Tuesday, June 30, 2009

Leveraging innovation

Innovation in the past created jobs. Innovation drove the manufacturing of products and that meant lots of jobs in the factories.

Innovation today means one or a handful of programmers, with a creative spark, writing the next big application like Twitter or those neat tricks for the iPhone. Once that individual or small team is done – they’re done. They don’t create a host of jobs for a lot of other people.

So when the economic experts and politicians talk about “leveraging innovation” what is their plan for the people who won’t have jobs because the innovation stops when those few creators finish? What happens to the people who used to work making products when you ship the manufacture overseas to cheap labor markets?

Friday, June 26, 2009

Just a little common sense

I’ve been watching the growing mortgage crisis with awe and admiration for the consummate stupidity of the entire banking industry. If that sounds harsh, look at what they are doing.

People who were paying their mortgage on time until the adjustable rate mortgage (ARM) adjusted up now can’t pay. So rather than adjust it back, they foreclose and loose even more money by selling the house at a huge discount.

As job loss grows, homeowners who had been paying their mortgage and need a quick fix can’t get bankers to work with them. All they need is a one or two or three month mortgage holiday. So allow them to skip the payment for a month or three and add those payments on the end so it’s not a 20 or 30-year mortgage, it’s a 20 or 30-year plus the extra payments that were missed. The lender misses a very small amount of interest but they don’t have to foreclose.

How about a homeowner who gets fired and takes a lower paying job because that’s all they can find? Better to cut the interest (the biggest part of your monthly payment) and keep the loan active than allow it into foreclosure. Don’t believe me that interest is the biggest part of your payment?

If you have a $200,000 home loan for 40 years at 7% your payment is 1330.60. Divide $200,000 by $1330.60 and you will pay off that house in 151 months. 30 years times 12 is 360 months and that means it will take you 209 months to pay the interest. So, the interest is $ $278,095.40 or just over doubling the cost of the house. The higher the rate (8% versus 7%) the more you pay in interest.

What does that interest get you? The use of the banks money for a long, long time and that’s a valuable thing. The point is that you’re paying more in interest than you are paying for the house so that’s the easiest place to cut. If you change the interest rate to 6% your payment is $1199.10, savings of $131 a month. Drop your rate to 5% and you save $256 - making the payment $1080 and that just might be the difference between your keeping the house or foreclosure.

There is an old saying - “When you’re in a hole, stop digging”. When the banks add late fees or demand an interest payment to “skip” a payment, they are digging the hole deeper and making it that much more likely that the loan will default!

Any banker that can’t see that taking a $1,000 loss in fees and interest is so much better than taking back a house mortgaged at $200,000 and selling it at a foreclosure auction for $125,000 shouldn’t be allowed to walk around with out adult supervision!

Making money is better than loosing money, but when the choice is between loosing $75,000 and loosing $25,000, which would you pick? And, are you sure that you want to trust your savings account to a banker that thinks foreclosure and a big loss is better than a small loss to work out a way for the bank’s customer to keep paying?

Tuesday, June 23, 2009


Insanity is doing the same thing the same way and expecting different results. Benjamin Franklin.

A couple of weeks ago I dropped by the state unemployment office to get help finding a job. I talked to the veteran’s assistance specialist, who recycled the same advice I’ve gotten before and which hasn’t worked.

What shocked me is that his recommendations to rewrite my resume were diametrically opposed to the recommendations the specialist at the other state unemployment office gave me. His suggestions would take my resume BACK to its original form.

He also observed that my resume was filled with the references to management and that I should be careful not to “manage yourself out of a job”.


The last person told me to focus on my management background.

Friday, June 19, 2009

When speculators don’t add value

Gas prices are on the rise again. The reporter for CNN money is claiming that a large part of the increase is caused by investors, who expect the dollar to be worth less because of borrowing to finance the “stimulus”.

So the answer is speculators.

Now we all know that speculators are not evil people, and in fact add a great deal of value to the economic system. When speculators buy futures, they make cash available today to people who won’t sell their products until next week, next month, or next year. Since the speculator doesn’t have the use of their money until the product sells, they should get some payment for the time their money is not available.

When you put money in the bank, the bank pays you interest for the use of your money. The longer the money is locked up the higher your return. A 6-month CD pays more than passbook savings because you can pull the passbook savings right now. The oil and gas speculators may not get their money for long periods of time, so the percentage of return is that much higher.

Is the speculator still adding value when their “fees” for the use of their money today become a significant part of the final cost tomorrow?

One problem is that a small number of players dominate the oil and gas markets and the cost of entry is huge.

This is not a monopoly in the usual sense. These people are, probably, not agreeing on a single price. It’s just a small number of people making independent decisions in a market where their self-interest leads them in the same direction.

The big problem with oil and gas is that a small number of players control a necessary resource and have an inordinate impact on prices. Oil and gas products are seasonal. We use more of certain products depending on what month it is and less of others. When the seasons change, the product mix changes as well. This also means that there may be excess of some products at some times. If a small number of speculators can control that excess they can move the price of the entire market up or down, usually up, by their actions.

At what point should they be more closely regulated and at what point does their negative impact on the consumer outweigh their value to the system as a whole?

Sunday, June 14, 2009

Clearing the health care nonsense

Washington is wrestling with health care costs yet again. The politicians have failed to get a consensus on how to cut or even hold down the shocking increases in costs we’ve seen with each successive administration for at least the last 20 years.

The best way to solve any problem is to look for and fix the simplest elements first. Not only do you gain momentum, but you also remove clutter and reduce the complexity of the problem.

One simple thing to fix in health care is multilevel pricing that forces people to pay higher prices for the same coverage as an individual than as an employee. The insurance company costs are exactly the same for an individual buying an independent policy as for that same person when insured as a worker for small three-person office or in a large national company.

The idea that the insurance company can spread the costs for that individual over a larger pool of insured is true only if you can forget that the number of people in the pool is an arbitrary fiction of the insurance companies’ accounting department.

Remember that the insurance company decided to put you into their internal accounting group labeled XYZ Company and not one labeled Joe Smith.

The second question is why, when I start a new job, the insurance company can accept my preexisting conditions but either cannot accept me as an insured because of those conditions as an individual or have to charge me a much higher rate?

Again the cost difference is an accounting fiction caused by which internal accounting group the insurance company assigns me to.

Nationalized health care would put ALL insured in a single pool with the same rules and prices spreading the cost across a large enough group to even out. Of course the private insurance companies could do the same thing right now and make a lot more money by insuring a lot more people.

Monday, June 8, 2009

You can't change what you don't acknowlege

In September of 2007 I wrote a blog post called “Call it what it is” about euphemisms.

The latest word game is the use of “laid off” for fired. Traditionally you are laid off only when the company really intends to bring you back to work in a few weeks.

During the annual model changeover shut downs at the automakers, the workers are laid off for a couple of weeks while the factories are retooled for the next year’s models. The company and the workers both understand that all the workers will be called back once the changeover is completed.

Does anyone really expect the workers now loosing their jobs will be rehired within a few months? Six months? Next year? If recalling those workers is not part of your business plan, they are not laid off - they’re fired!

It’s not just the intellectual honesty of calling it by its right name, it’s just as Dr. Phil McGraw said, “You can't change what you don't acknowledge”. If you use the wrong labels, you acknowledge the wrong things, then you and the people around you waste time trying to fix the things you labeled, not what’s really wrong.

Wednesday, June 3, 2009

Training your customers

I was just watching a commercial from Home Depot, and as many companies are these days, they are advertising lower prices. Seems like a good deal all around - the customers get cheaper products and the companies sell more “stuff”.

The problem is that you’re training your customers to believe that the sale price is the “real” price and the discount was your excess profit! You also train them to believe that any increase goes directly into your pocket as profit.

The automakers fell into this trap with discounts and sales. Customers began to expect that sale price all the time. The other result was that customers who might have bought in May bought in February to take advantage of the savings. So while sales were up in February they were down in May. Why? Cause those folks who would have bought in May already bought in February!

Now, you might lower the price on one item or even on several selected items to get people into your store. Supermarkets have used “loss leaders” for years. Selling one item, sometimes lower than their real cost, just to get you into the store in the hope that you will buy the rest of your groceries while your there. Again, while it gets the customer in to the store, it also teaches the customer that the “real” price of your house brand peanut butter is 89 cents not $1.45 as marked.