Parental Benefits for the Self-Employed

The government has proposed an addition to EI: parental leave for the self-employed.

However, there's no EI for the self-employed if they lose their job and can't find another. This policy means that the only way the self-employed can get EI is to have a baby.

The old argument was that you couldn't let the self-employed participate in EI because the worker decides when to work and when not to work. However, self-employment is a lot more complicated than that now. We have multi-month contracts that are renewed on a rolling basis. We have to work through agencies so that the companies can protect themselves from civil suits or government regulators, since we are essentially regular full-time employees (who just happen not to get any holidays or benefits). The business of self-employment has become so bizarre lately that the agency I am forced to work through deducts EI from my pay cheque but I am not eligible for EI.

This proposal is not just unfair to the rest of the self-employed. It's also unfair to all those regular employees who pay into EI. If the self-employed are not paying into EI, then why is EI being used to provide parental leave for them? If they do this, why not use EI to pay for other government benefits wholly unrelated to paying in?

This new proposal by the government just reeks of pandering. It has no relation to good policy or fair policy.

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Labour Day

This Labour Day, I call on all workers to resolve to do their jobs better.

Unions, I call on you to root out corruption in your ranks. It is your right to defend your members when they're accused of wrong-doing, but it's your responsibility to safeguard against their doing wrong.

Government, I call on you to find a way to reform your relationship with civil service unions, and to make commitments to ensure that all Canadians get the same benefits as your unionized employees. Further, you need to strengthen employment regulations to protect workers - all workers, including part-time and contract.

Corporations, I call on you to operate for the benefit of shareholders, employees and society - not for the enrichment of the handful of people at the helm.

If we all took seriously the need to do better, what a world we could have.

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Bike Couriers, Road Rage, and Tragedy

Following the death last night of a bicyclist near Bloor and University, the Globe & Mail is having an online discussion tomorrow about the issue of bike safety in Toronto.

Former Ontario Attorney General Michael Bryant is facing charges as a result of the death of bicycle courier Darcy Allan Sheppard. We don't know all the facts yet about the incident, but one thing appears clear: this is not a typical bike safety story. However heinously the driver reacted, the altercation started, according to witnesses, when Sheppard slammed the hood of Bryant's convertible with his pack and then grabbed the rearview mirror. It sounds like Sheppard attacked Bryant.

I'm not excusing Bryant, who then (again, according to witnesses) tried to knock Shepherd off his car, thus causing his death - but this isn't a one-sided tragedy.

I used to be a bike courier in Toronto (a long time ago) and I was appalled by the attitude and road behavior of some other couriers. The ironic thing is that the real insiders in the bike courier business get cushy routes and don't cycle that far. As a non-insider I was biking furiously all over town while the guys downtown had a two or three block radius of deliveries and spent a large part of their working day hanging out at a sandwich shop.

There are loads of horrible drivers in Toronto, and they're especially dangerous at rush hour when they're tired and hungry and want to get home. My life was endangered numerous times by drivers who were total jerks - who were essentially psychopaths in their utter disregard of the lives of bicyclists they shared the streets with.

But it's not going to make the roads any safer if we polarize the participants by misrepresenting this tragedy. Before we start drawing conclusions, we need to hear the whole story. This may be a case of road rage and a driver murdering a cyclist, or it may be a case of a driver in an open car fearing for his safety when attacked by a bicyclist. Or something inbetween, or something altogether different.

Update: Christie Blatchford wrote in the Globe tonight that "the cyclist will always physically lose in any contest with a car". That's simply not true. There was a case in Toronto a couple of years ago of a shouting match between a cyclist and a motorist, and the cyclist killed the motorist with a knife. If you're in a convertible and someone attacks you, you're pretty exposed. In this case, the developing story is that the cyclist was drunk and his girlfriend had called the police earlier in the evening because of aggressive behavior; a witness says that the cyclist tried to strangle the driver; and the driver called 911 before trying to shake off the cyclist.

Update nine months later, when charges were dropped: Prosecutor's report

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Driving Around Mennonites

There were two stories this month about Waterloo Mennonites being killed in their buggies by cars. (Here's one: Woman dies of head injuries after horse and buggy crash.)

I live in Mennonite country, and given the callous driving I see every day, it's a wonder that more buggy riders don't die.

Many, many people drive carelessly around horse-drawn buggies. There is simply no excuse for it. Part of the problem could be in a lack of public education.

When I went to driving school, I was taught that you pass a horse-drawn buggy you must give them wide berth, and only return to the right lane when you can see the entire buggy in your rearview mirror. I rarely see anyone else doing that these days. If there is oncoming traffic you just have to slow down and hang back. It's monstrous that many people seem to value a minute or two of their time more than the lives of other people.

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The High Price of Medicine

More money is spent in the pharmaceutical industry on advertising than is spent on research.

- Devra Davis, author of The Secret History of the War on Cancer.

So to reduce the price of medicine, why not restrict advertising? We used to restrict advertising on booze and cigarettes. It seems like a sensible solution to drug costs.

I was listening to Davis in a December 17, 2007 episode of The Current that I downloaded from the CBC podcast site. If I heard her correctly, the average cost of a new drug is $800 million, and half of that is marketing costs. If we want to control the cost of life-saving medicines, we could restrict the costs of the companies that make them.

A counter argument might be that the drug companies advertise because it increases their revenue. It also creates inefficiencies in the system. For example, when the patent runs out on a drug they make a minor change, re-patent it and advertise the hell out of it, trying to make it seem like something new.

I don't know enough about the pharmaceutical industry to argue this completely, but my thinking is... In labor law we have the concept of essential services; why not extend that concept to products? If I am unable to strike because I'm a nurse, why not say that there are also extra sorts of restrictions on the companies that make the drugs nurses hand out? Some life-saving drugs costs thousands of dollars a year, and not everyone has health insurance. In fact, it's a wonder that private health insurers aren't agitating to reduce drug costs. We in Canada have already reduced them by having better bargaining power with drug companies, but drugs are still arguably massively over-priced.

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The Fourth Way: Proactive Liberal Reaction to Crisis

Like many people, I have been floating along assuming that the recent utter failure of unregulated-market theory would result in a change to more regulation, more government oversight, and more involvement of the public purse.

The opposite may be happening. Large economies are acquiring such massive deficits that national agendas will be overwhelmed in the years 2010-2015 with the need to restore fiscal health. As happened in many countries throughout the 1990s, even liberal governments will become deficit hawks and make restraint their number one priority. Everything will be slashed, including much-needed social programs, foreign aid that has long-term economic benefits... even budgets for regulatory agencies.

Despite all the talk about reducing business cycles, we are now in fact creating a world in which business cycles are enhanced by tag-along government spending cycles. We have a market crash and/or recession, followed by government bailouts and/or stimulus, followed by the development of a new market bubble and/or economic growth, followed by government cutbacks to pay off the bailout/stimulus.

You could argue that the government cutbacks put a damper on the upswing, and they might in fact have a positive effect on dampening inflation, but the problem is that by always reacting to market-caused problems, we never have a coherent, cost-effective or humane economic policy.

Part of the challenge is to create the bureaucratic and public will to achieve something without letting the entire rest of the agenda get swept along. For example, the biggest regulatory debacle in the recent financial crisis was caused by the Office of Thrift Supervision (OTS), an American regulatory board that was created after the Savings and Loans crisis in an attempt to impose more effective regulations. But the OTS was created in the early 90s - during the era of deficit reduction priorities - and keeping an eye on the bottom line resulted in the creation of a regulatory board that was directly financed by, and so overly beholden to, the institutions it was supposed to regulate. (More about that here.) The fiscal restraint culture resulted in a new regulatory body that provided less protection and more hazard than ever before.

Conservative politicians revel in the idea of being able to reshape the country during fiscal restraint: it's a great excuse for further gutting public health and ushering in two-tier health care; gutting social spending; and so on. But liberal politicians could prepare for the coming half-decade of government cutbacks by creating a strategic vision for how to handle it.

If we accept that business cycles happen and plan for them, then we can have a more coherent economic agenda. This goes beyond having "shovel ready" infrastructure projects always queued up in anticipation of stimulus need. It may mean forging a new relationship with civil service unions that creates more flexibility in the system - even if not as much flexibility as exists with private sector employees, then at least somewhat more. It means long range economic planning that includes crisis management and that creates strategic priorities that can be maintained through good times and bad. (For example, perhaps instead of granting annual budgets to programs, governments should set up endowments.) It means finding a way to cut back spending that is temporary and humane.

Two decades ago, the "third way" transformed liberal politics by melding fiscal restraint with social progressiveness: by taking responsibility for how to pay for what we want to achieve as a society. Now we need a way to expand liberal principles to deal with economic crises in humanitarian, cost-effective, and coherent ways. Government needs to become less reactive to market shocks. It's not fair to create lavish social programs during rosy times and then slash them a few years later. Equally as disturbing, it's inefficient.

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Executive Compensation

The Globe & Mail published their most bone-headed editorial ever this week. The logic was so assinine that I wonder if they were trying to undermine their own argument.

It went like this: People are concerned about executive compensation. That concern was justified when CEOs didn't, on average, make less bucks last year after share prices fell - so people are saying there's not enough of a link between pay and performance. But wait! "The good news" the Globe says, "is that such a link is becoming the holy grail of compensation design."

At which point thoughtful readers everywhere started thinking: Well that's not right. Canadian CEOs weren't responsible for the biggest financial crisis ever to strike the five inner planets. When crisis hits, do we not need the best CEOs we can get to protect us? Performance metrics are a pretty sucky idea.

Of course performance metrics are just one aspesct of a huge issue of behavior so unethical it should have serious jail time attached. The Globe might have mentioned that fifty years ago, CEOs made 20 times what frontline employees made while today they make 300 times frontline wages. They might have cited the growing cries to create some legal protection for shareholders and employees, say by reducing the ability of the guys at the top to remunerate themselves, or by putting firm limits on how much they can suck the corporations dry... viz a maximum wage. Noone would expect the Globe to say that as long as the CEO-director cabal continues to run major corporations as a giant cookie jar for their own super-sized enrichment, we're not living in capitalism but just a corrupt oligarchy... but it seems rather pertinent too.

I'm not saying there's anything wrong with making $919M in one year, like the CEO of Och-Ziff Capital Management. There are situations in which making a bundle is perfectly ethical. For example, if I were ever to publish my collection of poems about bi-valve evolution, it would of course sell many copies and I would become very wealthy. If I got $2 per book in royalties, I might make, what... about $200 million in the first year. (I'm not completely acquainted with the income of poets but it's something like that.) I don't think there's any issue of unfairness in that income - after all it's volume that caused the figure to be so high.

But the incestuous little community of CEOs and directors, who set their own remuneration levels and move from company to company scratching each other's backs, is hoovering up vaster and vaster percentages of profit purely because they have the power, balls and lack of shame to allow them to grab other people's money. I'm not saying that they aren't qualified or that they shouldn't be well compensated, just that (1) they shouldn't have the nearly-unfettered ability to take as much as they like and (2) no-one deserves labor income in excess of $100,000 a week.

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Beer and Wine in the Grocery Stores!!!

I don't want to be a union-buster, but this may be an opportunity to finally mobilize public opinion to make it politically possible to change our system and allow the sale of beer and wine and - good god don't say it! - even liquor in grocery stores and corner stores.

At least two recent premiers have promised to do it, but there seem to be some powerful forces preventing it from happening. It's like when they put postal outlets in corner stores and pharmacies - lots of people were worried that service would decline, but it has worked out spendidly and is more convenient on all fronts.

Among the other benefits, it would be a great environmental boost... instead of driving across town to a Beer Store, walk leisurely to the corner. All around, an idea whose time has come.

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Policy Prescriptions for Retirement

There's an excellent article in today's Globe called Saving for Retirement Baffles the Boomers, by Doug Peters and Arthur Donner. Unfortunately, the article's subtitle, "Take a breath, think longevity, public policy and type of plan," is somewhat misleading. The advice in the article is: change public policy so that we have larger public pensions. Here's part of what they have to say:

The large pension plan knows how long we'll live because it deals in large numbers of people and uses averages for life expectancy. Thus, large defined-benefit plans can estimate fairly precisely the amount of savings one needs for the lifespan of the average pensioner in their plan. The large defined-benefit plan can also take a long-term view of interest rates and market returns, a perspective not often available to the individual investor. This again increases the economic efficiency of such plans as the CPP.

Three obvious public policy conclusions flow from this analysis:

Substantially increase the size of the CPP so it provides for a much larger proportion of income replacement on the retirement of Canadians. Many studies have recommended this idea. An increase in CPP contributions and coverage could be done over several years in a way that ensures the CPP remains fully funded.

Develop a system whereby companies and their employees can buy additional defined-benefit pension coverage from the CPP. These supplementary pensions would need to be fully funded and would be fully portable (as they are held in the CPP). An add-on plan to the CPP would provide companies and individuals with the economic efficiencies and the substantial cost savings that only a large plan can generate.

Develop a strategy to get companies that have lost the incentive to provide defined-benefit plans back into the business of offering them. This will not be easy. Companies have moved away from such plans because of complex pension laws designed to protect workers, and their experience that such plans are costly and difficult to manage. In addition, employees are wary of such plans when they see large companies fail to fully fund their plans or go bankrupt with their pension plans underfunded.

A policy of both increasing the CPP and allowing companies and individuals to buy supplementary pensions from the CPP is one acceptable policy move. Another is a much closer monitoring of pension plans by regulators. A positive move in this direction would be the establishment of the proposed national pension guarantee system.

Another feature of such a system would be to require underfunded pension plans to pay higher premiums for coverage. In other words, any company that requests relief from its required funding - that is, additional time to make up a pension deficiency - should pay an additional premium for such forbearance.

Smoke and Punishment

Conversation I overheard today: A man says he hates the smell of cigarette smoke. The woman he's talking to (I couldn't see either of them) launches into a series of complaints. First she says she can't stand the smell of "dead meat" to such an extent that when she walks by the deli counter downstairs she faints at the smell. Then she complains that when she lights a cigarette at the bus stop in the morning people move away from her "even when they're upwind" - and says she finds that terribly rude.

My first reaction was along the lines of "What an idiot", but then I started to think that the woman has a point. (Other than claiming that she faints when she passes a deli counter.)

For example, I have heard two people in two separate conversations complain about driving past a bus stop and being bothered by smoke from people standing at the stop. When told that their car is spewing a lot more harmful fumes than come from a cigarette they're like, Everyone drives - what's the problem with that?

Or this one: Residents in my condo building complain about smelling smoke from people standing outside - even when the smokers are far enough away that no smoke gets in their units, just a faint smell - and so we've enacted a property by-law to keep people from smoking anywhere near the building. But residents can still control what they do in their own units, so they've just started smoking indoors - and the whole building shares air so we're brething in more smoke now.

The by-law is shooting ourselves in the foot, but the anti-smoking contingent doesn't care because, let's face it, the anti-smoking movement is partly about punishing people for doing something we don't like.

I don't like smoking either, and I hate the smell. I even dislike being on an elevator after a stinky smoker has been on. But there has to be a limit on how much we clamp down on smokers. Make it illegal to smoke in cars with kids, sure, but can't we let people smoke on the street?

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Okay, NOW I'm Angry

I've been reading a series of articles in the Washington Post about the financial crisis, called What Went Wrong. Among all the usual details of greed and insane right-wing anti-regulation ideology, one small fact really jumped out at me: one regulatory board, the Office of Thrift Supervision (OTS) was so lax in its oversight that financial institutions found ways to switch their business so they could be regulated by it.

The OTS is the agency that regulates Savings & Loans.

For those who don't remember, the American Savings & Loan crisis of 1986-1991 was so severe that it cost the US over $160B in bailouts and other costs. It was a cause of years of US budget deficits and was a factor in the 1990-1991 recession. Millions of Americans lost their investments and/or their jobs. At the time it was just about the worst financial disaster imaginable.

We were told that the situation had been corrected so nothing like this could ever happen again. In the "Financial Institutions Reform, Recovery and Enforcement Act of 1989" several reforms were put in place. One was the creation of the OTS.

According to an article in the WaPo series (Banking Regulator Played Advocate Over Enforcer: Agency let lenders grow out of control, then fail):
* The OTS referred to the banks it regulated as "customers."
* It referred to subprime mortagages as "innovations."
* After a major bank failed in 2001 the OTS director admitted to congress that its regulation was too lax, but deregulation continued at an enhanced pace.
* Many of the OTS-regulated banks, such as Countrywide and Washington Mutual, are among the biggest bank failures in history.

The reason for the insanity at OTS? OTS is essentially partly privatized: it is funded by assessments on the banks it regulates, with the most of its budget coming directly from the banks. The banks were its customers. The entire problem was systemic, preventable, and foreseeable. And it wasn't like screwing up O-rings on the space shuttle: the Republican-dominated congress that forced all this deregulation on the country did it to enrich their donors.

They could have paid for regulation by increasing taxes and it could have been exactly the same cost to the banks as lower taxes plus regulatory fees, but the ideology dictates that taxes be low and services be paid by user fees. It's one of those subtle differences that spells the difference between a system that works and a system that fails, in this case spectacularly.

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Risk Part 7: Some Basic Accounting Problems

Avinash Persaud, chair of Intelligence Capital, describes current financial regulations as like seat belts that stop working when you need them. He says, "If the purpose of regulation is to avoid market failures, we cannot use, as the instruments of financial regulation, risk-models that rely on market prices, or any other instrument derived from market prices such as mark-to-market accounting. Market prices cannot save us from market failures. Yet, this is the thrust of modern financial regulation, which calls for more transparency on prices, more price-sensitive risk models and more price-sensitive prudential controls. ...if we rely on market prices in our risk models and in value accounting, we must do so on the understanding that in rowdy times central banks will have to become buyers of last resort of distressed assets to avoid systemic collapse."

Persaud argues that financial markets follow a sort-of Heisenberg uncertainty principle: since everyone is seeing the same data, using the same statistical tools, and chasing the same investment opportunities, then "under the weight of the herd, favoured instruments cannot remain undervalued, uncorrelated and low risk. They are transformed into the precise opposite. ...Paradoxically, the observation of areas of safety in risk models creates risks, and the observation of risk creates safety." He wrote in 2000 about the problem of market crises being exacerbated by this phenomenon: "market-sensitive risk models, increasingly integrated into financial supervision in a prescriptive manner... send the herd off the cliff."

Another problem with our current measurement of risk is that it too frequently looks at risk in isolation. In The Case for Collective Risk Reporting, David Shimko, president of Asset Deployment and a trustee at the Global Association of Risk Professionals, provides several examples of times when looking at risk in isolation was inadequate. One horrifying example is that banks do not have collective risk reporting, so can only evaluate the risk of their relationship with a company without knowing how many other banks the company is borrowing from. Another example is trading with an entity when you don't know who else they're trading with, and how vulnerable they are to their other counterparties.

Shimko suggests "a neutral risk report aggregation and disaggregation service, overseen or managed by the Fed, that would report each bank’s risk information on a no-names basis to the peer banks and other stakeholders. In so doing, risk information could be shared while the identity of the bank providing the information could be kept secret."

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard

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Risk Part 6: Moral Hazard

Moral hazard occurs when someone is in a position to take risks that can hurt other people, but that can only result in benefit to the risk-taker.

In our current financial environment, there are several causes of moral hazard:

* Bonuses to investment dealers - Traders invest other people's money, and they suffer no penalty for losing money. They are paid huge bonuses (sometimes as high as 20 to 50%) for showing short-term gains on their investments. This encourages them to invest recklessly - to look for high short-term returns, regardless of long-term problems.
* Layered leverage without transparency - There is a large group of players who benefit from the upside of investments but pass the downside on. These include the mortgage originator, underwriter, and mortgage pool sponsor; and the traders of credit default swaps, collateralized debt obligations and collateralized mortgage obligations.
* Government bailouts - Bailouts mean, essentially, that profit is privatized while risk is socialized.
* Sinecure - Senior management has become an elite group that looks out for itself, regardless of performance. Not only are management bonuses insufficiently tied to company performance, but CEOs who fail in one place are generally able to find similar work elsewhere.

The bad bonus system is not all the fault of the banks. When hedge funds started paying 20% bonuses they started attracting all the best traders, which pretty well forced the banks to increase bonuses.

There are lots of good suggestions for how to change trader incentive by reducing and restructuring bonuses. There's no question those need to be implemented.

But it doesn't help to incentivize the traders to think long-term if the bosses aren't thinking long-term. In fact, a lot of the current criticism smacks of scapegoating. After all, those bonuses got set up because it benefited the guys at the top, and it's at the top that the buck really stops. Currently, the organizational incentive is to push short-term profits at all costs - even at the cost of the company collapsing.

The problem goes beyond reckless investments; problems with over-leveraging and insufficient capital are just as bad, if not worse. By the time of the collapse last fall entire companies were precarious houses of cards that were doomed to collapse when the bubble burst. Worse, the only reason we didn't know it was going to happen was because of insufficient transparency. And all of this was in a heavily regulated, heavily scrutinized industry.

What we need to do is remove, or at least reduce, moral hazard throughout the financial industry. That means we need to go beyond capital requirements and leverage limits and address the root of the problem. People and organizations who have the priviledge of investing money should have to prove their ability to act responsibly. There should be serious jail time for people who take reckless risks. That would be a start.

See also:
See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems

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Risk Part 5: Capitalism 2.0

If the only lesson we get out of the current financial crisis is that we need to tweak the regulatory system, then we are in BIG trouble. Tax-payers in the western world are paying trillions of dollars to profit-taking corporations. This bailout may be necessary, but it is deadly dangerous. Every time we bail them out they get a little more complacent about taking risks that leave them needing more bailouts.

Make no mistake: these people have a mandate and it is to make as much money as possible. Their commitment to maximizing profits is as zealous as commitment can be. Like the creature on the late show, they will not stop. Like the Mississippi River, when they hit an obstruction they will overflow banks and find new routes. Even in the face of enormous pressure to act responsibly, after taking billions in bailout money they paid themselves billions in bonuses. The bailout became just another strategy to accumulate wealth, and that is just the nature of our current economic system.

Capitalism 2.0 is a change in basic principles: from "working to create value for shareholders" to "working to sustainably create value for all stakeholders". There are two key differences here:

Term - Decision making considerations need to move from short-term to long-term. Currently, the entire system is set up so that players make short-term decisions that put money in their pockets, and once there, they own it: there's no giving it back. Meanwhile, the decisions they make have long-term effects on everyone else. In the last few years the principle of short-term advantage was pushed to the limit by investment traders. The system encouraged them to make decisions that yielded short-term bonanzas but ulitimately caused the entire system to collapse.

Scope - The beneficiaries of business decisions need to move beyond a narrow group of the power elite. We charitably call this group shareholders, but in Cap1 a company is disproportionately run for the benefit of a handful of senior executives. (To get an idea of some of the extra remuneration head honchos give themselves, go to http://finance.yahoo.com, type a stock symbol or company name in the "Get quotes" box, and then scroll down the page and click on "Insider Transactions" in the left column.)

One example: we have to nationalize parts of our banks. Nassim Taleb has been arguing for this. There is a "utility" function to banks, clearing cheques and the like, that is fundamental to the running of our economy but that is threatened by the risk-taking parts of the bank. I have to agree that the utility functions of banks should be nationalized, and that everyone must understand that the risky investment part of banks will never again be bailed out.

The need for nationalization goes beyond the banks. Over and over in this crisis we hear people saying that there are companies that are too big to fail. And when the Bush administration ignored that warning and let Lehman Brothers fail, chaos descended. The lesson has to be that the market cannot be allowed to handle everything.

The idea of nationalization may seem shocking to some, but it's really not a huge change from the present. Paul Krugman wrote recently, "not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie." Most of the world's biggest oil companies are nationally owned. The move to privatize hydro operations is quite a recent phenomenon. Americans are horrified by the idea of "socialized medicine", but we in Canada are quite comfortable with a medical system that doesn't insert profit-takers throughout the process.

Another fundamental change required by Cap2 is the move from rule-based regulation to principle-based regulation. In Cap1, businesses can do anything that is not illegal. Business should be regulated in the way that driving is: you need to demonstrate fitness to participate. Part of this is rethinking what is legitimate business. For example, Robert Bonfiglio says, "Buying a Credit Default Swap that exceeds the actual amount of what you are protecting, or on something you don't own or have any money invested in, is gambling and should be subject to taxes and the laws of gambling in the state which the bet is placed."

The Cap1 concept of financial oversight is simply a joke. The watchdog for all the Wall Street hedge funds was a handful of inexperienced bureaucrats. And the models that are used in credit risk are a joke, analysing single transactions without looking at all the transactions of an organization. There needs to be so much more oversight that the concept of oversight reaches another dimension. We need a holistic approach to risk management. (See The Case for Collective Risk Reporting and the article "Integrated Risk Assessment", here.)

Capitalists have proved that they will act just as predicted by economic models, and that that means they can't be trusted. You may argue: what about corporate donations? But corporate donations are a way to create goodwill, which is just another line on the balance sheet. It reduces taxes, increases brand value, and makes shares worth more. It also gives personal advantages to senior executives who administer and fete the money they are giving away (which does not come out of their own pockets).

The ability of the Cap1 capitalist to find loopholes and routes around the rules are as powerful as the aforementioned creature on the late show and Mississippi River. Then once they get around the rules and make their money, our Cap1 value structure lauds them for being wealthy. A case in point is Conrad Black. Now in jail as a convicted felon, he was the cock of the walk for 25 years after being exposed as a con man in Peter Newman's best-selling "The Canadian Establishment". He was an important man because he was rich, even though we knew he was a crook.

For a long time we have known that the system is rotten, but have been told that while imperfect, it is the most efficient way to operate. The current collapse of the financial system has changed all that.

Part of our acceptance of Cap1 was a phony dichotomy between unfettered capitalism and state-centralized communism, as if those were the only options. Now that capitalism isn't working, it's clear that we need to find another option.

Capitalism has changed whether we accept it or not. We have entered a period of extreme business cycles. In the upswing there is enormous wealth-mongering that inevitably leads to a crash that requires bailout. Some call this corporate socialism but that is much too kind a word, as it is really a massive fraud perpetrated on the public by the power elite. The remuneration that senior executives at large corporations pay themselves has gone way beyond any fair amount required by competition to keep good talent - especially since top executives now get hundreds of millions of dollars a year even when the company loses money, and even (in the form of golden parachutes) when they are fired. It's not about attracting talent: it's about power rewarding itself. It has been going on for years, but recently has been on a sharp increase. There's only one word for it: egregious.

After all the scandals and all the trillions in bailouts, if we don't have the will to take real action now we'll never have it. And we need to strengthen our resolve to make some real structural change. Only when we accept the principle of Cap2 ("the purpose of business is to sustainably create value for all stakeholders") can we start to transform our political-economic system into something that works for the people.

The question is whether we can grab the monkey by the tail and get a harness on it. Every lobbyist in every national capital will be against this one, and the politicians are mostly part and parcel of the same community.

Update: Greenspan Backs Bank Nationalization

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems

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Risk Part 4: Regulatory Revision

There is widespread consensus these days that the way we, as a society, are dealing with risk is unacceptable. In up business cycles wild profits are made based on risky behavior, and then in down cycles the public has to bail out corporations. The re-regulation process spearheaded by the Basel Committee aims to "align bank capital more closely with the risks taken." To make banks more resilient to market downturns, Basel II proposes the following:

* Set higher capital requirements for certain complex structured credit products.
* Strengthen global practices for liquidity risk management and supervision.
* Initiate efforts to strengthen banks’ risk management practices and supervision, relating in particular to stress-testing and off-balance sheet management.
* Enhance market discipline through better disclosure and valuation practices.

Lots of other suggestions are being made for regulatory revision, many from players in the hedge fund community and financial community. Here's a selection of what I've seen recently:

* Pay bonuses out of the least-desirable assets held by the company. For 2008 year-end bonuses, Credit Suisse gave employees its most illiquid loans and bonds.
* Tax transactions during booms to even out business cycles and to pay for bailouts during busts. Perhaps this should be aimed directly at problem instruments: Steven Allen of Rutter Associates and NYU suggests that "uncollateralized derivative transactions would be subject to a “systemic risk tax” which could be adjusted by regulators until desired risk reductions were achieved. In addition, to aid regulators in overseeing credit extension to hedge funds, a complete database of hedge fund positions would be created to facilitate the assessment of risk concentrations that may not be visible to individual prime brokers."
* Keep some of the risk of loans in each place the loan passes through. Part of the problem in the sub-prime crisis is that the bank that originated the loan was able to pass all the risk on to other organizations.
* Reduce moral hazard - Tie bonuses to long-term profitability, not short-term, so that employees don't have an incentive to maximize bonuses through wreckless investments.
* Mark-to-Market accounting - Modify this accounting standard, such as by changing what counts as a capital charge.
* Scrutinize new products - Have a vetting procedure, akin to health & safety vetting of new drugs, for new financial products.
* Stopper up the loop holes - Make regulations principles-based instead of rules-based.
* Stop using VaR for determining market risk capital requirements. Use stress tests and stop limits instead.
* Change the way we calculate credit risk.
* Raise credit capital requirements for risky products - Such as credit default swap contracts; and any product that is new, complex or opaque.
* Improve the work of rating agencies - the founder of a hedge fund says, "The market perceives the rating agencies to be doing much more than they actually do. The agencies themselves don’t directly misinform the market, but they don’t disabuse the market of misperceptions — often spread by the rated entities — that the agencies do more than they actually do. ...The rating agencies remind me of the department of motor vehicles: they are understaffed and don’t pay enough to attract the best and the brightest. The DMV is scary, but it is just for mundane things like driver’s licenses. Scary does not begin to describe the feeling of learning that there are only three or four hard-working people at a major rating agency judging the creditworthiness of all the investment banks; the agency, moreover, does not even have its own model for evaluating creditworthiness."
* Ensure corporations have better forensic accounting staff to prevent rogue traders.

(I apologise that I've lost some of the links to that material, a hazard of doing my reading on the streetcar.)

Reading what needs to be fixed was shocking to me. I think most of us had no idea how lax the regulations and oversight have been. There is plenty of bureaucracy, but holes in the rules big enough to drive the space shuttle through. Lots of regulatory revision is required, but it's not enough. Some structural changes are needed as well. More on that next.

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis

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Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis

The collapse of Lehman Brothers on September 15, 2008 is the event that tipped the financial system into full-blown crisis. Allowing Lehman to fail is arguably one of the worst decisions of the Bush administration. Why did Lehman fail? Here's an analysis of the problems at Lehman. This is an excerpt from an article by David Einhorn in the Global Association for Risk Professionals' publication GARP Risk Review. Keep in mind that this article was written after the spring of 2008 (when the financial crisis started) but before the collapase of Lehman, and that when it was written few people suspected any problems at Lehman:

The first question to ask is, how did this [financial crisis] happen? The answer is that the investment banks outmaneuvered the watchdogs, as I will explain in detail in a moment. As a result, with no one watching, the management teams at the investment banks did exactly what they were incentivized to do: maximize employee compensation. Investment banks pay out 50% of revenues as compensation. So, more leverage means more revenues, which means more compensation.
...
The second question is, how do the investment banks justify such thin capitalization ratios? And the answer is, in part, by relying on flawed risk models, most notably value at risk (VaR). VaR is an interesting concept. The idea is to tell how much a portfolio stands to make or lose 95% of the days or 99% of the days or what have you. Of course, if you are a risk manager, you should not be particularly concerned how much is at risk 95% or 99% of the time. You don’t need to have a lot of advanced math to know that the answer will always be a manageable amount that will not jeopardize the bank.

A risk manager’s job is to worry about whether the bank is putting itself at risk in the unusual times — or, in statistical terms, in the tails of distribution. Yet, VaR ignores what happens in the tails. It specifically cuts them off. A 99% VaR calculation does not evaluate what happens in the last 1%. This, in my view, makes VaR relatively useless as a risk management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an airbag that works all the time, except when you have a car accident.

By ignoring the tails, VaR creates an incentive to take excessive but remote risks. Consider an investment in a coin-flip. If you bet $100 on tails at even money, your VaR to a 99% threshold is $100, as you will lose that amount 50% of the time, which obviously is within the threshold. In this case, the VaR will equal the maximum loss.

Compare that to a bet where you offer 127 to 1 odds on $100 that heads won’t come up seven times in a row. You will win more than 99.2% of the time, which exceeds the 99% threshold. As a result, your 99% VaR is zero, even though you are exposed to a possible $12,700 loss. In other words, an investment bank wouldn’t have to put up any capital to make this bet. The math whizzes will say it is more complicated than that, but this is the basic idea.

Now we understand why investment banks held enormous portfolios of “super-senior triple A-rated” whatever. These securities had very small returns. However, the risk models said they had trivial VaR, because the possibility of credit loss was calculated to be beyond the VaR threshold. This meant that holding them required only a trivial amount of capital, and a small return over a trivial amount of capital can generate an almost infinite revenue-to-equity ratio. VaR-driven risk management encouraged accepting a lot of bets that amounted to accepting the risk that heads wouldn’t come up seven times in a row.

In the current crisis, it has turned out that the unlucky outcome was far more likely than the backtested models predicted. What is worse, the various supposedly remote risks that required trivial capital are highly correlated; you don’t just lose on one bad bet in this environment, you lose on many of them for the same reason. This is why in recent periods the investment banks had quarterly write-downs that were many times the firmwide modelled VaR.
...
Lehman’s management is charismatic and has almost cult-like status. It gets tremendously favorable press for everything from handling the 1998 crisis to supposedly hedging in this crisis to not playing bridge while the franchise implodes.

From a balance sheet and business mix perspective, Lehman is not that materially different from Bear Stearns. Lehman entered the crisis with a huge reliance on US fixed income, particularly mortgage origination and securitization. It is different from Bear in that it has greater exposure to commercial real estate and its asset management franchise did not blow up. Incidentally, neither Bear nor Lehman had enormous on-balance-sheet exposure to CDOs. At the end of November 2007, Lehman had Level 3 assets and total assets of about 2.4 times and 40 times its tangible common equity, respectively. Even so, at the end of January 2008, Lehman increased its dividend and authorized the repurchase of 19% of its shares. In the quarter ended in February, Lehman spent over $750 million on share repurchases, while growing assets by another $90 billion. I estimate Lehman’s ratio of assets to tangible common equity to have reached 44 times.

There is good reason to question Lehman’s fair value calculations. It has been particularly aggressive in transferring mortgage assets into Level 3. Last year, Lehman reported its Level 3 assets actually had $400 million of realized and unrealized gains. Lehman has more than 20% of its tangible common equity tied up in the debt and equity of a single private equity transaction — Archstone-Smith, a real estate investment trust (REIT) purchased at a high price at the end of the cycle. Lehman does not provide disclosure about its valuation, though most of the comparable company trading prices have fallen 20-30% since the deal was announced. The high leverage in the privatized Archstone-Smith would suggest the need for a multibillion-dollar write-down.

Lehman has additional large exposures to Alt-A mortgages, CMBS and below-investment-grade corporate debt. Our analysis of market transactions and how debt indices performed in the February quarter would suggest Lehman could have taken many billions more in write-downs than it did. Lehman has large exposure to commercial real estate. Lehman has potential legal liability for selling auction-rate securities to risk-averse investors as near cash equivalents.

What’s more, Lehman does not provide enough transparency for us even to hazard a guess as to how they have accounted for these items. It responds to requests for improved transparency grudgingly, and I suspect that greater transparency on these valuations would not inspire market confidence. Instead of addressing questions about its accounting and valuations, Lehman wants to shift the debate to where it is on stronger ground. It wants the market to focus on its liquidity. However, in my opinion, the proper debate should be about Lehman’s asset values, future earning capabilities and capital sufficiency.

In early April, Lehman raised $4 billion of new capital from investors, thereby spreading the eventual problems over a larger capital pool. Given the crisis, the regulators seem willing to turn a blind eye toward efforts to raise capital before recognizing large losses; this holds for a number of other troubled financial institutions. The problem with 44 times leverage is that if your assets fall by only a percent, you lose almost half the equity. Suddenly, 44 times leverage becomes 80 times leverage and confidence is lost. It is more practical to raise the new equity before showing the loss. Hopefully, the new investors understand what they are buying into, even though there probably isn’t much discussion of this dynamic in the offering memos. Some of the sovereign wealth funds that made these types of investment last year have come to regret them.

Lehman wants to concentrate on long investors; in fact, it went to great lengths to tell the market that it sold all of its recent convert issue to long-only investors. Putting aside the fact that some of the clearing firms have told us that this wasn’t entirely true, companies that fight short sellers in this manner have poor records. The same goes for companies that publicly ask the SEC to investigate short selling, as Lehman has done. There is good academic research to support my view on this point. As I have studied Lehman for each of the last three quarters, I have seen the company take smaller write-downs than one might expect. Each time, Lehman reported a modest profit and slightly exceeded analyst estimates that each time had been reduced just before the public announcement of the results. That Lehman has not reported a loss smells of performance smoothing. Given that Lehman hasn’t reported a loss to date, there is little reason to expect that it will any time soon. Even so, I believe that the outlook for Lehman’s stock is dim. Any deferred losses will likely create an earnings headwind going forward. As a result, in any forthcoming recovery, Lehman might underearn compared to peers that have been more aggressive in recognizing losses.

Further, I do expect the authorities to require the brokerdealers to de-lever. In my judgment, a back-of-the-envelope calculation of prudent reform would require 50-100% capital for no ready market investments; 8-12% capital for what the investment banks call “net assets”; 2% capital for the other assets on the balance sheet; and an additional charge that I don’t know how to quantify for derivative exposures and contingent commitments. Only tangible equity, not subordinated debt, should count as capital. On that basis, assuming that Level 3 assets are a good proxy for no ready market investments — assigning no charge for the derivative exposure or contingent commitments and assuming its asset valuations are fairly stated — Lehman, based on its November balance sheet, would need $55-$89 billion of tangible equity, which would be a three- to-five-fold increase.

See also:
Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems

Risk Part Two: The Mess

The financial crisis of the last ten months is so severe that banks around the world are collapsing, propped up only by unheard-of bailouts by their governments. Many banks have been fully nationalized, either completely or effectively. These include Icelandic banks; Northern Rock in Britain; the biggest Irish banks (Allied Irish Banks, Bank of Ireland and Anglo Irish Bank); and Fortis in Belgium. The British government now owns 70% of the Royal Bank of Scotland. I have lost track of the billions (trillions?) the US government has put in its financial sector. And that's just a partial list, and only as of today. We can foresee that many more banks are going to be in big trouble in the future, especially as the countries on the periphery of Europe implode and we await the next round of mortgage defaults in the US.

The crisis is so severe that currently governments are doing little more than buying time before there are more defaults and more bankruptcies. Despite the massive payments, the credit crunch is not easing. Consequently, the whole economic system is folding in on itself, and a vicious cycle is in full swing of layoffs, reduction in demand, and corporate collapse. Already it is estimated that 20% of the wealth of American citizens has been wiped out. Layoffs are announced daily. All of this will have tremendous negative impact down the road. Just one example: a massive reduction in municipal tax revenues.

To me, the scariest part of the whole mess is the complete inability of anyone to predict what's going to happen next or to agree on what to do about it. Just a few weeks ago our government and most Canadian economists were saying we might escape unscathed. Then the statistics came out (after a frustratingly long delay) and it was apparent that things are much worse than the worst prediction.

At President Obama's press conference about the financial crisis last week, the first question was about the language he used in describing the crisis: the reporter implied that he was fear-mongering and asked him to justify his extreme language when saying what could happen if we didn't enact effective stimulus immediately. It was a profoundly stupid question. In reality, we already have fallen into the abyss.

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Measuring Risk Part 1: Issues

Risk is all the rage right now. I made a timely decision last year when I decided to move into financial risk statistics as a new area of expertise. The financial meltdown caught everyone unawares, and the idea of being better prepared next time has caught on big. Businesses are getting interested in finding more sophisticated ways to measure volatility and exposure, and new government regulations are also requiring they do so.

In the banks, risk is effectively a corporate governance function, not a business function. One reason for this is that risk is seen as an impediment to short-term profits (and hence bonuses). But it's also the case that people don't trust risk statistics. A lot of money goes into producing risk statistics, but people don't actually make decisions based on them... and when they do, their accuracy is so poor that they're hardly better predictors of financial gain than flinging a dart at a newspaper stuck to the wall.

Most risk measurement is based on normal distributions that simply don't exist in the stock market. A normal distribution can be assumed when you have a lot of small movement without a lot of outliers (meaning that severe market events would occur only once every few hundred years). In reality, we have severe market events every five years or so. Real distributions are not normal; they're skewed in various ways.

In addition, most measures of risk are measures of volatility around the mean. This assumes that upside volatility is as bad as downside volatility - hardly true! Plus, they assume that volatility and the correlations between assets are not affected by extreme market conditions, even though it has been shown that after extreme market shocks the volatility and correlations go haywire for a while.

But even if you use stable (non-normal) distributions, measure downside risk, and account for volatility clustering, there are basic limitations to fundamental analysis: how far can you go basing risk on historical market data? For example, you're not measuring the exposure of an asset to exchange rates: you're measuring the way the asset responded to exchange rate fluctuations in a particular historical period. You don't know why it fluctuated, so you can't predict it will follow the same pattern in the future. It's the fundamental problem of econometrics: correlation does not imply causation.

Even if the statistics were at all accurate, there are problems with how to use them. We need a more sophisticated vocabulary and set of statistics based on the purpose of the measurement, and we need a better understanding of how to apply the statistics to the real world. Regulators, corporations, risk managers and individual investors all have different needs for assessing risk and should in many cases use different statistics.

More to come in subsequent posts.

Risk Part 1: Issues
Risk Part 2: The Mess
Risk Part 3: Case Study - How Poor Risk Management Caused the Crisis
Risk Part 4: Regulatory Revision
Risk Part 5: Capitalism 2.0
Risk Part 6: Moral Hazard
Risk Part 7: Some Basic Accounting Problems

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Business as Usual

The most underreported aspect of the current economic crisis is the degree to which this is just business as usual. By making events seem extraordinary, we don't develop the public will to change.

Economic downturns, crisis in the banking industry, large-scale bailouts of corporations, fraud in the securities industry, millions of investors losing their shirts - all happen on a regular basis. The last US recession was just five years ago. This time the housing bubble burst; ten years ago the tech bubble burst. The US government bailed out the auto industry in the late 70s and the banks in the early 90s (and thousands of other companies from that period to now). This time inadequate regulation led to enormous losses due to sub-prime mortgages and the securitization of risk; in the 80s lack of regulation led to enormous losses due to junk bonds. In the 80s the banking sector was rocked by the Savings & Loans scandal, and in the early 90s it was rocked by the collapse of that decade's real estate bubble. This year investors lost billions to Bernie Madoff; just a few years ago investors lost billions in Enron. I was flipping through a 2005 copy of a financial industry magazine the other day, and it was full of articles about fraud and corporate collapse in the hedge fund industry. This recession is so far no worse than those we suffered in the early 80s and early 90s.

The essential problem seems to be an inability to understanding during booms that booms lead to busts. Alan Greenspan kept interest rates low long past the time that monetary policy was needed to spur to the economy, and so created the massive bubble that burst so spectacularly last year. During booms we feel that the good times will never end. I recall during the tech boom that the business press line was: If you don't invest in tech stocks you're throwing away money; tech stocks grow by 30% every year while every other investment pays a fraction of that; it's crazy not to invest in tech stocks! Then tech stocks went kaput.

During a downturn we all understand the concept of business cycles. During an upturn we forget about it completely. If citizens, investors, policy-makers and regulators all developed a clear long-term approach to business cycles, then we might start to get some coherent policy that would avoid our current situation of lemon socialism, in which the rich bleed dry a company and then seek government assistance.

If we saw the situation for what it is, we might institute taxes on financial transactions to create a bailout fund (first, we should create a fund to pay off previous bailouts; then start saving for future catastrophes). Or we might decide that if something is too big to fail then it's too big to be in private hands. We might think about regulating the bonus system in financial institutions that lets financial managers collect bonuses on investments that make huge gains in the short term but face catastrophic risk down the road, after the manager collects the bonus.

We might see that we need some reins on the ability of the elite to enrich themselves at the helms of large corporations. That there is something wrong when individuals in the hedge fund industry make over a billion dollars a year (and pay only a 15% tax rate). Or when CEOs of money-losing companies take home hundreds of millions in remuneration. Or even little things like senior management of public companies flying to the superbowl on company jets.

And we need to see that the good times aren't so good after all. We need to even out business cycles by putting a damper on booms. This can be done with monetary policy (raise interest rates to slow down a hyperactive economy), but also with fiscal policy, such as some form of excess-profits tax. Just as we have economic stabilizers for downturns, such as employment insurance payments, so we could institute economic stabilizers for booms, such as more top-end tax brackets.

Thirty years ago, at least we knew we were being shafted. Now we (the middle class) seem to have been blinded by our own increased affluence, even though it is mostly driven by demographics (more people in peak-income years), women joining the workforce and so creating two-income households, increased hours of work, and a decrease in the non-immediate remuneration of pensions. We also fail to see that the increasing lack of job security means that our income is lower than it would seem from a single pay cheque: increasing numbers of us face periods of no income.

Once we see that this economic crisis is not extraordinary but just business as usual, it becomes clear that this isn't bad luck: it's a corrupt system. We haven't moved beyond the trickle-down economics of the Reagan years. In fact, the gap between the compensation of senior management and the average compensation of everyone else in corporations continues to widen, while tax cuts have mostly benefited corporations and the wealthy; and when bad times hit, it is the taxes of the middle class that bail out the wealthy. It's time for real change, and it's not going to come without public awareness and will.

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The New World of Employment

At banks, government offices and many other employers, a large proportion of the staff is on contract - in some cases as many as 50%. This has been going on for a long time; the incentive for employers is that they don't have to pay vacation, holidays, benefits, CPP, or other costs of having full-time employees, and they can ditch people at will. Contracts tend to be three months in length and the contractor is informed within the last few weeks whether it will be rolled over. In many cases it is rolled over for years and years, but the contractor never has any job security. Even within a contract period the employer can sever the contract, usually with only ten days notice.

A while back a Royal Bank contractor who'd been on contract for many years was let go and sued for severance. Since then the banks don't hire contractors directly; they go through staffing agencies to protect themselves from law suits. These agencies collect money from the employer and pay it to the contractor; for this middleman role they often pocket at least 15% of the contractor's gross. In many cases they do nothing other than pass through the money: the contractor gets the job, negotiates the contract, and then is directed to an agency. In some cases the employer contacts the agency to find candidates, and while there are cases where the agency performs a useful service, in many cases they do no more than leaf through workopolis and monster.

The staffing agency business appears to be completely unregulated. You'd think that there might be limits on how much they can charge for their services, or rules about having to disclose to contractors how much they're skimming off their backs, but there don't appear to be any at all. I've heard rumors of people who got shafted by unscrupulous staffing agencies, finding out too late that much more than 20% of the employer's payouts were staying in agency pockets. And once you have a relationship with an agency that has contracts with employers, your options are limited.

Employers use contractors to reduce their costs, but some contractors like being on contract because they can reduce their taxes. They are self-employed, and so can deduct the costs of driving to work and working at home and the like. (Strangely, though, the self-employed cannot deduct health costs or the costs of buying benefits.) Smart contractors form co-ops with a few other contractors and so reduce health costs, as well as share accounting and incorporation costs.

White collar labor is a seller's market right now, so it doesn't seem so foolish to be a contractor at the moment - lose the contract and you can move into another one quite quickly. (I can attest to that: I posted my CV on workopolis a while back and have been flooded with offers from staffing agencies.) But with the economic downturn starting to get serious, that's likely not going to last.

The self-employment white collar world is chaotic and unregulated, and everyone is taking advantage of the situation. It creates distortions that are unproductive. For example, contractors can write off the vehicle they drive to work, so are incentivized to buy expensive gas guzzlers. Short-term budgets lead employers to think they're saving money by using hired guns, but they end up with a work force that lacks experience and institutional knowledge, and who takes care not to get their budgeted work done before the deadline. Staffing agencies are expensive, but add very little to productivity. Their necessity for domestic contracts also makes off-shore contracts more affordable. This is a situation that is crying out for some government attention.

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