Archive for August, 2009

A True “FIRE” Sale

She was a real beauty.  

The images stared at me from the Craigslist ad and I read the description eagerly.  It was one of those “I’ve found it moments.” 

With each characteristic my excitement increased: 

One ton pick up, 4×4, rebuilt 350 four bolt main carb to pan, new clutch, an Allison transmission with a crawler gear, new hydro boost master cylinder new tires, new brakes & rotors, new warn 4×4 locking hubs, new exhaust, new oil & water gauges,  

And the icing on the cake: 

A 50 ton hydraulic capstan winch

The asking price?


In addition, the ad was a few weeks old so I figured the guy would probably take $500 or $600.  

I swooned thinking about all the firewood I would be harvesting with this wonderful piece of equipment.  

Ever since we started heating our house with wood, I have struggled to obtain firewood.  Not because I can’t find it, but because I can’t haul it.  You would be surprised at how many people give away firewood for free….if you come and haul it away.  

I also had visions of going to the back few acres of my father’s property and using the 4 wheel drive and the winch to extract a few cords of wood.  

The next day, after taking care of some client work, I placed a call to my insurance agent to tell him the good news. 

A THOUSAND DOLLARS A YEAR!   That’s twice the value of the vehicle that I have to pay EVERY YEAR! 

After confirming that they were quoting me for the minimum liability coverage, I hung up the phone in disbelief.  Before we go further, yes I have a good driving record, no DUIs and I have the multi car, multi line discount, etc, etc, etc.  

I then reverted to my nasty habit of thinking about things.  

“So the thousand dollar premium is ostensibly for liability coverage”, I thought.  Liability being damage I may do to others.  

Then shouldn’t liability premiums be assessed on the driver rather than the vehicle?   In other words, what’s the difference if I go to pick up some firewood in my Honda Accord or if I go in the proposed pickup truck?  It’s still me driving the car and I cannot drive two vehicles at once.  

Therefore, the number of vehicles I have is irrelevant.  Why then do I have to pay for (redundant) liability coverage for each vehicle?  

Beyond that, what once a very economical purchase, buying an occasional use pick up truck for a onetime payment of $500, just became uneconomical through the distortion of insurance premiums.  

This is another example of the FIRE economy at work.  

Various commentators have written about our Finance, Insurance and Real Estate (FIRE) economy.  Essentially we have become a nation of paper pushers suing and insuring each other and then financing our homes and buying on credit all of the “stuff” it takes to fill them up. 

Wikipedia defines the FIRE economy as: 

A FIRE Economy is any economy based primarily on the paper intensive sectors of Finance, Insurance, and Real Estate (FIRE). 

In recent years, FIRE has created a positive feedback loop for rapid suburban development in the US as new real estate developments generate finance (mortgage) activities and associated insurance activity. This activity in turn creates demand for yet further real estate development and the cycle feeds upon itself. 

Much criticism exists on the internet and in the blogosphere for the shifting of the US economy to a FIRE economy at the expense of a manufacturing and export-based economy. As the consumer of last resort, many believe that the United States has eschewed productive elements of its economy in favor of consumption to its long term detriment. A common theme of these criticisms is that FIRE is really a non productive, paper-based system in which participants trade pieces of paper and are not in fact involved in any real productive activity. 

We have written previously about the importance of maintaining productive economic activity as the backbone of the economy.  Ghosts of Long Island was a memorable post

The FIRE economy feeds on itself and acts as a drag on the productive parts of the economy.  Let’s take the insurance part of FIRE as an example.  

The origin of the insurance business is simple and value added.  The insurance business is a utility function designed to guard the policyholder against unforeseen (and unlikely) risks.  This is the reason we insure our homes against fire damage for example.  The vast majority of us will never have a fire in our homes but the few that do are protected against financial catastrophe. 

Sadly, the insurance business has gone beyond simple and value added.  

Insurance companies are in the business of insuring against risks.  The more risks, the more insurance they sell.  If more risks do not exist, they are manufactured.  Another example.  

Most people believe lawsuits are anathema to insurance companies but it is the lawsuits that manufacture risks for the insurance companies to sell policies to cover.  For every slip and fall lawsuit, for every little old lady that burns herself with hot coffee, for every doctor that is sued for losing a patient that no human could save, there is an insurance agent waiting to sell a policy to cover the “risk.”  

“You don’t want to end up like that guy do you?” they might say in their sales pitch.  

It happens quite often in business that seemingly adversarial relationships are actually symbiotic.  Like the traffic ticket defense lawyer who can’t survive without the cops writing speeding tickets, insurance companies cannot add new business lines without trial lawyers winning a large (and unbelievable) lawsuit every few years.  

So I held off on buying the pickup and ruminated for the next few days about how I was going to procure wood to supply this winter’s heat.  

At least the exercise prompted me to review my current insurance coverage.  As I looked at my policies, I confirmed that I was insured against some hapless postman tripping on something while delivering a package.  

Wow, that should keep us warm this winter…shouldn’t it? 

Have a great week, 


Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


No Comments

A Lonely Voice

I sometimes wonder if anyone really believes bad debt can just disappear.  Can we really play the “Three Card Monty” with bad debt until it just magically goes away?  

We’ll we are certainly getting an “A” for effort.  

So far we have massacred accounting by changing the “mark to market” rules to “mark to fantasy”, given billions to otherwise insolvent banks and trampled on contract rights by denying bondholders their due.  

Why do so many believe that we can make bad debt disappear?   I suppose it’s because so many economists tell us it’s possible.  

These economists tend to view their profession as a strict science rather than what it truly is, a study of society.  For a full explanation, see this prior post: 

Spending Our Way to Paradise 

As an example of how theories can get in the way of reality, let’s take the Efficient Market Hypothesis (EMH) as an example.  The EMH is continually inculcated into students when even the average person knows it cannot be true (even those teaching it don’t believe it!).  The EMH basically states that financial markets are efficient and prices on traded assets reflect all known information, and instantly change to reflect new information.  

For a scathing critique on the EMH, see this: 

Six Impossible Things Before Breakfast 

For those pressed for time, the author uses the following metaphor which sums things up beautifully: 

This, of course, is akin to the age old joke about the economist and his friend walking along the street. The friend points out a $100 bill lying on the pavement. The economist says, “It isn’t really there because if it were someone would have already picked it up”. 

There is; however, a minority of economists and intellectuals that view their profession for what is really is, a study of society and how the world actually works.  Whether anyone listens to them, is altogether another story.  

Well respected author Nassim Nicholas Taleb, recently wrote an open letter to British Conservative Leader David Cameron, cautioning him against following the standard party line of stimulus spending and bailouts.  

For those who do not know Taleb, the following is an abridged biography from Wikipedia: 

Nassim Nicholas Taleb is a literary essayist epistemologist, researcher, and former practitioner of mathematical finance. Taleb is a specialist in financial, although critical of the industry He held a “day job” in a lengthy senior trading and financial mathematics career in a number of New York City‘s Wall Street firms, before starting a second career as a scholar in the epistemology of chance events to focus on his project of mapping how to live and act in a world we do not understand, and how to come to grips with randomness and the unknown—which includes his black swan theory of unexpected rare events.

 The following are the main points (as we see them) in Taleb’s letter followed by some excepts: 

1)    Excessive debt is not a good thing and more debt is not the cure for the current crisis. 

David, you must counter this complexity by lowering indebtedness. We have known since Babylonian times that debt is treacherous and allows no room for mistakes: felix qui nihil debet goes the Roman proverb (“happy is he who owes nothing”). The combination of debt levels swollen from two decades of over-confidence with modern finance’s complex derivatives has been disastrous.


2)     Economics is not a strict science

Be careful, too, of the so-called science of economics. Economists have been no better in their predictions than cab drivers. We have an “expert” problem, in which the expert provides you with misplaced confidence, but no information. Because we think, correctly, that the dermatologist, the baker, the chemist are true experts (they know more about their respective subjects than the rest of us), we swallow the canard that the economists at the International Monetary Fund, the World Bank, the Bank of England and the US Federal Reserve are also experts, without checking their record. This reliance on faux experts is, for the most part, what got us here. Now it is continuing with the build-up of government deficit and an increased reliance on flimsy forecasts by the Obama administration.


3)       Being old fashioned is actually good business and prevents disaster

Old, conservative bankers and traders have been replaced by keen young mathematical analysts, yet anyone who listened to a grandmother who survived the Depression would have been warned against debt and been better prepared than Ben Bernanke and Alan Greenspan, respectively chairman and former chairman of America’s Federal Reserve.


4)     Market failures should be allowed to happen and are needed to cleanse the system

Look at mother nature. There is a complex system built around sound principles that has insured both evolution and survival. It does not let anything get too big to fail. It breaks things early. I don’t understand why people who stand against tampering with nature accept tampering with the economy that would have organically grown too. Work on building a “robust” society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly).


5)     The current policies are exactly what is not needed. 

The best blueprint is the very opposite of the Obama administration’s economic policies (its foreign policy is commendable). It has been administering pain-killers without addressing the cause of disease. Obama is strengthening those who do the wrong thing. Take the “cash for clunkers” programme. It is a handout to those who bought the wrong – uneconomic – car. He is penalising people who did not make a mistake. The same applies to other “rescues”. By raising taxes after the crisis, the administration is hampering evolution. Those who do well in difficult times end up paying more tax and those who lost money in the crisis pay less. The rich who got us here are being rescued by regular Joes and being subsidised by the tax system.


For the full text of Taleb’s letter click here:


I suppose we will have to see if anyone pays any attention to Taleb or others like him.  

Well, have a great we….Oh I almost forgot.  Taleb has been in the news lately for another reason as well.  

Taleb has been involved in a new investment fund called Universa Investments L.P.  The fund’s strategy is to position itself to profit from hyperinflation.  



Michael Bechgara, CPA

Managing Director

Granite Consulting Group Inc.


No Comments


I hardly watch TV anymore but I periodically watch some of the network and cable news programs to get a feel for what’s being broadcast. 

So one evening, as my wife was on her way to the mall (to do her patriotic duty), I settled the children with a board game, parked myself on the sofa and turned on the evening news.  

After a few stories about health, foreign affairs and the Supreme Court, I saw the President at a press conference.  

The President was explaining several new policy initiatives.  “My fellow Americans, today I am here to outline a clean break with prior policies and a return to our traditional values”, the great orator intoned solemnly.  

First the administration’s economic team would be revamped.  Geithner, Summers and Bernanke are going to be transitioning out of the administration.  The new economic team has yet to be named, but the President assured the reporters that former executives of investment banks were not on the shortlist.  

“The doctrine of too big to fail has failed us repeatedly” the President made his next point in his familiar cadence.  As I listened carefully, I understood that the government would henceforth refer mismanaged enterprises to the bankruptcy courts if they desired any relief.  

In an incredible break with the past, the President began to discuss monetary policy.  He announced a new taskforce being formed to examine the role of the Federal Reserve in creating market bubbles and interfering in capital markets.  “All options are on the table with regard to the future of the Fed”, the President deadpanned.     

The discussion moved swiftly towards fiscal policy.  The President explained that the bailouts and excessive government spending have threatened to devalue the Dollar.  “We can no longer threaten our citizens’ purchasing power”, he explained.  

In the short term, a freeze will be instituted on all stimulus spending.  This will allow the foreign governments upon which we depend for funding to have some confidence that we are serious about controlling spending.  

For the long term solution, the President began to outline the details of the government’s new fiscal austerity program.  This program included drastic cuts in spending with corresponding decreases in taxes.     

A question on healthcare reform was then asked by one of the reporters.  Healthcare still needed to be reformed the President answered, but rather than compound the problem with a single payer system, the true issue of costs must be addressed.  “In this vein, we are proposing legislation to members of Congress for tort reform.  Separately, we will start treating the healthcare industry as we do all other industries.  Specifically we will apply the principals of price transparency and open competition”, he finished.  

The President then gestured toward the line of State Governors standing behind him on the dais.  With considerable flair he announced the Federal Government would henceforth confine its activities to actions authorized to it under the US Constitution.  “These guys are going to have pick up the slack”, he quipped.  

Finally the President turned to foreign policy.  ”I have directed Secretary of State Clinton to immediately inform our allies that they would henceforth be responsible for…… 

The baby shrieked and the other two kids raced around the house with a bag of pretzels leaving a trail behind them.  

I got up from the couch and before I could regain control of the situation my wife walked in through the garage door.  Back from her trip to the mall, she tersely informed me that she could not leave the house for an hour without pandemonium breaking out.  We began the process of reprimanding the kids and cleaning up the mess.  

I thought back to the President’s address.  What did he say exactly?  Wow, I guess it was all a…..Midsummer Night’s Dream. 

Have a great week, 


Michael Bechara

Managing Director

Granite Consulting Group Inc.


No Comments

Do As I Say

Kids become infuriatingly annoying when they begin to use logic.  The following exchanges are familiar to many of us:

“Don’t use bad words”                                        “But I heard you say yesterday….”

“Eat your broccoli”                                              “How come you’re not eating any?”

And the teenage classic…

“Slow down you’re driving too fast”            “Didn’t you get a ticket last week?”

Children, like all intelligent beings, are not swayed by empty words.  They demand consistency in word and deed and learn by example; whether good or bad. 

I suppose that more than any law or regulation it’s this concept that encourages us to lead the best lives we can.  We are continually haunted by the question, “What if my kids got wind of this?”

If institutions had children, our government’s progeny would be definitely be the boy “from the wrong side of tracks” or the girl “with the reputation.” 

There are a wide number of examples we could provide here, but ever faithful to our readers, we’ll stick to the areas of our expertise; accounting, finance and economics. 

Anyone who runs a business of any size, especially a public company, is very familiar with the gargantuan amount of rules and regulations they are subject to.  For example:

  • In financial reporting there are audits to be passed, disclosures to be made and attestations to be signed. 
  • The taxation rules require documentation to support all deductions and the burden of proof is on the taxpayer. 
  • Company processes and controls must be exhaustively documented, tested and audited to ensure there is no hint of wrongdoing.  

The issuers of these rules and regulations sit in their Greek revival buildings in Washington DC with a solemn air of authority around them.  Behind the marble columns they take the broadly worded laws passed by Congress and create the regulations and interpretations that everyone must follow.  Upon their release the authors expect these exhaustive rules to be given the literary importance of St. Paul’s Letter to the Corinthians. 

 But what of the authors themselves?  Are they leading by example?

 A quick look at the facts reveals that as of 2007, the Federal Government has failed the audit of its financial statements for the eleventh straight year.  We have reprinted excerpts from the Government Accountability Office’s (GAO) 2008 report at the end of this post.  The GAO is the arm of Congress responsible for auditing the Federal Government. 

More ominously, not only has the government failed audit after audit, but by any rational financial measure, the government is simply……insolvent.  

Former Comptroller of the United States and Head of the GAO, David Walker, is currently CEO of the Peter G. Peterson Foundation.  The Foundation is an organization dedicated to “Increasing public awareness of the nature and urgency of key fiscal challenges threatening America’s future, and to accelerating action on them.”

 As the former head of the GAO, Walker knows firsthand the financial position of the US Government.  He does a wonderful job of describing our dire situation in the FAQ section of the website:

 Q: What does a “$56.4 trillion hole” mean?

A: $56.4 trillion is basically the total sum of our federal government’s liabilities and unfunded retirement and health care obligations as of September 30, 2008. These include publicly-held debt, pensions, retiree health care and other miscellaneous commitments, as well as the current value of the unfinanced promises the federal government has made for future payments for Social Security and Medicare..

Q: Why should Americans care if our federal government has promised $56.4 trillion?

A: Because it is $56.4 trillion that our government does not have. This staggering amount breaks down to a $483,000 burden on every American household, or a $184,000 burden on every man, woman, child and newborn in this country. At some point, we will either need to cut back on those promises and/or raise more revenues to fund them.

Future historians will marvel at how we are currently passing stimulus bills, paying people to junk perfectly operable cars and discussing national healthcare when we simply do not have the money for any of these “bright ideas.” 

So is this the whole story? 

No friends it’s only half the equation. 

A nation’s finances are determined by two forces.  What we have discussed so far is fiscal policy, which are the decisions associated with income and spending.  These types of decisions are understood by most people as we can relate them very easily to household finances.  We all, in some form, make and spend money. 

The other force that determines a nation’s destiny is monetary policy.  Enter the little understood world of central banking. 

Monetary policy is the management of interest rates and the money supply.  Not only is this area so little understood by the average citizen (we cannot set interest rates or print money at home) but the whole apparatus operates under a shroud of secrecy.  

The Federal Reserve determines monetary policy for the United States.  Without going into the technical reasons, the decisions they make regarding interest rates and the money supply have deep and long lasting effects on the economy and the lives of most Americans.  Indeed, many blame the Fed for causing the housing bubble by leaving interest rates too low for too long.  

The Fed’s decisions are made behind closed doors by unelected bureaucrats and are not subject to review…or audit.  No one really knows what’s on the Fed’s balance sheet.  No one knows how much money they have lent ….and to whom.   

House Resolution 1207, introduced by Texas Congressman Ron Paul to “Audit the Fed” is currently making its way through Congress.  The bill currently has 279 co sponsors.  

It’s amazing how things change.  When Rep. Paul was running for President in 2008 his criticisms of the Fed were widely dismissed as “populist” or “wacky” by the media.  

We certainly hope that Rep. Paul’s bill will make it to the President’s desk, for we surely cannot get our national finances in order without first understanding and then bringing some transparency to monetary policy.  

So just to recap, the fiscal policy decisions of the government repeatedly fail audits and the monetary policies of the government are not audited at all.  Accurate reporting, full disclosure and burden of proof apparently are not applied consistently amongst the public and private sectors. 

We leave you this week with the 2008 GAO Audit Report on the Federal Government’s financial statements.  We have added emphasis where we deemed necessary. 

 Geez, they even failed the internal control portion to boot!

 Have a great week,


Here is the GAO Audit Report:

 In summary, significant financial systems weaknesses, problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal controls, including computer controls, continue to prevent the government from accurately reporting a significant portion of its assets, liabilities, and costs. These deficiencies affect the reliability of the financial statements and much of the related information in the financial report, as well as the underlying financial information. They also affect the government’s ability to accurately measure the full cost and financial performance of programs and manage its operations. Major problems included the federal government’s inability to:

  •  properly account for and report (1) billions of dollars of property, equipment, materials, and supplies arid.(2) certain stewardship assets;
  • properly ‘estimate the cost of most major federal credit programs and the related loans receivable and guarantee liabilities;
  • estimate and reliably report material amounts of environmental & disposal liabilities and related costs,  
  • determine the proper amount of various reported liabilities, including postretirement health benefits for military employees, accounts payable, and other liabilities;
  • accurately report major portions of the net cost of government operations;
  • determine the full extent of improper payments that occur in major programs and that are estimated to involve billions of dollars annually;
  • ensure that all disbursements are properly recorded; and
  • properly prepare the federal government’s financial statements, including balancing the statements, accounting for billions of dollars of transactions between governmental entities, and properly and consistently compiling the information in the financial statements.

No Comments