Forbes: How Capitalism Will Save Us

By Steve Forbes (Forbes Magazine) |We are experiencing the devastating consequences of a chain of major economic policy errors, which, to use a current cliché, created the perfect storm. These government blunders temporarily paralyzed the global credit system and are now sending the U.S. and Europe into recession, while sharply cutting back Asia’s growth rates.

Left to its own devices, the credit crisis, which began in August 2007, would have crushed economies as severely as did the Great Depression.

Belatedly, but thankfully, governments recognized that the only way to get credit flowing again was for them to make quick and direct massive infusions of new equity into beleaguered banks, as well as commit to other emergency measures hitherto unimaginable.

If sensible rescue efforts continue–and they will–the immediate crisis will quickly pass. Shell-shocked businesses and consumers won’t recover rapidly from the trauma of recent months, especially as we now cope with recession. But the downturn shouldn’t be prolonged: The economy here and those overseas should start to pick up no later than next spring.

That soon? Despite the crisis, the global economy still retains enormous strengths. Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high-tech-oriented economy. Even in recent years the much-maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy. Obviously China’s growth rates were higher, but China was coming off a much smaller base.

The world is flush with cash. It’s frozen because of fear, but the cash is there. Productivity gains are burgeoning.

So, will this global boom resume next year, slowly at first and then with increasing momentum? It should. Whether that happens, however, depends on the next, highly dangerous phase: <<<Read the Full Story>>>

>>>Learn more about Capitalism and becoming a capitalist

Rogue Agency Arrests Utah Mom

Imagine you’re Annie Bradley, a married stay-at-home mother of eight. Two weeks before your 43rd birthday, its 9:00 pm and you’re sitting down with your husband and two house guests discussing a very difficult topic—the sale of your home.  Uncharacteristically, your seventeen year-old daughter interrupts the discussion with a stunned look on her face, informing you that police and federal agents are surrounding your house.  An armed Sheriff’s deputy has followed closely behind her and now stands before you asking, “Are you Anna L. Bradley?”

The scene in the Bradley’s neighborhood Tuesday was much like something you might expect to see on the big screen, or read about in one of those hard to believe mystery novels.  But for Annie, her husband Randy and their eight children, it was a very real nightmare.

“I begged them not to take her,” explains her husband.  He couldn’t understand why law enforcement was at his house in the middle of the night, demanding $10,000 cash for bail, or they were going to be taking his wife.  At 9 o’ clock in the evening, when banks and businesses are closed, it’s close to impossible for an average family to come up with that kind of cash.

So, at approximately 9:41 pm, after local agents from the Utah County Sheriff’s office, accompanied by at least two federal agents, had surreptitiously surrounded the family’s home and afterwards made quite a scene for the neighborhood, law enforcement agents placed Annie Bradley under arrest, handcuffed her, and led her the long way across the front lawn, in front of inquiring neighbors, stunned house guests, her confused and bewildered husband, and perhaps most difficult, in front of her sobbing children.

When asked why they were doing this in the middle of the night, with so little opportunity for the Bradleys to even reach an attorney, one member of the Utah County Sheriff’s department replied, “Well, we don’t usually deal with nice folks like you.”  Annie was booked into jail and held on $10,000 bail.

Annie Bradley's Arrest Photograph

While the image of her arrest might seem dramatic, the facts surrounding her arrest are even more bizarre. Annie Bradley wasn’t arrested, as it turns out, because she’s suspected of committing some violent crime.  The barrage of law enforcement officers didn’t surround her house to execute an arrest warrant because she’s suspected of some kind of drug involvement or some other dangerous crime.  Annie Bradley was arrested because she and her husband have been caught up in a political battle related to the Utah Department of Commerce.

In February of this year that Utah Division of Securities Director Wayne Klein resigned under a cloud of suspicion for corruption and mismanagement.  Randy and Annie Bradley were one of the cases originally overseen by Klein.  Earlier this summer, on July 3rd, an independent audit of the Division was delivered to the State Legislature citing widespread abuses, mismanagement, miscarriages of justice and a government agency rife with internal conflict, lack of leadership and suffering serious internal divisions.

But what does this have to do with Annie Bradley?

Well, let’s start with the basics.  A lifelong resident of Utah County, the last year and a half has been an exceptionally difficult time financially for Annie her family.   In a situation becoming all too common in America today, with the mortgage market in shambles, and the credit industry in upheaval, Annie and her family are in the middle of an unplanned move.  The guests in her home Tuesday night when she was arrested, were negotiating the purchase of several pieces of furniture to be sold along with their house.

The previous success of her husband’s small business Race Holdings, LLC—which had enabled the family to move from Springville just a year and a half ago into their dream home on the west side of Mapleton—has become a thing of the past.  With no business income to speak of for most of the past year, the family has been living on food storage, modest financial reserves, and the hard work of the entire family to bring in whatever they can.  Randy has recently taken a job working over six hours away from his family, in Montana.

The Bradleys however, are no strangers to hard work or sticking together.  Generations of both sides of the family have made a living at hard work in Utah, with no troubles or run ins with the law and no questions about their integrity or reputation.  What they are unable to comprehend however is in the midst of these difficult circumstances, why was Annie Bradley arrested, handcuffed and taken from her family in the middle of the night.

The entire Bradley Family

What would cause the Utah County Sheriff’s office, in conjunction with Federal Agents, to surround the family’s home as if they were conducting some kind of undercover sting operation?  Why would law enforcement arrest a stay-at-home mother in the middle of the night when it’s almost impossible for the family or friends to reach an attorney or to get access to cash for bail?

The charges made against Mrs. Bradley, according to the affidavits and other documents provided by the Utah Division of Securities allege that Annie was involved in committing securities fraud against her neighbor.  The Bradleys dispute the charges. Annie Bradley never worked for her husband’s business and was never an employee or manager of the company.

The neighbor, Mrs. Wendy Hendry, who owns and manages her own real estate related investment company loaned $30,000 to Race Holdings, LLC in June of 2007.  The loan from Mrs. Hendry’s company to Mr. Bradley’s company, was a high interest loan charging 36% annual interest.  According to banking records the entire loan plus interest and fees was repaid in full by Race Holdings in November of 2007.  No subsequent business was transacted between the parties.  Annie Bradley had nothing to do with it.

So what were the grounds upon which to make such a dramatic arrest of Mrs. Bradley? Apparently, Annie was arrested as part of a legal strategy related to another case being investigated by Securities Division Enforcement Director Michael Hines under the direction of his superior Ms. Francine Giani the Executive Director of the Utah Department of Commerce.  Their plan was evidently to increase pressure on Annie’s husband, Annie’s friends and some of her husband’s former business associates related to another case.

Substantiating the chain of events is a reputable and prominent Utah County securities attorney who has represented clients and worked directly with the Utah Division of Securities for more than a decade.  FCD has obtained multiple audio recordings substantiating the shocking reality behind Mrs. Bradley’s arrest, but has been asked not to reveal the identity of this attorney for fear of reprisal and other consequences from the Utah Government.

Apparently Mr. Hines believed that Randy would do “just about anything” to keep his wife out of jail.  In the recordings obtained by FCD it is revealed that Mr. Hines’ intention was a strategic decision to implicate Mrs. Bradley regardless of her actual involvement in any suspected wrongdoing, in order to bring pressure on her husband to “turn State’s evidence.”

Hines reportedly explained,

We have to put maximum pressure on people…and if Mr. Bradley can’t provide me information that would help me then we are going to charge them both   The information that would help is for Randy to say contrary to that whole affidavit basically, to say he received misrepresentations.

Annie and her Husband Randy Bradley

In the same conversation Annie and Randy were told that if Randy wasn’t able to provide the information he was looking for, Hines intended to follow through with his threat to put Annie in jail.  At one point in the conversation Mr. Bradley can be heard asking,

“What if there isn’t any information?… I would have to commit perjury to say that.”

The formal audit released to the public after several complaints about these kinds of abuses, explains that obtaining cooperation or even false confessions under the threat of jail time is a “Division Tactic” where investigators attempt “to coerce cooperation by intimidating and threatening that the person would be arrested.”

At one point in the recordings it is revealed that in an earlier conversation with Hines, prior to her company even being repaid, Mrs. Hendry was uncomfortable with Mr. Hines agenda, insisting;

“We don’t care about the money.  Let’s just rip up the promissory note.”

Even though Annie was not involved, even though her neighbor apparently did not want to complain against the Bradleys, and even though Race Holdings, LLC did in fact repay the full amount of the loan in question as per the written agreement, Michael Hines had another objective and it required that the case proceed against Annie.

According to Hines, he could charge Annie with a crime based solely on one conversation she had with her neighbor in church one Sunday.  Evidently, during a short stretch of time in mid-2007 when her husband’s business had fallen behind on monthly payments Mrs. Hendry approached Annie looking for re-assurance that the debt would be paid. In defense of her husband, Annie reportedly replied, “My husband is an honest man, and he will repay this debt no matter what.”

Annie Bradley, targeted by Michael Hines

That statement, innocently made by a spouse, in a Sunday church meeting, according to Hines, “constitutes an inappropriate statement or omission of material facts, and therefore constitutes fraud.”

The Bradleys are confused as to how Annie’s statement could be considered fraudulent, especially since her husband later did exactly as she had suggested, ensuring that his business repaid the very high interest loan, plus all interest and fees, as agreed.  The Hendrys profited, according to FCD calculations, in excess of $10,000 in six months and received a full recovery of principal prior to the note’s maturity.

Answering the question of how such a situation could be construed as fraud, Utah Securities regulator A. Gary Bowen provided a rather lengthy but insightful explanation.  He explains:

“People do not understand the nuance of securities regulation.  Most attorneys do not…we can go after these people and we have been just overwhelmed by the filings, you get into my office I’ve got them practically stacked up to the ceiling and I’m not making this up and I’ve got them stacked all over the floor so we’re pursuing them…

“I’m going to recommend you look at section 61-1-1 which is entitled ‘Fraud Unlawful’ and you’re going to discover a definition of fraud that your average attorney is going to be totally clueless about…the nuance that the average attorney doesn’t get, whose competent in real estate, competent in corporate or business law, competent in contract law, is the mere omission of a material fact… do you know what the implication of fraud is, criminal prosecution, time in jail!”

Mr. Bowen who according to his own representations has been charged with advising Utah citizens and business owners about how to avoid breaking the law for more than ten years, later admits that its impossible to pin down what might be construed as “fraud” if the government wants to press charges.  He continues,

“If you look at our definitions section, I’ve been working for this for years and read it a number of times but it really sunk into me here this summer when I was reading it and talking to someone like you, you go in and read the definition actually under 61-1-13 of fraud, and its one of those things that you say, well, what does that mean? The answer is, I don’t know.”

With a definition like this, its no wonder that Utah has become known by some as the “fraud capitals” of the West.  Mr. Bowen’s advise boils down to a simple axiom.  If the government thinks it is fraud, its fraud.

Even experienced attorneys, according to Mr. Bowen, can’t understand what the enlightened public servants in the Department of Commerce might allege.  Or, in short, all Utahans should be very careful when discussing their spouse’s integrity in church on Sunday.

As 2008 rolled around, the Bradleys lived with the daily uncertainty and fear of being charged with fraud as a result of Mr. Hines strategy.  It didn’t seem to matter that both parties agreed the loan had been satisfied and that Annie Bradley had nothing to do with it, other than being married to the business owner.

At one point Randy reveals that the stress became unbearable.

“I came close to considering saying whatever Mr. Hines wanted me to say if it meant it would keep my wife out of jail.  I decided against it, but I couldn’t trust Hines anyway if he was willing to build another case based upon a lie.”

Resigned. Former Director Wayne Klein

But this past February things started to look brighter from the Bradley’s perspective, when Utah Securities Director Wayne Klein was forced to resign because of scrutiny being placed on the Securities Division for its alleged abuses.  The Bradleys along with many small business owners in Utah hoped a new Director would be more just in his oversight of the Division and more effective at reigning in employees like Hines.

Lying, by “any person” during a proceeding under Sate Securities Laws is a 3rd degree felony.  While Randy decided against going along with the enticements of Hines, Audit Manager Tim Osterstock’s performance audit of the Division clearly documents that the Division had been engaging in deceptive practices, evidently believing that government employees are exempt from the requirements of the law.

“The division has, at times, violated the terms of its settlement agreements.  In one case, the division agreed to not publicize the action or commence further administrative actions and then violated both terms of the agreement.  The person accused told us he felt compelled to plead guilty to a lesser criminal charge rather than place his business in jeopardy defending a greater charge.  The division agreed to not seek additional charges but nevertheless pursued an administrative action.  The respondent then signed the settlement agreement after the division agreed to not publicize it.  However, the day the settlement was signed, the division publicized the information on its web page and also published the information in its newsletter the following month.”

The audit also revealed that the Division made false allegations against innocent businessmen as part of its coercive tactics, obtained false confessions and false settlements by threatening citizens with arrest and jail time, and that the State of Utah had been violating its own legal settlements with impunity while Department employees escaped criminal investigation for such activity that clearly violates State law.

With this information now public, the Bradleys anxiously waited for the government to take action to reform the Department.  They also continued to correspond regularly through their attorney with the Division of Securities and specifically with Securities Division attorney Scott Davis who works for the Utah Attorney General’s office.

Mr. Davis corresponded multiple times with the Bradleys about resolving the civil concerns raised by the Division, but never informed the Bradleys that they were in eminent danger of being arrested or criminally charged.  Things seemed to be looking better for the Bradleys, and they were hopeful they could soon put this troubling ordeal behind them.

Then, out of the blue, new rumors began circulating of the Bradley’s pending arrest.  The rumors came from the most unusual of places.  For some unexplainable reason in early August of this year, Mr. Hines called Ron Hendry and explained that the Bradleys were being charged criminally and would soon be arrested.

“I didn’t know what to make of it,” said Randy about the phone call from Hines to Hendry.  Mr. Hendry subsequently began sharing the information with other Bradley neighbors including their religious leaders.

Although the Hendrys had profited handsomely from their transaction with Race Holdings, Mr. Hines, in very questionable legal territory, evidently had some reason for giving them a “heads up.” As it turns out, Hines had told the Hendreys that they were witnesses, as victims, in the now criminal case against both Randy and Annie.

Hines, according to Ron Hendry, had been in contact with them seven our eight times throughout the months of June and July.  During this same time, the Bradleys unsuspectingly continued to hope things were getting closer to being resolved.

When Randy received a surprise phone call from his local Bishop asking about his pending arrest, he wasn’t sure if Ron Hendry was just spreading gossip, or if the strange collaboration between he and Hines were actually fact.  So, through their attorney the Bradleys went straight to the government.  They contacted Scott Davis of the Utah Attorney General’s office.  Randy explains,

“I thought we were working things out.  Through our attorney we were in regular communication with the State.  They are the ones who postponed our last meeting.  Through our attorney we contacted the Attorney General’s office and Scott Davis, the man we were told was the attorney for the Division and he acted surprised and claimed he knew nothing about any criminal charges.  He acted completely embarrassed and didn’t seem to know what Michael Hines was up to.”

Huntsman Appointee, Executive Director of the Utah Department of Commerce, Francine Giani

Seeking to defend herself and her Department, once the audit was released, Francine Giani publicly insisted that her Department had taken all necessary corrective action.   However, one of the major indictments in the audit was that Giani’s staff was repeatedly in violation of Utah State law related to how the State’s lawyers from the Attorney General’s office were being ignored as the Division pursued its own agenda.  The audit reads in part,

“[S]taff from the AG’s office are assigned to represent the  division.  Securities law states “The attorney general shall advise and represent the division and its staff in all matters, administrative or judicial, requiring legal counsel or services in the exercise or defense of the division’s power or the performance of its duties” (Utah Code 61-1-21.5).  There have been conflicts with both how the former director utilized the attorneys representing the division and the level of authority the attorneys should have in defining division activities.  In some cases, it appears the former director assumed the role of the attorney.”

Despite the Attorney General’s office claiming that they knew nothing about criminal charges or arrest warrants, to the shock of Annie, Randy, and their attorney, such warrants were indeed issued.  Randy was arrested on August 29, 2008.

After Randy’s arrest he worried that his wife would be next.  Through their Attorney, the Bradleys made an agreement with prosecutors that with Randy voluntarily returning from his job in Montana, surrendering to the Utah County Sheriff’s office, and providing the required $10,000 bail, the warrant for Annie’s arrest would be withdrawn.  A few short days later however, local and federal agents were surrounding the Bradley’s home and in almost no time, Annie was in jail.

“I told them that we had already taken care of things,” says Randy.

“I begged them not to take her.  I explained that the prosecutor had agreed to release the warrant for Annie’s arrest since I cooperated and posted $10,000 bail.  The Deputy told me that he believed me, but since I had nothing to prove it, there was nothing he could do.  I wasn’t angry at the Sheriff’s office, they were professional and doing what they were supposed to do.  But, who is going to stop Michael Hines from ruining people’s lives while he does whatever he wants?  That is what makes me so angry.  He doesn’t care about my wife, my kids, or our family.”

Annie and Her Two Daughters

So, how and why was Annie arrested so dramatically this past Tuesday night, even after the prosecutors had agreed to release the warrent for her arrest? Why didn’t the government follow the usual procedure when dealing with reputable citizens, not charged with violent crime, having no past criminal history, and just deliver a “Summons to Appear?”  Evidently, that wouldn’t work for Mr. Hines strategy.

Annie Bradley was arrested because Randy and Annie had the courage to resist Mr. Hines for almost a year.  That, evidently, is just not acceptable to the State of Utah, Department of Commerce.

It’s not just the Bradleys who have had to make this tough choice.  The pattern of unjust enforcement by the Division of Securities is revealed unmistakingly in the formal audit results, but Ms. Giani and her boss Utah Governor Jon Huntsman Jr., have neglected to address the gravity of the situation.  Certainly, Ms. Giani and the new Securities Director Keith Woodwell have failed to reign in Hines and others engaged in the abusive practices.

The actual truth related to Annie Bradley’s arrest might have never come to light except that a number of individuals, attorneys, businessmen and even Department of Commerce employees have grown weary of this unchecked abuse and have begun using audio recording’s to try and help document this behavior.

The recordings obtained by FCD are a collection from multiple sources, and cover a multitude of cases. These recordings, and hopefully others yet to be provided to FCD by interested citizens, are beginning to serve as a powerful tool to provide critical insight and political leverage to address this rogue government agency reeling from criticisms, rife with internal conflict and desperate to cover-up its own current and past misdeeds.

Nevertheless, some bureaucrats can’t seem to understand how persecuting small businessmen in Utah (and their wives) is the same as persecuting normal families.  Some government officials can’t seem to understand how unjust it is to have a government agency justify their supposed administration of justice with lies, cover-ups, excessive force, coercion and deceit.

Annie Bradley’s arrest is one more revelation in a series of events alerting Utahan’s to the very real consequences of a corrupt government agency, the conduct of malicious bureaucrats and an incompetent government appointee—Francine Giani—who seems more worried about the appearance of “protecting investors” than she is about following Utah’s laws and protecting all Utah citizen’s civil rights.

The Bradleys have now had to come up with $20,000 cash bail so that they could continue remain free to take care of their family while continuing their fight against a corrupt government investigation.  This amount pales in comparison to the mounting legal costs they’re incurring in a legal circus that could last many more months if not years.

But, instead of heaping added difficulty on their heads, the State of Utah should be issuing the Bradleys a sincere apology as part of its first step to clean up the seriously damaged reputation of the Utah Government.  We should all be grateful for families like the Bradley’s that stand up to corruption, that work constantly to provide a good life for their children, that conduct an honest business, and do all they can–even if they’re late on payments—to always pay their personal and business debts as agreed.

“This has probably been the most difficult emotional thing that has ever happened in our lives, but we’re going make it through,” says Randy, soberly.  “Annie has said that if this is what it takes so that someone will finally put a stop to people like Michael Hines, its okay, I’m okay with it.”

In the face of America’s current economic difficulties it seems like the Executive Branch of Utah’s government has somehow forgotten the virtue of families like the Bradleys and the responsibility to protect all Utah citizens equally.  It is, after all, small businessmen and women, along with their families, who regularly take risks and assume responsibilities that creates more jobs, deliver more services, and add more value to our community than any government appointee and her bureaucrats.

Despite Mrs. Giani’s public assurances, there is an obvious problem in the Utah Department of Commerce.  Evidently this problem extends all the way to the head of the Executive Branch into the office of Governor Jon Huntsman.

Despite calls by numerous state legislators for the removal of Ms. Giani and several of her remaining staff; and despite the multitude of problems revealed in the recent performance audit of her Department; and finally despite even the personal appeals made directly to him from Utah’s own Attorney General for her firing, Governor Jon Huntsman (who is the only elective oversight provided by State law over Francine Giani) seems to share the philosophy of Giani and Hines, namely, that innocent people being wrongly accused is simply a price Utahans should get used to paying if they expect the government to do its job.

That’s an interesting theory of government.  No matter how nice, pleasant or polite Governor Jon Huntsman, Jr. comes across — there is no mistaking that he was not elected to simply look good in office.  Hard decisions sometimes have to be made, and in this case, when dealing with the Department of Commerce, the direct action that needs to be taken just isn’t that hard to discern.

Tyranny, at any level, only works for so long.  What is happening in the Utah Department of Commerce is wickedness; there is no way to skirt around the issue.  A full audit of all divisions within her stewardship will reveal even more succinctly that it is time for leadership in the Governor’s office, in the legislature, and in the judiciary in dealing with abuses like the Giani’s absurd, forceful, and dramatic arrest of Annie Bradley.

This problem will come to a head and the unjust, and in some cases criminal, activity of government bureaucrats along with the startling incompetence of executive management in the Department of Commerce will ultimately cost some politicians and employees their jobs.  Someone with courage will ultimately step forward to address and correct the very serious problems.

In the mean time however, the dirty politics and renegade operations of the Utah Department of Commerce will ensure that more Utah families like the Bradleys will be trying to explain to their small children why mommy or daddy was dragged away in handcuffs, in the middle of the night.

It just doesn’t seem like America.

The Bradleys

Whose Time Is It, Anyway?

HIGHLAND, UT | 6 August 2008 | One hundred-fifty years ago, nearly everyone worked from home. Not much of a surprise; it was an agrarian society. People worked in their own fields or they had shops (such as a blacksmith or mercantiler) attached to their homes. Following decades found more people move their workplaces into town as the industrial revolution took hold. Over the past fifty to eighty years hardly anyone has worked at home, preferring to take a job rather than be self-employed at a home-based operation. But today with the high cost of fuel and other influences, more and more people are opting to work at home.

Today’s work-at-home environment poses new challenges that yesteryear’s work-at-homers perhaps didn’t have to deal with. Sue Shellenbarger, of the Wall Street Journal, reports that employers fear workers will take advantage of the lack of personal supervision and squander valuable time. The solution? Employing monitoring devices in employees’ computers to “look over their shoulders.” Naturally, questions of “Big Brother” arise both from employees and from critics of the process. So, is an employer justified in placing such monitoring devices? Or should the work-at-home employee have the right to work as he sees fit without the close electronic supervision? Several principles are at play in this this interaction.

Most recognize almost immediately in this story that force destroys freedom and that perhaps by using the monitoring devices employers are using force over their employees and therefore destroying their freedom. But other principles come into play that reveal a much deeper issue involved in the interaction between employer and employee: Productivity is the standard, and agency implies stewardship.

Key Points

• Employers own the businesses people work in.
• They own the equipment, the buildings, the hardware and the software associated with the business.
• They own the projects pertaining to the profitability of the business.
• They own the labor their employees have agreed to sell them.
• Owners recognize that labor rightly ordered (or as Napoleon Hill puts it, organized effort) is required to be profitable.
• Therefore, they have the right to monitor the productivity and effectiveness of the labor they have purchased from employees.
• To be honest, employees should be the most productive they can be during the times they sold their labor to employers.
• Employees often squawk about the monitoring of labor from their employers. They claim the employers take away their agency in this process.
• The best way to recognize where agency rightly exists is to answer the question: Who has stewardship in the matter? Regarding Employer/Employee exchanges agency and stewardship changes hands at different times.
  • Prior to the agreement, both parties have stewardship over their own self-interest—their personal and family welfare, business concerns, etc.
  • In the process of coming to an agreement both parties essentially say, “I see what you are wanting to do. My self-interest aligns with yours in ____ area, and I want to create value for you by ____.” The employee agrees to sell a portion of his life (time and labor) to the employer in order to accomplish both sets of self-interests. Or in other words, the employee sells a portion of his agency to the employer.
  • After the contract has been signed, the employee no longer has stewardship or agency over that portion of his life (time and labor). He must therefore fulfill his obligations in the contract by laboring in the manner and at the time his employer and he agreed upon.
  • The employer still carries the ultimate stewardship of the business, and has the right to monitor the employee’s productivity while on the job.
• Often employers like to share the responsibility of stewardship with their employees. Along with that responsibility, when properly executed by the boss, comes added agency for the employee. The employee then is able to make a few decisions regarding his time and labor.

Conclusion

Ms. Shellenbarger’s story dealt mostly with employers monitoring employees. Based upon the items listed above, this process appears perfectly right. However, often the comment was made that employers wish to monitor free-lance and contract workers at home as well. These types of individuals clearly fit into a more free category. While they have sold their time and labor to others, they generally do not sell those items in the same way an employee does. They have usually preserved for themselves a little of the agency and stewardship that the employee gives up. It would therefore be against principle for the employer to monitor the productivity of these people.  

The challenges between employer and employee have been around for generations. The boss wants the utmost productivity from his workers. The worker wants mostly to be left alone while working and to have the freedom to work as, how and when he chooses. A FreeCapitalist society—one in which both employer and employee choose voluntarily to live according to ancient principles of prosperity—can peacefully and easily solve these challenges by exploring the myriad solutions available to those whose brains are awake and switched to on.

Action Items

1. Review your own situation for creating value in the world, whether it be business owner, self-employed, freelance, contract worker, or employee.
2. Study out the level of agency and stewardship you possess by reviewing the agreements you have made for the exchange.
3. Resolve to stick to those agreements. If you do not like your agreement, stick with it until the opportunity presents itself to alter or abolish that agreement in advantage of a new one.
4. If you are the boss of work-at-home employees and you suspect that you are not receiving the level of productivity you desire or think is reasonable, discuss alternatives with your employees. Perhaps some of the following questions could be of help.
   1. What is the nature of the agreement you have with your employee?
   2. How much agency and stewardship have you afforded to your employee?
   3. Have you allowed the amount of agency and stewardship you intended?
   4. Is the amount of agency and stewardship facilitating or restricting the amount of productivity you desire?
   5. If no on #4, how can you make arrangements—including monitoring, or changing the employment status to freelancers or contract workers, etc.—with your employee to incite higher productivity?
5. If you are the employee in a similar situation, and you are dissatisfied with the current arrangements, it is also healthy for you to explore the answers to the above questions. If they are not to your liking, consider some of the following.
   1. Go into business for yourself.
   2. Seek to become a freelancer where you have control over your time and labor and whom you sell them to. Perhaps selling time and labor to several employers on a piece-rate method would be better than selling your productive time to just one employer.
   3. Become a contract worker, which carries a little more agency than an employee but not as much as a freelancer or a self-employed individual.

MRFC Principles:  (3, 7, 9, 10, 13) 

Sources

Sue Shellenbarger, Work at Home? Your Employer May Be Watching, Wall Street Journal, July 30, 2008.

Fast Food Slow Down in L.A.

TAYLORSVILLE, UT | 30 July 2008 | Amidst the ongoing news of a heated and controversial election, failing companies and markets, and myriad world conflicts, talk of fast food seems a low priority. The city of Los Angeles thinks otherwise, however. In a unanimous vote, the city council voted on Tuesday decided to “place a moratorium on new fast food restaurants in an impoverished swath of the city.”Their reasoning? “A proliferation of such eateries and above average rates of obesity.”

Their goal? “To attract restaurants that serve healthier food.”

Their problem? For whatever reason, restaurants that serve healthier food have not already freely chosen to operate in the area, and the number of fast food restaurants is not likely to be the thing that has kept them away.

Key Points

• After analyzing market conditions and local customer base, many restaurants have decided that it is in their best interest to operate in other areas of town.
• The only real incentive that the government has to attract new business to the area is tax breaks.
• Use of tax breaks to attract a business to an area that doesn’t have the customer base to support it is a recipe for failure. While lower taxes appear to increase profit margins, the increase is synthetic. Without revenues from a loyal customer base that can afford the products offered, there will be no need for tax breaks—there will be nothing to tax. Both the business and the government will be frustrated when the venture doesn’t work.
  Blocking other ‘less desirable’ establishments from opening is an abuse of the city’s power. If the market supports the fast food joints, they should have the freedom to operate as they please, where they please.
• If people really are looking for healthier choices, then the market will support the restaurants that offer those choices. Those businesses should compete based on their merits, rather than on government-given advantages.

Conclusion

Just like some of the left believe that they should keep the price of gas high because it will force people to quit ‘damaging the earth’, the L.A. City Council believes that they can force the people to be healthy by limiting the amount of fast food available to them. This is faulty logic. Dollars follow value. That means that people spend on the things that are important to them. “They should have better things for children,” said Rebeca Torres, a South Los Angeles mother of four. “This fast food really fattens them up.” If the price and convenience of unhealthy fast food has caused people to ignore healthier options (inside or outside of restaurants), then it is unlikely that any amount of government planning will lead them to patronize healthier, government-sponsored restaurants.

When the Nazi’s came to believe that there were problems with certain groups in their society, they began eliminating them. Their impossible goal was the social engineering of a perfect race. While the tactics being used by the City of L.A. are significantly less harsh, they are based in the exact same vein of thinking. With all that is going on in the world today, fast food does seem a low priority. But, the underlying attempt at social engineering is highly disturbing and should be a high priority to any freedom loving capitalist.

Action Items

1. Look at some of the ordinances passed by your city council. Do they generally tend to promote individual freedom or limit it?
2. Pick an ordinance that has been in place for a long time. Does the ordinance really make any difference in the city?
3. Make a list of ways that the community (citizens, not government) could persuade its citizens to effect the same changes without using force.
4. Take a deeper look at your personal relationships. When you want something to change in someone else, do you persuade or try to force?

MRFC Principles: (2, 4, 7, 8, 9, 11, 12)

Sources

Christina Hoag, LA blocks new fast-food outlets from poor areas, Associated Press, July 29, 2008.

(Matthew Pilling is a member of the FreeCapitalist movement known as the Canadian Capitalist. Despite his time in the Great White North, Matthew loves America and all that it stands for. He lives with his wife and two children in Taylorsville and works in finance.)

Lower Standard of Living Caused by Forced Wage Increases

TAYLORSVILLE, UT | 30 July 2008 | In their first 100 hours in control of Congress in early 2007, Democrats pushed to accomplish as much as possible and effect immediate change. That change was to be reflective of the party’s ability to create quick, effective solutions. Unfortunately, much of the legislation passed as part of the 100-hour plan has been perfectly reflective of the party’s abilities, or lack thereof. A case in point would be the Fair Minimum Wage Act of 2007—a display-case trophy that not only fails to help, but actually hurts the people it was supposed to save.Signed into law on May 25, 2007, the act raises the federal minimum wage from $5.15 per hour to $7.25 per hour in 3 incremental steps. The 2nd of those steps went into effect on Thursday, July 24th, raising the wage to $5.85 per hour (a jump of 70 cents per hour).

Breaking the change down into 3 steps was supposed to help businesses make a smooth transition into the final minimum wage of $7.25 (a jump of 140 cents per hour). Really, easing into the changes has only given employers greater time to stew over the problems that this law will cause for them. Seldom are the dire effects of bad legislation so readily visible at the very moment that the legislation takes effect.

Key Points

• Anytime the government dictates a minimum wage regardless of the value created by any given employee, they are creating a damaging sense of entitlement for that employee.
• If dollars follow value, then employees who receive additional dollars without creating additional value are a cumbersome burden on the intricate workings of the free market system.
• In order to cover the higher wage, employers who wish to stay in business are left with 4 options, all of which hurt employers and employees because they violate the fact that dollars follow value:
  • Shrink profit margins—business need to have reserves that will carry them through lean months. Shrinking or depleting those reserves brings businesses closer to the brink and often brings undue stress to the work environment.
  • Raise the costs of goods and services—in addition to the potential loss of customers, the net effect of raised prices is an increase in the cost of living. Ironically, this increase in the cost of living is often greater proportionally than the increase in wages. So, while minimum wage employees will take home more income, they will tend to keep less of it because they will have to pay more for bread, milk, and basic essentials. “David Heath, owner of Tiki Tan in College Station, Texas, said the increase will force him to raise prices for his monthly tanning services by about 12 percent. There just isn’t any room for profit, and so this is why prices will have to go up.”
  • Reduce payroll—the cost of giving “more green” to some workers is often giving “pink” to others. Those who happen to keep their jobs will have the honor of fulfilling the duties of dismissed employees. If a small business with 5 employees has to cut one, each remaining worker will have to do 25% more to keep pace with previous production. If the 4 employees are kept at minimum wage, their income will increase approximately 12%. And they call it “Fair Minimum Wage”.
  • Ignore the law—if an employer chooses to ignore the law and pay less, he is left with a limited pool of potential empleados/employees. The sense of entitlement created by minimum wage laws is one of the major driving forces behind the mentality that there are some jobs that Americans just won’t do.
• The pay increases laid out by Fair Minimum Wage Act of 2007 were calculated to keep up with a projected increase in cost of living. Because recent events have caused the price of just about everything to go up, the wage increase is already obsolete. “Walter Jasper, who earns minimum wage…will still struggle with the higher gas and food prices hammering Americans. “It will help out a little,” said Jasper.” Any additional inflation caused by the increase in wages will only add to this problem.

Conclusion

Violation of principle will always bring unintended consequences. Failure to recognize the connection of those consequences to their true cause will often lead to further violation of principle. As minimum wage workers feel the negative effects of this law, they are likely to complain to their elected officials who will, in turn, push another damaging piece of trophy legislation and raise wages again.

Amidst all of the manufactured turmoil, however, it is nice to see that the free exchange between individuals outpaces the 100-hour plan. In spite of government regulation, “most businesses, even restaurants and other service sector companies, already pay above the minimum wage anyway… You can’t get a dishwasher for minimum wage.”

Action Items

1. Consider your income and pay increases. Do you create the level of value that you agreed upon with your employer when they offered you your current pay level?
   Ask yourself if you feel “entitled” to your income. Consider how you can eliminate the destructive desire for a “free ride” from your mentality. Commit an honest day’s work for an honest day’s pay.
2. If you feel you need greater pay, determine what you can do to create greater value for your employer.
3. Make a list of ways in which you can increase your human life value.
4. If you employ others, consider whether the wages you pay are commensurate with the value they create for you.

MRFC Principles: (7, 11)

Sources

Ellen Simon and Anne D’Innocenzio, Federal minimum wage rises to $6.55 today, Associated Press, July 24, 2008.
Fair Minimum Wage Act of 2007, Wikipedia.com

(Matthew Pilling is a member of the FreeCapitalist movement known as the Canadian Capitalist. Despite his time in the Great White North, Matthew loves America and all that it stands for. He lives with his wife and two children in Taylorsville and works in finance.)

You Get What You Pay For

TAYLORSVILLE, UT | 25 July 2008 | When we buy gas at the pump, we see an obvious connection between the amount we get and the amount we pay. At times, the price goes up and we all recognize that filling up our tank will cost us more. At times, the reverse is true. Either way, it is easy for us to determine if we are willing to pay the current price in exchange for the amount of gas that we feel we need.Would we feel the same way if it was the quantity of gas that fluctuated, rather than the price? If the price of gas was fixed at $2, but, at times that $2 would buy you a full gallon, and at other times it would only buy you a half gallon, would it be cause for concern? The end result would still be the same—a full tank of gas would always cost more than you hoped it would. But, would you feel deceived when your $2 didn’t buy as much as they used to?

Well, some consumers are concerned that this has been happening at the grocery store. As prices have continued to rise, some food companies have recognized that there is a threshold price for any given commodity. When the price reaches that threshold, consumers will simply stop buying that product. Rather than continue to push the price to the threshold point, food companies have decided to change tactics. They have repackaged items in smaller amounts and still charge the same price. The end result is the same—a gallon of ice cream will cost you more than it used to. But, consumers aren’t used to thinking in terms of “product decreases”, and some feel that the practice is a little deceptive.

Key Points

• Consumers enter transactions freely. While it is frustrating to get less than you thought you were getting, that is the consequence of your choice. As the agent in the transaction, it is the consumer’s stewardship to verify the facts before paying for anything. (Makes grocery shopping sound fun, doesn’t it?)
• The beauty of the invisible hand in the free market system is that it leads entrepreneurs to find better, more efficient ways to create value. Deception (a form of force) hinders that process, and ultimately destroys freedom.
• If the market doesn’t continue to support your product, deception will never substitute for a sustainable marketing plan. Dollars follow value, and if the value you present doesn’t attract dollars, then it’s time to re-think your value proposition.
• Consumer-minded people believe that remaining competitive is solely a function of pricing. “If competition gets tight, find a way to give less or charge less.” This scarcity-based mentality is an unsustainable lose-lose situation where neither party really feels that it is getting what it needs from the exchange.
• A better idea, as suggested in “Blue Ocean Strategy”, is to figure out ways of tailoring the value you offer to match the value that the market place is looking for. When my wife and I go to our favorite restaurant, the price isn’t our focus. We go because the quality of the food and the experience are exactly what we are looking for.

Conclusion

Food producers have a bottom line to focus on. That bottom line has to include the costs of raw materials, transport of those materials, production and processing, product marketing, and transportation to their vendors. The costs in all of those areas have increased significantly in recent months, and that leaves the companies with a difficult choice. While consumers are responsible for the choices they make when spending their money, grocery companies should let the invisible hand work its magic. Exchange creates wealth only when both parties are getting what they think they are getting from a transaction. If there is a need to change pricing structures, make it obvious to the consumer. Rather than hope that consumers don’t catch on to what they are doing, food producers should be up front and let the market decide. Otherwise, deceptive marketing practices will almost certainly make that decision for them.

Action Items

1. Before entering any transaction, see that your expectations are being met. Failure to do so does not entitle you to play the victim card later.
2. When your obligations become difficult to meet, determine that you will never try to deceive others in an attempt to give less than is expected.
3. Read “Blue Ocean Strategy—How to Create Uncontested Market Space and Make the Competition Irrelevant”.
4. Realize that productivity, not pricing, is the standard.
5. Consider how you can increase and customize the value that you offer to your family relationships and your business relationships.

MRFC Principles: (4, 7, 8, 9, 10, 11)

Sources

Four Points Media, “Incredible Shrinking Consumer Products”, KUTV 2 News, July 22, 2008.

(Matthew Pilling is a member of the FreeCapitalist movement known as the Canadian Capitalist. Despite his time in the Great White North, Matthew loves America and all that it stands for. He lives with his wife and two children in Taylorsville and works in finance.)

The Follies of Fannie and Freddie

MAPLETON, UT | July 22, 2008 | Recently, two names have been plastered across headlines so often you’d be forgiven for thinking they were the latest hollywood pair. Their celebrity status has been cemented by constant mentions in the top news programs, length pieces on their life history, and endless gossip and rumors about their sudden fall from grace in the current housing crisis.

They are the 800-pound gorillas of home ownership: Fannie Mae and Freddie Mac, the biggest owners of mortgages in the country.

In order to understand how such trusted institutions could sink to the notoriety of tabloid fodder, shocking the country with revelations of their default-ridden mortgage portfolios, let’s use an imaginary example. While it is helpful to study their historic origins, a hypothetical situation will demonstrate the cause of their tragic fate…

Imagine you started a company that loaned money to people. In order to raise capital, you pitched your business plan to potential investors, who would be interested in knowing how you would manage the risk of borrowers defaulting on their loans. If you were like every other private company, you would provide a effective strategy that would reassure your investors of the relative safety of their investment. Obviously, no plan would be foolproof, thus investors would determine if they valued the potential gains more than the potential risk of defaults that could cause your business to fail and their investment to go up in smoke.

Now imagine that next door, a new business is formed to provide the same service, only this one makes a unique promise to investors: if for any reason they fail to operate profitably, they have access to financial reserves unlike any other –  an enormous pile of cash replenished annually by every taxpayer in America (not to mention a fine collection of special printing presses). Other companies might have large insurance policies, or additional streams of revenue, but what could compare with the ability to extract money from millions of people under threat of force?

Which company do you think will attract the most investors over time? Which company would possess a nearly unlimited ability to increase their loan portfolio? Which company do you think will eventually cease to exist, leaving its competitor to absorb nearly the entire market for lending in America? Which would you choose if you were the investor?

In a free marketplace, where force was only used to punish fraud and enforce contracts (and not reassigned to the job of eliminating risk), the growth and success of any financial services company would be directly tied to their ability to demonstrate fiscal responsibility and profitability over time. They would be limited in their ability to raise capital in that all funds would have to come from voluntary sources – no guarantee other than that of their capability to manage risk and operate profitably would be possible. Such a company would have a vested interest in carefully scrutinizing every transaction, knowing that their very future depended on it. No investor would voluntarily invest in a company that had a reputation for poor stewardship.

But a company with the advantage of an armed, wealthy godfather like the one in our story has no such incentive to personally insure the solvency of its business. Additional funds could always be extracted from taxpayers, who had no say in the matter (and thus had no interest in evaluating the safety of their “investment”). There would occasionally be complaints and concerns, voiced in committee hearings, but other than enduring some boring meetings, no real threat would be posed to the existence of the company. Even the bureaucrats, prodded by their angry constituencies would be unable to stop feeding the unprofitable beast  – especially now that the company is “too big to fail”.

And thus another naturally corrective process would be suspended by force: the process of failure, in which losses are experienced, lessons are learned, and ideas are re-evaluated. In an attempt to avoid the pain, the benevolent godfather would step in and make the consequences of the original bad idea seemingly disappear (through another violation of principle).

Some are crying that Fannie Mae and Freddie Mac were originally “good” institutions, created for the purpose of helping the poor and underprivileged acquire home financing they would not otherwise have qualified for. Ironically, the very violation of principle that made those companies so attractive in the housing market (reducing risk by promising security with funds taken by force, thus removing the possibility of failure) made them appealing to everyone in the housing market – and reduced the incentive for Fannie and Freddie to be more careful about the risk they purchased so rampantly. Even if Fannie and Freddie never purchased a single sub-prime loan, their very existence as an unlimited source of funds had an enormous effect on the availability of easy money for home financing, which in turn influenced the rise in real estate values that was the enabler for much of the speculative and sub-prime transactions in recent years.

By creating a company that was perceived to be protected from the risks that would challenge any private mortgage buyer or insurer, a distortion was created in the marketplace. Such a company has an artificial advantage, having the sanction and protection of the only entity in America with the legal power to use force to provide funding for its endeavors – the U.S. government.

In a recent article in the New York Times, the following explanation was given:

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges. The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

This particular author, who clearly describes the contradiction inherent in the business model of Fannie and Freddie, is nevertheless adamant that they should not be allowed to fail. Despite his articulation of the system of “privatized profits and socialized losses”, he acknowledges no violation of principle, and advocates continued support of the flawed enterprises, while blaming greedy speculators for dragging down the whole housing market, and causing defaults in the “good mortgages” that Fannie and Freddie hold. In other words, no one would have noticed that the emperor has no clothes if it wasn’t for everyone else losing their shirts.

The only thing the current crisis has done to Fannie and Freddie is reveal the fatal flaw in their very foundations. It has simply sped up a process that cannot be stopped, only delayed. Violating principle, even for a “good cause” has consequences that cannot be avoided, but are often hidden from view for years in an attempt to defy reality. The very birth of Fannie Mae and Freddie Mac, as institutions wishfully set apart from the rules that would govern every other private endeavor, held the seeds of their own destruction.

Many critics today cry foul at lenders who provided the “easy money” to those who they claim should never have been given money due to their “sub-prime” status – in other words, the likelihood that they would default. What they forget is that those lenders and the investors that supported their efforts are now paying the price for their decisions. Loss is the natural consequence of their bad ideas. In an attempt to ease the pain of loss, little tyrants everywhere are calling for regulations to keep people from making such “risky” investments. But government has no place telling people how to invest their money. Such efforts to revise government regulations would be better spent removing the poison in the well that perverted the minds of irrational investors – those institutions that stood as the bastions of the illusion of security in the housing market, Fannie Mae and Freddie Mac.

Action Steps

1. Learn more about how Fannie Mac and Freddie Mac were formed and what their role is in the housing market. Learn about how the mortgage market works, how liquidity affects it, and what 
2. Write your Congressmen and Senators to express your opinion of a taxpayer bailout of Fannie and Freddie – include your view of the violations of principle involved in the current situation and the very existence of the institutions.
3. Share what you have learned with your friends and family. Teaching principles helps us to live by them, as we strive to advocate principles effectively.

MRFC Principles:  (5,6,7,8,12)

Sources

Julie Creswell, Protected by Washington, Companies Ballooned, New York Times, July 13, 2008.

Making Sense of Problems at Fannie and Freddie (informative graphic showing how Fannie and Freddit supply liquidity to the mortgage market), New York Times, July 11, 2008.

Paul Krugman, Fannie, Freddie and the Threat of Economic Meltdown, New York Times, Reprinted on alternet.org, July 15, 2008.

Paulson: Support for mortgage giants needed, MSNBC, July 22, 2008.

FDIC (Fear Drives Ignorant Consumers)

SALT LAKE CITY, UT | 16 July 2008 | In a move that stirs up images of the Great Depression, people are lining up outside of IndyMac Bank branches to see that they “get theirs” before there is nothing left to get. Because of the number of people waiting to close their accounts and withdraw their funds, the bank has had to limit the number allowed in the bank at any time to five (those seeking to deposit funds are bumped to the head of the line). So, the rest are left to sit outside and stew in each other’s sob stories. And the scarcity abounds.Each of these customers felt that the high interest rates offered by IndyMac, combined with FDIC’s guarantees, were sufficient reason to deposit their money at one point. But, today, as the FDIC makes moves to fulfill their part of the bargain, panic-driven people are proving that they don’t trust the guarantees that made them feel so secure in the first place.

What has changed to cause these people to panic? Certainly, the general economic conditions of the day aren’t favorable, and the bank has shown a lack solvency, neither of which would muster much confidence in the average consumer. Even so, weren’t these distinct possibilities when accounts were opened and monies were deposited? No one likes to lose out and good stewardship demands that we do what we can to protect and increase our resources. But, when things do go differently than we hoped or planned, what should we do as good stewards to rectify the situation?

Key Points

• Faith begins with self interest. Fear is the enemy of faith, and therefore, acting out of fear is never an act of faith and can never produce the needed or desired result. Fear is an emotion that is meant to warn us of potential dangers and help us determine how to handle those dangers. It is meant to help us consider the options before us and navigate our course rationally. But, most people allow fear to lead to panic and irrationality. In the name of protecting their prosperity, people make moves that will almost certainly lock them into a life without prosperity.
• Panic and irrationality lead people to forget where real value lies. If the bank fails, if the dollar fails, if the entire system fails, each of us will still have the talents and knowledge that we have always had. We may have to adapt how we apply our talents and knowledge in our new situation, but we will still have the ability to create value, exchange it with others, and find value in the ensuing relationships.
• People standing in line will likely get their money back, but will either cling to it and not put it to good productive use (the hoarding mentality of so many of the Depression Era), or they will put the money at continued risk, speculating in other areas in hopes of recouping lost profits. Neither option has the power to create prosperity for these people. Both options place value in the physical reality of dollars—an option which leaves these people as slaves. They have no ability to control the market value of those dollars, and are therefore captive to the market swings of those dollars. If the dollar becomes completely devalued, they will be left with worthless papers and the big question of who is to blame for their bitter situation.

Conclusion

Loss hurts. But the amount that it hurts is entirely up to us. We can choose to be victims of bad situations and be tossed about by them. Or, we can take stock of that which we still have and determine how to produce with it. Money, the great distracter, has nothing to do with that decision. Which kind of makes sitting in line at a bank seem a little silly.

Action Items

1. Learn to eliminate fear and apply true faith to your financial decisions. (This DOES NOT MEAN hoping really hard that an investment will work the way you want it to.)
2. As best possible, know the potential positive and negative outcomes of an investment before you choose to make it.
3. Determine if the worst case scenario is something that you could live with and learn from.
4. Determine how you will recognize if the investment is faltering. What leading indicators should warn you that things are heading south?
5. Determine what your exit strategy would be if leading indicators showed the likelihood of the worst case scenario coming to fruition.
6. Recognize from the get-go that whether you recoup all of your money and expected profits or not, the risk of the investment was something that you chose to assume. In similar fashion to John Galt’s refusal to accept unearned guilt or profits, vow to never blame others for your gains or your losses on any investment.

MRFC Principles: (2, 3, 4, 5, 6, 7, 8 )

Source: Hundreds Demand Money From Failed California Bank, Associated Press, as seen on FoxNews.com, July 15, 2008 http://www.foxnews.com/story/0,2933,383341,00.html

“It’s Not a Tumor!”

SALT LAKE CITY, UT | 12 July 2008 | Ten years ago, a good friend was diagnosed with highly advanced brain cancer. The doctors told the family that there were some tough choices to be made. The tumors had grown to the point that standard treatments wouldn’t slow their growth. Their placement within his brain was such that any surgical attempt to remove them would do more damage than good, and he likely wouldn’t survive the procedure. Even if he did survive, he would probably die of complications within a few short years. Weighing the options available to them, the family decided to let the cancer run its course. They felt that the exorbitant cost of questionable surgeries and procedures was unjustified. They loved this man and were sad to see the end draw near, but wisely realized the futility of trying to intervene and determined to make the best of what they had.As part of FDR’s cavalier New Deal that was going to save the nation’s economy, Roosevelt injected steroids into the mortgage markets without concern for their carcinogenic effects. Today, the doctors are telling us that we have some tough choices to make because the cancer is here and the tumors are inoperable. To get a picture of how large the tumors are, imagine the combined size of Countrywide, Bank of America, Citigroup, Washington Mutual, Wachovia, Wells Fargo, and every other banking name, that you can think of. Now imagine how big you would have to be if you were the organization that all of those banks depended on. Then throw in some unregulated government spending and you have the approximate size of these tumors.

In 1938, the Federal National Mortgage Association (Fannie Mae or FNMA) was created as a government agency to create liquidity in the failing mortgage market. Then, in 1968, Fannie Mae was privatized—not because the government shouldn’t be messing in private market matters, but because Fannie Mae’s numbers were messing up the Federal Budget. In the same year, congress chartered the Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC) as a private corporation to provide competition to Fannie Mae’s 30 year monopoly on the secondary mortgage market. Nothing like fair, open-market competition between Uncle Sam’s step children, is there?

While both Fannie Mae and Freddie Mac hold the status of being Government Sponsored Entities (GSE), they are technically private institutions. As GSE’s, both enjoy relaxed regulatory guidelines, so they hold an obvious upper hand in the competitive market place. So much so that virtually all privately owned lending companies base their guidelines on standards set by Fannie and Freddie.

And now, even with that competitive advantage, both organizations are on the verge of collapse. Ironically, their collapse is being blamed on current mortgage market conditions, when in reality, the presence of GSE’s in the market-place is one of the leading factors in the meltdown. Lenders, borrowers, and investors have poured money into the system based on the mistaken belief that FNMA and FHLMC are backed by the government. They are not. That false sense of confidence and security has led to over-extension of credit and speculation. FNMA and FHLMC are companies that were created by a government inexperienced in that field, with dollars that weren’t theirs to spend in the first place. Had either company had an honest start in the market place, they would have likely collapsed decades ago. Instead, we have an entire market segment that is based entirely on unsustainable foundations. The foolish man built his house upon the sand.

Yesterday’s news was that if the two lending giants were to collapse, there was little that the government could or would do for them. This morning’s news is that, in rethinking the ramifications of that collapse, the government feels we need to preserve these tumors. The foolish man tried to rebuild his house on the sand.

Key Points

• The creation of FNMA and FHLMC using tax payer dollars was an extreme violation of principle (Principle 9, to be specific), and was therefore destined to fail.
• The government is saying that the cost of bailing out either or both groups will have to be passed on to tax payers because it doesn’t have the money.
• The bailouts will only provide a temporary fix and will simply delay the inevitable at an extreme cost to the American people.
• To put this in greater perspective:
  • The total cost of war on terror through end of 2008 is estimated at $752 billion.
  • The high-end potential cost of bailing out private mortgage companies is estimated at $250 billion.
  • No one knows the exact cost of bailing out Fannie and Freddie yet, but they own and/or guarantee around $6 Trillion in loans. That’s 8 times larger than the current cost of the war on terror, and 24 times the cost of bailing out private mortgage banks.
  • While it is not likely that both organizations would be bailed out for every dollar they owe, the level of their insolvency is growing daily.

Conclusion

Allowing FNMA and FHLMC to fail will bring dire ramifications. The entire lending industry and all investments tied to that industry will experience major setbacks. This will affect other seemingly stable industries (such as the insurance industry) that invest heavily in mortgage-backed securities, and it will have direct impact on the stock market and value of the U.S. dollar. Trying to save FNMA and FHLMC, however, will bring much greater problems. Both organizations will still likely fail in time. They will just do so at a much greater cost to tax payers.

Action Items

1. Learn more about seller-carried financing and other lending options that aren’t connected to government lending agencies.
2. Write your congressman and express your concern that spending more to save a dying patient will only multiply the problem.
3. Develop greater levels of self reliance in your life by studying the Principles of Prosperity and learning to effectively apply them.

MRFC Principles: (4, 5, 7, 9, 10, 11, 12)

Sources

Letter to Committee on the Budget, Congressional Budget Office, February 11, 2008.

Mark Zandi, A Mortgage Bailout Would Cost up to $250 Billion, Wall Street Journal, February 27, 2008.

How Do You Celebrate Independence?

HIGHLAND, UT | 4 July 2008 | Ah! The Fourth of July! That great mid-summer holiday. Full of parades and beauty pageants, fireworks, barbecues, 10k races, pancake breakfasts in the park, and flag raising ceremonies. This is what this holiday is all about, right? Oh, and thinking about the signing of the Declaration of Independence (whatever that is). I sure am glad those guys did that in summertime so we could have such an awesome party.

Independence Day is also a day to reflect. Do we recognize the price our Founders paid to win their independence? Do we know of the struggle leading up to that great event? What do we know about those men? Do we buy in to the image so prevalent today that they were philandering old men or have we done our homework and recognize their virtue? Do we just spend our day lounging around, getting drunk, and exercising the inner urge to blow things up?

The Founders started a revolution, but they did not complete it. They recognized it would take many generations to complete what they started. Yes, they were able to validate their declaration of political sovereignty; but their revolution was so much more. They subsequently created a government to transcend the ages, one which had never been tried before. One which honored the individual and allowed the individual to govern himself.

The Founders revolution included three areas. The first, most well-known is the political revolution, discussed above. The basic premise is that man is able to govern himself and doesn’t need a king or elected officials to tell him what to think and how to act. How are you doing? Do you govern yourself or do you allow others (political leaders, bosses, Kommissars*, etc.) to control your life? Second, this revolution was one of religious freedom, or freedom of conscience. Finally, to be a citizen of a nation an individual did not have to be the member of a certain church. He could choose for himself, according to the personal belief system within his own mind. The third portion of the revolution is economic. Through capitalism people can freely exchange with one another, individuals can do more than just live paycheck to paycheck. They are free to discover their life’s missions and to pursue those with that same freedom of conscience and to strive to leave the world better than when they entered it.

This revolution—all three portions of it—are not intended only as a collective revolution; it is a personal revolution. So how are you doing? Do you understand the purpose of the revolution? Do you live the revolution, or are you just living paycheck to paycheck, getting up when others say you should, going places others say you should, thinking the ideas others say you should? Or do you practice your own autonomy? Are you actively engaged in a personal revolution? Do you celebrate independence all year long, or is it a 0.27% of the year?

MRFC Principle:

*German spelling used intentionally for effect.

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