What Is the Right Value of a House?

HIGHLAND, UT | 29 July 2008 | The International Monetary Fund (IMF) announced recently that housing prices in the U.S. are “overvalued” by as much as 20%. A common misconception in the world today is that things have inherent value and that when prices fluctuate they become overvalued or undervalued. What the IMF and other economists are really attempting to do is to scientifically measure the amount of Human Life Value (HLV) at work in a given marketplace. They measure items such as whether fear or faith is dominating the actions of humans in the marketplace; whether people are exchanging like they have in the past; and what the perceived self-interest might be for those potentially available to exchange in the market.

Key Points

• HLV determines the value of things. If every human ceased to exchange, the value of items in the market would drop to zero, as became apparent last week in Flint, Michigan, where a house that sold three years ago for $110,000 could not be sold for $6,900. This is a perfect example of how property values are worthless without the human element.
• People are driven either by fear or faith. When on fear, people usually refuse to act or begin to act very irrationally. We see that with the panic stricken lines in front of Indy Mac and other banks as they are forced to close their doors. (Funny how the government and others are playing games lately with these bank closings to reduce these panic lines, but that is a discussion for another time.) When people check their emotions with more rational thinking, faith has a better chance of setting in and people may find better solutions to their challenges.

Conclusion

There is really only one cause of recession and price deflation. That is the human element. When human beings exchange, those involved in the exchange become enriched. When exchange slows down, poverty and scarcity set in. The problem with all of thee fantastic gadgets to predict trends and explain conditions is that they tend to become self-fulfilling prophecies. When indicators show a slow down, people tend to panic. Panic reduces action and productivity, which in turn restricts exchange.

Humans determine value. Those who will profit the most in these economically difficult times, will be those who most successfully get others to exchange with them. This will require a lot of cool-headed thinking, a high degree of persuasion, and ideas that make life easier for those whom one wishes to exchange with. In short, the higher the HLV, the greater the value there will be in exchanging with that person.

Action Items

1. Whatever your chosen field may be, seek to increase your HLV by looking for ways to increase people’s willingness to exchange with you.
2. If third party lending is usually a catalyst to the exchange, like it is in real estate, seek for ways not to need that part of the equation for the exchange.
3. Improve your communication skills in order to persuade prospective people to exchange with you.
4. Specifically related to real estate, consider ways of exchanging while still holding onto that property until more people are willing to exchange, thus increasing perceived value in the market.
5. Seek other areas to create value in to offset your losses in real estate.

MRFC Principles: 6 (2, 4, 5, 6, 8 )

Sources

Lesley Wroughton, U.S. house prices overvalued by up to 20 percent: IMF paper, Yahoo! News, July 25, 2008.

Valdimir Klyuev, What Goes Up Must Come Down? House Price Dynamics in the United States,imf.org, July 25, 2008.

Bob Ivry and Sharon L. Lynch, Fannie mae Unsold $5 Billion Homes Brings Peril to Shareholders, Bloomberg.com, July 23, 2008.

You Get What You Pay For

TAYLORSVILLE, UT | 25 July 2008 | When we buy gas at the pump, we see an obvious connection between the amount we get and the amount we pay. At times, the price goes up and we all recognize that filling up our tank will cost us more. At times, the reverse is true. Either way, it is easy for us to determine if we are willing to pay the current price in exchange for the amount of gas that we feel we need.Would we feel the same way if it was the quantity of gas that fluctuated, rather than the price? If the price of gas was fixed at $2, but, at times that $2 would buy you a full gallon, and at other times it would only buy you a half gallon, would it be cause for concern? The end result would still be the same—a full tank of gas would always cost more than you hoped it would. But, would you feel deceived when your $2 didn’t buy as much as they used to?

Well, some consumers are concerned that this has been happening at the grocery store. As prices have continued to rise, some food companies have recognized that there is a threshold price for any given commodity. When the price reaches that threshold, consumers will simply stop buying that product. Rather than continue to push the price to the threshold point, food companies have decided to change tactics. They have repackaged items in smaller amounts and still charge the same price. The end result is the same—a gallon of ice cream will cost you more than it used to. But, consumers aren’t used to thinking in terms of “product decreases”, and some feel that the practice is a little deceptive.

Key Points

• Consumers enter transactions freely. While it is frustrating to get less than you thought you were getting, that is the consequence of your choice. As the agent in the transaction, it is the consumer’s stewardship to verify the facts before paying for anything. (Makes grocery shopping sound fun, doesn’t it?)
• The beauty of the invisible hand in the free market system is that it leads entrepreneurs to find better, more efficient ways to create value. Deception (a form of force) hinders that process, and ultimately destroys freedom.
• If the market doesn’t continue to support your product, deception will never substitute for a sustainable marketing plan. Dollars follow value, and if the value you present doesn’t attract dollars, then it’s time to re-think your value proposition.
• Consumer-minded people believe that remaining competitive is solely a function of pricing. “If competition gets tight, find a way to give less or charge less.” This scarcity-based mentality is an unsustainable lose-lose situation where neither party really feels that it is getting what it needs from the exchange.
• A better idea, as suggested in “Blue Ocean Strategy”, is to figure out ways of tailoring the value you offer to match the value that the market place is looking for. When my wife and I go to our favorite restaurant, the price isn’t our focus. We go because the quality of the food and the experience are exactly what we are looking for.

Conclusion

Food producers have a bottom line to focus on. That bottom line has to include the costs of raw materials, transport of those materials, production and processing, product marketing, and transportation to their vendors. The costs in all of those areas have increased significantly in recent months, and that leaves the companies with a difficult choice. While consumers are responsible for the choices they make when spending their money, grocery companies should let the invisible hand work its magic. Exchange creates wealth only when both parties are getting what they think they are getting from a transaction. If there is a need to change pricing structures, make it obvious to the consumer. Rather than hope that consumers don’t catch on to what they are doing, food producers should be up front and let the market decide. Otherwise, deceptive marketing practices will almost certainly make that decision for them.

Action Items

1. Before entering any transaction, see that your expectations are being met. Failure to do so does not entitle you to play the victim card later.
2. When your obligations become difficult to meet, determine that you will never try to deceive others in an attempt to give less than is expected.
3. Read “Blue Ocean Strategy—How to Create Uncontested Market Space and Make the Competition Irrelevant”.
4. Realize that productivity, not pricing, is the standard.
5. Consider how you can increase and customize the value that you offer to your family relationships and your business relationships.

MRFC Principles: (4, 7, 8, 9, 10, 11)

Sources

Four Points Media, “Incredible Shrinking Consumer Products”, KUTV 2 News, July 22, 2008.

(Matthew Pilling is a member of the FreeCapitalist movement known as the Canadian Capitalist. Despite his time in the Great White North, Matthew loves America and all that it stands for. He lives with his wife and two children in Taylorsville and works in finance.)

The Follies of Fannie and Freddie

MAPLETON, UT | July 22, 2008 | Recently, two names have been plastered across headlines so often you’d be forgiven for thinking they were the latest hollywood pair. Their celebrity status has been cemented by constant mentions in the top news programs, length pieces on their life history, and endless gossip and rumors about their sudden fall from grace in the current housing crisis.

They are the 800-pound gorillas of home ownership: Fannie Mae and Freddie Mac, the biggest owners of mortgages in the country.

In order to understand how such trusted institutions could sink to the notoriety of tabloid fodder, shocking the country with revelations of their default-ridden mortgage portfolios, let’s use an imaginary example. While it is helpful to study their historic origins, a hypothetical situation will demonstrate the cause of their tragic fate…

Imagine you started a company that loaned money to people. In order to raise capital, you pitched your business plan to potential investors, who would be interested in knowing how you would manage the risk of borrowers defaulting on their loans. If you were like every other private company, you would provide a effective strategy that would reassure your investors of the relative safety of their investment. Obviously, no plan would be foolproof, thus investors would determine if they valued the potential gains more than the potential risk of defaults that could cause your business to fail and their investment to go up in smoke.

Now imagine that next door, a new business is formed to provide the same service, only this one makes a unique promise to investors: if for any reason they fail to operate profitably, they have access to financial reserves unlike any other –  an enormous pile of cash replenished annually by every taxpayer in America (not to mention a fine collection of special printing presses). Other companies might have large insurance policies, or additional streams of revenue, but what could compare with the ability to extract money from millions of people under threat of force?

Which company do you think will attract the most investors over time? Which company would possess a nearly unlimited ability to increase their loan portfolio? Which company do you think will eventually cease to exist, leaving its competitor to absorb nearly the entire market for lending in America? Which would you choose if you were the investor?

In a free marketplace, where force was only used to punish fraud and enforce contracts (and not reassigned to the job of eliminating risk), the growth and success of any financial services company would be directly tied to their ability to demonstrate fiscal responsibility and profitability over time. They would be limited in their ability to raise capital in that all funds would have to come from voluntary sources – no guarantee other than that of their capability to manage risk and operate profitably would be possible. Such a company would have a vested interest in carefully scrutinizing every transaction, knowing that their very future depended on it. No investor would voluntarily invest in a company that had a reputation for poor stewardship.

But a company with the advantage of an armed, wealthy godfather like the one in our story has no such incentive to personally insure the solvency of its business. Additional funds could always be extracted from taxpayers, who had no say in the matter (and thus had no interest in evaluating the safety of their “investment”). There would occasionally be complaints and concerns, voiced in committee hearings, but other than enduring some boring meetings, no real threat would be posed to the existence of the company. Even the bureaucrats, prodded by their angry constituencies would be unable to stop feeding the unprofitable beast  – especially now that the company is “too big to fail”.

And thus another naturally corrective process would be suspended by force: the process of failure, in which losses are experienced, lessons are learned, and ideas are re-evaluated. In an attempt to avoid the pain, the benevolent godfather would step in and make the consequences of the original bad idea seemingly disappear (through another violation of principle).

Some are crying that Fannie Mae and Freddie Mac were originally “good” institutions, created for the purpose of helping the poor and underprivileged acquire home financing they would not otherwise have qualified for. Ironically, the very violation of principle that made those companies so attractive in the housing market (reducing risk by promising security with funds taken by force, thus removing the possibility of failure) made them appealing to everyone in the housing market – and reduced the incentive for Fannie and Freddie to be more careful about the risk they purchased so rampantly. Even if Fannie and Freddie never purchased a single sub-prime loan, their very existence as an unlimited source of funds had an enormous effect on the availability of easy money for home financing, which in turn influenced the rise in real estate values that was the enabler for much of the speculative and sub-prime transactions in recent years.

By creating a company that was perceived to be protected from the risks that would challenge any private mortgage buyer or insurer, a distortion was created in the marketplace. Such a company has an artificial advantage, having the sanction and protection of the only entity in America with the legal power to use force to provide funding for its endeavors – the U.S. government.

In a recent article in the New York Times, the following explanation was given:

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges. The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem. The classic example of how this can happen is the savings-and-loan crisis of the 1980s: S.& L. owners offered high interest rates to attract lots of federally insured deposits, then essentially gambled with the money. When many of their bets went bad, the feds ended up holding the bag. The eventual cleanup cost taxpayers more than $100 billion.

This particular author, who clearly describes the contradiction inherent in the business model of Fannie and Freddie, is nevertheless adamant that they should not be allowed to fail. Despite his articulation of the system of “privatized profits and socialized losses”, he acknowledges no violation of principle, and advocates continued support of the flawed enterprises, while blaming greedy speculators for dragging down the whole housing market, and causing defaults in the “good mortgages” that Fannie and Freddie hold. In other words, no one would have noticed that the emperor has no clothes if it wasn’t for everyone else losing their shirts.

The only thing the current crisis has done to Fannie and Freddie is reveal the fatal flaw in their very foundations. It has simply sped up a process that cannot be stopped, only delayed. Violating principle, even for a “good cause” has consequences that cannot be avoided, but are often hidden from view for years in an attempt to defy reality. The very birth of Fannie Mae and Freddie Mac, as institutions wishfully set apart from the rules that would govern every other private endeavor, held the seeds of their own destruction.

Many critics today cry foul at lenders who provided the “easy money” to those who they claim should never have been given money due to their “sub-prime” status – in other words, the likelihood that they would default. What they forget is that those lenders and the investors that supported their efforts are now paying the price for their decisions. Loss is the natural consequence of their bad ideas. In an attempt to ease the pain of loss, little tyrants everywhere are calling for regulations to keep people from making such “risky” investments. But government has no place telling people how to invest their money. Such efforts to revise government regulations would be better spent removing the poison in the well that perverted the minds of irrational investors – those institutions that stood as the bastions of the illusion of security in the housing market, Fannie Mae and Freddie Mac.

Action Steps

1. Learn more about how Fannie Mac and Freddie Mac were formed and what their role is in the housing market. Learn about how the mortgage market works, how liquidity affects it, and what 
2. Write your Congressmen and Senators to express your opinion of a taxpayer bailout of Fannie and Freddie – include your view of the violations of principle involved in the current situation and the very existence of the institutions.
3. Share what you have learned with your friends and family. Teaching principles helps us to live by them, as we strive to advocate principles effectively.

MRFC Principles:  (5,6,7,8,12)

Sources

Julie Creswell, Protected by Washington, Companies Ballooned, New York Times, July 13, 2008.

Making Sense of Problems at Fannie and Freddie (informative graphic showing how Fannie and Freddit supply liquidity to the mortgage market), New York Times, July 11, 2008.

Paul Krugman, Fannie, Freddie and the Threat of Economic Meltdown, New York Times, Reprinted on alternet.org, July 15, 2008.

Paulson: Support for mortgage giants needed, MSNBC, July 22, 2008.

FDIC (Fear Drives Ignorant Consumers)

SALT LAKE CITY, UT | 16 July 2008 | In a move that stirs up images of the Great Depression, people are lining up outside of IndyMac Bank branches to see that they “get theirs” before there is nothing left to get. Because of the number of people waiting to close their accounts and withdraw their funds, the bank has had to limit the number allowed in the bank at any time to five (those seeking to deposit funds are bumped to the head of the line). So, the rest are left to sit outside and stew in each other’s sob stories. And the scarcity abounds.Each of these customers felt that the high interest rates offered by IndyMac, combined with FDIC’s guarantees, were sufficient reason to deposit their money at one point. But, today, as the FDIC makes moves to fulfill their part of the bargain, panic-driven people are proving that they don’t trust the guarantees that made them feel so secure in the first place.

What has changed to cause these people to panic? Certainly, the general economic conditions of the day aren’t favorable, and the bank has shown a lack solvency, neither of which would muster much confidence in the average consumer. Even so, weren’t these distinct possibilities when accounts were opened and monies were deposited? No one likes to lose out and good stewardship demands that we do what we can to protect and increase our resources. But, when things do go differently than we hoped or planned, what should we do as good stewards to rectify the situation?

Key Points

• Faith begins with self interest. Fear is the enemy of faith, and therefore, acting out of fear is never an act of faith and can never produce the needed or desired result. Fear is an emotion that is meant to warn us of potential dangers and help us determine how to handle those dangers. It is meant to help us consider the options before us and navigate our course rationally. But, most people allow fear to lead to panic and irrationality. In the name of protecting their prosperity, people make moves that will almost certainly lock them into a life without prosperity.
• Panic and irrationality lead people to forget where real value lies. If the bank fails, if the dollar fails, if the entire system fails, each of us will still have the talents and knowledge that we have always had. We may have to adapt how we apply our talents and knowledge in our new situation, but we will still have the ability to create value, exchange it with others, and find value in the ensuing relationships.
• People standing in line will likely get their money back, but will either cling to it and not put it to good productive use (the hoarding mentality of so many of the Depression Era), or they will put the money at continued risk, speculating in other areas in hopes of recouping lost profits. Neither option has the power to create prosperity for these people. Both options place value in the physical reality of dollars—an option which leaves these people as slaves. They have no ability to control the market value of those dollars, and are therefore captive to the market swings of those dollars. If the dollar becomes completely devalued, they will be left with worthless papers and the big question of who is to blame for their bitter situation.

Conclusion

Loss hurts. But the amount that it hurts is entirely up to us. We can choose to be victims of bad situations and be tossed about by them. Or, we can take stock of that which we still have and determine how to produce with it. Money, the great distracter, has nothing to do with that decision. Which kind of makes sitting in line at a bank seem a little silly.

Action Items

1. Learn to eliminate fear and apply true faith to your financial decisions. (This DOES NOT MEAN hoping really hard that an investment will work the way you want it to.)
2. As best possible, know the potential positive and negative outcomes of an investment before you choose to make it.
3. Determine if the worst case scenario is something that you could live with and learn from.
4. Determine how you will recognize if the investment is faltering. What leading indicators should warn you that things are heading south?
5. Determine what your exit strategy would be if leading indicators showed the likelihood of the worst case scenario coming to fruition.
6. Recognize from the get-go that whether you recoup all of your money and expected profits or not, the risk of the investment was something that you chose to assume. In similar fashion to John Galt’s refusal to accept unearned guilt or profits, vow to never blame others for your gains or your losses on any investment.

MRFC Principles: (2, 3, 4, 5, 6, 7, 8 )

Source: Hundreds Demand Money From Failed California Bank, Associated Press, as seen on FoxNews.com, July 15, 2008 http://www.foxnews.com/story/0,2933,383341,00.html

How Do You Celebrate Independence?

HIGHLAND, UT | 4 July 2008 | Ah! The Fourth of July! That great mid-summer holiday. Full of parades and beauty pageants, fireworks, barbecues, 10k races, pancake breakfasts in the park, and flag raising ceremonies. This is what this holiday is all about, right? Oh, and thinking about the signing of the Declaration of Independence (whatever that is). I sure am glad those guys did that in summertime so we could have such an awesome party.

Independence Day is also a day to reflect. Do we recognize the price our Founders paid to win their independence? Do we know of the struggle leading up to that great event? What do we know about those men? Do we buy in to the image so prevalent today that they were philandering old men or have we done our homework and recognize their virtue? Do we just spend our day lounging around, getting drunk, and exercising the inner urge to blow things up?

The Founders started a revolution, but they did not complete it. They recognized it would take many generations to complete what they started. Yes, they were able to validate their declaration of political sovereignty; but their revolution was so much more. They subsequently created a government to transcend the ages, one which had never been tried before. One which honored the individual and allowed the individual to govern himself.

The Founders revolution included three areas. The first, most well-known is the political revolution, discussed above. The basic premise is that man is able to govern himself and doesn’t need a king or elected officials to tell him what to think and how to act. How are you doing? Do you govern yourself or do you allow others (political leaders, bosses, Kommissars*, etc.) to control your life? Second, this revolution was one of religious freedom, or freedom of conscience. Finally, to be a citizen of a nation an individual did not have to be the member of a certain church. He could choose for himself, according to the personal belief system within his own mind. The third portion of the revolution is economic. Through capitalism people can freely exchange with one another, individuals can do more than just live paycheck to paycheck. They are free to discover their life’s missions and to pursue those with that same freedom of conscience and to strive to leave the world better than when they entered it.

This revolution—all three portions of it—are not intended only as a collective revolution; it is a personal revolution. So how are you doing? Do you understand the purpose of the revolution? Do you live the revolution, or are you just living paycheck to paycheck, getting up when others say you should, going places others say you should, thinking the ideas others say you should? Or do you practice your own autonomy? Are you actively engaged in a personal revolution? Do you celebrate independence all year long, or is it a 0.27% of the year?

MRFC Principle:

*German spelling used intentionally for effect.

Who Is to Blame for $4 per Gallon Gasoline?

HIGHLAND, UT |18 June 2008 | While surfing the Internet for interesting news stories I came across an advertisement: “Who is to blame for $4 per gallon gasoline?” It then offered three photographs the reader could choose from for the blame. One was a picture of an Arab, representing the OPEC producers of oil. Another was George W. Bush, representing, surely, himself but probably the American government in general as well. And the third was a photo of BP, representing the fuel refinery companies. I clicked the link to find out what the attitude was; unfortunately, it was a broken link and I did not discover its source. But the question still looms in my head. Who is to blame for these outrageous fuel prices?

Ultimately, to argue about “fault” is a useless endeavor. It does nothing to solve the problem and serves to raise animosity between different camps. Much more productive is to recognize the powers at work in the issue and to see how principles govern the process.

Key Points

• Perspective determines action. The ever important principle: one must be on the lookout for deception, and self-deception is the most dangerous kind. A Free Capitalist will recognize that he is always free to act, and will reject situations in which he is acted upon.
  Regarding gasoline: As the twentieth century wore on and we have moved into the twenty-first, mankind’s seeming dependence upon petroleum based products is increasingly evident. Perhaps, similar to a drug dealer, the producers of petroleum have kept the prices artificially low until we have become addicted to their convenience in our lives. Now that we think we “gotta have it” these producers are letting us “have it” by raising the prices above levels reasonable to most. A proper perspective on the matter allows an individual to recognize the freedom to act in many different ways.
• Human Life Value is the source and creator of all Property Value.The price of oil or gas is never a necessary or natural phenomenon. The price is set by producers and consumers who voluntarily engage in free exchange with one another. The parties involved are always free to ask prices, negotiate better circumstances, or to walk away.
• Exchange creates wealth. This principle ensures that both parties ultimately want the exchange to take place. Both sides wish to prosper.
• Faith (the driving force within individuals) begins with self-interest. The Free Capitalist individual will assess and recognize his self-interest while deciding to pay any price at the pump, and will determine whether to pay, negotiate, or to refuse the exchange. The fact that the individual acts is an indication of his faith.
• Force destroys freedom. The proper role of government in any economy is not to participate but rather to referee. President Bush’s and others’ imploring of OPEC to lower prices or to produce more oil is misguided and inappropriate. The only role is to ensure that both parties enter the exchange voluntarily and that no deception is involved.
  The Organization of Petroleum Exporting Countries (OPEC) is one of force, in that it is a cartel monopoly supported by practically every political government in the world. It reduces the competitive nature of the industry, which in turn could invite lopsided exchanges to occur. Government, in this respect, has failed its citizens by failing to referee situations in which free exchange can take place.
  Still, this is not to say that all exchanges are forced. Individuals are still responsible for their own actions and may choose to either exchange as they see fit, or to refuse to exchange.

Conclusion

Upon checking the link to the question again, I find that it links to an offer for Money and Markets newsletter. The poll, has many other choices than just the three people like to blame the most, though still none of blame answers is appropriate. The matter, ultimately, and most morally, is simply one of market conditions. Producers are free to ask as much as they believe people will pay. Consumers (or buyers) are free to counter that asking price or to find some other solution, thereby lowering the producers’ asking price to a level more acceptable to those consumers. Individuals must remember they are free to enter or refuse the exchange based upon their self-interests.

Action Items

(The following list is not hierarchical; perhaps simply multiple choice)

• Refuse to pay by not engaging in the transaction.
• Ride a bike to work.
• Walk to work.
• Work at home.
• Buy a vehicle that runs on alternative fuel sources.
• Explore ways to increase your own income (i.e. create more value for people) so you can afford the rising cost of fuel.
• If you are one of the very smart ones, create your own alternative fuel source and challenge the premise that the world must only run on petroleum.

MRFC Principles:  (2, 4, 6, 8, 10, 11)

Sources

“Who’s to Blame for $4 Gas” Choose your answer and see what most respondents believe. You may be surprised.

For comments about government being the referee, see Milton Friedman’s Capitalism and Freedom, fortieth anniversary edition, University of Chicago Press, 2002.

Desperate to Exchange

HIGHLAND, UT | 2 June 2008| In a market where no one is confident enough to exchange, people can get pretty creative. This can give rise to some very interesting opportunities for those whose eyes are open and who position themselves for such opportunities.

Two stories recently—one this weekend and another about a month ago—tell about merchants who are working to increase exchange. Hotels want people to come and stay, but because of the relatively high price of gas, fewer people are currently traveling. They are offering fuel credits to guests as an enticement. The other, a real estate development company in San Diego, is offering 2 for 1 houses. If a customer will buy an upper-end home, for which the development company is asking $1.6 million, the company will throw in a 2000 square foot city-scape home worth $400,000. A representative of the company is reported as explaining, “It’s our way of dealing with current market conditions to move some inventory.” This sentiment indicates an understanding, even if only subconscious, of several principles of prosperity.

Key Points

• People are assets. This development company recognizes that it has far too many properties in its inventory. They are all worthless unless people take possession of them and begin to exercise their agency over them.
• Human Life Value is the source and creator of all property value. Again, and very closely related to the statement above, these properties—all properties—have zero value. The development company, through its marketing campaign is searching for the level at which humans value the properties the company currently holds.
• The development company is also learning another very valuable lesson about Human Life Value. They, along with a myriad other developers in Southern California and all over the country, are discovering that people are beginning to value less the higher end homes. Certainly, the plight of the lenders is an influence but the people, in general, have ceased to value these homes as well. This does not bode well for the developers in the near future. But as they continue to search for the perceived value of the potential buyers, they will eventually effect an exchange.
• Exchange creates wealth. This is probably one of the most well-understood of the 13 principles. If two people do not strike hands and make a deal, the perceived value creation does not exist. It is merely an illusion.
• Faith begins with self-interest. Market conditions that go sour breed fear which destroys faith. The developers are currently seeking for the self-interest of individuals in the marketplace. When they find that individuals will begin to act again.

Conclusion

Market slow downs are often difficult to deal with, whether an individual is a producer or a consumer. The idea, however is to help create certainty in the marketplace. Those most able to help others realize that certainty stand to prosper well during these questionable times.

Action Items

1. If you have fear regarding the current market, recognize that fear and strive to replace it with faith. This may not be an easy task. The best way to alleviate fear is to act. Identify where you see certainty and act upon it.
2. maintain an open mind to new ideas.
3. Encourage those within your personal sphere of influence to also maintain such a mental state.
4. Begin today to create certainty in your market by learning the motivations of those you wish to exchange with and then create value in those areas.

MRFC Principles: 8 (2, 5, 6, 8 )

Sources

Peter Viles, “In Escondido: Buy one (house), get one free”Los Angeles Times/Blogs, June 1, 2008.

Steve Hargreaves, “Hotels offer gas rebates amid record prices,”CNNMoney.com, April 21, 2008.

Principled Globalization! Is It Possible?

HIGHLAND, UT | 5 May 2008| The common perception in recent weeks is that America is falling and the rest of the world is rising. The weakening dollar compared to other currencies around the world is only one sign of this seeming change in economic supremacy. Fareed Zakaria, of Newsweek Magazine, however, sees it more of a growing world than a declining United States. The post-American world—as Zakaria calls it—is “naturally an unsettling prospect for Americans, but it should not be. This will not be a world defined by the decline of America but rather the rise of everyone else. It is the result of a series of positive trends that have been progressing over the last 20 years, trends that have created an international climate of unprecedented peace and prosperity.” There has been much talk of globalization, and the FreeCapitalist approach is: Is there place for correct principles in a globalized world?

Key Points

• Zakaria’s Newsweek article points out: “For the first time ever, most countries around the world are practicing sensible economics.” And, “The natives have gotten good at capitalism…” This analysis is good for FreeCapitalists. Even the most controlled economies—China, Cuba, Vietnam—are loosening up and allowing free enterprise economics to have a freer hand. Yes, most markets could stand even more relaxed regulation, but as Sakaria points out, these countries are prospering because they are practicing more principled economics.
• Americans seem to be in a frenzy over some of the “losses;” however, globalization enables exchange to increase. Zakaria: ”…over the last 20 years, globalization has been gaining depth and breadth. America has benefited massively from these trends. It has enjoyed unusually robust growth, low unemployment and inflation, and received hundreds of billions of dollars in investment. these are not signs of economic collapse.”
• The article reveals that the U.S. as a culture, tends to act upon the principles of abundance: “It remains the most open, flexible society in the world, able to absorb other people, cultures, ideas, goods, and services….it adapts and adjusts…” and finally, the U.S. is “different and may not fall into the trap of becoming rich, and fat, and lazy” like many of the older European countries have in the past. This is an important fact to remember as we work our way through the current economic crises. The entrepreneurial spirit within the American psyche searches for solutions to the challenges we face. We are not as apt to lie down and expect government officials to fix things for us (though we are becoming more so as bad experience stacks upon bad experience.) Zakaria explained that this is our biggest strength. Indeed it is. As a people, we’ve always been rather resilient. Individually, however, could it be that we allow those principles to slip and we allow ourselves to become victims of circumstance?

Conclusion

Over two hundred years ago, our forefathers created a system of government that allowed America to become the freest nation in modern times. They had intended to export this freedom throughout the world as soon as each nation became ready for these ideas. Though nations of late have loosen the bands that restrict free intercourse, it must be done according to the principles that govern prosperous living in all its forms in order to be a durable freedom and prosperity. These principles are enshrined in the American Declaration of Independence and protected by the U.S. Constitution. Zakaria’s Newsweek conclusion proclaims:

American diplomats, businessmen, and intellectuals have urged people in distant lands to be unafraid of change, to join the advanced world, to learn the secrets of our success. Yet just as they are beginning to do so, we are losing faith in such ideas. We have become suspicious of trade, openness, immigration, and investment…Just as the world is opening up, we are closing down….Generations from now, when historians write about these times, they might not that by the turn of the 21st century, the United States had succeeded in its great, historical mission—globalizing the world. We don’t want them to write that along the way, we forgot to globalize ourselves.

Thomas Jefferson explained: 

The preservation of the holy fire [the preservation of man's rights by the Constitution] is confided to us by the world, and the sparks which will emanate from it will ever serve to rekindle it in other corners of the world.

Perhaps this is the case, but it must be done with the principles intact. The Constitution of the United States must remain sovereign in this process. For that is our greatest export.

Action Items

1. Educate yourself regarding free enterprise and the Constitution of the United States.
2. Seek out and associate with like-minded individuals who strive on a daily basis to further the cause of freedom in all its forms.
3. Identify areas in your own life where you have been afraid of needed change and/or sought the “safety and protection” of the government as an answer. Resolve to improve your thinking and actions in those areas of your life.

MRFC Principles: 8 (2, 4, 8 )

Resources

Fareed Zakaria, “The Rise of the Rest.” Newsweek, May 3, 2008

National Center for Constitution Studies, The Real Thomas Jefferson, 1983, p. 534–5.

Scientists Able to Shrink World

HIGHLAND, UT | 7 April 2008 | Scientists have found a way to make this great big world of ours much smaller: “The Grid” as they are calling it is a device which makes the quick speeds of broadband Internet communication pale in comparison. Jonathan Leake, science editor of British Times Online, reported Sunday that “the grid” could transmit information upwards of 10,000 times faster than current broadband technology, sending a “the entire Rolling Stones back catalogue from Britain to Japan in less than two seconds.” Leake also reported that this new technology could allow a home user to download a full-length movie in five seconds rather than the usual three hours. This, in effect brings people of the world much closer than they have ever been. This has great meaning for businesses and individuals the world over.

Scientists are still toying with this new technology and expect to test out its abilities later this year and have it available for academic use on campuses around the world this fall.

Key Points

• For centuries, the world had been a slow place to exchange. Natural boundaries and confusing languages kept the people from meeting with one another in any degree of rapidity so any foreign exchange was truly a delicacy or precious commodity. Caravans usually traveled by camel, mule or horse could only bring so many of those commodities at a time and usually took months or even years to traverse the globe.
• Ships made travel a little better but had to circumnavigate around large masses of land in order to reach their respective ports. This, of course, was the motivation for Columbus to push westward at the close of the 15th Century hoping to enter the back door of the Indies and to create a route much faster than that of rounding the Cape of Good Hope in Southern Africa.
• The latest century saw the advent of mass production and motorized vehicles, on the ground and in the air. These made world travel an absolute reality. Goods could be shipped across the globe in the matter of a few days. This brought people together in ways previously unheard of and allowed exchange to occur at much quicker and more frequent rates. Thus, prosperity skyrocketed (literally?) far beyond levels the medieval kings could ever have conceived.
• Still, printed information in books and magazines lagged. Even television and radio were limited in their ability to transmit enough information to truly increase human exchange.
• The Internet of the 1990s increased the volume of information that could be transmitted across the wires. Yet, to some, even this technology is too slow. Thus we see the advent of “the grid,” an ultra-high-tech communications device, the latest development from those who invented the internet.
• This is good news for those looking to communicate quicker. Production can increase at blinding speeds. Exchange can take place at paces much quicker than ever before imagined.

Conclusion

The 13 Principles of Prosperity™ enumerate eternal laws that govern wealth on this planet. Paramount among them, “People are assets” teaches us that in order for man to obtain wealth, he must learn to create value for other human beings rather than place value in stuff over the value of other people. Akin to this is the fact that “Exchange creates wealth.” A person may have all the stuff in the world, but if he does not share that stuff with his fellowman, he and the stuff soon wither to nothingness. The medieval kings of Europe are perhaps the prime example of such disintegration of wealth and prosperity. Their castles, designed to protect their stuff from invading forces, effectually cut them off from nearly any interaction with others. Is it any wonder that many of these monarchs ended up mad, such as the famous Ludwig of Germany?

Action Items

1. Take a speed reading course that will enable you to increase your own rate of information gathering.
2. Reflect on your own ability to create value and exchange with others, including your unique abilities, personal strengths, your definite chief aim, and other Human Life Values. How might you be able to use new technologies to interact with more people and thereby benefit from the possibilities of higher paces of exchange?
3. Read the FreeCapitalist Primer and seek for ways to turn your brain on.

MRFC Principles: 8 (4, 5, 8 )

Resources

Leake, Jonathan. “Coming Soon: superfast internet” The Times Online. April 6, 2008

The FreeCapitalist Primer, in print and now available online.

Secretary Paulson Proposes Changes in Treasury, Fed

HIGHLAND, UT | 1 April 2008 | Economic policy is often shaped by the emergencies of the day. As far back as the Civil War (1863), our current policy situation began to take shape. This is followed by several others through America’s history until we stand today, faced with the Federal Reserve possibly increasing its power, an act one Accent Radio Network talk show host compared to a fire department arriving at a blazing fire only to hook their hoses to the nearest gasoline station (refer to Jerry Hughes, “Straight Talk” March 31, 2008). Today’s proposal by Secretary Henry Paulson of the Treasury Department’s “regulatory overhaul” explained history thus:

The regulatory basis for depository institutions evolved gradually in response to a series of financial crises and other important social, economic, and political events: Congress established the national bank charter in 1863 during the Civil War, the Federal Reserve System in 1913 in response to various episodes of financial instability, and the federal deposit insurance system and specialized insured depository charters (e.g., thrifts and credit unions) during the Great Depression. Changes were made to the regulatory system for insured depository institutions in the intervening years in response to other financial crises (e.g., the thrift crises of the 1980s) or as enhancements (e.g., the Gramm-Leach-Blily Act of 1999 (“GLB Act”)); but, for the most part the underlying structure resembles what existed in the 1930s (Treasury Financial Blueprint, march 2008, p. 2).

This practice is highly dangerous. Trying times when emotions are high and fear abounds, call for measures that usually see the rights of man gleefully surrendered to a collective with a gun in exchange for what the individual thinks is security. Our Founding Fathers plainly taught, however, that security and freedom are usually opposites of the same pole. Yet, over the last 80 years, the American public has been skillfully duped into craving security almost to the point of addiction. Today’s news by both the Treasury Department and the Fed reveals one more link in the chain designed to carefully lead America into the warm hands of socialism.

Key Points

• Though common belief says there are natural times in economies where severe instabilities reign, government intervention is the major contributory factor.

Today, government measures constitute the major impediments to economic growth in the United States. Tariffs, and other restriction on international trade, high tax burdens and a complex and inequitable tax structure, regulatory commissions, government price and wage fixing, and a host of other measures give individuals an incentive to misuse and misdirect resources, and distort the investment of new savings. What we urgently need, for both economic stability and growth, is a reduction of government intervention not an increase (Friedman, 38).

• There seems to be a social cycle where crisis breeds fear, which breeds emergency government measures to save the day, which restricts the ability to exchange, which breeds more crisis.
• Each time the government steps in to save the day, a little piece of freedom erodes from the individual.
• The Treasury Department’s recent proposal to “modernize” the regulatory processes is simply one more step in the above mentioned cycle. Secretary Paulson does explain that the study began before last summer’s crises began and that most measures would not be put in place until after the current crisis has subsided. He has also attempted to explain that the current proposal is not to increase regulations, simply streamline them. However, the Treasure Proposal does call for a new department: the Mortgage Origination Commission (MOC). In the proposal’s words:

…a new federal commission, the Mortgage Origination Commission (“MOC”), should be created. The President should appoint a Director for the MOC for a four to six year term. The Director would chair a seven-person board comprised of the principals (or their designees) of the Federal Reserve, the OCC, the OTS, the FDIC, the National Credit Union Administration, and the Conference of State Bank Supervisors. Federal legislation should set forth (or provide authority to the MOC to develop) uniform minimum licensing qualification standards for state mortgage market participants. These should include personal conduct and disciplinary history, minimum educational requirements, testing criteria and procedures, and appropriate license revocation standards. The MOC would also evaluate, rate, and report on the adequacy of each state’s system for licensing and regulation of participants in the mortgage origination process. These evaluations would grade the overall adequacy of a state system by descriptive categories indicative of a system’s strength or weakness. These evaluations could provide further information regarding whether mortgages originated in a state should be viewed cautiously before being securitized. The public nature of these evaluations should provide strong incentives for states to address weaknesses and strengthen their own systems (Treasury Financial Blueprint, March 2008, p. 6-7).

• This increases the federal government’s powers beyond their original intent, which is a violation of many of the Principles of Prosperity™. First by taking the rights away from individuals (Principle 12); second, by placing those regulations within the confines of punitive action (Principle 11); third, by relieving each individual of his stewardship to increase his/her own Human Life Value by increasing his knowledge of the actions performed. (Principles 3 and 4).
• Furthermore, this process of crisis-fear-government intervention-relinquishing of personal freedom, etc., distorts the recognition that God is the author of prosperity and places that authorship on government entities. This causes the individual to think that the pathway to prosperity lies within the permissions set by government rather than recognizing that principles govern these processes and that God does not play dice with the universe. The universe is one of order and predictability, not one of chaos and confusion.
   

Conclusion

The current financial crisis is one which the government cannot curb or stave off. Government can only shift the thrust of the crisis’ pain upon different groups of people. This is unjust and unnecessary. Companies like Bear Stearns that have recently revealed their woes do not need a bail out. Home owners who are currently unable to pay their mortgages do not need a government-mandated stay in the foreclosure process. Banks that foolishly loaned money to people they knew would not be able to pay do not need government bail outs. The country does not need more regulation. The government (that’s every individual, from the President, the bureaucrats, Congress, and common citizen alike) needs to understand that the best form of regulation—according to correct, irrevocable principles—is the crisis we are now in. If allowed to plod through this crisis, the bankers, investors, home owners, and others will learn to regulate themselves in the best possible way. Take that away by allowing government to save the day, and all we get is a perpetually dumb society that won’t be able to solve the next crisis, or the next crisis, or the next, and so forth.
 

Action Steps

1. Read Milton Friedman’s chapter on “The Control of Money” in Capitalism and Freedom.
2. Discuss with your friends and neighbors the historical nature of the crisis pattern above and resolve to control your own fear in the face of today’s matters.
    

Resource(s)

Lawder, David and Mark Felsenthal. “Treasury pitches regulatory overhaul.” Reuters, March 31, 2008.

“U.S. Treasury Department. “The Department of the Treasury Blueprint for a Modernized Financial Regulatory Structure” March 2008
Friedman, Milton. Capitalism and Freedom, 1962, Chicago, University of Chicago Press

MRFC Principles:  (1, 3, 4, 11, 12)