Tuesday, December 30, 2008

What if Investments Were Guided by Morals?

What if every dollar we spent directly reflected of our beliefs and values?
What if budgets truly reflected internal beliefs?
What if we took the actions recommended by our words?

They are and we do.

These thoughts were prompted by a friend's message including the article Aligning Foundation Investing and Mission from CSRWire posted below. It seems that Foundations, with all their millions and billions have the opportunity to make a much bigger impact than they already are. Here's what I wrote (NOT fact checked) back to my friend, with the CSRWire news item posted below (image from responsible-investor.com).

My wife and I were just talking about this a few days ago. Seems that if I put my cynical hat on, one could argue that foundations are elaborate schemes to create cushy jobs for friends & family (think Blagojevich in IL [am I assuming he's guilty?]). They give out a small percentage of their assets and keep growing their capital. If we're intellectually honest (IMHO) foundations' missions should predict their demise...either they solve the problem (or make some predefined metrics of success) by investing massively, or they move on. Of course, this is heresy in the non-profit world. Dan Pallotta just released a book that pillories the charitable fundraising world for hamstringing themselves with outdated morals around how one can raise money. Isn't the desired result to solve a problem? If it is, then let's use the best available tools to do it.

If we take a step back and think about where these foundations invest, it is completely possible that they are underwriting the problems they are "trying" to solve. I wonder how many foundations are members of CERES? One large group of institutional investors influencing corporate behavior are state pension funds...I believe CalPers and CalTrans are the big players. Could foundations join the chorus en masse as well (if they already have not)?
Here's the CSRWire article:
What's the most ironic aspect of the Bernie Madoff Ponzi scheme fraud? The fact that fellow fraudster Henry Blodget (busted for pumping tech stocks and mocking his clients’ gullibility) maintains the most accurate list of its victims? That billionaire celebrities such as Stephen Spielberg lost millions? No, it's the fact that foundations, such as Spielberg’s Wunderkinder Foundation as well as the Elie Wiesel Foundation for Humanity, invested with Madoff and thus compromised their mission work. The silver lining may be that it shines the spotlight on foundation investing, which typically accounts for 95 percent of endowment assets but receives scant attention compared to foundation grant-making, which typically accounts for a mere 5 percent of assets.

Steve Viederman has been highlighting the need for foundations to align their investments with their missions for years. As early as 1995, when he was President of the Jessie Smith Noyes Foundation, he advocated for reducing (and eliminating) the dissonance between foundations’ grant work and their investment portfolios. Now, more than a dozen years later, he continues to crusade, characterizing foundations as "old-fashioned slot machines: They have one arm and are known for their occasional payout."

"Think of how much more bang for the buck foundations would achieve if they used both of their arms - the 5 percent making up the grants, and the investable capital that makes possible the grants - the 'other' 95 percent," Viederman writes. "By not using both arms, by failing to use all of their resources in support of their missions, foundations are failing to meet their fiduciary duty."

The More for Mission Campaign, launched at the April 2007 Council of Foundations Annual Conference, challenges foundations to get both their arms working in concert. The Campaign encourages foundations to increase their mission investments by at least 2 percent of total foundation assets over the next 5 years – a potential shift of $12 billion. The Campaign (formerly known as the "2% Campaign" for obvious reasons) has enlisted the Boston College Institute for Responsible Investment to house a Resource Center to help foundations make the alignment. And the Campaign's Leadership Committee of 24 foundation CEOs representing almost $19 billion in assets is actively urging fellow foundations to jump on the wagon.

Perhaps the greatest irony of all is that, after a half-decade of ambitious work, the participating foundations will only have 7 percent of their assets (5 percent grant-making and 2 percent mission investing) assuredly working toward their missions, leaving the remaining 93 percent potentially undermining their missions. At this rate, it would take participating foundations a loooooong time to fully align their money with their missions.

This article was written by CSRwire contributor Bill Baue

And I go back to what I posted at the top, "what if...?"

Thursday, December 25, 2008

It's a Wonderful Life

The messages in this classic Christmas-time heart-warmer are so inescapably appropriate for where we are in the economy it's simply astounding. When you watch it this year, pay attention to the elements surrounding the Bailey Building & Loan.

In a nutshell; Small local building & loan company lending to people within the community, knowing people by name, knowing their character so that the loans will be paid back...amazing. Imagine if we were doing more of that instead of packaging debt instrument vaporware for sale thirty times over?

The film reinforces our ownership society; "owning" your own home is something the Bailey business supports. Bailey Park, a small suburban development featured in the movie populated with modest homes financed by the Bailey Building & Loan is the perfect example of this ideal. Of course the Bailey's were helping lower income families get out of the awful conditions and exorbitant rent of Potter Flats (Potter is the old curmudgeon banker that would prefer to own the entire town of Bedford Falls where the movie takes place). Were they making sub-prime or alt-A mortgages in the 40's? Neither I assume...

There is an interesting scene that we can learn from, it's when George & Mary are trying to leave for their honeymoon and a run on the bank starts (it's the early 1930's). George goes into the building & loan and convinces the customers (he knows them all by name, imagine that!) to only withdraw the money they need to tie them over; most of the customers heed his advice. George explains that the money is not really there, the money deposited has been lent to other members of the same community to help them buy houses. The members of the community are supporting each other, the building & loan is merely acting as the agent connecting them all.

This is exactly the opposite of what happened with the packaging of mortgage backed securities. People were far, far removed from the origin of the loan, and therefore their assessment of the risks associated with the loans (especially the high risk ones that probably should never have been written) was practically impossible to determine.

So, taking a comment from Michael Shuman speaking to the Commonwealth Club of California on November 5, 2008; one of the solutions to the extraction of capital from communities is to keep lending connected to place. Makes sense to me.

So at this happy time of year, surrounded by friends and family, watch "It's a Wonderful Life" with a slightly different set of lenses and see what you might learn about community finance.

Sunday, December 14, 2008

Tracking the Bailout

I just have to say that my belief structure is being unwound as quickly as our capital is being drained...

Tracking the Bailout

Some excerpts:

EMMA COLEMAN JORDAN: The belief system was one in which he believed that by fixing the problem at the top, by giving the money with trust to his peer institutions on Wall Street, the money would trickle down in the form of lending to consumers and businesses. And the economy would be restored. And so that way of thinking dominated his decision making, slowed things down.
The facts that were clearly on display were simply ignored. And I'm giving Secretary Paulson credit for being a very smart man. I believe that the delays were caused by pre-commitments to an economic belief system that has been turned on its head by this crisis.
BILL MOYERS: The ideology is that trickle-down economics will work and that the market will eventually correct the excesses? Is that what you think that ideology is? That's the bubble they live in on Wall Street, right?
EMMA COLEMAN JORDAN: It's that confluence of belief, the Federal Reserve, the Department of the Treasury, and the White House, all believing that the markets would correct. So that in the year between August of 2007 and September of 2008, we had a natural experiment. And the natural experiment was the markets did not correct. They crashed and burned. And as a result, the government had to come in to rescue with the taxpayers' dollars.
BILL MOYERS: What about this cover story on this current issue of "The Atlantic"? "After the Crash: China to the U.S., 'Shape Up or Else.'" What's going on there?
EMMA COLEMAN JORDAN: What's going on is a change in the power relations, and we're seeing that the countries who have savings like China are now asserting themselves to tell us to reform our debt dependent ways, both in the public sector and the private sector. They have been financing this. China is the largest purchaser of U.S. Treasuries and other securities, government-related and securities.
BILL MOYERS: They're saying live within your means, right?
EMMA COLEMAN JORDAN: Live within your means. Your credit line has been reduced.
There is so much in this interview, I do not know where to start and where to stop.

Thursday, December 11, 2008

What Does GDP Really Measure?

Remember GNP (Gross National Product)? How is that different from GDP, and why is that important? I am curious to investigate the difference further as a classmate of mine planted the seed in my mind that GDP includes many of the intangible assets that contributed to our current state of economic affairs and that were not included in GNP. Which one is therefore a better measure of the real potential of an economy?

What does GDP really measure? One of my classmates phrased it quite well, I summarize here,
...GDP measures dependency. The more dependent we are on others for goods/services the more commerce and economy experience and the greater growth of GDP we will see. Independent, self-sufficient people participate in cultural & community commerce and not nearly as much in the financial world alienated from the barter system. Our culture as it stands depends on the story of dependency. In my experience, it is a crime to take and effective stand against it - yet it embodies the essence of what life is worth living for.

Maybe the Genuine Progress Indicator's time has come to be brought into the mainstream of economic and social thought? It makes sense to me that we weight things based upon their ability to increase or decrease the health of the human body & spirit:

The GPI starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.

Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale. Measurements that make up the GPI include:

Income Distribution
Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

Housework, Volunteering, and Higher Education
Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and so on. The GDP ignores these contributions because no money changes hands. The GPI includes the value of this work figured at the approximate cost of hiring someone to do it. The GPI also takes into account the non-market benefits associated with a more educated population.

Crime imposes large economic costs on individuals and society in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime.

Resource Depletion
If today’s economic activity depletes the physical resource base available for tomorrow, then it is not creating well-being; rather, it is borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, forests, farmland, and nonrenewable minerals (including oil) as a current cost.

The GDP often counts pollution as a double gain: Once when it is created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

Long-Term Environmental Damage
Climate change, ozone depletion, and nuclear waste management are long-term costs arising from the use of fossil fuels, chlorofluorocarbons, and atomic energy, respectively. These costs are unaccounted for in ordinary economic indicators. The GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals. It also assigns a cost to carbon emissions to account for the catastrophic economic, environmental, and social effects of global warming.

Changes in Leisure Time
As a nation becomes wealthier, people should have more latitude to choose between work and free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do—as something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.

Defensive Expenditures
The GDP counts as additions to well-being the money people spend to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.

Lifespan of Consumer Durables & Public Infrastructure
The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amount Americans spend to buy them. This hides the loss in well-being that results when products wear out quickly. The GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.

Dependence on Foreign Assets
If a nation allows its capital stock to decline, or if it finances consumption out of borrowed capital, it is living beyond its means. The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines.

With market reports that focus on things like this, I wonder what we really are measuring
The Cancer Market Outlook to 2013 (Business Insights): The global cancer market generated sales of $56.7bn in 2007, representing a 16.8% increase over 2006 sales, and is forecast to increase by a CAGR of 5.1% over the period 2007–13 to reach sales of $76.9bn.
So, cancer treatment increases GDP...

Wednesday, December 10, 2008

Thermodynamic Economics

What would a new economy that values increases in social wealth as much as increases in material wealth look like? What kind of an economy takes into account the Laws of Nature, the fundamental scientific tenets of thermodynamics? This, The Center for the Advancement of the Steady State Economy?

What a second...I think I just found some nice relaxing reading for the holiday break, something to integrate my engineering background with a desire to think about economics in a whole different way;

Thermodynamic accounting of ecosystem contribution to economic sectors with application to 1992 U.S. economy
Nandan U Ukidwe, Bhavik R Bakshi. Environmental Science & Technology. Easton: Sep 15, 2004. Vol. 38, Iss. 18; pg. 4810
Abstract (Summary)
Incorporation of ecological considerations in decision-making is essential for sustainable development, but is hindered by inadequate appreciation of the role of ecosystems, and lack of scientifically rigorous techniques for including their contribution. This paper develops a novel thermodynamic accounting framework for including the contribution of natural capital via thermodynamic input-output analysis. This framework is applied to the 1992 US economy comprising 91 industry sectors, resulting in delineation of the myriad ways in which sectors of the US economy rely on ecosystem products and services. The contribution of ecosystems is represented via the concept of ecological cumulative exergy consumption (ECEC), which is related to emergy analysis but avoids any of its controversial assumptions and claims. The use of thermodynamics permits representation of all kinds of inputs and outputs in consistent units, facilitating the definition of aggregate metrics. Total ECEC requirement indicates the extent to which each economic sector relies directly and indirectly on ecological inputs. The ECEC/money ratio indicates the relative monetary versus ecological throughputs in each sector, and indicates the relationship between the thermodynamic work needed to produce a product or service and the corresponding economic activity. This ratio is found to decrease along economic supply chains, indicating industries that are higher up in the economic food chain price ecosystem contribution more than the basic infrastructure industries such as mining and manufacturing. The ratio of CEC with and without inclusion of ecosystems indicates the extent to which conventional thermoeconomic analysis underestimates the contribution of ecosystems. Such ratios, made available for the first time, provide unique insight into the importance of natural capital, and are especially useful in hybrid thermodynamic life cycle analysis of industrial systems. The approach, data compiled in this work, and the resulting insight provide a more ecologically conscious tool for environmental decision-making, and has potential applications at micro as well as macro scales.
The currency of the future may be more overtly energy based, or perhaps backed by carbon. I suppose it already is, but the carbon is undervalued or its contribution is misunderstood.

Wednesday, December 03, 2008

2009 Harvest New England Conference Announced

Harvest New England has announced that its 2009 Agricultural Marketing and Trade Show will be held February 24 - 26 at the Sturbridge Host Hotel in Sturbridge, MA.

“This conference is an excellent opportunity for agricultural producers to learn from some of the finest experts in the field about a diverse range of marketing topics,” said Robert Pellegrino, President of Harvest New England and Director of Marketing for the CT Department of Agriculture. “Our last conference attracted over 700 producers from all over New England, who provided extremely positive feedback about the event. We have taken their comments and incorporated them into our planning to make this conference even better.

Two pre-conference workshops – to cover farmers’ markets and agritourism - will be held on Tuesday, February 24. The main event kicks off Wednesday morning, February 25, with “The Best of New England” session, featuring a panel of the industry’s stars from each of the six states. Mel Allen, Editor of Yankee Magazine, will charm attendees on Thursday morning with stories amassed over the years through his work at the popular publication

Twenty breakout sessions, an optional half day of farm tours, and a trade show that is expected to draw over 100 vendors, will round out the event. Topics to be covered include working with local officials, website development, community-supported agriculture, virtual marketing, cooperatives, energy conservation, and much, much more

Harvest New England was created in 1992 by the Departments of Agriculture in the states of Connecticut, Rhode Island, Massachusetts, New Hampshire, Vermont, and Maine. The organization’s original objective was to encourage the sale of New England produce to and through large supermarkets.

Over the past 16 years, Harvest New England has grown and diversified to meet the changing needs of New England producers and consumers. Although fresh local produce remains a primary focus, Harvest New England also promotes products such as meat; poultry; seafood; dairy; eggs; honey and maple syrup; specialty foods; greenhouse and nursery plants; Christmas trees and greens; and farm-produced fiber and fiber products. For more information about Harvest New England and the 2009 Agricultural Marketing Conference and Trade Show please visit: