Bobby Bonilla was a good, but not great, baseball player for the Pittsburgh Pirates in the late 1980′s/early 1990′s. He was able to parlay these years into a series of obscenely rich and guaranteed contracts in the 1990′s. In the meantime, he got fat and lazy as a player (famously playing cards in the clubhouse while his team lost in the playoffs). Known as a clubhouse cancer and a coach killer, the New York Mets, so eager to get rid of him, bought out the last year of his contract at $5.9 million in 2000.

Buying out a player’s contract is not unusual. What was unusual is that the Mets arranged for the $5.9 million payment to be postponed for 11 years- with the first installment starting in July 1, 2011- and then paid for over 25 years at 8% interest. To put this another way, the Mets are paying Bobby Bo (as he is known) $30 million for a $5.9 million payout.

Why would the Mets agree to such a ludicrous deal?

Well, you see, the Mets would invest the $5.9 million with a brilliant investment manager who could out-perform the earn-out. The manager?

Bernie Madoff.

Have a great weekend.

The Vancouver 2010 Winter Olympics drew to a close on Sunday night.  Everyone I knew who was there came home and got sick. Must have been quite a party! The problem with the coverage of the Olympics, any Olympics, is that they are subject to such hyperbole during the event and then quickly forgotten right afterwords for the next greatest event this century.  But these types of events always hold life and financial lessons for me. There are two I will take away from these games (Chasing Prosperity shares her lessons as well).

Firstly, life never occurs in a straight line. The script for these games was that Canada was going to dominate skiing, skating, the sled events, hockey and curling on route to winning the most amount of metals under the Own the Podium program. Canada fell flat on its face in skiing (literally and figuratively), a poor skeleton competitor ended up sobbing on national television apologizing to the nation for not winning and the Canadian men’s hockey team were taken to overtime by Switzerland and beaten by the Americans in the round robin.

Yet, Canada won the most amount of gold medals in any winter Olympics winning medals in events no one expected Canada to metal. Canada did, indeed, own the gold podium but not in a manner anyone expected. The morale of the story being that sometimes going from point A to point B is not a straight line but full of unexpected twists and turns.

Similarly, expectations of investing returns do not always go from expectation to result and getting what you want often does not happen in the way you thought it would turn out. The only thing to do at this point is make your adjustments (changing goalies or changing investment strategies) and keep plugging away.

The other lesson that came to light is the media’s growing obsession, in the 24-7 tabloid age, to create a story which is often wrong. Some members of the media questioned whether Canada would win enough medals and were calling the Olympics a disaster before the games were half over. Canada did very well in the medals count and most observers, even the grumpy English reporters, admitted that Vancouver threw a great party.  This seemed to shine light on the fact that some members of the media are taking the a small sample size of something, anything, and trying to blow it up into a story- even before the story has really developed.

Traditional media is in a tough bind. The internet has pulled the rug out from under them. To be relevant is to break a story and to break it faster than TMZ. It does not necessarily matter if the story is right. Just that it is broken and you grab attention.

In personal finance, we have whip sawed from terms such as  “economic miracle”, “unrivaled historical growth”, “never ending good times,” to “depression”, “bubbles”, “economic collapse” in a short period of time. Both sets of terms were hyperbole to the extreme.

Things are never as good as a salesperson makes it to be or as bad as a lawyer would have you believe. I sometimes think we may be better off as investors not reading the headlines and going straight to the financial reports.

Have a great weekend.

There is elegance (and profit) in simplicity

I sold the last of my mutual funds this year when the deferred sales charge no longer applied. Call it my youthful investing mistakes finally expiring. Now everything I invest in is relatively simple: broad based exchange traded funds, dividend paying stocks, high interest savings accounts etc.

I have posted many times this year about how simple investing products have been overly twisted into complicated ones that serves no one but the people selling it. Jason Zweig gets my vote for quote of the year: ““Sooner or later, Wall Street turns every good idea into a bad one.”

There has been a lot of focus on de-leveraging this year. Now that the Jones are broke, it seems ok for everyone to uncomplicate their lives again. However, people have short memories and we are already seeing the return of good ideas turned bad in investment products. The leveraged ETFs being one of the worst products for overly complicating an average investor’s portfolio.

Want to know how problematic more complicated ETFs are? Class action lawsuits aimed at the ETF market is now described as “a new litigation phenomenon.” 13 class action lawsuits have been filed against ETF issuers between August-November, most having to do with the alleged undisclosed risk disclosure of leveraged ETFs to investors. None of the allegations have been proven and it will interesting to see what the Courts believe is an adequate level of disclosure.

The larger point being is that sophisciated products (asset-backed commercial paper, sub-prime mortgage notes etc) almost stalled the banking system. One should never forget history (see below). Simple is beautiful.

Success is the process of hiring and retaining the right people around you.

2009 is the year the investor struck bad. Articles about suing investment advisors, the statistical improbability of active management beating the market and the excesses of the financial markets became common-place this year and no one just confined to the DIY community.

The exclamation point occurred earlier this month when Jonathan Chevreau’s editors accidentally hung him out to dry by proclaiming in a headline that investment advisors were “spoiled” (writers write the content while editors write the headlines). The author’s attempt to explain the article on two separate occasions most likely spoke to the immediate and negative backlash he received from the investment advisory community.

But there is a far larger underlying point to which I will to defer to Brett Wilson. For those who don’t know, Brett Wilson was a leading oil and gas i-banker in the Alberta oil patch for the last 15 years and, more recently, is one of the judges on the television show Dragon’s Den. I  saw him at a speaking event in the fall.

In a question and answer period, an audience member asked Wilson (to paraphrase): “if you lost it all tomorrow, could you make it all back?” Wilson’s answer was an emphatic “yes” because (to paraphrase again) he had learned to hire and retain the right people. Notice his answer was not “I am the smartest guy in the room” or “I have all the right connections” but he was implicitly recognizing his own limitations and finding people to off-set this.

To revisit a  point I made yesterday about process vs. outcome, we tend to hire investors because of an implied promise of an outcome. But do we have it backwards? If one seeks nothing but high return without an over-arching strategy to achieve it, does one not end up with a salesperson and not an advisor that will sell you magic beans? Should the goal to be to find an advisor that has the right process in place?

I come to this lesson as an employer; I had a terrible time hiring people and I have sat down and asked for a lot of advice on this. Too often, I was attempting to hire for skill-set (an outcome) rather than attitude and personality that add something new to the work environment (a process of creating a more efficient team). More often than not, I also got into the “hire fast, fire slow” routine which many investors also do with their investment advisors.

There are, sadly, terrible financial advisors out there. A system that sets high sales quotas will encourage an environment of fee-taking and sales rather than advice. However, no one puts a gun to our collective heads and demand that you have to stick with an advisor that is not right for you. Again, it is a process to find the right person (whether a traditional advisor or an advisor who is paid by the hour for a 2^nd opinion or no advisor at all).

The key is to hire the right people AND not abidicate to them but engage in a healthy debate towards a common goal.

Being a good student of history will make you a good investor

Past performance does not guarantee future results. But history works in patterns and understanding history, your own and the world’s, plays a much larger role in money than some people may think.

A brokerage house fails due to a short sale gone bust. A bank holding collateral on the trade collapses. A stock run starts. The public starts withdrawing money in a panic. Banks stop lending money. JP Morgan steps in and rescues the situation. Regulatory reform ensues.  Sound like 2008 doesn’t it? Actually,  it was 1907 and it was JP Morgan, the man and not the bank, who stepped in (…and those who want quick regulatory reforms be prepared to wait. The Panic of 1907 lead to the creation of the Federal Reserve 7 years later).

Times change and technology changes but the nature of people do not. If one really wants to be better at personal finance, I would suggest looking at one’s own history and figuring out the recurring patterns which lead to negative results and recognize that pattern and discipline oneself to change it. Making small changes could go a long way in 2010.

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Thanks for reading in 2009. Seeing you on the other side.

The dialogue presumes a top-down approach to the issue at hand is the right approach.  The conventional thinking is that the schools need to teach us about money and the government should offer new pension plans. But, is not the same top-down approach, ceding our finance responsibilities to those who supposedly “know better”, what lead to hyper government deficits (check out the debt clock), lack of regulatory supervision over bankers and a poorly designed social security system in the United States?

Why would we presume, given past history, that a continued top-down approach to money would lead to a different result? As a wise person once wrote, the definition of insanity is doing the same thing and expecting different results.

Ultimately, financial independence is taken and not given by others. If you are a big fan of the book The Millionaire Next Door, as I am, what the authors noticed is that financially independent individuals spend more time on their own personal finances than those who are not. No school or government mandates that financially independent people spend their free time balancing their books. They are self-motivated to do it themselves through a bottom up approach (as in I’ll pull myself up from the bottom up).

Just some food for thought this weekend. Enjoy the weekend.

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Are the opinions and information provided by blogs better or worse than mainstream media? Who can you trust for helping you make your decisions?

The answer cannot be framed as an either or question. Sports and political blogs have a different dynamic than personal finance blogs; they are generally rooted in access to the source which can breed an old boys network. The beat reporters for the New York Yankees baseball club are notorious for covering up for the excesses of its stars from Babe Ruth forward; after all, the team can simply deny you access to the club-house or to players if you report on the well-known debauchery of spoiled young athletes with lots of money. So, the beat reporter becomes part of the team rather than a true insider-outsider and can view anyone not in the circle, like bloggers, with suspicion.

Personal finance blogs exist within a regulatory framework of equal access to all. A CEO cannot give an exclusive interview to a reporter on some secret of their company that is material to the company’s fortunes without making that information publicly available to all, lest they break securities laws (the founders of Google found this out early when they went public). Thus, the asymmetry of information (not opinion) is not as great in the personal finance context.

This lack of relative asymmetry of information is probably why mainstream media are beginning to use good bloggers as references (see below for a possible reason why). Jonathan Chevreau and Larry MacDonald, writers for mainstream media, do cite bloggers as sources on occasion. It is hard to process so much information by yourself.

Where the asymmetry does occur is the mainstream media’s access to resources. Mainstream media have research staff, editors and reach of hundreds of thousands, which makes getting expert opinions easier. Whether the opinions provided are worth anything is really in the eye of the beholder. Fact-checkers and researchers can also weed out most wrong information which is an often cited, and correct, issue with some blogs.  With access to editors as well, the presentation tends to be a lot more polished as well.

However, bloggers do have a certain advantage over reporters. Many bloggers tend not to suffer from glass tower syndrome, whether literally or the editorial leanings of large congolermates who own media outlets, and, with a keen eye of observation on their daily lives, can report on many things that mainstream media cannot. For example, I have been told that the banks have begun to do well by resorting to the Wal-Mart model of having their suppliers de facto finance their business. Many service providers for banks are now being paid on 60-100 day terms and being grounded down on their fees. The law of intended consequences is that by doing this small and medium sized business have less than ideal cash flow statements which makes lending to small businesses harder, caused, in part, by the banks themselves.

What are we to make of all of this? Attacking the medium, in and of itself, is lazy analysis. I would suggest instead that people fused information from both sources to make an informed PERSONAL finance decision. For example, Rob Carrick and I both recently wrote about investing in ETFs against the back-drop of the sheer amount of  EFTs being sold. Rob’s excellent article tackles subjects mine does not and vice versa. I would suggest reading both and then deciding accordingly on how to proceed if you are assembling an ETF portfolio.

Having said that, I have enjoyed Rob’s articles because he is primarily a provider of information and not a peddler of opinion (I have never spoken to Rob before). Blogs and mainstream media alike which are nothing more than soapboxes for opinions should be viewed with a critical contextual eye. After all, the opinions and recommendations being provided are based upon the particular context of the opinion-maker and not the reader. Thus, just because some television personality believes you should buy Australian 10 year government bonds, does not necessarily mean it is right for you.

As one blogger once wrote, personal finance is 90% personal and 10% finance. At the end of the day, all media and blogs should be doing is conveying information. It is still up to you to (i) verify the information; (ii) process it and act in accordance to your life.

While the medium of blogging has changed the dynamic of personal finance somewhat, with due respect to people falling all over themselves about Web 2.0, the basics of creating a household budget has existed since the advent of money. Thus, apply the same critical analytical eye to personal finance decision-making regardless of where you get the information. While blogging has certain increased the amount of information available, you still have one context to apply that information to- your own life.

Best of luck.

Who is right?

Depends. I have been a legal advisor (an industry with its fair share of horror stories) and been a client of  investment advisors. Thus, I have sat on both sides of the advisor-client table and I would provide a few brief comments and tips.

HOW DID YOU CHOSE YOUR ADVISORS?

This is where I think the investor more often than not trips up. Like anything else in life, there are good, bad and indifferent advisors. It is your responsibility to find the one that is the best fit and not the most comfortable fit.

More often than not, I hear people pick investment advisors because of proximity, they saw an ad or they got what I call a throw-away referral (a referral given by someone who never used them or knows them casually). In other words, we act out of comfort and not accuracy. For example, my first non-bank account investment was to buy mutual funds through my bank branch because it was down the street- wow, was that a learning lesson!

I would also be remiss not to point out that not all advisors can sell mutual funds and stocks).  Conduct your due diligence of what they can buy and sell for you.

Start right. Even if it means taking longer to find a good advisor, take that time. The good ones often don’t advertise (don’t need to- their word of mouth referral networking is great) and the bad ones sometimes make the most noise. It is like dating- you have to sift through a lot of crap to find a good one.

WHAT IS YOUR INITIAL CONTACT WITH YOUR ADVISOR?

This responsibility is shouldered on both the client and investment advisor. If hiring an investment advisor is a long-term relationship, you just don’t propose to a girl on the first date do you? You enter cautiously and you establish some ground rules.

When I hired my investment advisor, I gave him a part of my portfolio and told him upfront that I was doing this and would transfer the rest if things worked out well. I also said that we needed to meet periodically- in other words, I set some ground rules. I find that clients who gave me reasonable boundaries to work with legally, even if I did not like them, gave a better form to the relationship.

On the flip side, it is really the advisors responsibility to be honest. Investor expectations can be unrealistic. A good advisor does not pour fuel on the fire of those expectations. If the client feels that he should be paid 18% on a guaranteed fixed income instrument, and if the advisor has told them this product may exist only in la-la land, then it is the investor’s responsibility when his result does not meet these unrealistic expectations.

HOW DO YOU DEAL WITH YOUR ADVISOR?

If you manage employees, unless you trust them 100%, you check in with them from time to time right? So why do some people hire an advisor and then never have periodic contact with them to see how things are going? Letting the advisor know you are around and want to talk is the investor’s responsibility. Ask “why?” a lot. Ask “what are all my options?” a lot. Ask “justify your advice” a lot.

The advisors responsibility should ideally: (i) keep in periodic contact (bonus points if you are actually not selling product but doing this to earn trust); (ii) lay out ALL options (not the ones that make the most sense for the advisor only); (iii) educate;  (iv) answer the “what” and “why” questions; and (v) avoid sales pressure tactics.

If you have a salesperson, fire them. If your advisor never calls back, fire them. If you had a terrible boy-friend, you would dump his sorry butt right?

FINALLY…

One final note, I have had very indecisive clients in my time who want me to make the decision. Here is the thing. A good advisor can give you options and tell you what they would do but clients always don’t disclose everything, they are emotionally attached to the issue, they get all sorts of other advice etc. etc. In other words, an advisor does not have perfect information about you.

Thus, at the end of the day, an advisor cannot decide for you. This is your life. You have to take responsibility for the final decision. Use your advisor to give you ALL options and information to arrive at that decision but you have to make it yourself. If you abdicate decision-making powers to your advisor, you are setting yourself up for failure because the decisions that will be made are from someone else’s perspective.

The angry surrounding the approximately $165 million of bonuses that were due to be paid to executives of AIG on March 15 played itself out in Congress this week as the House of Representatives voted to impose punitive taxes on all AIG bonuses. If nothing else, the whole scandal over the AIG bonus has done nothing more than to widen the mental chasm between Wall Street, and their defenders, and main street.

As best as I can explain, here is why normal, working class people are angry or, inversely, why Wall Street and their defenders don’t get it.

Banking, as a friend who works in a bank said to me, is the perfect business model (insurance is often described as insurance without banking). Think about this for a second. I take your money for safe-keeping and I pay you a small fee to keep it BUT I also charge you money to keep it. Then I take YOUR money and lend it someone else and charge considerably more than what I am paying you.  I make sure that when I lend money out, I receive enough collateral in return to recover all, if not most of my loan, if the borrower defaults so your money should be safe even if the loan defaults.

You really have to try hard to mess this business model up and, yet, the bankers messed it up.

On the other side of the ledger, we all drank the cool-aid collectively. We leveraged ourselves to the hilt, bought stupid products that these bankers who were trying so hard to mess up a perfect business model sold to us and never met a tax cut we didn’t like while demanding more services at the same time (see the now nearly bankrupt state of California as Exhibit A).

In what should be the most economically prosperous time in the history of humankind, we collectively mess that up too.

So the “mess up” score is now: Bankers 1, Main street 1 circa September 2008.

On the main street side, do you know what I hear after the mess up score is tied? Yes, we made stupid mistakes but we are adjusting and coping and moving on. We are down-sizing. Shedding staff. Interviewing new investment advisors. Taking more control of our money etc. etc. Is the spike in the savings rate to 5% not indicative of the fact that people are retrenching back to a more responsible lifestyle?

In other words, most people I meet have taken responsibility and have moved on. You have to remember that the world that the media lives in quotes the exception rather than the rule and the exceptions are the people not taking responsibility for their actions. Most people I know have and are adjusting- just that the media doesn’t interview normal people; they find the wailers (there will always be irresponsible people no matter what the economic climate so you can’t speak to someone who is always irresponsible and say they do not take responsibility for the subprime era actions since they never take responsibility at any time).  In addition, most people are keeping a stiff upper lip and begrudgingly allowing their tax dollars to the economy whole again.

On the Wall Street side, do you know what we read? I need a “retention bonus” in a job market that has cratered for financial industry management. Keep bailing us out. We want legal immunity (the banks in ABCP restructuring). We’ll move our automotive plant out of country if you don’t do what we want (discounting years of government subsidies). We will not cut our union wages (even though that is part of the source of the problem). This wasn’t our fault- it was previous management/union heads/bad government decision/the general public/geo-political forces etc. etc.

So now the responsibility score is Bankers 0, Main Street 1 in March 2009.

Thus, when the AIG bonus first came to light, it made me feel like it was doing nothing more than reinforcing the responsibility deficit on the bankers’ part.

I look at it this way. You are employed in a large department for an equally large company with your boss having a lot of managerial discretion (i.e. little regulatory over-sight). You boss losses his/her marbles and starts making terrible decisions. But no one in the department actually calls the boss on it; instead, everyone begins to engage in equally terrible decision making. The department completely blows up and nearly puts the company into bankruptcy.

What happens? Employees are fired or disciplined. Pay freezes and budget cuts ensue to punish the department.  But the boss stays and, not only does the boss stay, he/she decides to give himself/herself a raise and the company forces you to pay for the raise out of the pay cheque of the remaining employees (this part is not realistic but work with me for a second). Would that not entice a revolt in the company?

That to me is the AIG bonus issue in a nut-shell. Feel free to comment/rant as I just did.

Have a great weekend.

Today is also the 400th post of this blog! Thanks for everyone for reading and commenting. If you keep reading, I’ll keep writing.

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Paul Krugman is a famous economist-to the extent any economist can become famous. Before he became known as a frequent critic of W’s economic policies,  Krugman wrote a paper called the “The Myth of Asia’s Miracle” during the 1990′s which ruffled a lot of feathers in political and academic circles (sensing a pattern in Krugman’s career here?).

His assertion was simple. There was no mystery, or secret sauce, to Asia’s economic rise in the 80′s and 90′s. Quite simply, Asian economics developed by a mass mobilization of resources, moving people from farms to cities, employing them in state-built factories and educating workers to be literate. However, a mere increase in these economic inputs (to use his terms) without an increase in the efficiency of these inputs will eventually lead to declining returns and limit growth.

In other words, throwing money at the problem will give you an immediate lift but with declining effectiveness over time if the money is not spent wisely (or work smart not hard). The best example being the Soviet Union who enjoyed a great rise in the 50′s and 60′s by forcing citizens to factories but could not think of how to make any further gains after that initial rise and the system imploded onto itself as the gap between it and America kept growing.

How is this related to our current situation?

There has been some quite article posts of the credit crisis and whether the home bailouts are economically feasible. However, the question I keep coming back to is if we are throwing trillions of dollars at the problem, what exactly is supposed to be at the light of the tunnel? Where are we going as a nation and society?

The end result of a stimulus is to put life back into the economy.  But for what purpose? If the government handed out $250 rebate cheques to shop at Costco or buy a locally made cars, we end up back in Krugman’s observation. It merely gives a temporary jolt to the economic system which fades in time.

While this may provide much needed temporary relief, one has to remember that the economic system that crashed was unsustainable: we were leveraged to the hilt, fraudsters manage some of our money and we consumed and not produced.

And, yet, I get the distinct impression from our leaders that the stimulus is intended to put us back to that lifestyle instead of telling us the truth which is: “We can only sustain this lifestyle by destroying the earth, mortgaging our children’s future and living materialistic and empty lives. We need to use this opportunity to really set ourselves onto the right path for many years to come.”

Certain parts of the stimulus do address productivity issues such as infrastructure build funds but I hear very little about those funds being used to rebuild old schools, attract more world-class academic talent to conduct research locally or to rehabilitate populated lands for other uses. Fixing roads should be done for safety reasons alone but it is a bit of a sad comment that we are using this opportunity to do what should be the government’s basic duty every year.

More than anything else, if the government is going to use taxpayer funds, many of whom did not speculate on real estate or buy shaddy investment products, it better say to these good and hard working citizens, here is the future we are crafting using your funds. Give us a light at the tunnel to look forward. If you are taking hard earned cash from the people who did not contribute to this issue, it should be to shape a sustainable future they want and not to maintain the lifestyle of those who got us here.

But all I see and hear are confused leaders who know nothing more than to throw cash at the issue without a real plan and, to use the Krugman analysis, this type of policy making can get us out of this mess but probably put us right back in it not soon thereafter unless our leaders actual articlute a crystal clear vision of getting value for all the money being spent.

Have a great weekend and enjoy the March break if you have it off next week.

Clearly, the poll was such a small sample size as that you cannot say that the minority of stories is the majority but that is what the media does- it takes a small sample size and attempts to argue that this is the norm.

I have spoken to several reporters in my life  and some of the things you glean are: (i) they are generally nice people doing their jobs; (ii) their expertise is writing and prose and not finance or government policy or municipal politics (sports writers are slightly different but half of them just stand on their soapbox and spout garbage- looking right at you Stephen A. Smith); and (iii) most of them would rather report the true story than the one they write but they know the game.  So you play the game and you help them by feeding them a story.

And in this Internet, twitter, pop-up headline world where “traditional” media is up against instant micro-blogging and bloggers (equivalent to bringing a bicycle to a motorcycle race…), the only real story that has legs is to find something gruesome and emotional and beat it to death- even if it may not reflect the reality around you. After all, reporters are (a) usually not experts (columnist are, in theory, experts; reporters are generally not); and (b) told to find something that bleeds or it won’t lead.

Think about the amount of  investigative journalism it took to undercover Watergate. The 1998 equivalent of a Watergate reporter was sent to report on how blue Gap dresses absorbs presidential fluids and the 2009 equivalent is reporting on what Michelle Obama is wearing.

Here is one of the more interesting pieces on the decline of newspaper journalism I ever read (well, admittedly, I have read one story on this topic…). It is from the creator of the TV the HBO show The Wire. It probably pines too much for a past that never existed but in commenting on the impact of multinationals acquiring newspapers and the challenge of the internet to newspapers, Simon [the author] writes:

“…the newsroom culture will instead emphasis impact…Impact means prizes. Now you pick a target and, to the exclusion of all complexity, you hammer on that target, story after story. Most especially, you write additional accounts highlighting the “impact” that The Sun’s coverage has achieved — covering your own coverage — the better to show that the newspaper has effected change….”

So, if you believe Simon (which I do partially), you have a dying industry trying to save itself by blowing up THE STORY big time which is creating a difference between media hype and reality (don’t get me wrong, its bad but its not the end of the economic world). I think the focus should be looking at our own personal context and deciding accordingly rather than believing what someone in a glass tower who is fed stories for dramatic impact writes (I am actually quite sympathetic to reporters; they are caught between their jobs and their morality at times).

But, as a final thought, here’s the real curious thing  I often wonder- does the media ever think through the implications of its doomsday stories? If you make things worse than they seem (take a small sample size and argue it is the norm), do you not scare people into not consuming? Less consumption means their advertisers have to cut back on advertisements which means the media outlets suffer. Before the web, people may still buy papers to be informed but, with such an easy substitute, is the traditional media not just sowing the seeds of their own demise by screaming at the top of its lungs the end is near?

Thus, this whole idea of going into massive deficits as part of a stimulus makes me uneasy. I wonder if all we are doing is recreating the welfare state of the previous generation, which was substantially dismantled in the 1990′s, and substituting the excesses of private enterprise with the excesses of bureaucracy in the name of a stimulus.

For example, the Canadian stimulus package was introduced this week as part of the budget (because Canada has a minority government, there could be weeks and months of negotiations before it is passed). Look at the comments in Million Dollar Journey’s post on the budget concerning the tax credit for home renovations or Michael James on Money reporting on new (unspecified) regulations on credit card issuers.

How will these questions be answered and regulations put in place?  You got it-the machinery of government needs to expand and it is always a trend that temporary government programs tend to become permanent ones no matter what the government says when it introduces a program (remember that personal income tax was supposed to be a temporary war measure).

Thus, are we doing nothing more than providing a stimulus for the expansion of government again? As reported in the local paper this week, it is easy to announce money will be spent but hard to actually put the money on the ground after the bureaucrats want to create processes to manage it (the example cited was the Feds said they would fund a subway extension to the ‘burbs- 2.5 years ago and no money has flowed- but all that has happened is paper being pushed).

If government really wanted to provide instant relief and stimulus, why not declare a tax holiday? Simply put, no one has to pay taxes for a period of time. You don’t need to craft processes, laws and regulations for a tax holiday. You simply don’t collect tax for a while. You put money in people’s pockets through instant tax relief and given that this temporary measure is easy to stop, the government does not have to expand in the process (which is why they won’t do it). I do not claim any originality on this idea- it has been raised as a concept by many others as a cheap and timely way to provide relief but works against the interest of government so it won’t happen.

I am by no means a raging libertian and I see the need for regulation to rein excesses in the system. What I worry about is the pendulum swinging too far the other way from a unregulated market to an over-regulated market and from the state taking little to no role as private enterprise abused the system to the state taking too great of a role and suffocating innovation and enterprise. As with everything, the only excess should be moderation.

Anyone else worried about this?

Have a great weekend.