You are currently browsing the monthly archive for May 2012.

Innovators as Star Trek:

What We Learn from Episode 62 

By Shlomo Maital   

  Episode 62 Spectre of the Gun

 

 

 

In episode 62 of Star Trek (from its third season),  “Spectre of the Gun”, one of the top ten episodes of all time, the plot is as follows:  

   Kirk, Spock, McCoy, Scotty and Chekov are transported to a planet that has all of the trappings of the Old West.   It’s 1881 and Kirk soon realizes exactly where they are: in Tombstone, Arizona on the day of the famed gunfight at the OK Corral between the Clanton gang and the Earps.   The only problem is that Kirk and company represent the Clantons and if history is to be repeated, they will all be killed. They use whatever resources are available to them to defeat the enemy but the solution, and the only way of escape, lies within them.    The trap is placed by the planet’s inhabitants, the Malcotians, who are testing the ‘earthlings’ to see if they kill others, even when defending themselves.  A ‘yes’ answer would bring their destruction.

  It is half-human Dr. Spock who reveals the solution.  The ‘bullets’ are not real, he says. But they kill us because we believe they do. Only if we believe, beyond a shred of doubt, that the bullets are unreal, will we survive.  As a perfectly rational being, super-human, he KNOWS the bullets are unreal. But his human colleagues? They have doubts. And the tiniest doubt will kill them.  In the end, the Star Trek explorers do believe, and the bullets of the Earps  do not harm them.  Kirk bashes Wyatt Earp, pulls his gun, readies himself to shoot him..and stops.  This, the Malcotians reveal, is why they agree to meet with the Star Trek explorers rather than destroy them.

   I think there is a parable here for innovators.  If you have a great idea, then test it, put its feet to the fire, examine every possible flaw, from every possible angle.  Do this, in order to eliminate the tiniest shred of doubt. Because if you doubt, if you fear failure, those around you will sense it – and the fear itself will bring failure, just like the Star Trek crew at the OK Corral.  Entrepreneurs I meet who have near-impossible ideas believe with utter confidence in their success.  And that confidence itself is a perception that shapes reality, just as with Episode 62. 

When is a “Hedge” A Risky Bet?

J.P. Morgan – Part Two 

By Shlomo Maital     

 

 Jamie Dimon

   Faithful reader Laura was right.  When I called the J.P. Morgan traders who caused huge losses “really smart”, she objected.  They’re just insiders, she said, dumb insiders.  The evidence comes from J.P. Morgan CEO Jamie Dimon himself.   “We were stupid,” he said yesterday. “We have egg on our face.”  If the boss himself calls himself and his traders stupid, who am I to argue?

    Dimon has led the charge against the Volker Law, which bans banks from speculative trading for its own account in derivatives.  Dimon, who until now has had huge weight in Congress, clearly believed the law would cut his bank’s obscene trading profits — first quarter 2012 net income “fell”, to “only” $5.4 b., a lot of it from ‘nostrum’ (bank’s own) trading profits.    Dimon has fiercely criticized Volcker himself, even though Volcker is one of the wisest most respected capital market authorities in the world. 

   But even if enacted the Volcker Law probably would not have stopped the disastrous trade that will lose J.P. Morgan far more than the published $2 b.  Why?  Well, because the trade was a ‘hedge’, designed to reduce risk.  How?  J.P. Morgan has massive holdings of govt. bonds and loans.  This is a ‘position’ fraught with risk.  If the bonds drop in price, J.P. Morgan loses.  So, you need to offset this position with a ‘hedge’, or opposite position, one that if bonds drop, you make offsetting profits. How?  By dealing in credit default swaps, or insurance.  If bonds drop, the CDI’s become more valuable; you lose on bonds, win on CDI’s.  Even the Volcker Law allows hedging.  But in practice, this was not a true hedge, because the hedge itself apparently ended up being larger than the position it was supposed to offset? Why? Because the trader who ran it, from London, got into a hole; as the ‘hedge’ lost money unexpectedly (bond markets got worse, rather than better), the trader kept expanding the hedge to manipulate the market and reduce the losses.   Smart traders saw the hole J.P. Morgan was in and shrewdly bet against it…     The real failure, and stupidity, was J.P. Morgan’s “back office” – the people who are supposed to monitor trades, evaluate risk and sound the alarm when the risk mounts.  This happens quite often. Back office people are easy prey for shrewd traders who know how to disguise their positions, especially in exotic derivatives that are really hard to value.  So Dimon was right – his bank does have egg on its face, his own face, because he failed to put in place a tough sharp effective back office.  Again, it’s not the first time.

       Bottom line:   Even if the Volcker Law passes, and bans banks from risky speculative derivatives trading, the banks will circumvent it like J.P. Morgan by ‘hedging’, only the hedges will be so big that they become speculative trades rather than risk-reducing actions.  There aren’t enough regulators in the world to control this.

       The system is broken.  The only real long-term cure is to enroll a new generation of traders, who understand that their primary responsibility is not to generate enormous profits (and bonuses for themselves) but to avoid crashing the system.  The chances of that happening?  Zero.

Pirate Parties Innovate Democracy:

Why Not Start One in Your Town? 

By Shlomo Maital   

 

   Usually, when an organization is in trouble, it has lots its creativity and needs to innovate, but can’t.  Well, democracy all over the world is in trouble. Nations face tough problems and the conventional democratic process has produced nothing innovative to deal with them.  All it can do is dump old leaders, and recycle even older ones. 

 

    But – there IS innovation in democracy. It’s called the Pirate Parties and they are gaining ground. They exist, or will soon exist,  in about 40 nations.  The idea is spreading. (The name comes from ‘internet piracy’, the right to property rights on the Internet). 

   The BBC reports that “All across Europe, disgruntled voters are deserting the established parties, and in Germany, it is the Pirate Party they are turning to.   At regional elections at the end of April, they got 8% of the vote, enough to give them seats in the state parliament of Schleswig-Holstein, in the far north of Germany. It is the third state in which they now have people in parliament, making law. In Berlin, they have 15 members of the legislature.”

   What IS a Pirate Party? They are unconventional parties that (according to Wikipedia) “support civil rights, direct democracy and participation, reform of copyright and patent law, free sharing of knowledge (Open Content), data privacy, transparency, freedom of information, free education, universal healthcare  … They advocate network neutrality and universal, unrestricted access to the Internet”.   Mostly they are parties that advocate not policies, but processes – using technology to let everyone express their opinions.  It’s a perfect remedy for a world in which some 80 per cent of the population of major nations believe the current system imposes unfair burdens on ordinary people.    Naturally, most of the Pirate Parties’ supporters are young, under age 34.

   Here is a Pirate Party innovation:  “liquid democracy”.   It involves members “making suggestions online which then get bounced around through chat rooms, which they call Pirate Pads, before emerging from cyberspace into the real world as policy”.

  The German Pirate Party says,  “we offer what people want. People are really angry at all other parties because they don’t do what politicians should do. We offer transparency, we offer participation. We offer basic democracy.”

   What is amazing is that the Greens, in Germany, now seem tied with the Pirates!  When the Pirates enter the Bundestag in the next elections, they may be king-makers, because the Christian Democrats and Free Democrats may not form a majority (the Free Democrats’ popularity is collapsing).  Predictably, the Greens are unfuriated by the Pirates. 

    In Greece, in the recent election, the newly-formed Pirate Party formed only in January got 33,000 votes, or 0.5 % .  If Greece goes to new elections, they will get far more. 

   Whatever you think about the Pirates, they are a fresh wind blowing through the stench of old-time party politics.   Why not consider starting a branch in your town?

Why JP Morgan Lost a Bundle

And Why Really Smart People Can Destroy the World  

By Shlomo Maital  

 

 

 

    [Warning: This blog is 1,800 words, and hard to read. Read it ONLY if you really want to understand why JP Morgan Chase lost $2  b. and has rattled the whole world. If you wish, skip to the last three paragraphs, which capture the essence.]

  John Pierpoint Morgan 

   Last Thursday night,  Jamie Dimon, the respected CEO of America’s largest bank, J.P. Morgan Chase, made a staggering announcement.  He reported to the media that his bank had lost $2 b. in securities trading.  Immediately, J P Morgan’s stock price dropped, and stocks fell in general.   And old John Pierpoint Morgan is turning in his grave.

     J P Morgan Chase has over $2 trillion in assets. So a tiny $2 b. loss is only 0.1 per cent, or 1/1000 of its assets.  Did the capital markets over-react?  Not at all.  J P Morgan is widely respected for its risk management, and it weathered the global financial crisis 2007-11 better than other banks.   If J P Morgan is in trouble, if it takes big uncalculated risks, well, in whom can we trust?  

   WHAT IN THE WORLD HAPPENED?

   According to the respect New York Times column and blog DealBook,  in early April there were rumors about JP Morgan’s Chief Investment Office.  [Background: JP Morgan Chase has been profitable, despite the bleak capital markets, largely due to this office.  The Office is really a kind of hedge fund, making investments in anything and everything and reducing the resulting risk by spreading the investments widely.  Some of these investments were ironically in credit default insurance – a complex asset whose riskiness is hard to measure, and which in large measure led to the onset of the global crisis in 2007-8.]      

   The rumors said a JP Morgan trader called The London Whale was making huge bets on derivatives, big enough to distort the whole market.   When the Fed began to investigate, JP Morgan CEO Jamie Dimon flatly denied the rumors.  [How much déjà vu have you seen in this story already – and I’ve barely begun!].    He told analysts the whole thing is a “tempest in a teapot”.   Perhaps – but that teapot was pure arsenic. 

        WHO WAS RESPONSIBLE?

   The New York Times names Ina Drew, the bank’s Chief Investment Officer, and the London Whale, named Bruno Iskil, who led the specific trade that lost all that money. Ina Drew fiercely defended the huge trade done by her star trader in London.  But JP Morgan executives, from the 48th floor of their Park Avenue headquarters, became increasingly alarmed.  A team of risk officers called the Navy Seals began to meet daily on the problem.  (The semantics of  financial speculation are colorful, because the traders themselves are colorful…e.g., Goldman Sachs called its clients “Muppets”.)  The trade was so big, when it began to go bad, it could not be ‘unwound’ (reversed), even by “Navy Seals.”   Other hedge funds got wind of the fact that JP Morgan was in trouble, and began betting against it, specifically betting on the opposite side of the huge bet JP Morgan’s hedge fund had taken.  This is not unlike a bleeding dolphin in the ocean – sharks smell the blood and attack fiercely.   When that happens, well, frankly, you’re dead.

   CAN YOU BE MORE SPECIFIC ABOUT ‘WHAT WENT WRONG’?

    Here is the clearest explanation I could find, by NYT experts.  It’s not easy reading…but it’s worth persisting to the end.  I closely follow everything NYT columnist Andrew Sorkin writes.

     “In 2009,  [JP Morgan’s Chief Investment Office] unit’s net income peaked at $3.7 billion, up from $1.5 billion the previous year. The jump in earnings in 2009 resulted from large purchases of mortgage-backed securities guaranteed by the United States government, according to a company filing.  Net income for last year totaled $411 million.  Last summer the chief investment office began calling brokers at several Wall Street banks, the brokers say. The office was offering to sell insurance on an index of big American corporations like General Mills, Alcoa and McDonald’s — known as CDX IG Series 9. If the companies in the index went bankrupt, JPMorgan would have to pay out, but if the companies continued to do well JPMorgan could rake in the fees from financial firms that bought the insurance.  The strategy initially made money for JPMorgan and its position began to grow, as did an appetite for it among a tight-knit segment of hedge funds focused on credit opportunities. The large scale of the trade was permitted as a result of an expansion in the limits placed on the size and the scope of securities the unit could trade in that were adopted after JPMorgan acquired Washington Mutual in the financial crisis. Those limits have now been scaled back. By January, these hedge funds were getting calls nearly every day from brokers representing the chief investment office, according to hedge fund managers and brokers on the calls.  The seller’s identity was not supposed to be known, but the sheer volume of the trade made it hard to hide, and soon enough all fingers in the “small, clubby world” of credit hedge funds pointed to Mr. Iksil’s desk at JPMorgan, according to one fund manager. “A bunch of us started looking at it and talking about it a lot,” the manager said. “There was agreement that Bruno was selling.”   There were two ways that JPMorgan could win this bet. 1. If the companies in the index did well, the bank’s cost of insuring the index would continue to fall. 2.  JPMorgan could also artificially drive the price lower by continuing to issue more and more insurance — a distinct possibility thanks to JPMorgan’s size and stature.  In January and February, as the price of the insurance continued to drop, lunch meetings and casual conversations between hedge fund managers swirled around the ability of JPMorgan to continue financing this bet. “A lot of people told me it was a foolish trade,” said an official with a hedge fund that bet against JPMorgan. “The naysayers on this trade said, ‘Look, this guy has unlimited firepower, he can just keep selling and selling and make your life miserable.’ ”  Among the hedge funds that began taking positions against JPMorgan were Blue Mountain, a New York fund; Lucidus Capital Partners, a London fund; Hutchin Hill, a New York fund; and Bluecrest, a giant London hedge fund founded by two former traders on JPMorgan’s proprietary trading desk.  The trade did not at first make money for the hedge funds betting against it. In the improving economy early in the year, the hedge funds had to make regular insurance payments. But in late March, doubts about the economy began to swirl, and the index jumped.  JPMorgan began seeing losses by the end of the first quarter, on March 31, but they were not enormous, allowing bank executives to shrug off the early criticisms of the trade. But the trade drew increasing attention as the index continued to spike, multiplying JPMorgan’s potential losses if it had to pay out on the insurance.  Soon United States and British regulators were talking daily with bank executives. (The New York Fed has been following the chief investment office practically since its inception, as part of its regular supervision of the firm.)   [But despite ‘following’ the problem, the Fed did nothing, nor could it do anything – until it was too late].   

    WHY ARE CAPITAL MARKETS SO UPSET?

    Because this should not, could not possibly, have happened.  Because it was precisely trades like this one that got Bank of America, Lehman Brothers, Citigroup and others in such hot water.  And because few even knew about the existence of the business unit of JP Morgan that caused the problem.  Another instance of under-the-radar risk that we discover only when it blows up.     

     Morgan’s Chief Investment Office  “ employs fewer than 40 people across the bank’s international offices, and was created to manage the bank’s exposure to complicated global financial transactions, like interest rate changes and currency movements.”    Unlike JPMorgan’s deal-making investment banking unit, the chief investment office was supposed to keep its head down, carrying out trades that protected the bank from the volatility caused by the recent financial crisis.    Yet what began as a way to hedge against risk has turned into a major liability.”

  HOW DID THIS ALL START?

    “In 2007, the bank hired Achilles Macris of Greece.   He was charged with running the unit’s European operations on the sixth floor of JPMorgan’s offices near St. Paul’s Cathedral in London’s financial district.   As part of an expansion, Mr. Macris turned to a number of former hedge fund and investment banking experts to bulk up the European team.   Under the leadership of Mr. Macris in London and Ms. Drew in New York, the group’s exposure to financial markets ballooned.   Ms. Drew — one of the highest-ranking women and one of the highest-paid executives at the bank, making $15.5 million last year — is widely viewed as a natural trader with an eye for unusual opportunities to strike a profit.”

   SO HOW DID SUCH BRILLIANT PEOPLE GO WRONG?

   It’s the fundamental problem with banking today.  When you’re paid $15.5 m., well, you better bring big bucks to your employer and to your shareholders. You’d better perform. The only way to make money is to take risks.  And it is perpetually tempting to take excessive risks.  Why? Well, because, people who are paid $15.5 m. yearly are really really REALLY smart.  For them, they are not taking risks, because, well, they KNOW which way the market is going.  How do they know they know? Because they guessed right in the past – otherwise, why would they be paid $15.5 m. every year?    It’s an accident waiting to happen. 

  WHAT IS THE SOLUTION?

   It is so obvious.  Restore a much much tougher Volcker Law. Paul Volcker was the respected head of the American Fed under Ronald Reagan, in the 1980’s.  After the recent global crisis, Volcker recommended banning banks from the kind of speculative trading that got them into trouble, including J P Morgan. But the Republicans managed to remove the teeth from the law, and the current version, even if fully enacted, would not have kept J P Morgan from the kind of ‘hedging’ that got it into trouble.   What we need is a simple law, with one line. Banks cannot trade, for their own account, credit derivatives. Period.

  WHO IS REALLY TO BLAME?

  Chalk another one up to the Republicans.  They have prevented effective legislation to force banks to do what banks do, and what the original John Pierpoint Morgan did so well – take deposits and lend money.  Old John Pierpoint made a fortune lending wisely at 10 % (including to Thomas Edison to ‘electrify’  America).  This indeed was banking to create a good society.  Why can’t we return to it? 

   John Pierpoint Morgan once said, “a man always has two reasons for doing things, a good reason and the REAL reason.”  JP Morgan Chase had a good reason for its hedge trading (reduce risk) and a REAL reason (make piles of money, to offset weak performance in conventional banking).  

    Will we finally get some tough banking regulation laws in America?  Don’t count on it.   

If Josh Hamilton Can – So Can We! 

How a drunk junkie became baseball’s greatest player 

By Shlomo Maital  

 

   Josh Hamilton..AFTER

 

   Consider Josh Hamilton.  He is a baseball player who plays for the Texas Rangers.  And recently he did something that has happened only 16 times in the history of baseball. He hit four home runs in one game (and one double!).  (Remember, pitchers rarely throw him balls worthy of hitting – but he hits homers anyway).  He may be the best baseball  player alive today.  He is one of the few baseball players intentionally walked – with the bases loaded!  And he has a story.  It is about drugs, alcohol … and redemption.  He is the least likely baseball star in history:

     In the 2001 Hamilton began using drugs and alcohol heavily.   He made his first failed attempt at rehab. Hamilton only played 45 games in the 2001 season.  At the start of the 2003 season, Hamilton showed up late often during spring training and was sent down to the minor leagues . He left the team and eventually took the rest of the season off for personal reasons.   In 2004,  he was suspended 30 days and fined for violating the drug policy. He went back to rehab.  He failed two or more drug tests after being put into the program.   The suspension was increased several times, after repeated violations of the terms of the program.   From 2004 until 2006, Hamilton did not play baseball at all. He made several attempts at rehab, and started off the 2005 season with hopes of being a star major league outfielder. His return to baseball was helped along by former minor league outfielder and manager Roy Silver, who owns a baseball academy in Florida. After hearing about Hamilton’s desire to return to baseball, Silver offered the use of his facility if Hamilton agreed to work there. After several months there, Hamilton attempted to play with an independent minor league team, but Major League Baseball stepped in and disallowed it.  Hamilton was allowed to work out with the Devil Rays minor league players starting on June 2, 2006. By the end of the month, he was allowed to participate in minor league games. He played 15 games with the Hudson Valley Renegades at the end of the 2006 season.  In addition to returning to baseball, Hamilton also served as a cautionary tale for his young teammates with the Renegades.   Hamilton has twice fallen off the wagon.  On August 2009 sports blog Deadspin.com posted photos of Hamilton shirtless in a bar in Tempe, Arizona, with several women. According to reports, witnesses saw Hamilton drinking, heard him asking where he could obtain cocaine, and heard him reveal his plans to go to a strip club later that evening.  And on February 2, 2012   Hamilton suffered a second slip with alcohol. He claims to have had 2 or 3 drinks before inviting his friend and teammate, Ian Kinsler, to talk at the bar.  Hamilton held a press conference on February 3, 2012, to apologize for his actions.    Hamilton provides urine samples for drug testing at least three times per week.   He is a born-again Christian and when his teammates celebrate wins and championships, they drink ginger ale rather than champagne, for his benefit.   He speaks often to young people about the dangers of drugs.

    Hamilton has been dogged by tragedy.  Last July 7, during a home game at Rangers Ballpark, a fan died while catching a foul ball tossed into the stands by Hamilton. The fan, Shannon Stone, leaned over the rail to catch the ball and fell 20 feet behind the scoreboard. He was transported to a hospital, but died on the way.

       On May 21, Hamilton will be 31 years old.  Because of drugs and alcohol, he got a late start, and a rare second (and third) chance.  Let’s wish him well.  Let’s hope he can avoid self-destruction.  He is a gifted athlete;  his skill lies in his ‘fast hands’ – he waits until the last millisecond before swinging, and his bat speed is unprecedented.  Hamilton has gifts given him by God.  He abused them for years.  Someone that talented owes it to the world to continue to thrill and excel.    The next time you feel you need a second, or third, chance, think of Josh Hamilton.  And emulate him.

 

   Josh Hamilton:  BEFORE

A World Record Marathon Time – 384 Hours!  

By Shlomo Maital  

 

   I’ve run two marathons, Boston and New York; the Boston marathon took me over five hours.  This is very slow; the current world record time for men   is 2 hours 3 minutes and 38 seconds,  set by Patrick Makau of Kenya  and the world record for women was set by Paula Radcliffe of Great Britain  in 2 hours 15 minutes and 25 seconds. 

   But the greatest marathon record by far is that set recently by Claire Lomas:  384 hours, or 16 full days.  She walked across the finish line of the London Marathon, accompanied by three riders from the British Household Cavalry.  (see photo).    The reason this is amazing?  Claire’s legs are paralyzed.   She was injured in a horse-riding accident.  She was able to complete the full 26-mile 200 yard marathon course ON HER OWN TWO FEET thanks to an Israeli invention called ReWalk, an ‘exo-skeleton’ invented by Dr. Amit Goffer, an Israeli entrepreneur. 

    According to The Guardian,  the £43,000  (about $70,000) ReWalk suit enables people with lower-limb paralysis to stand, walk and climb stairs through motion sensors and an onboard computer system.   A shift in the wearer’s balance, indicating their desire to take, for example, a step forward, triggers the suit to mimic the response that the joints would have if they were not paralysed.  

    Lomas walked two hours a day, for 16 days. London Marathon officials refused to give her a medal awarded to all finishers, because she failed to finish in a single day.  In response, a dozen or more other finishers gave her their medals. 

    Goffer’s ReWalk exoskeleton is now widely used in the United States, in Veterans Administration hospitals, to help soldiers who were paralyzed by war wounds.  Goffer himself is a paraplegic.  He was injured in a freak go-kart accident.  Ironically, he himself cannot use his exo-skeleton to walk. His upper body is too weak to operate it.  Goffer says that his invention gives new dignity to those who are paralyzed, transforming them from someone in a wheelchair, always looking up at the people with whom they work and converse, to “just another guy on crutches”.    I visited ReWalk, at its headquarters near Haifa, and watched a demonstration of ReWalk as a paralyzed man walked up a long set of stairs.  It was amazing. 

Tampa Bay Rays: How Innovation Replaces Bucks –

Tell Me What You Think, Not What You Heard 

By Shlomo Maital   

   

 

  Joe Maddon, manager of Tampa Bay Rays

Read this only if you like, or at least partly understand, baseball.

  Tampa Bay Rays are a low-budget American League team, competing with the big-bucks Boston Red Sox and New York Yankees.  Yet right now the Rays defeated the Yankees in three straight games, and are ahead of them in the standings, tied for first with Baltimore. Last year Tampa Bay grabbed a wild-card playoff spot from Boston, on the season’s last day.  The reason is: Innovation.

   Manager Joe Maddon, when he took over at Tampa, had T-shirts made for each player, that said: “Tell me what you think,  not what you heard.”   He wanted his players, and of course himself, to think differently about baseball.  He wanted the people surrounding him to really think, and innovate, not just repeat all the worn clichés, most of which are wrong. 

    Maddon has pioneered something called the “shift”.  When left-handed hitters are shown by data-mining  to ‘pull’ the ball (i.e. hit mainly into right field), Maddon shifts his defensive infielders and outfielders far to the right.  This leaves a big hole in left field, but, so what?  Data are data.  Other teams have used the ‘shift’. But Maddon uses it far more.  And he even uses it on right-handed batters, who ‘pull’ the ball to left field.  And it works!  Moreover, when batters actually see it, mentally it freaks them out.  That alone helps the ‘shift’ work. 

     Eventually, other teams will copy Maddon. (The process is very slow; baseball is a game hidebound by old traditions and clichés).  Meanwhile, innovation is giving Tampa Bay an edge, that big bucks cannot.  Innovator: If you’re facing a tough stubborn incumbent, the only way you can win often is by trying new ideas, and instilling innovative thinking in every single person in your organization.  Tampa Bay and Joe Maddon show that it works.  

   My previous blog was about an illegal experiment. Maddon’s extreme shift is a highly legal experiment – one that pays off.  The other key element in Maddon’s success is perseverance.  Even when the ‘shift’ fails, he says, we stick to it.  We live and die by our innovation. 

 

     Source:  “Tamba Bay’s shifting ways are paying off” Global NYT May 9, 2012, p. 12

 The Great Experiment: Early Results 

By Shlomo Maital   

  

 

 

A massive experiment is underway. Despite the Helsinki Convention, you and I are the subjects, even though we have not given our permission.  Early results are in.

   The experiment is this:   Hypothesis – budget austerity creates economic growth and wellbeing.  The subjects:  Europeans, plus those who trade with them.  Control group: America.

    Europe, led by Germany, imposes fiscal austerity on Greece, Ireland, Spain and other nations, causing social unrest, protests, deep unemployment (over 20% in Greece and Spain, and even Serbia).  It’s for your good, say the Germans (and the reluctant French, under Sarkozy).

   America, stymied by vetocracy (Fukuyama’s term for political deadlock, where each political party vetoes anything the other party wants) has massive deficits and is unable and unwilling to fix them.  So America is the control group for European budget austerity.

   Which of the two is doing better?

   Europe is now mired in recession, officially.   America is growing faster, with lower unemployment and better job creation.

   The verdict, so far, is in.  Austerity doesn’t work.  As NYT reporter Jack Ewing notes in the Global New York Times today, “Everyone in Europe seems to agree that government austerity has been overdone.”  

    What infuriates me, and blows all my fuses, is that top experts have been warning about this for years.  You cannot grow an economy by shrinking it. It’s that simple.  This experiment has been done on human beings.  Greeks are committing suicide, 40% increase in suicides since 2010, because of it.  Europe’s German-led austerity is a war crime.   America is fortunate; the Republicans pay lip service to cutting spending but in fact, it is they who created the deficits. First, under Reagan and Bush the father, dumping a massive budget deficit on Clinton’s shoulders in 1992 (he fixed it), and then, under George Bush the son, whose tax cuts created the massive budget deficit Obama faces now.  Fortunately, political deadlock has kept America from the austerity that is ruining Europe.       

     I live in Israel. Israel’s economy has so far weathered the crisis better than many other nations, partly because of an enlightened and experienced Central Bank Governor Stanley Fisher.  But even Israel is now sinking because of Europe.  So, I intend to protest, that I and billions of others worldwide are subjects of an unauthorized experiment in Europe, that is causing pain and suffering.  It’s time Europe woke up!  When 11 leaders are dumped in elections in recent years, including the latest Sarkozy, don’t Germany and Europe get the message?

   In the notorious Tuskegee Experiments, in 1932, black American men were given syphilis, purposely, then allowed to die (while being told they were getting treatment) so that data could be collected from autopsying their bodies.  Today this is illegal. Yet the austerity experiments continue.  In the end, all those who authorize or support such experiments will pay the price. 

 Yes, YOU ARE Creative!

By Shlomo Maital      

 da Vinci & his masterpiece

   I meet a lot of managers all over the world. I always ask them, how creative are you? Say, 1 to 10, where 10 is da Vinci.  Very few admit to an 8, 9 or 10.  Most say, well, I once was creative, but after years in the corporate world, it was extinguished. 

  Now, comes corroborative evidence, from the Harvard Business Review website, and a piece called “Crush the ‘I’m Not Creative’ Barrier” .*  They “regularly ask groups of 100 to 1,000 managers and executives, ‘are you creative?’, and with clockword consistency at best half the hands in an audience slowly rise.”  Most managers, say the researchers, don’t define themselves as creative, or as innovative. 

    The bad news, they say, is that if you think you’re not creative, you aren’t..because you won’t bother to generate ideas.  The good news is, this mindset can be changed.  If you think you’re creative, you will become so, provided you take action.

   Here is a diagnostic test the scholars propose.   If you say ‘no’ to three questions or more, you need some creativity exercises. 

   I creatively solve challenging problems by drawing on diverse ideas or knowledge

 

  I often ask questions that challenge others’ fundamental assumptions.

 

  I get innovative ideas by directly observing how people interact with products and services.

 

   I regularly talk with a diverse set of people (e.g. from different functions, industries, geographies) to find and refine new business ideas.

 

  I frequently experiment to create new ways of doing things.

 

Spend time on this.  Actively hunt for things to change.  If you think you’re not creative, you won’t be. So think positively. Watch how, when you DEFINE yourself as creative, you become so. 

 

* by Jeff Dyer, Hal Gregersen, and Clayton Christensen.     

 No,   American is NOT #1…But It Can Be #10 

By Shlomo Maital 

  

   A recent podcast by Harvard Business School Prof. Rosabeth Moss Kanter, offers wise advice to America, on how to restore its vital innovation ecosystem.  A newsmagazine recently splashed on its cover: America Is Still #1.  It is far easier for Americans to wallow in self-delusion than to make the painful difficult changes it needs.  American is NOT #1.  With effort, it CAN be #10.  I wish America would listen to the veteran expert Prof. Kanter than the sages of Newsweek. Here are Kanter’s key points, structured to debunk some myths.

    America did not invent the things that made it strong, but its entrepreneurial spirit rapidly leveraged them.  “There are many production processes, for example, textile mills and the steam engine and lots of other things, that were invented in other countries. But it was that entrepreneurial spirit in the US that made those things into big industries. And it’s been the US investment in universal public K-12 education– well, actually, 1-12 in some places– investing in human capital and then being enriched by people who would come in search of opportunity from other countries who, because they would leave their home base, were a little more entrepreneurial. And therefore, they were risk takers, and that’s how you get innovation.”

    America’s system of K-12 education was once the envy of the world. No longer.  America needs to rebuild and reconnect its educational system with the needs of industry. “…our system of higher education, which grew on the base of having all those people who could get universal high school education, our base of higher education is the envy of the world. This draws talent, but it also produces ideas. And those ideas become the foundation for enterprises. So this is our strength. This is where we have to invest. This is what will revive American progress.”

     Big American firms must help small and medium-size ones. “…(we should connect) small and new enterprises to large companies. Why would something like that actually result in more innovation?   Well, it would result in more innovation. It would also result just in more growth and more jobs, because what has happened since the economy started to globalize is that many of the large companies in the US that work overseas– multinational companies– they have become more efficient, in part, by consolidating their supply chains, looking for more and more goods and services from other parts of the world. And that has squeezed out many small, local suppliers, some of which may be content to be small businesses, but some of which are growth engines for the future. So since small companies are the ones we depend on for growth, for new ideas, we need to find a way to mentor them, get their best ideas. And they also are sort of innovation, by the way, because they’re tinkering at the fringes of new technology.”

     Great basic research is NOT solely done at MIT or Stanford.  “I love the new research collaborations that are springing up between universities, businesses, small businesses, public funds.  So in Albany, New York, for example– this is a little esoteric for many people– but the State University of New York at Albany had one of the country’s first schools of nanoscience. And this is a very important science for semiconductors, which is a very important component of all of our devices, computers, and anything else that runs digitally. So they are the world’s leading researchers.” 

    Innovation must take place in education, not just in business.  “ If we wanted incredible school reform around the needs of employers, to do that nationally, you pass a law, you provide mandates, you provide some funding. But meanwhile, you need demonstrations. And those demonstrations go region by region, like the new six-year high school in New York City, which is now going to grow in New York and be copied in Chicago, which is a new form of schooling.   It means kids in ninth grade are essentially entering community college. And after six years, they graduate with a high school degree and an associates degree. And they get a job interview, because their work has been so targeted to the skills that are needed.”

   What are the chances Prof. Kanter’s voice will be heard?  According to NYT columnist Tom Friedman, very little. He quotes historian Francis Fukuyama, who says America is not a ‘democracy’ but a ‘vetocracy’, where interest groups veto any law they dislike.   And America is not alone.  Worldwide, a leadership vacuum exists, with no-one willing to propose tough measures, like those of Rosabeth Kanter, that cause pain and possibly electoral defeat. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

Pages