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Banbury Cross

a pillow for lost thoughts...

Archives for: August 2013

How to Balance the Federal Budget

These days, congressfolks have more functions than a loaded smart phone. Cultivating donor liaisons, dancing with eligible and ineligible lobbyists, rubbing elbows with fellow power brokers, debating the state of federal highways, delivering passionate speeches at annual gatherings of local tent makers, testing Air Force cockpits for flash resistance, meeting the press every other Sunday, avoiding arrest for cliche laundering, managing their private steamy affairs, breathing fire across the aisle during the session and I am not even going into the little chores like kissing babies, naming cute piglets or cutting ribbons.

But when all is said and overdone, their job number one is taking good care of our public affairs and more specifically managing the national finances. In other words, balancing our societal needs against the available funding in such fashion that we can provide the current population with all the necessary services but won't saddle the future generations with undue debt burden. And let's be honest - on this all important front they are usually badly failing. As the debt ceiling debate approaches again, the sprawling circus of the DC politics shifts into the highest gear: the rhetoric heats up, obstructionism runs rampant, threats are flying lower than swallows before a thunder storm and partisan posturing swings wide on either side. All in the name of American taxpayers.

Yet an antidote to this annual burlesque is simple. No congress person receives his or her salary for the given year until the corresponding budget is proposed, finalized and passed. No exceptions. Moreover, for every 1% of the deficit, the legislators' salary gets automatically reduced by 5%. And guess what? You would immediately see a flurry of intense negotiations. They would make compromises no one deemed possible just a few months ago. And best of all, we'd have a sustainable fiscal policy in virtually no time.

Mathematics does not care about ideological squabbles. And the simple fact is that you cannot run deficits larger than your average rate of growth. At least not indefinitely. That is why this issue is paramount for maintaining the long term financial health and for being good stewards of our common wealth. Yes, balancing the budget is a hard job because you have to carefully weigh the consequences of each cut and you have to consider the implications for each segment of the electorate. But that's the point. It is exactly this hard job for which we sent our representatives to DC in the first place. So they better do it right.

Time Machine on Track 4

Life is like a movie set. Find the right props and it catapults you into the most exotic locations. If you get lucky, you can even visit that most coveted destination of all - the past.

This August I was waiting for a train at a small station in the border region of northeast Bohemia as I was returning from a trip to my parents' summerhouse. It was already dark and the train to come was the last one to serve this particular route for the day. We used to call these "Boozer Trains" as they mostly collected local tipplers and carried them home. After I left Czechoslovakia more than 20 years ago, the fleet of the state owned railways has undergone a significant modernization - high speed trains are barreling down the main corridors and even the local branches are served by fast and efficient multiple units. I was fully expecting one of those newfangled marvels of modern transportation, so I was pleasantly surprised when I saw the familiar view of a one car train that was popular in the 1970s. Apparently the Czech Railways kept couple of them in service for those late under-utilized connections.

For me, there is a definite sentimental value associated with this type of motor car (technically known as Series 810). The moment I stepped on board it was as if I set foot in a different time. I immediately recognized the layout of its seating configuration, and as we took off the familiar grumbling of its diesel engine fit snugly in my memory keyhole. Even the wailing sounds made by its undercarriage hadn't changed a bit. The rickety soul of this vehicle carried with it a piece of my life. And the passengers looked like they fell out from an old communist retro flick, too. No sign of tablets or smartphones. Just a bunch of local guys who probably rarely made it into my hometown (a regional capital), much less to Prague; a couple of teenagers discussing the standings of some soccer teams that FIFA did not even know existed and a conductor that knew nearly everyone by name and a few by occupation. And all that was nicely pickled in the sweet smell of the meadows blowing their pollen into the summer breeze alongside the river Orlice.

It was an instant trip to the past. The sense of traveling in some surreal dimension was so palpable that I felt I'd heard the public address system informing me that we were about to arrive at the Hogwarts Central Station. Who says time machines don't exist? They are all around us. You just have to recognize them and hop in when they arrive at your feet.

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The Case for Dual Banking System

Imagine you have a solid and trustworthy family car - say a Volvo - which you need to cover your basic transportation needs. You go to work in it, you drive your kids to school with it, your wife uses it to bring groceries home, you need it to drive grandpa to the hospital occasionally. But then one day your crazy younger brother borrows the Volvo to make some extra money in a car race and in the process inflicts serious damage to its vital components. After all, sturdy sedans - while reliable - are not well suited to zip along narrow mountain roads at breakneck speeds. But that's not all - to add insult to injury, now your little bro asks you to chip in for the repair costs.

You would not be very happy about it, would you? Well, that is pretty much what happened to our financial system.

We used to have a reliable, if boring, banking system which served us well for several decades since the Great Depression. It extended credit to farmers and producers, it kept our deposits safe, it provided a flow of blood for the real economy. But then one day our crazy younger brothers - the financial wizards of Wall Street - asked us if they could borrow the family car for a generously sponsored rallye.

Our beloved Masters of the Universe figured out they could make tons of extra money if only we'd loan them our car for a risky race through high financial mountains. And for a while they did. Things were rolling smoothly, markets were climbing like Reinhold Messner on steroids, fees and profits reached obscene levels and our old beaten car was suddenly worth much more than a boring trip to the office and back. But then something went terribly wrong, our reliable Volvo - or its financial equivalent - went into a skid and it makes lots of funny noises ever since.

The business of banking is based on loans. That provides a steady stream of predictable income. But being merely rich is never the option on Wall Street and so over the years we have got all kinds of insurance vehicles, foreign exchange swaps, leveraged hedge instruments and other exotic contrivances. No one really understands how they work, but who cares. As long as you hear that magic "cha-ching", all is well. Until one day you wake up in the pool of tears. And the worst part is we are the ones who have to mop up the mess this speculative spree created. "Privatize the gains and socialize the losses" - that's how this cookie crumbles. In other words, they kept all the prize money they won when the going was good, but now that the car no longer works, we have to drive it to the garage and pay for fixing it. What a great deal. If you are a high financier that is.

We clearly need two cars. One safe and boring for the family use and one sporty and spiffy for our wild younger brother. The first one will represent the old fashioned banking as we know it and it will be fully covered by our central bank, which effectively means by all taxpayers. The other one will be all theirs - engine, hood and blinker. Chase away boys. Do as you wish. If you can find a great opportunity and get a few extra percent of return, go right ahead. If you get tons of private investors plowing their money into your well thought out charades - good for you. Just don't come crying back to us when the roulette wheel does not turn your way.

Why? Because we need a stable monetary environment for education, for sickness, for infrastructure, for research and for actual investing. We can't commit that money to your Ponzi schemes and high stakes gambling just because you like to live in the fast lane.

We used to have such protection. It was called the Glass Steagall Act. But thanks to Alan Greenspan, Robert Rubin, Larry Summers and other high priests of deregulation, it was dismantled at the end of the last millenium. All in the name of brighter future and prosperity. Well, that bright future lost its way somewhere so I guess it's time to reinstate this wall and make it stronger than ever. The wall that will split our garage into two separate booths, just to make sure that our younger brother won't mistakenly trash the old family car.

Menu as an Algebra Problem

An inn is not a place where most people would wield their high level mathematical skills.

Unless the inn keeper has a devious mathematical mind, in which case you better brush up on your trigonometry before ordering the main course. When I was wandering in obscure corners of the Czech Republic this summer, I happened upon a far flung restaurant whose daily specials menu would make you feel very grateful for that little calculator conveniently imbedded in your smart phone.

Consider this sampler (all prices in Czech Koruna = Kc):

Fried Cheese: Sqrt(12100)
Cabbage Soup: 1280-300+20-970
Sausage: 6.71^2
Pancakes: Sqrt(2)/2 = sin(x) (where x in degrees is the price you pay)
Potato pancakes: (2^2+2)*4
Goulash: 8245/97

For connoisseurs of spherical geometry, I will add that this gem can be located at latitude: 49 degrees 49 minutes and 41.53 seconds North and longitude: 16 degrees 8 minutes and 58.122 seconds East. Regular mortals will find it in a small village of Vranice, which is one of the entry points into a low exposure natural park called "Toulovcovy Mastale", known mostly for its dreamy woods, deep ravines and bizarre rock formations from cretaceous limestone. The (partly open air) pub is called "Na verande U Toulovce", and you can get there via a short hike from Bor u Skutce, which in turn is not very far from Nove Hrady (with a nicely renovated castle) and Litomysl (the town where composer Bedrich Smetana was born). You should be able to locate those on any reasonable map of the Czech Republic.

Bon appetite! Or shall I say Bon Arithmetique?

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