go one step further. I do not put anything on the card unless I currently have enough money to pay for it. That is, I do not buy something on the fifth of the month with the expectation that my paycheck on the fifteenth will cover it.
- Do not incur a regular payment that prevents you from saving a little every month.
- Only borrow as leverage. That is, the money should be used in a way that will pay for the total amount of the loan. For a family, a mortgage is in this class. Shelter is an expense that cannot be avoided. If you intend to live in a place for some time, paying a mortgage rather than rent may make sense because the non-interest portion of the payment buys property that can be sold later. This can be a good long term investment even if the property decreases somewhat in value. Rent is simply lost.
- In flush times, pay down debt. I bought my current car with a loan. A couple of years after the purchase I got some unexpected cash. I used that to pay off the car which eliminated a fixed monthly expense.
- One way to create a cash reserve is to pay ahead on loans. I am several months ahead on my mortgage. When a cash crunch comes, that gives me an expense I can eliminate for some period of time.
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