She’s So Good With Brackets, I Can’t Wait Until She Covers Next Year’s NCAA Basketball Tourney

Brenda and I went to the grocery store this morning and got nabbed for a “man on the street” interview for one of the “journalists” from KCAU, Channel 9 News here in Sioux City. She wanted us to comment on the ObamaCare decision that had just been handed down by the Supreme Court.

We declined to comment since neither of us had yet heard what the decision was. So, using all her journalistic expertise, she explained it to us in the following manner:

The Supreme Court upheld the decision, but they changed one provision in the law. Instead of fining people who refuse to get insurance, the court said that anyone who didn’t get insurance would be bumped up one tax bracket and have to pay more taxes.

[You can’t invent stuff this good!!!]

In case you haven’t been following the news, or were unfortunate enough to get the story from KCAU, Channel 9 Eyewitness News and their goofy little news babe (this “journalist” deserves the nick name, after all!), let me clarify using the Chief Justice’s own words (which, amazingly, are quite a bit less vague than the above quoted grocery store journalist). According to Roberts, the law’s “requirement that certain individuals pay a financial penalty for not obtaining health insurance [that is, the ‘individual mandate’] may reasonably be characterized as a tax.” Thus it is legal, based on congress’s constitutional authority to impose taxes. (Source: Reuters)

Yeah, that’s pretty much the same thing  as the Supreme Court moving me into another tax bracket.


Eat, Eat, Eat!

I listened to the most recent Munk Debate today. The Munk Debates are formal debates featuring high-profile experts in their fields which are funded by Peter and Melanie Munk. They take place in Toronto. The resolution of the most recent debate was as follows:

Be it resolved: North America faces a Japan-style era of high unemployment and slow growth.

Arguing for the affirmative were Paul Krugman and David Rosenberg. Arguing for the negative were Lawrence Summers and Ian Bremmer. It was not a particularly inspiring debate.

But what struck me was that all four debaters assumed the solution to the economic woes of the modern world lay in increased consumption. In fact at one point the very idea of a fundamental change in consumption patterns was mocked. I was reminded of Jon Arbuckle’s mother (of the Garfield comic strip). When Jon and Garfield went to visit all his mother said was, “Eat, eat, eat.”

It’s amusing when a comic strip character says it. It’s alarming when someone with the credentials (both in industry and government) of Larry Summers says it. Granted, he served under Clinton, and Clinton, by all accounts, was an “Eat, eat, eat!” sort of guy, but I don’t think that’s a good excuse.

It makes me pessimistic that we will find our way out of this mess when everyone involved in the debate won’t even consider the possibility that excess consumption might be a major (and possibly the major) contributor to the mess we’re in.

I suppose that’s a grinchy sort of thing to say one week before Christmas. But on the other hand, as an Orthodox person I can appeal to the Christmas fast and say that historically this is one of the four seasons of abstinence rather than consumption. …

Oh my, what came over me? Don’t buy stuff???? Quit reading this heretical blog and go to the mall! After all, according to Larry, et. al., this mess we’re in is all your fault.

At the very least, eat, eat, eat!

Facts and Details

The following is from an excellent article by John Médaille, The Mosh-Pit of Philosophy, the Pedestal of Science, and a Plate of Green Beans. (He is referring to a dinner conversation. The “he” is an economist who took umbrage at Medaille’s claim that values play a role in authentic economic theory.)

He was defending the “scientific” nature of his work, which for him meant that it was “positive,” that it dealt with “facts” and let the “values” fall where they may.

The problem, however, is that there are no such things as “naked facts,” only details. “Facts” are the details we select because we believe they will be useful for some purpose, such as constructing a theory. We might compare the construction of a theory to the making of a map. Any map of necessity leaves out more than it includes, but the details selected as “facts” depend entirely on the purpose of the map. That is, a road map will have one set of facts, while a political map another set and a topological map a third, and only the selected details will count as “facts” for the purpose of the map; everything else will be irrelevant detail, to be excluded.

Explaining Some of the Criticisms of Grameen Bank (4 of 4)

The American critics of Grameen Bank are prolix and it’s hard to know where to start and end in an attempt to balance fairness with length of this essay. One site that offers links that present the good, the bad, and the ugly both by supporters and critics, by legitimate news sources and commentators is this site which has a specific connection to the documentary To Catch a Dollar.

After reading many criticisms, it is my opinion that those who criticize Grameen Bank fall into one of two categories. First, they lump Grameen Bank in with the other microcredit organizations. Second, they argue that because Grameen Bank’s collateralization is so high, the program is actually a wealth redistribution system rather than an authentic loan program.

As to the first critique, many of the microcredit organizations that have sprung up (and this would include Morgan Stanley’s foray into the field) try to operate microcredit banks like modern western banks in miniature. These organizations (1) require some form of collateral for the loans and (2) operate on a for-profit basis. Grameen Bank does neither of these and is therefore relatively unique. Second, many of the microcredit institutions charge exorbitant interest rates. Grameen Bank’s 10% – 20% range may seem high to those of us accustomed to banks that practice fractional reserve banking, but that’s comparing apples and oranges (more about that later). Grameen’s rates are, for the most part, the lowest in the microcredit industry.

American banks (and to a lesser extent, European banks) can charge much lower interest rates because of the practice of fractional reserve banking. The American government allows banks to loan ten times more money than they actually have, and thus create money out of thin air. If a bank is capitalized with $1 million, it can write up to $10 million in loans. Not only does this create money out of thin air, it means that banks can reap ten times the interest income that they would be able to get if they were required to be fully backed by actual reserves.

European reserve requirements are much higher than American, and some countries consider the whole idea of fractional reserve banking to be immoral and highly risky. Fractional reserve is in essence a legalized Ponzi scheme encouraged by the government.

Grameen Bank does not practice fractional reserve banking and therefore it needs huge cash reserves. A fractional reserve bank can loan out its million dollars, and as it grows, loan that same money out a second time, and a third time, etc. Bank growth therefore does not require an increase in cash reserves. On the other hand, as the same money is loaned out multiple times to different borrowers, the risk increases dramatically while that risk is spread out among a much larger base of customers. As Grameen Bank grows it does not loan the same money out to two different customers. It needs new cash reserves each time the customer base expands.

This refusal to participate in fractional reserve banking creates an optical illusion which is the basis for much of the criticism of Grameen Bank. Fractional reserve banking allows banks to create money out of thin air. If an observer assumes that fractional reserve banking is the natural order of things, when a bank does not participate in the highly risky practice of fractional reserve banking and therefore collects new cash capital for each new loan, it appears (to those for whom fractional reserve banking has become the norm) that cash is simply disappearing down a hole.

So, what happens to the money that Grameen Bank collects (from wealthy individuals, foundations, etc) for its cash reserve? That money is loaned out and then paid back over the next year. After it is paid back to Grameen Bank, it is again loaned out to new borrowers. Thus that cash reserve gets recycled into the microloan market year after year, just like an American bank. The difference is that if an American bank has a massive default rate (above 10%), the effect is a sort of financial black hole.

If an American bank has 10,000 depositors who have various savings instruments totaling $1 million dollars, the bank can loan out $10 million dollars. If housing prices crash and 20% of the loans go into default, it means that the bank has just lost $2 million dollars. (The problem is that only half that is real money. The bank has just lost $1 million of nonexistent money.) If there were no government bailouts, all the people with savings accounts at that institution just lost all their money.

If Grameen Bank had a similar default rate (which it has never had in its history), it would simply have 20% less money to loan out. The critics say this is very bad business – an investor can’t get a good enough return on investment without fractional reserve banking. Grameen Bank says it is merely honest business – artificially increasing one’s return on investment by creating money out of thin air is both risky and unethical. If one doesn’t understand the difference in sensibilities, one can never understand the faulty basis of these criticisms.

The other thing that mystifies many critics is the “no collateral” policy. Jeffery Tucker, for instance claims that the documentary tries to explain how Grameen Banks works “on mere rhetoric alone.” How does this system work, asks Tucker, why do people bother paying their loans back at all? Actually these questions are answered very clearly and forthrightly in the documentary. But Tucker, being totally blinded by his presuppositions, is completely incapable of understanding the answer. The women pay back the loans because in the real world (in contrast to Tucker’s Enlightenment view of things where individuals have no responsibilities to anyone or anything) these women are responsible to four other women. If they default they will (1) lose their reputation and (2) severely hurt the future prospects of the four other women in their group.

Yunus and Grameen Bank recognize that for a human being, this is some of the best collateral available. For Tucker and his ilk who have reduced people to individuals who care nothing for institutional relationships, such social responsibility is unthinkable. And, truth be told, such responsibility is seemingly unthinkable among the self-interested individuals who populate Wall Street and Washington, but among human beings, such social responsibility is a necessary part of what makes us human.

Tucker appears to be absolutely corrupted by the Enlightenment ideal of the individual with no responsibility to others and only self-interest to guide him. As such, he can’t recognize a real human with real human sensibilities when she is presented to him in the flesh (or at least, on the big screen). He finds the overwhelming evidence of success to be “mere rhetoric alone.”

Because of this huge gulf between the story of a non-Western Bank that treats humans like humans within all their human relationships and the Western critics who don’t believe in responsibility but only contracts, greed, and threats, it is extremely difficult to explain to a Western audience why the film critics so utterly missed the mark when writing about this documentary.

The above mentioned Jeffery Tucker deserves special attention because his critique is so inflammatory and so off the mark. But many readers probably won’t be interested in all those details. Therefore I have written a separate critique of his article, which can be found here. (There is no other link to this piece on the web site, so if you want to return to my critique you need to get to it through this essay or bookmark the critique.


The Story of Grameen Bank (3 of 4)

Beyond a certain point, stuff doesn’t matter; people do. This was the assumption of economist Mohammad Yunus when he began to teach economics in Bangladesh. But he soon realized that modern economics, which is rooted absolutely in the Enlightenment, cares only about stuff and little about people. Take a bank loan as an example. In the modern world, to get a bank loan one has to have collateral. (And remember, a good credit score is an indication of past performance with your stuff as well as other people’s stuff that you had previously borrowed. In short, collateralizing a loan with a good credit score still boils down to stuff.)

But desperately poor people don’t have stuff for collateral, so they can never get a bank loan to get the stuff they need to make enough profit to eke out a living (as well as pay back the loan). As a result, Business and Banking (see the previous essay) are only open to people who already have stuff. In short, Business and Banking (and therefore Bureaucracy) is pretty much all about stuff (and the amassing of power by a handful of bankers, businessmen and bureaucrats).

Mohammad Yunus, being Bangladeshi, didn’t see the world that way. Ultimately, in Yunus’ non-Western world view, the world is not about stuff, it’s about people, and more specifically, it’s not about individuals (which is the Enlightenment ideal) but rather about communities (people connected to each other).

Based on this assumption, he began loaning money for economic development to groups of people (never to a single individual). The rules of Grameen Bank (the bank Yunus founded) are as follows.

  • Loans are only made to women who are below the poverty line. (That’s a long story, but in a word, in an Islamic society, women are the poorest of the poor because they have no rights, so that’s who Yunus focused on.)
  • Only groups of people (specifically groups of five women) can get loans (five loans for five different women who are responsible to each other). If any one individual defaults on a loan, the other four are ineligible for any more loans. This accountability system of one person to others is the “collateral” that assures repayment. In another time we might have called it “one’s good name” here in the Midwest.)
  • The loans are very small (just a few dollars in Bangladesh, from $500 to $3,000 in the U.S.), are paid back on a weekly basis, and are short term (one year) loans.
  • Husbands can get loans to start a business but the loan is through the wife and in the name of the wife, giving her power to make sure he stays on target.

This system has been wildly successful in certain parts of the world. The default rate is well below 3% (and below 1% in the United States). Yunus and his supporters claim that it is bringing hundreds of thousands of families out of poverty around the world. (Actual statistical evidence is hard to come by, largely because of the part of the world where Grameen Bank works. The evidence is anecdotal.)

In spite of success (and maybe because of it) not everything’s rosy in microfinance. Grameen Bank reportedly charges around 20% annualized interest in Bangladesh. Occasionally accusations of loan-sharking are made against Grameen Bank. Ironically, Yunus got his start counteracting the loan sharks of Bangladesh who charge 70% – 100% interest. According to Yunus, because of the decentralized nature of the business (each group of five women paying their money each week at a meeting, etc.) the overhead is quite a bit higher than a traditional bank, the interest rate is necessary to break even.

Other groups have gotten into the microfinance boom, but are trying to make as much profit as possible. (Grameen Bank is nonprofit.) It is therefore not unheard of for microfinance banks in the third world to charge 70% or even 100% annualized interest. In other words, they’re loan sharks in microfinance clothing. Given the “wild, wild, west” character of the business, it’s no surprise that everyone’s reputation is sullied, even the legitimate players.

In the United States (when the documentary was filmed a couple of years ago), the fifty week (1 year) repayment on a $1,000 loan would be $20/week principle, $2/week interest, and $2/week paid to Grameen that goes into a savings account in the woman’s name. A $1,000 loan therefore creates a 1 year $24/week payment obligation, and the woman ends up with an improved credit score and $100 in a savings account at the end of the year.

The biggest problem with Grameen Bank is that it is not self-supporting and continues to rely on help from individuals and foundations to the tune of millions of dollars. The critics claim that it’s not so much a banking system as it is a wealth redistribution system disguised as a bank. To a certain extent this is no doubt true. But it is a bank in the oldest sense of the word, not a bank by contemporary definition. In order to function it has to have huge cash reserves on hand. Grameen does not use fractional reserve banking to create money out of thin air like American banks do.

The magic of fractional reserve banking is that an American bank (a country where this sort of sleight of hand is actually legal!) can loan out millions of dollars that they don’t even have (money, that prior to the loans, didn’t even exist), thus collecting profits on interest for non-existent money. Confused? Fractional reserve banking is as complicated as it is shady. For our purposes it is enough to say that Grameen Bank does not participate in this sort of high risk banking. It actually has money on hand before it loans it out. It therefore requires huge capitalization to operate. The millions of dollars that pour into Grameen are invested, paid back, and reinvested, with Grameen’s user base constantly expanding. So these millions of dollars that come into Grameen are not just poured into a welfare hole, but create an ever-expanding base of money that continually recirculates within the poor communities where Grameen Bank works.

But American critics rarely if ever think to question the Ponzi scheme called fractional reserve banking (the norm in America), so Grameen’s system, with its necessarily large capital layouts, seems at the very least inefficient. From my research I have not found truth to the wealth redistribution charge. It only appears that way to people who accept the American system of funny money via fractional reserve banking as normative.

Interest rates aren’t the only problem. Evidently (and here reports differ, depending on whose side the reporter is on) Grameen Bank in Bangladesh is now partially controlled by the Bangladeshi government. Critics claim that Grameen has just become another government program disguised as a non-profit in order to get their hands into the pockets of naïve people who want to do good.

The Bangladeshi government is indeed involved in Grameen Bank, but according to Yunus, it is a coercive move on the part of the government because the government fears it is losing its power over the people. Yunus is not happy with the situation, but when a government shows up at your door and says it’s here to help, what can you do? (I suppose it’s not dissimilar to American health care where our government, which is only here to help, has managed to criminalize non-traditional and non-mainstream activities.)

Grameen Bank is now large enough that The Triumvirate of Big Business, Big Banking, and Big Bureaucracy has had to take notice. Each side is pushing the other. Each side is trying to position themselves in relation to the world’s poor population. The Triumvirate sees Grameen Bank specifically and microfinance generally as a threat and are trying to take control of it. Grameen Bank is fighting back. The result is a pretty ugly picture. If you believe Big Banking and Big Government is the good guy, you will no doubt see Grameen Bank in a very bad light. But if you think The Triumvirate is a dangerous development you will most likely consider Grameen a step in the right direction.

I am afraid of The Triumvirate and therefore tend to be quite charitable toward Grameen and microfinance. In the next essay, I want to consider the critics of Grameen Bank and the documentary To Catch A Dollar from this light.

A Brief History (Pt 2 of 4)

In order to understand both the rise of microfinance and the criticism of it, a bit of history is in order:

Historically people with absolute power were few and far between (although they’re the people/empires who make the biggest wave across history, so we hear a lot about them and, ironically, assume that they’re somehow normative). Every few hundred years a mighty empire would rise up whose leaders seemed to have absolute power (Egypt, Assyria, Persia, Rome – I would not put the Greek empire into this category). But for the most part authority and loyalty were divided among competing interests.

In Europe, for instance there were kings, landowners, the guilds, businesses, banks, the church, and the community itself. Each had their sphere of influence and when any one sought too much power, the others would step in to bring them into line. Over the centuries the royal families and the church became increasingly powerful as the other institutions slowly lost influence. By the end of the Middle Ages both kings and churches began to imagine that they had divinely given absolute power. The kings seduced the land owners into serving the throne by telling them they were a sort of royalty also, thus consolidating their power.

Eventually European royalty came close to amassing absolute power and became quite corrupt in the process. This set the stage for a series of revolutions (the English re-establishment of a powerful parliament, followed by the American, French, Russian, Haitian, etc. revolutions) which were based on what would eventually become Enlightenment Liberalism (of which all Protestantism – conservative and liberal – and all American politics – both Democrats and Republicans – are a species). [See this essay where I explain this in more depth.]

The core belief that defines the Enlightenment is the autonomy or rights of the individual. Unintentionally or not, Enlightenment thinking (and modern western culture that grew out of it) undermined not only the power of the royalty and the church (the two institutions they were trying to undermine), it also undermined the institution of society itself. Ultimately communities became collections of individuals. Even the church, rooted in a theology of sacramental connectedness, became a volunteer organization in America. In short, the Enlightenment swept nearly all institutions aside in an attempt to put the individual on the throne.

What these philosophers and politicians did not understand was that individuals without the constraints of values and the institutions to maintain these values quickly turn to their more animal characteristics. Altruism is replaced by greed; politeness is replaced by rancor; etc.. The unleashed greed led to the reestablishment of just a handful of institutions. Without the checks and balances of other institutions, they have the ability to be far more authoritarian than any empire previous.

The primary institutions today are big government, big business, and big banking. In response the labor movement came about after the industrial revolution leading to big labor, but big labor was coopted by big government so that for the most part the triumvirate of Bureaucracy, Business, and Banking has an absolute stranglehold on the western world today. Through foreign aid, the “expansion of democracy,” and advertising this absolute stranglehold is moving beyond the western world into the developing world, and even into the formerly communist block and the Islamist block where Western Enlightenment values previously had little or no influence.

And this triumvirate is not friendly to the very individuals that the Enlightenment was supposed to protect. The bureaucracy serves business and banking (not the individual). Banking serves the bureaucracy and business. Business serves … well, you get the picture. And in the process the individual loses actual freedom, liberty, and justice to the self-interest of big business, big banking, and big bureaucracy. Furthermore, because ethical sensibilities lay with institutions that were marginalized by the Enlightenment and were maintained by the social institutions that were largely destroyed by the Enlightenment, the Big Three have no ethical limitations because ethics and morality are now an individual (and thus private) matter.

This is the world in which we live. This is the world that third world countries are terrified of. Radical dehumanizing western values on the one side and radical dehumanizing Islam on the other, both seeking to control the societies in developing countries: what is a developing country supposed to do?

What Mohammad Yunus tried to do was to develop a new institution that could work within the western democratic/capitalist context but was not beholden to either the authority or the values of Big Banking (and thus to the rest of the Triumvirate). Needless to say, such an audacious plan would likely be wildly popular among the people who are largely dehumanized by Western Democratic Capitalism and at the same time strongly resisted by Western Democratic Capitalism because it undermines the power and wealth of the Triumvirate.

This is how Grameen Bank (and other microfinance groups) is trying to change the world in which we live in one small way.

The Pros and Cons of Microfinance (1 of 4)

I haven’t said anything about microfinance for a long time. The last few years there have been questions raised and questionable practices uncovered in the microfinance business. When Morgan Stanley entered the field three or four years ago, I began to suspect that something was terribly wrong. I left the Kiva link on the web site (right hand column at the bottom), but have stayed quiet about the movement.

Then last week I received a slick, professionally designed, email sent by Mark Skousen, a libertarian economist for whom I have a great deal of respect. (He’s a libertarian but disagrees with Austrian economics – maybe the only libertarian economist in America to do so – so he clearly thinks for himself.) The email was an ad for the premier of a documentary movie entitled, “To Catch a Dollar.” It’s about Mohammad Yunus, the inventor of microfinance and founder of Grameen Bank. The documentary was to be followed by a roundtable discussion with Yunus, Vidar Jorgensen, president of Grameen Bank America, Premal Shah, president of Kiva, and Suze Orman, president of shrill, annoying financial self-help talk TV and radio, and moderated by CNBC’s Maria Bartiromo (who seems right down calm and pleasant when put in the same room with Orman).

In the last several days I started boning up on the latest scandals and successes of microfinance. Last night I went to see the movie. After this round of inquiry I see there are many clouds hovering over the movement, but I believe it’s authentic enough to leave the Kiva link on the web site. All of that deserves some explanation. (Ah, I see another series of essay. Tune in tomorrow.)

Who knew? …

… well, Chris Ferrrara knew, because that’s where I discovered this little oddity on my way to finding something else.

Did you know that according to British Common Law, money deposited in a bank is not your money? A bank deposit is not a “bailment” (an entrustment of your property to the bank for safekeeping) but rather an “investment” in the bank.

This bit of common law is why “fractional reserve” banking is legal. Banks can legally lend out many multiples of money they have on deposit. If a bank has $100,000 on deposit, it can loan out nine times that, or nearly a million dollars. This fractional reserve system allows banks to create money out of thin air.

The fractional reserve system is the government-sponsored ponzi scheme that is the basis for the various housing and property bubbles in our history. But I had no idea that it was rooted in British common law saying that bank deposits were investments in the bank!!!

Médaille: Now He’s Just Meddling

John Médaille, in a recent Front Porch Republic article, is asking hard questions. Why is it “90% of all economists missed the coming of the current disaster”? He admits everyone makes the occasional mistake.

The problem, however, is that the same 90% of all economists also missed the last crises [sic], and the one before that as well, and before that, and so on. In fact, their record of being able to diagnose and treat economic problems is about zero. And their prescriptions always seem to be counterproductive: the recommendations to limit government always make it grow, their advice on limiting taxation always makes it more, their prescriptions on growing the economy only leads to the illusory growth of bubbles, etc. Put it this way: If your doctor had this same track record of diagnosing and treating disease, you’d be dead by now.

It’s become a commonplace to say that economics is obviously not a real science with the same sort of predictive power of, say, an astronomer, or even a Las Vegas bookie, or even Aunt Mabel’s lumbago when it comes to approaching storms. Criticizing is economics is easy. Answering the question of where it went so terribly wrong and why is a more difficult matter. On that point Médaille has some interesting theories.

The study of economic systems is as old as Aristotle, but this study was always considered to be a branch of ethics, and the proper functioning of any economic system was believed to be dependent upon proper ethical arrangements. Adam Smith, for example, was himself a professor of Moral Theology. Through most of the 19th century, the science was known as political economy. As the name implies, an economic system was always viewed as something embedded within—and dependent upon—particular political and social institutions, and could not be studied apart from them. Further, political systems cannot be viewed apart from ethics. …By the start of the 20th century, the term political economy disappeared from common usage and was replaced by the new “science” of economics, a “science” divorced from the moral world.

In other words, John Médaille is saying the same thing that the church has been saying since before Adam Smith. Pope John Paul II was roundly criticized for making observations such as these throughout his robust tenure as pope. And of course, the relatively new Roman Catholic catechism spends quite a few questions in several different contexts on these very things.

But who listens to JPII? Who reads the Catechism of the RC Church? Who listens to the pastors, priests, or bishops when they talk about economics? But this guy is a college instructor!!! Maybe we’ll pay attention to him.

Good News for the Grandchildren

Here’s a wonderful excerpt from David Einhorn’s speech at the Ira Sohn Investment Research Conference.

I have titled today’s talk Good News for the Grandchildren. By that, I mean that I do not believe that there is a need to worry that today’s debts will be passed on to our current youth…I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences. If we do one thing, let’s stop bemoaning the fate of our grandchildren on this topic. We might take the issue more seriously if we realize that our own future is at risk.