Archive for May, 2010|Monthly archive page

Some musings on my business, and the KYA Quiz

This week, thanks to the Globe & Mail, I became aware of the existence of a prototype “Know Your Advisor” quiz being developed by a pretty neat blogsite,, run by a mutual fund executive by the name of Preet Banerjee.  The idea is a takeoff of the Know Your Client form, which in the investment industry is ideally the final product of a fairly thorough discovery session in which an advisor/planner helps a prospective client gauge their understanding of their objectives, their attitude toward risk, and so on. 

If you’ve not noticed, or I’ve neglected to say it before – my primary occupation is working as a financial planner for one of Canada’s Big Five banks.  The financial planner term sometimes isn’t accurate because a large number of the clients I see are neither seeking nor require complex financial planning, and in the role I have, if they are really complex needs I really just play a sort of quarterback role to get them to the right relationship manager.  What I really get paid for is consolidating investment business, and building the foundation for some manner of financial planning.

I took a look with great interest at Mr. Banerjee’s quiz.  As the Globe writeup (it’s here if you’re interested in seeing it) says, Banerjee’s a cynic of sorts.  But I think his quiz, despite supposdly being “food for thought”, isn’t entirely helpful to those who are trying to gauge the investment advisor they’re meeting.  First, the term is not well defined, nor is the target audience.  In my experience of about 10 years in the industry, the term investment advisor refers to a full-service broker.  These people will generally have no interest in talking to anyone with investible assets of less than $250,000.  Not ones worth paying for, anyhow.  Even at that level, it’s mainly rookies trolling the market to build their books.  The reason is simple.  There’s no way to make a decent living from this type of client building portfolios other than with mutual funds – or charging higher than necessary fees.

If the quiz, however, is meant to discuss financial advice providers in general, then I have some insight.

I took a look at the quiz itself and the scoring key and I wondered how useful it was from what I’ve seen in my own practice, and here’s what I think.  The quiz puts an incredibly high weighting on certain designations and capabilities that do not apply to most investors.  For example, it favours holders of the Chartered Financial Analyst designation quite heavily.  Few of them are actually involved in selling investments, those who are generally are found only in the discretionary management side of the business, the realm of $1million+ investors.  Expecting that the average family would need or be able to expect the services of a CFA directly is sort of silly to me.  The CFAs are to be found managing funds they buy more like.

It seems since I read it, there’s been some changes.  One of the biggest issues that comes up in a lot of articles on advisors is about compensation, in particular commissions, something that I think is often misunderstood and often problematic.  In my last job I was paid by salary plus a variable compensation system that was calculated in a way so complicated I barely understood it.  In my current role, I’m compensated almost entirely by commissions – or more strictly, advances on commissions which are not payable until the investment has been on my employer’s books for a year.  If the money goes inside a year, I don’t wind up getting paid, basically, they claw it back from me.

When I was on salary I used to hype this fact to my clients because my interests and theirs didn’t necessarily conflict – I didn’t have any incentive to advise them to take risk they shouldn’t, I didn’t really have any incentive to advise them on anything as a means of making more money, save that I’d really like to consolidate their assets, because the arcane variable compensation structure favoured making my book bigger, obviously.

The thing is I do not think commission is a bad thing – and it seems like Mr. Banerjee sort of agrees – like me, he thinks the compensation structure isn’t the problem, it’s the unwillingness to discuss it that is.  I don’t proactively discuss how I get paid with any clients – but at the same time, I don’t refuse to answer if I get asked – though not to the level of detail that the first iteration of the quiz I saw suggested I should.  I won’t go into amounts or anything like that.  Even the people I work with at the branch, who send me lots of referrals, don’t know that, and we don’t share it.  Ultimately, I don’t deal in the great evil of the mutual fund world, deferred sales charges, so the impact on the client really isn’t there anyhow.

It’s DSCs that really piss me off in the industry, because they give a license to an advisor to be lazy or negligent.  They get paid a huge commission (far more than I’d get, even after the house takes its share), and the funds stay on their book likely for a long time, because it costs too much to get away from the advisor.  This is particularly true when it’s a company like Investors Group, Assante, the insurance companies generally, anyone who uses proprietary products that can’t be moved to another dealer.  IG I particularly despite, because in addition to these DSCs they charge atrociously high MERs and most of their reps deliver virtually no service to clients.

Contrast this with me, who has to present a good strategy to a client, match them with a good relationship, and make sure it stays strong for a year so I don’t wind up getting my pay clawed back.  I’m still on commission, but who has the incentive to really look after the client?

Right now I’m working to get employees of a company set up with a group plan with my employer because the previous holder treated them so shabbily.  They had a captive audience and basically ignored them, just collected their commissions and trailers.  I’m trying very hard to make sure that at least for the people I met with that doesn’t happen with us.

The quiz also maligns anyone who can’t deal in insurance, something that I agree with Mr. Banerjee is a vital component of a financial plan.  This is the thing about being in the bank that sucks.  Because of the ridiculous Bank Act regulation that bars our banks from promoting their insurance arms in the bank to ridiculous lengths, while I happen to hold a leading financial planning designation, I can discuss insurance only in the most general of terms and cannot make any concrete recommendations.  Not only that, I cannot refer a client for whom I identify a need to an insurance advisor from my company, unless they ask me in just the right way, in which case I can provide them a “contact card”.  I think it’s probably easier to get into a Mason’s Lodge than for me to follow the letter of the law!

The quiz oversimplifies this issue.  Someone who comes to me will get insurance advice from me and I’ll have nothing at all to gain from it – I can’t make a dime from it, can’t win a barbecue, can’t get anything.  Interestingly enough, though, some of the worse client experience nightmares I hear come from when insurance folks get involved with the financial plan, particular on the investment product side.  They will push more lucrative insurance-based products, even when they don’t make sense for the clients.  I’ve seen some true horror shows – clients with massive Universal Life policies I don’t see any need for.  Clients sold on segregated funds to enable them to avoid probate – where the cost of the segs far exceeded the cost of the probate!

In all, it looks like the quiz is a work in progress, and I have to say, I like the concept.  I’ve never had a problem with presenting who I am, what I do, and what my qualifications are to anyone who asked – I figure I owe that to them.  I have to applaud the effort on it, and the fact that it seems like Mr. Banerjee has taken a lot of constructive criticism to heart.  I think he’s on to something good, and I’ll keep an eye on it as it develops.

The great irony is that the guy promoting it, Rob Carrick, isn’t exactly my favourite financial writer, mainly because he seems to bash a lot of things undeservedly.  He loves things like index funds, ETFs, etc, bemoans mutual funds in general because of the cost – but for most investors, they lack the expertise to manage their own portfolio, and once they hire an advisor, they’re not getting the supposed cost benefits of these products anyhow!  He doesn’t have, to my knowledge, any background or education in the industry either, in comparison to several great writers to be found in Canadian papers like James Daw, Ellen Roseman (actually, I don’t know if she does – but she writes about basic issues and presents them really quite well) , and Tim Cestnick.  Of course, counterbalancing that, there’s people like Gordon Pape and Brian Costello, who wrote a lot about investing but mainly were fueling their own efforts to manipulate markets or pump up junk products.

I guess it’s hard to choose someone to read on the subject effectively, so you need a lot of sources.  I think overall I can defend myself handily against any criticisms leveled against my business as a whole well, it’s why I work where I do.  My livelihood, after all, depends on it.


A Short Musing On Cheap Oil

Between the European fiscal mess, the BP oil disaster, North Korea sinking a South Korean Navy ship, and the fact that the weather in Nova Scotia is just finally starting to get nice, I’ve been unable to really focus on any particular issue or event in the world to really pump out good blog fodder.  (That, of course, assumes that I do in the first place, which may or may not be the case).

I’m on an environmental kick lately though, and I think I have always had that streak.  Right now it’s being fuelled by a few desires – mainly market signals, which are to someone who likes the idea of markets creating allocative efficiency, is good.  I made what I think is a very wise decision a while back to buy a diesel-fuelled car.  At the time I bought it, I had a fairly long commute and ideas about great long roadtrips, and the fact that it gets far better mileage was something I welcomed.  In fact, my biggest grip at the time (October 2005)  was that there were so few diesel models on offer in North America.  Europe has always been far ahead of us there.

Diesel engines, of course, are not really as clean as gasoline engines, litre for litre of fuel consumption – but the advantage comes from using less fuel per kilometre travelled.  I have two Volkswagens – a Rabbit and a Jetta.  The former is gasoline-engined, the latter diesel.  The Rabbit’s a little lighter in curb weight but uses about 50% more fuel for travelling.  I know this because I’ve been using an iPhone app to track it, just out of interest mostly, but also in the vain hope that I’ll be able to claim some of it as a tax deduction.

The whole thing about markets and what I was starting into last night is a belief I have that we don’t pay anywhere near adequate cost for things like fuel – particular petroleum and other non-renewables.  The simplistic solution is to use taxation to adjust the cost to something more realistic and then use the tax revenues toward remeditation.  Great idea, but I can already hear the more reasonable complaints, and I’d echo them – the funds wouldn’t go into remediation or alternatives, they’d go into general revenues and be squandered in the manner practiced so effectively by governments.

I saw the same thing living in Ontario with the Liberal Government’s “OHIP Levy” that “wasn’t a tax”, even though it was determined by income and collected by payroll deductions.  The money didn’t get earmarked specifically for healthcare, it just went into general accounts and disappeared with no real explanation.

Never mind that jacking up the price of a significant input without good alternatives would be economically very destructive and probably counterproductive in the end.  We need to have a little more complex and working solution that that – it’ll take thinking, something that some in the realm of politics seem woefully unwilling to do in any way.

The trick, I would think, lies in expanding the range of alternative fuels available, and alternatives to driving – rail and other mass transit infrastructure.  Until they become more accepted they’d need some subsidization or tax incentives to expand.  This is something that is being tried in Canada, where monthly transit passes attract a federal tax credit – but it’s on the lowest tax rate of 15.5%.  I’d like to see the passes attract a higher credit rate – maybe against the maximum federal income tax rate.

At the same time as this expansion happens, there then can be efforts to disincentivize driving – at least in areas where there’s effective mass transit.  The issue that I can see with the idea of promoting alternatives to driving is that they work well in urban areas, but in a country like Canada – or the United States, too – where there are huge amounts of people living in rural areas where transit simply isn’t an alternative, is that you’ll punish those folks – and the resentment will build quickly.

It’s not an easy thing to think through – how to get us off our addiction to cheap oil, when the alternatives are slow coming and not universally available.  It has to be something one feels in the wallet in order to create incentive to change – but how to make it happen without causing too much adjustment pain.  Or maybe, just maybe, we have to consider that the pain is necessary and just take the big shock at once, get it over with, like ripping a bandaid off – but I don’t think that’s possible given the amount of things that would change quickly.

The trick is to find that sort of balance that allows us to wean ourselves off – the incentives to develop alternatives to oil, and to find ways to maximize what we have – the ways in which we have wasted the resources over the past 150 or so years – making lots of cheap plastic junk, burning off usable gas as a byproduct, building ridiculously inefficient cars because it didn’t matter, all of that has to end and be used as a base point from which to improve.  We’ve put people on the moon, we have to be able to solve this sort of problem, surely.

A Bit Of A Ramble

I’ve spent the last view days working more than anything else, and as a result I haven’t really felt like I’ve had a lot to say. I’ve spent most of my time and effort on Twitter, which hasn’t been much to begin with, doing battle with creationist fools, which seems to be something I rather enjoy, but in a strange way. Strange because I’m truly horrified both that people can be as ignorant as they are, but moreso that they may actually wind up with influence.

They confound me for the simple fact that anyone can be so stupid – and yet -they simply refuse to see the facts before their eyes, jumping from silly fallacy to silly fallacy without any thought.

What I’ve really contemplated lately, though, is the idea of liberalism and something I’d not heard of until Rand Paul’s emergence in the Kentucky Senate race down south, the idea of “paleoconservativism”. I think I’m trying to understand how people like Dr. Paul can be tagged as libertarians, when they seem to abide an astounding amount of government interference in certain aspects of society.

I for a while thought I was something of a libertarian. At least in the broad view, I like to think that the government should have a pretty minimal role in my life. I’d like to think that only where the free market, the entrepreneurial spirit fails that government has a role to play. There’s a number of places that markets don’t work optimally – roads and other public works, defence, that kind of thing. For those things, obviously, we need a tax system and everyone to pay in to make sure that market failures are addressed.

I’ve realized since having those ideas that the free market is indeed not totally workable, because the cost structures that exist in the market in its current form do not work. I came to realize this when I started to take more interest in the environment, something I think that was first cued when I was living in Costa Rica and the idea of trading carbon credits was getting going. The whole concept which is now morphed into the idea of “cap and trade” and various other names seemed to have originated there, insofar as I never heard of it anywhere else. Costa Rica was trying to use the idea of selling what are now known as “carbon offsets” to raise capital to preserve its own forests.

The problem as I learned about it is that markets do not adequately incorporate some costs into production. For example, the cost of disposal of a product at the end of its useful life, the cost of the impact of pollutants released during manufacture, transportation, etc. These sorts of real costs with real impacts are not actually built into pricing and therefore not taken into account by the market in setting allocations.

This is something I think we’ll need to get a good handle on in order to actually improve our ability as a civilization to live more sustainably. The fact that we cannot reckon costs effectively is the main reason we make what are essentially poor decisions about how we use resources. This is something that will take innovation to address.

Back, briefly, to these so-called libertarians before I get onto the whole matter of environmental economics.

The whole concept of libertarianism is that the role of the state in the lives of free people should be as little as possible. I’ve always understood this to mean that there should be as little government as possible, and that its power and influence should be extremely limited.

So, then, in my estimation, a libertarian should be pro-choice, since the government shouldn’t have an role interfering with one’s own body. It should be pro-equal marriage , or if not, then it should not allow for the existence of laws which discriminate in any way against those who are unable to marry – no tax advantage, no preference in treatment at all at law should be abided by them. As for immigration – given that it is a function of the free labour market, libertarians should find themselves unable to justify a large state apparatus set up to fight “illegal” immigration. After all, the reason that migration happens is simple – supply and demand for labour. Where better jobs exist at better rates of pay, labour will move to maximize their utility.

Funny enough, this sort of stuff doesn’t seem to make sense to a lot of supposed libertarians, many of whom thus wind up in the “paleoconservative” column instead.

What I’ve come to realize in considering these things is that, as I’ve stated before, I don’t think I have a specific spot on the political spectrum. I’m generally a fiscal conservative (which is different than being a conservative, most of whom seem to be remarkable non-conservative), while thinking that broadly there’s no need for government to intrude into social issues, save to address market failures. I see no reason, for example, for government to oppose the idea of equal marriage, when marriage to me is simply a legal/social arrangement for a couple. What really matters when gay couples are fighting for equal status is the impact that the relationship has on things like access to their loved ones in hospital, division of property on the breakdown of relationship, and various other common law concepts. I couldn’t care less if religions oppose the idea. Sadly, we haven’t reached a point in society where we can look back at religion and wonder why we bothered, but I hope within my lifetime that will be the case.

So what do I think government should be able and stand ready to do? Address market failures – things like making sure that the true costs of goods brought to market at clear and reflected in the process that allows us to make decisions. I think we’ve not done particularly well with this as a society, yet – but not for lack of trying. In some ways, we have. When I get an oil change for my car, for example, I’m charged a fee which goes toward making sure the oil is disposed of properly, and to address pollution issues (at least, that’s the explanation for it – and whether these work in practice is somewhat the issue I’m trying to explore).

We have a variety of laws now that require better stewardship from industry, but they don’t necessarily work well. And there’s constantly political pressure to overturn them, to limit them, to make them toothless. Consider the law in the US which is going to cap BP’s liability for the disaster they’ve created in the Gulf of Mexico at $75MM, a paltry amount given the amount of damage that the Deepwater Horizon disaster is going to deal to the environment and the economy of several states by the time it’s done. There’s no way that will likely even begin to address the mess.

We have examples of the cost of not looking after these externalities everywhere. Near where I live now a massive project is underway to clean up the Sydney Tar Ponds, a vast amount of waste from coke ovens and a steel mill. This site, on a tidal estuary, is contaminated with a myriad of chemicals, and the mess was made worse by the fact that even when people realized the problem nothing was done, and according to some sources, it seems as though more waste from other sources was just dumped there. Near where I used to live in Peterborough, Ontario, sits the Deloro Mine Site, a gigantic nightmare – a mix of arsenic laced mine tailings, combined with radioactive waste from uranium refining, all sitting at the headwaters of a river which supplies drinking water to a numer of communities. In the case of Deloro, the owners of the site are corporations now long gone, and the government is holding the bag.

These sorts of scenarios are not rare, not isolated. We haven’t created an effective way to deal with them, to force business to reckon the cost of their impact on the environment. This to me has become something I think has to be a priority for government – moreso perhaps than anything else. We’ve done so much damage, mostly from ignorance, to our own surroundings, and we have to find ways to alleviate the problems.

What staggers me, then, is seeing so many people in denial of this whole situation. Watching people try to deny climate change is as staggering as watching people try to deny evolution. They want people to think that it’s a myth, a hoax, something designed only to make someone an obscene amount of money or something.

Like evolution, climate change is just reality. There is no evidence to suggest that it’s anything but real. As much as some would like for climategate as it was called to have proven that it was nonsense, they were not so lucky.

I guess it shouldn’t surprise me that these groups overlap either. If you’re irrational about one particular thing I guess it’s only natural to be deluded about a variety of things. If you’re going to buy into one insane concept, why not go full bore.

Again, this is the way I come to realize I’m just not conservative. I don’t get how people come to think that government shouldn’t interfere in business but can intrude in private lives. It seems that to so many conservatives there is some desire to be free of government but no problem with religions controlling people’s lives. That just drives me around the bend.

Deluded Creationists, Atheism A Religion?

Nothing really gets my goat like the lengths to which some religious drones will go to defend their untenable cause.  For whatever reason, they remain to me like watching a trainwreck – I can’t stop looking.  In fact, they’re worse.  Not only can I not stop looking, I find myself unable to resist the urge to intervene, even though I really should know better.  The odds of me ever bringing someone so deluded as to be a Young Earth Creationist into the light is probably somewhat worse than the odds of me walking through a concrete wall, which, incidentally, is possible according to a physics professor I had in first year university.  Possible but highly, highly improbable.  (the secret lays in the gaps between all the atoms in one’s body passing through the gaps in the atoms in the concrete wall.

The thing of it is that all I really want these people to do is actually produce the evidence that leads them to believe what they do – evidence that isn’t readily refutable.  I guess that’s asking a lot since there’s no such evidence and that’s the whole reason that it’s all nonsense.  However, the ones I see (and occasionally for whatever reason engage) all claim that they have volumes of evidence.  When asked to produce it they try to claim that that’s them “doing our work for us”.  I don’t get it.  When asked to produce evidence for evolution I can point to a massive body of work – I can point to books, journals, studies, all sorts of things that show that the theory of evolution might as well be taken as fact because it has never actually been refuted, and it probably never will.

They like to then try to shake me by asking how life appeared.  I don’t know.  There’s quite a few hypotheses that anyone interested could research.  Ultimately, my scientific background isn’t that strong and I defer the question to stronger minds on the subject, but again they don’t know for sure.  I personally accept that we likely will never actually know with anything remotely close to certainty – there will always be a mystery to it I guess.  That mystery, for me, is not explainable by any sort of supernatural deity – it’s just a phenomenon.

One of the more interesting tacks one of these fools takes is making the claim – and wanting us to admit that first of all evolution is equal to atheism.  It’s not, though.  The Roman Catholic Church, which employs a host of scientists and whose universities since the Middle Ages pursued much research, has basically decided that evolution as origin of species is true – and thus has moved the study to their concept of “soul” as the divine creation.  This is the crux of the idea of non-overlapping magisteria that Steven Jay Gould advocated.  I have ultimately no issue with whatever they want to believe so long as they aren’t trying to teach people that the world is 6000 or so years old like young-earth creationists are. 

The most interesting thing about YEC types is that their movement takes the view of science that Mormons take of history – something best not questioned, for lack of a better way to put it.  It’s interesting that some of its leading advocates seem to share an interesting “qualification” – a criminal record.  Funny how that ties into religions so much, isn’t it?  More interesting is that most of them have no actual education, despite the fact that they might claim so.  Kent Hovind, for example, the so-called “Dr. Dino”, holds a “Ph.D” from a dubious sectarian college with no real qualification/accreditation.  He likes to throw around the term Doctor when apparently most people with Ph.Ds – actual ones from real universities, tend not to do so.  I guess it’s to add an air of credibility to the bullshit he preaches.  Despite lofty sounding names like “The Institute For Creation Research”, I don’t see much actual research being done by them.

It seems one in particular, a man who has no evident scientific background, seems intent on trying to make a claim that “atheism is a religion”.  To this end, he’s actually written a book of that name.  While he plugs it endless on the web, in a sort of pathetic, quixotic way which includes whining via Twitter to such lofty characters of Glenn Beck, S. E. Cupp, and Bill O’Reilly, he won’t actually flesh out any of his arguments to us to try to take apart.  It’s an interesting thought though.

The Oxford English Dictionary defines atheism is “the belief that God does not exist”.  The Random House Dictionary expands the definition somewhat, offering two definitions, the first being “the doctrine or belief that there is no god”, the second being “disbelief in the existence of a supreme being or beings.”  The second definition is a little broader – seeming to encompass the rejection not only of a the Abrahamic god, but any supreme beings, monotheistic or polytheistic. 

As for religion, Oxford says it is “1 the belief in and worship of a superhuman controlling power, especially a personal God or gods. 2 a particular system of faith and worship. 3 a pursuit or interest followed with devotion.”   Random House’s definition is again different and somewhat more comprehensive, and includes “1. a set of beliefs concerning the cause, nature, and purpose of the universe, esp. when considered as the creation of a superhuman agency or agencies, usually involving devotional and ritual observances, and often containing a moral code governing the conduct of human affairs. 2. a specific fundamental set of beliefs and practices generally agreed upon by a number of persons or sects: the Christian religion; the Buddhist religion”.  There are other parts to the latter, but none of them really have any bearing on the matter at hand.

So with these definitions taken together, I don’t see how anyone could claim atheism is a religion, not within the constraints of any definition in the English language, anyhow.  It has no superhuman controlling powers.  It has no system of faith or worship.   The first RH definition might come a little close, in saying that it is a set of beliefs about the origin of the universe, but really, atheism taken alone is not.  I don’t see any set of universal ideas about the origin of life among atheists.  In fact, most like me have no idea how life originated, only a number of hypotheses put forward by scientists which probably can’t progress beyond that point.

Simply stated, it’s quite a stretch to make any definition of atheism fit any definition of a religion.  In colloquial use it’s clearer – we view atheism as the absence of religion quite often.  While not technically correct it is a somewhat fitting description.

The whole thing seems to turn, for these particular type of religious folks on a semantic argument.  If I believe there are no gods, then that is a belief which then is a religious view in their opinion.  Suppose I accepted that to be true – I would then say that my religion is anti-religion – in essence, I believe in the existence of nothing.   How, if at all, does that advance any cause they have.  If I concede that atheism is my “religion”, then I fail to see what the next logical step for them is.  The individual most strongly making the assertion claimed that if we concede atheism is a religion, then “you can’t say you are neutral, unbiased, standing on sideline, but you have a horse in the race”. 

When did I claim to be neutral, unbiased, standing on a sideline?  I’m not.  I’m not neutral, I’m fervently anti-religion and pro-science, rationality, reason.  I’m not unbiased, there’s no such thing.  And the very fact that I aggressively pounce on these idiots is a pretty strong suggestion that I do in fact have a horse in the race (whatever race it is, that I’m not sure about).  I have a stake in this because I do not have any interest in living in a Dark Ages theocracy.  I don’t want religious fools controlling my destiny in any way, shape, or form.  I don’t want them poisoning young minds with their anti-science ideas.  I don’t want their quirky view of the world in any way imposing itself anywhere I happen to be.  I want to live in a society completely free of religion, and I have no problem stating that I want that, and that’s why I engage these people.  I make the exception that those who have some kind of personal religious belief that they keep to themselves and as such doesn’t impose on me, I don’t bother.  There’s no need, it doesn’t accomplish anything further to my stated view above.  If it’s their own ideas and isn’t impacting policy, or my life, then I couldn’t care less really.

So what is it then that drives this guy to make the claim, if I’ve told him now that it doesn’t matter – that his claim doesn’t make sense to begin with?  I’ll have to see, I guess.

The Military Sacred Cow

Lately there has been a fair bit of political hay made over the state of defence spending globally. Whenever an economic downturn happens and tax revenues fall, governments are forced to try to find savings wherever they can in order to keep budget deficits from spiralling out of control. With the global recession in 2008 we saw many nations experience a perfect storm of economic contraction, falling tax revenues, and the uncomfortable reality of needing to pump stimulus funds into several flailing industrial sectors.

What has now lately emerged in the United States is some controversy about a few policy decisions taken by President Obama which has prompted some serious consideration of the impact of defence spending on national economies.

In the US in particular, the military consumes an absolutely massive amount of resources. Someone recently told me that about a third of US tax revenue goes to funding the Armed Forces. It seems that this is the military-industrial complex of which Dwight D. Eisenhower warned after WW2. When the Cold War took the place of heated conflict, Ike saw the danger of focusing so much economic activity on the pursuit of ever newer and ever more powerful weaponry. The arms race between the US and the Soviet Union nearly bankrupted both nations as each sought to build a massive arsenal with which to deter the other’s ambitions.

In particular, what Eisenhower was concerned about was a sort of corporatism where the influence of the defence industry trumped that of the public in the eyes of the government, where they gained the sort of influence that in the classic economic debate of “guns or butter”, guns one every time. This isn’t hard to see happen. Military procurements are a tremendous form of pork and can have the perverse effect of giving the armed forces equipment they don’t even want or need to satisfy political goals. Canada’s LSVW truck is often pointed to as an example of this kind of development.

What astounds me is how supposedly fiscal conservative Americans in particular seem to want to treat the military like a sacred cow and treat any effort to contain spending on it like some kind of astounding act of treason. First I noticed this when President Obama made an agreement with Russia to cut nuclear arsenals dramatically and issued clarification on the circumstances under which the United States would use its nuclear weapons. If you read nothing but conservative extremist commentary you would think that he had renounced nukes entirely, disarmed the US, that sort of thing. Nothing could be further from the truth.

This seems a continuous of the “support the troops” rhetoric that became so commonplace when the United States launched into the disastrous quagmire that is the Iraq War. I note with glee that amongst right wingers at the time it was considered unpatriotic and un-American to criticize a sitting President over policy decisions like that war. It seems they have forgotten this when they attack Barack Obama.

I always laugh at the “support our troops” concept because it can be so empty and rhetorical. It was something hurled at left-leaning protestors (or anyone sane who opposed the invasion of Iraq) so as to suggest that not “supporting the troops” was wrong or that whether you agreed with the policy or not “supporting the troops” was key.

I never really understood what supporting the troops actually meant. Did these people actually do anything “supportive”? No. They didn’t question the wisdom of the war in Iraq or the lies that propped it up. They didn’t demand a clear strategy for Afghanistan. They stuck flags and ribbons on their cars and contented themselves that somehow they had done some good. Now, I’m getting off a bit on a tangent – but there are ways this can be good. In Canada, for example, CANEX sells this merchandise and proceeds do in fact go to programs which benefit military families.

Back to the premise though. The reality is that when you look at the US’ military budget, which is almost 25% of the total federal budget, you have to know that there are plenty of ways to cut. There are plenty of capabilities that exist in surplus, like carrier battle groups in the US Navy, costing a fortune to maintain.

Talk about making these cuts though and many get incredibly defensive, as though shrinking the massive might of the US while still being far ahead of the rest of the world is somehow going to make America vulnerable. We’ve already seen that all the advanced F-22 fighters (another program scrapped, thankfully for US taxpayers) won’t end the war in Iraq, nor prevent terrorist attacks, nor support counterinsurgency efforts.

In Canada as well I suspect this kind of reckoning is coming soon. The floodgates for spending opened when Afghanistan heated up, but when the mission there winds down next year, there will be a lot of calls to curb the defence budget particularly since Canada is now in a deficit position. While disengaging from Afghanistan will save DND a lot of money in a lot of different ways, the argument will likely be made that some substantial capital reinvestments will be necessary in order to continue operations – worn out vehicles will need replacing, for example. There may be some challenges in getting this done – and all the while Canada’s Navy and Air Force will be looking for their share of the pie. The Navy, in particular, will probably want to get some attention as there has been no significant investment in them lately. They have an entirely rational interest in keeping themselves relevant and getting the largest possible piece of what is likely to be a shrinking pie.

The more fascinating thing – especially in the case of the US is the quandary of supposed fiscal conservatives not only resisting the idea of shrinking the US military, even while maintaining effective capabilities, but the fact that many of them didn’t see an issue with Iraq war – or more shockingly particularly in the case of the social conservative/religious right, they seem to want to wage war on Iran.

It’d be a whole other post to get into why invading Iran would be absolutely insane and stupid, never mind atrociously expensive and likely unsuccessful by any definition anyhow. I don’t know if this ties into some kind of effort to trigger their end of the world story (the only reason I can see for their “pro-Israel no matter what shite Netanyahu says” position).

The point of this is that I don’t understand the reason that these people blindly defend the unsustainable spending the US military consumes. It’s the one time they seem apt to suspend their fiscal conservative disbelief (and it undermines it altogether anyhow). If you want small government, it starts with getting the military right-sized and focused on its intended role: national defence.

Treating the military like a sacred cow when it comes to fiscal discipline is simply unrealistic. Berating spending on healthcare or education while continuing to blindly shovelling money into the military-industrial complex neither benefits economic competitiveness nor makes a country s better place to live. While it’s important to have an effective defence capability it makes no sense to bankrupt the treasury to maintain a capability far beyond any foreseeable threat.

The Bank Tax

Prime Minister Harper is actually doing his job on one current issue and I’m glad to see it.  He’s basically told the European Union to go pound salt on their plan to impose some manner of global levy on banks as a form of “insurance” against future financial catastrophes.  I support this for a few reasons.

First, primarily, there is the issue of national sovereignty.  I’m very, very wary of the idea of supranational taxes and laws, particularly when they seem to be a sort of punitive measure against a particularly industry.  While the idea might have some merit it must be up to national governments – elected and accountable to citizens – to make such decisions.  While building a consensus among many countries to develop such a system is fine and good, it must absolutely be up to national governments to decide for themselves whether to participate.  While the EU member states may have adopted some manner of supranational governance, Canada has not and should not.

Along that vein, the other key issue is this: Canada’s banking industry is quite conservative and well-managed.  We were the only G8 nation which did not have to bail out its banking sector because Canada’s banks didn’t expose themselves to the sort of nonsense that triggered the nightmares that struck the rest of the world.  The reality was that the effects felt in Canada were primarily the ripples of the problems of other nations.  When Canadian bank stocks tanked, it was a tremendous buying opportunity due to the fact that anyone with knowledge of the industry in Canada would have know (or ought to have known) that the direct impact would be minor.

I will not try to claim I saw it all coming and could have predicted the catastrophe, but even in 2006 I started to wonder about the mortgage market in the USA after learning about how ARMs worked and how Americans in particular were addicted to equity take outs.  When it came to the derivatives market, well, I never totally understood it.  I started the Chartered Financial Analyst designation process a few years ago and remember learning about things like CDOs and other derivatives and the whole thing seemed like sham.  What I’ll call “first derivatives” – puts, calls, futures – that stuff made sense, they have a good role to play in the financial sector but I never got the second, third, and beyond derivatives.  It seemed like a house of cards to me then – and well, it of course turned out to be.

The next concern I have is the classic insurance dilemma, the moral hazard problem.  The IMF’s “Financial Stability Contribution” is essentially just an insurance fund.  While the IMF claims it will discourage taking risks, the reality is that insurance in fact does exactly the opposite.  Just like bailouts, insurance distorts perception of risk because the expectation of indemnification means that the risk’s potential payoffs are more likely to outweigh the potential costs.  I touched on moral hazard problems in a previous post about health insurance.

The second IMF proposition, the Financial Activates Tax strikes me as similarly ridiculous.  It annoys me to no end that people villify banks for having the audacity to a) make money and b) pay their people well for doing so.  The whole concept of our economic system is the pursuit of profits.  Having worked in retail banking I was constantly infuriated by people thinking we were some kind of public service not entitled to make a profit for providing the services we provide.  I do understand the anger that people had at the amount being paid out to top dogs at companies that had to be saved from failure – and I had no problem with the US government’s effort to cap salaries and bonuses at firms which took bailouts – but a special, permanent tax?  That makes no sense to me at all.  To the best of my understanding, this would be on salaries in general.  Banks pay their employees extremely well in Canada, and a tax like that would actually incentivize cost cutting wherever possible.  There’s nothing particularly smart about that to me.

Not imposing such a tax could support the expansion of foreign banks in Canada, something which was anticipated when it became clearer that Canadian banks were going to come through the last crisis so strongly.  I’d personally love to see that happen – both because presumably any foreign bank locating itself more in Canada would have to play by our rules, and presumably, they would create more good-paying jobs.

I think overall I like the position that Bank of Canada Governor Mark Carney expressed in today’s Globe And Mail – that the whole bank tax discussion is a distraction from real issues, and ridiculous to begin with (I think he said “foolish”, actually).  I, like him, would prefer to see efforts to develop better regulatory structures for the industry.  It would seem like Canada would be a good place to look for ideas there, since we seem to have done a pretty good job of that.

Overall I don’t think tax measures are particularly effective means to control any particular business practice.  Excessive taxation just increases incentives for businesses to relocate to more tax friendly jurisdictions.  There’s a reason, for example, that U-Haul’s corporate headquarters is located in Arizona (and all its vehicles registered there).  There’s a reason why so many US corporations are registered in Delaware.  There’s a reason why most merchant ships fly flags of convenience like Liberia, Bahamas, etc.  Imposition of taxes creates incentives to avoid them, and I don’t see this being any different.  Investment banking will simply head more offshore to less regulated jurisdictions.  There’s no reason to believe otherwise.

I’m firmly convinced that well-thought out, practical regulation will suffice to help stave off a similar crisis.  It’s naive to believe that there will never be any further financial and economic crises, there will be something else (likely in 5-7 years, that’s just how it goes), but at least we can prevent a repeat of the kind of catastrophe we just saw.  The reality of the world is a reasonable free market system is the best way to deliver allocative efficiency, so heavy-handed regulation is not in anyone’s interest, but that doesn’t mean that the market can’t be massaged through prudent rules.

My Trip – Or How I Know The Terrorists Have Won

Well, I didn’t write a post on the Toronto-Ottawa leg.  It was too short to bother, anyhow.

Arrival was fine, got my bags in only a few minutes, got the ferry off the island, and took the shuttle downtown.  Walking up to breakfast at Cora’s I swear 50 caps honked and waved me over, making me wish I had a sign that said “I don’t need a cab”.  Good to see my friends I met for breakfast, walked down to Union Station with the intent of locking my bags up somehow, and going to play tourist a bit in what is for all intents and purposes my hometown.

And there I learned that the terrorists have indeed won.  There are no longer any lockers in Union Station and the only way to check bags there is to be a Via Rail passenger.  The info service at the station was utterly unhelpful save to suggest I could drag my stuff to the Metro Toronto Coach Terminal which might still have lockers.  Not really a good solution.  So I worked out an alternate plan, jumping a GO train (Toronto’s rather excellent commuter rail system) to Pickering where I used to work, dropped bags there, visited old colleagues, retrieved home theatre receiver that was in for warranty service before we moved, and then met a friend who gave me a ride to Oshawa where I went for drinks and then met another friend who gave me my ride to Peterborough.

Today’s parade went well, last night into long discussion about various current military affairs – about Afghanistan, about the direction the Army is taking over the next few years (we think, anyhow), all kinds of things like that.  When Canada’s current role in Afghanistan ends in 2011 it’s going to be very interesting to see what the Canadian Forces does next, not that I have really any idea, nor do I plan to speculate much.  The conversation was improved substantially by whiskey of the finest in the greatest traditions of the Regiment.

I think Monday I’ll get to the airport nice and early, check my bags early (have to call Porter and see what they can do about that) and then I can play tourist until my flight leaves.  I’ll have a little time anyhow.

Tonight, I think I’m just spent.  I’m going to find a comfortable couch in the officers mess and get me some sleep…