Wisdom from the 42nd Page

When Giants Fall

On the forty-second page of “When Giants Fall: An Economic Roadmap for the End of the American Era” author Michael Panzner wrote (emphasis added):

To try and avoid the economic and social challenges posed by growing resource constraints, countries around the world have raced to find alternatives. Among the options they have chosen is one that will almost certainly have unwelcome and unintended consequences. Without meaning to, they have heightened the risks in a world already destined to become more dangerous and violent.

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(John Wiley & Sons, February 2009. Hardcover, 264 pages. ISBN: 047031043X; EAN: 9780470310434.)

The Limits of Power

On the forty-second page of “The Limits of Power: The End of American Exceptionalism” authors Andrew Bacevich wrote (emphasis added):

technology converted to military use by talented, highly skilled soldiers) could sustain quantity (a consumer economy based on the availability of cheap credit and cheap oil).

Pledges of benign intent concealed the full implications of Star Wars. To skeptics—nuclear strategists worried that the pursuit of strategic defenses might prove "destabilizing"—Reagan offered categorical assurances. "The defense policy of the United States is based on a simple premise: The United States does not start fights. We will never be an aggressor. We maintain our strength in order to deter and defend against aggression—to preserve freedom and peace." According to Reagan, the employment of U.S. forces for anything but defensive purposes was simply inconceivable. "Every item in our defense program—our ships, our tanks, our planes, our funds for training and spare parts—is intended for one all-importantant purpose: to keep the peace."

Reinhold Niebuhr once observed that "the most significant moral characteristic of a nation is its hypocrisy."²³ In international politics, the chief danger of hypocrisy is that it inhibits self-understanding. The hypocrite ends up fooling mainly himself.

Whether or not, in 1983, Ronald Reagan sincerely believed that "the United States does not start fights" and by its nature could not commit acts of aggression is impossible to say. He would hardly have been the first politician who came to believe what it was expedient for him to believe. What we can say with certainty is that events in our own time, most notably the Iraq War, have refuted Reagan's assurances, with fateful consequences.

Illusions about military power first fostered by Reagan outlived his presidency. Unambiguous global military supremacy became a standing aspiration; for the Pentagon, anything less than unquestioned dominance now qualified as dangerously inadequate. By the 1990s, the conviction that

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(Metropolitan Books, August 2008. Hardcover, 206 pages. ISBN: 0805088156; EAN: 9780805088151.)

Empire of Debt

On the forty-second page of “Empire of Debt: The Rise of an Epic Financial Crisis” authors William Bonner, & Addison Wiggin wrote (emphasis added):

of property rights or the division of labor. Things got simpler, more brutal, mean, and nasty; lives were shortened. It was not a time to be in the insurance business.

What caused the periodic invasions no one knows. Perhaps good weather out on the plains produced population explosions that caused the nomads to expand. Perhaps bad weather caused famine that sent hungry mouths in search of someone else's meat and grain. Historians don't know. But fear of the barbarians from the steppes has been a chronic theme of Western history—particularly among the Teutonic tribes that were most exposed to them.

The Great Khan

Perhaps the most successful empire builder of all time was a leader of one of those periods of barbarian expansion—Genghis Khan. Since the time of the Romans, it has been fashionable to put a civilized mask on your face when you put the imperial purple on your back. You are bringing religion to the heathen. You are bringing civilization to the indigenes. You are bringing culture, education, and technology. Even Alexander the Great thought he was doing the world a favor. Conquerors do not like to admit—even to themselves—that their instincts are no different from those of barbarians. They have better table manners. But they are subject to the same urges as Genghis or Attila. Bloodlust, prestige; power, status—who can deny that it would be a thrill to conquer a whole city or an entire nation? But empire builders typically put on the imperial purple like a set of angel's wings, leap off the balcony, and come down with a thud.

Genghis Khan needed no mask. The man showed his face as it really was. He united the Mongolian tribes in about 1129 and beginning with a series of attacks on northern China, he embarked on a spectacular epic of mass slaughter and rapine from which two empires were derived. One of them, the Ottoman Empire, lasted until the end of World War I. The Mongol hordes overran northern China, Tibet, Persia, nearlly all of central Asia and the Caucasus, Korea, Burma, Vietnam, Anatolia, and much of Russia. They attacked India and eventually, in 1526, Babar, one of Genghis Khan's descendants, set himself up as emperor of the place. In China, too, Genghis's descendants founded the Yuan dynasty, which ruled until nearly the fifteenth century.

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(John Wiley & Sons, September 2005. Hardcover, 370 pages. ISBN: 0471739022; EAN: 9780471739029.)

Crash-Proof

On the forty-second page of “Crash-Proof: How to Profit from the Coming Economic Collapse” author Peter D. Schiff, wrote (emphasis added):

The GDP started out as the GNP (gross national product) during World War II, when it was used to measure wartime production capacity. It was never intended to be used as a measure of the country's economic well-being, and its shortcomings are laughably numerous.

By definition, the GDP is the sum total of the monetary value of all final goods and services bought and sold within U.S. borders in a given year. The distinction between GDP and GNP, incidentally, is that GDP doesn't care about the nationality of the producer. It includes everything transacted within our borders, even BMWs manufactured in North Carolina. (GNP, which is almost never used, would exclude foreign manufacturers in the United States and include goods and services produced by U.S. firms operating abroad.) GDP this includes the totality of consumer, investment, and government spending, plus the value of exports, minus the value of imports.

One big problem with GDP, although represented as a measure of economic health, is that it makes no effort to distinguish between transactions that benefit the nation's health and those that subtract from it. Destructive activities are included as well as productive activities. The GDP may not have been designed to measur economic well-being, but since it is used for that purpose, everything it includes—every monetary transaction that takes place anywhere and anytime within its time frame—is, by definition, progress and a contribution to the nation's economic health. Thus Hurricane Katrina added to the GDP despite tragic losses to the populace, as do other negative expenses, such as crime prevention costs, expenses incurred in divorces, medical costs, and national defense expenditures.

Another serious shortcoming is that it ignores everything that doesn't take place under the rubric of monetary trade. Money has to change hands. Functions performed in running a household, for example, are excluded because no money is

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(John Wiley & Sons, February 2007. Hardcover, 272 pages. ISBN: 0470043601; EAN: 9780470043608.)

Saving Capitalism from the Capitalists

On the forty-second page of “Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity” authors Raghuram Rajan & Luigi Zingales wrote (emphasis added):

on firm value. There are ways of ruiling this explanation out. When a company is included in the S&P 500 index, many mutural funds simply replicate the index and invest in the company. The higher institutional ownership in these "index" companies does not reflect the value judgment of institutional investors but simply the application of a mechanical rule. Even institutional ownership driven by such mechanical considerations has a positive effect on firm value.

More evidence that institutional ownership is beneficial comes from examining the consequences of regulatory changes.³¹ Before 1992, if ten or more investors in the United States wanted to discuss the performance of a particular company, they had to file a report with the Securities and Exchange Comission, detailing the purpose of, and participants in, the discussion. These requirements made it onerous for institutional investors to coordinate their actions. In 1992, this rule was done away with. The relationship between institutional shareholdings and firm value is twice as large after 1992 as bfore, consistent with the idea that institutional investors force companies to be better managed. That institutional investors help reduce waste in companies flush with cash is bolstered by the finding that the relationship between institutional shareholding and firm value is especially strong in firms that generate more free cash flow.

For mature firms, therefore, financiers play the role of policemen and undertakers, preventing the theft of resources and burying the dead. In other instances, however, they play the more creative role of midwife. Young firms need a very different kind of assistance than established, mature firms. Young firms have tremendous growth opportunities, and in an economy with good laws and decent accounting, most managers of young firms ahve the incentive to succeed (rather than steal or waste investors' money). Top management runs the company in trust, not just for shareholders but also for junior management, which expects to succeed top management. The rewards for a growing firm come not from misappropriating current free cash, which is meager, but from the prospect of running a larger, more profitable firm. So managers can be relied upon to keep obvious wrongdoing by other members of the management team in check.³² The reason management needs close monitoring is that management may be inexperienced and headstrong and may unwittingly do the wrong thing.

Consider how venture capitalists (VCs) help inexperienced manage[ment]

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(Crown Business, February 2003. Hardcover, 384 pages. ISBN: 0609610708; EAN: 9780609610701.)

Secrets of the Temple

On the forty-second page of “Secrets of the Temple: How the Federal Reserve Runs the Country” author William Greider wrote (emphasis added):

and his home mortgage payment does not increase at all. The Federal income tax becomes somewhat more onerous, but this effect is far outweighed by the benefits of homeownership. The average middle-income home renters does not fare as well, but overall he nearly keeps up with inflation.

By contrast, Minarik found that upper-income households, then defined as those above $37,500 in income, approximately the top 10 percent on the income ladder, were "left substantially worse off." Their salaries kept pace with inflation too, but their assets were eroded. "The wealthy have no safe and profitable store of value in times of inflation," he explained.

A similar study by economist Edward N. Wolff of New York University measured the effects on wealth caused by the first lag of the modern inflationary spiral, starting in 1969 and ending with the recession of 1974. During that period, Wolff reported: "Inflation acted like a progressive tax, leading to greater equality in the distribution of wealth."

Minarik found that inflation's impact on two other groups—the poor and the elderly—was more ambiguous but also more benign than popular political opinion assumed. Generally, it was believed that these two groups suffered most severely from inflation because they lived on fixed incomes. Minarik found that this was not true. With a lag, government benefit programs for low-income families, those under $9,000, generally increased in time to keep up with prices. Many poor people were sheltered from rising costs in two sectors where prices were soaring—health and housing—because of Medicaid and public housing. "Over a short period, low-income households are indeed the most adversely affected when prices increase, simply because they have the least maneuvering room in their budgets," Minarik wrote. "But over longer periods their incomes tend to catch up with prices." The poor were still poor, of course, but inflation did not make them worse off compared to others.

The elderly were partially protected too. Social Security benefits were indexed to the inflation rate, automatically increasing the monthly checks periodically to catch up with prices. Among the elderly, Minarik found, the ones hurt most "are those who rely most heavily on private pensions or their own savings. The notion of the Social Security recipient as the chief loser in inflation is largely incorrect...."

The central explanation for this reversal of fortunes—the many gaining at the expense of the few—was homeownership. Most American families, two-thirds of them, owned only one real asset of any

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(Touchstone Books, January 1989. Paperback, 798 pages. ISBN: 0671675567; EAN: 9780671675561.)

The Best-Laid Plans

On the forty-second page of “The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future” author Randal O'Toole wrote (emphasis added):

of money for fire suppression each year. When fire costs exceeded this amount, the Forest Service was expected to borrow the money from its Knutson-Vandenberg (K-V) fund and then repay it in future years when costs were less than the annual appropriation.

The Forest Service responded with many cost-cutting measures, including allowing forests to let natural fires burn instead of suppressing every fire and changing strategies from suppressing fires on every acre to containing fires within natural boundaries. Average annual fire costs fell dramatically for several years. However, droughts in 1987 and 1988 forced the Forest Service to severely deplete the K-V fund. So in 1990, Congress gave the Forest Service a supplementary appropriration of nearly $280 million to replenish the fund.⁴

Congress's action effectively restored the blank-check mentality and reduced the incentive for forest managers to control costs. An internal Forest Service review in 2003 found that fire managers continued to act as though "suppression funds [were] unlimited." They spent millions of dollars on little-used rental cars, unnecessarily purchased upscale camping gear for crews, and paid exorbitant rates for firefighting equipment.⁵

Such free spending offers many opportunities for corruption. In 2006, a Forest Service purchasing agent in Oregon was discovered to have paid her boyfriend more than $640,000 in firefighting funds. No one in the agency missed the funds; she was caught only after someone tipped off the local district attorney that the couple was gambling away unusually large amounts of money.⁶

In 2000, a prescribed fire lit on the Bandolier National Monument escaped control and swept across the Sante Fe National Forest into Los Alamos, where it burned hundreds of homes. Congress responded by increasing the Forest Service's budget by a whopping 38 percent and asking the Forest Service and other federal land agencies to write a national fire plan.

The Forest Service long ago agreed with private landowners that some forests benefit from frequent light fires. But not all do: while 85 percent of the mostly private forests in the South need frequent fires, only about a third of forests in the West, where most federal lands are located, fall into this category. Without making any effort to determine where the money would be most effectively spent, the National Fire Plan simply asked for huge appropriations for treating forests to reduce fire hazards.

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(Cato Institute, September 2007. Hardcover, 416 pages. ISBN: 1933995076; EAN: 9781933995076.)

Nanny State

On the forty-second page of “Nanny State: How Food Fascists, Teetotaling Do-Gooders, Priggish Moralists, and Other Boneheaded Bureaucrats Are Turning America In” author David Harsanyi wrote (emphasis added):

"You don't need nicotine or an illegal drug to create an addiction. You're creating a craving," Hirsch once explained. But more important for the justification of his case, the lawyer maintained "that the fast-food industry has not been totally up front with the consumers." Thus Hirsch was trying to coerce fast-food companies into offering "a larger variety to the consumers, including non-meat vegetarian, less grams of fat," and a reduction in meal size.

Hirsch also demanded that federal legislation require warning labels on fast food similar to those on tobacco products. As many fast-food companies have begun to provide detailed labels of all nutritional content, this truly was grandstanding. But even if you're inclined to believe Hirsch's intentions were unsullied by the dollar—and this would be a massive leap of faith—what we have on our hands is a full-blown nanny.

In the early stages of Jazlyn's suit, the press had a field day. The always cheeky New York Post ran an entertaining piece accusing Hirsch of being almost "singularly responsible for making attorneys the most hated briefcase carriers in the world." Law professor Donald Garner opined in The Washington Post that obesity lawsuits portray "Americans as the most pathetic, pitiable people in the world, that we are incapable of limiting what we eat." Even the usually composed and regal television anchorwoman Diane Sawyer was impelled to ask Hirsch, "Do you realize the whole world is laughing at you?"

No big deal. The world had laughed before. The thick-skinned Hirsch's first crack at litigating the fast-food industry into low-fat submission utilized a highly suspect and completely disingenuous plantiff named Caesar Barber. A maintenance supervisor in his mid-fifites, Barber claimed that he ate at fast-food restaurants four or five times a week and, until recently, had no idea that his diet was slowly killing him. Unlike Jazlyn, Barber didn't have his par[ents]

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(Broadway Books, September 2007. Hardcover, 291 pages. ISBN: 0767924320; EAN: 9780767924320.)

Fallen Giant

Since American Tax Payers now own almost 80% of insurance giant AIG, we turn to the forty-second page of “Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG” where authors Ronald Shelp & Al Ehrbar, wrote (most emphasis added):

shakers. Luce's friend got great treatment—Starr's is the first profile in the package, and the longest. Even then, journalists recognized that insurance as practiced by AIG was different: "His insurance career has not been the dull, routine-ridden affair that is so typical of this profession in America.

"Were the total assets of Mr. Starr's companies to be tabulated they would seem midgetlike beside those of Metropolitain Life," Fortune wrote. "Buy Mr. Starr's income is fat—perhaps as bigtoday as any U.S. insurance income. This money is earned upon a sociological premise, that the standard of living and hygiene of the Chinese middle class are improving, with a consequent decline in the death rate. Indeed, since Chinese statistics are all but nonexistent, the success of Mr. Starr's American Asiatic Underwriters, and of its various subsidiaries, is perhaps the best available proof that the death-rate decline in China is a reality."

The article observed that Starr had never bothered to become proficient in Chinese, but his knowledge of China was encyclopedic, and he was famed in the foreign community for his uncanny ability to work with and through the Chinese people. Fortune explained he was expelled from the Rotary Club for speaking his mind. There is no record of what he said but I would wager it was his pro-Chinese stance, either his belief in their integrity and honesty or his conviction of foreign concessions would revert to the Chinese. In any case, his expulsion probably became a badge of honor to Neil Starr.

Fortune called him Shanghai's most bullish tai-pan. "But like many of his modern associates, he is bullish in finance rather than in goods." Interestingly, the article describes an insurance operation with one characteristic that became a hallmark of AIG under Greenberg: "His operations form a vast and intricate web, the outer limits of which no one knows."

The article concluded: "His is a machine-gun mind, tactful at times, but often tough. At the psychological moment he will thrust out his jaw, which, with his glasses, is the most prominent feature of his face. He is forever on the go—Shanghai to New York, New York to London, London to Singapore. He goes with, and in quest of, ideas, talks insurance everywhere, spreads his interests out through Asia.... In his rare periods of quiescene he lives with a maiden aunt on the eighth floor of the North China Building, No. 17, The Bund, where Asia Life and American Asiatic are also housed. He belongs to the usual Shanghai clubs, dines outs, drinks

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(John Wiley & Sons, October 2006. Hardcover, 228 pages. ISBN: 047191696X; EAN: 9780471916963.)

Greed and Glory on Wall Street

Greed and Glory on Wall Street: The Fall of the House of Lehman” was published in 1987. Obviously the author would have a lot of new material in the past 24-hours (and in the coming weeks and months) for an updated revision! But looking back two decades we find that on the forty-second page author Ken Auletta wrote (some emphasis added):

strategy"; (2) "a fragmented and undisciplined approach to running its business"; (3) "a portion of the partnership whose ability, training, and/or work habits are inconsistent with the competitive demands of the marketplace and with Lehman's present business"; (4) "too small a professional staff relative to the number of clients to be serviced and transactions to be processed"; (5) "a bond distribution system which is in chaos and an equity distribution system which is experiencing declining market share"; (6) "recent management changes throughout the organization"; (7) "high overhead relative to current revenue levels"; (8) "comparatively limited capital." The authors warned that "in our judgment the long-term future of this firm is uncertain."

"The firm must face up to the fact that the ability, training, and/or work habits of a substantial number of partners (totaling perhaps 10 to 15 throughout the Firm) are inconsistent with the competitive demands of the marketplace and with that expected of Lehman partners," the authors concluded. "These individuals should be phased out according to some specific plan. The single most important conclusion of this study is that the quality of the partnership is the key to our present problems and to our ability to be successful in the future [their italics]."

Peterson was determined to phase out some partners and to reinvigorate the forty-four man partnership with new blood. But he was sensitive to how fragile the partnership was, and he moved slowly. It wasn't until September 1976 that he replaced seven senior members of the board, reducing the average age of the board from fifty-six to forty-seven years. After his friend Warren Hellman left in 1977 to start his own venture capital firm, Peterson left the presidency vacant.

To address the composition of the partnership required Peterson to confront a strategic question: What kind of investment bank did Lehman wish to be? With remarkable prescience, the internal report had sketched how investment banking had changed, and was likely to change further: "As the nation industrialized, financing was the most important element of corporate life, since shortages of goods created demand which eliminated marketing as the key feature. Few of the inventory-entrepreneur class understood how to raise capital; they had limited contacts with financial institutions and knew of only the handful of investment banking firms whom they could solicit to assist them in the critical function of raising capital... Personal contacts, imaginations, salesmanship and an entreprenurial orienta[tion]

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(Warner Books, March 1987. Paperback, 292 pages. ISBN: 0446384062; EAN: 9780446384063.)