2009... the year of change!

"There is nothing new under the sun."

Well, the recession continues! John Thain resigned today from Bank of America. Thain's quite an interesting man, aside from looking rather orange in recent photos. He led the NYSE during the boom era, and then in Nov. 2007, rolled over to Merrill-Lynch to take over as CEO, where he received a $15M signing bonus. During the 2007 year, he was nicely compensated with a reasonable $83.8M. Under his stellar leadership, the company entered the recession. Unfortunately, even with Thain's brilliance, the company could not stay afloat, and had to be bought by Bank of America. Despite that, Thain requested a $10M bonus for his 2008 performance. Outcry from the NY Attorney General and the public, led to Thain withdrawing his request. Apparently, the reason he's being fired is that he really didn't know what's going on with the company, hence the additional write-downs of $15.3B this last quarter! This complete lack of awareness led to the tension between Bank of America CEO Ken Lewis and Thain, ultimately resulting in Thain's exit. Either that, or without getting the $10M bonus, it really wasn't worth Thain's time... he'd probably rather go enjoy a massage or whatever $83.8M can buy you.

My key thought on all this...
...is the importance of doing your homework and sticking to the fundamentals. I was reading the prospectus of my mutual fund, which thankfully I don't have to retire on for at least another 40 years, and the fund executive summed it up very nicely. He basically said that financial people had forgotten the fundamental principle of accurate risk management. It's not difficult to imagine how you could turn a blind eye to risk, or not do your homework to identify risks, when you have the opportunity to make mad cash. I don't blame Thain for going big--hey, if I could make $83.8M, I'd definitely go for it--but the problem was that people got so excited about winning, that they forgot the fundamentals of the game. They 'were lookin' down field before they got the ball tucked away' (I still can't believe those Colts, amazing!). Unfortunately, we all now get to pay the price by enduring this recession. In the future, I don't think we'll see the same sorts of gains that we saw in the past because people will manage risk better from now on. I'm expecting mostly single digit returns for a long time, until people forget the fundamentals again, make tons of money, and then crash. Life has a way cycling. I guess the wise man was right when he said,

"There is nothing new under the sun."

Money's Effect on Medicine

I read a fascinating article in yesterday's New England Journal of Medicine. Briefly, it was an essay by Pamela Hartzband and Jereome Groopman discussing the influence that they see money having on the ever evolving practice of medicine. They describe a fascinating sociological experiment designed to test the effect of money on people's behavior.

A truck was parked with a couch close beside it on a busy university walkway. The investigators asked passersby to help. When they asked them to help them as a favor, they got a good response; however, people's willingness to help dramatically decreased when they offered passersby 50 cents to help out. If they offered them a piece of candy to help out, they got an equal response to the control group that did it as a favor. They had to offer passersby $5.00 before they got an equal percentage of people to help as when they asked people to do it as a favor. (n=614)

The interpretation of the study, which is supported by several other studies, demonstrates the effect of money on people's responses. Simply put, even the presence of money in the room affects people's altruistic inclinations. The implications for the practice of medicine are quite staggering, particularly as medicine becomes more heavily influence by business.

We need to preserve the art, the compassionate side of medicine, while also embracing the reality that we are running a business. This has been a significant conundrum for medicine over the centuries. While typically history would have many lessons, I'm not familiar with a time where medicine has been as complex and expensive as it currently is. Only a small percentage of individual patients with significant medical problems could cover the true cost of care on their own. Clearly, we need some kind of cost-sharing system, but the best model has yet to be determined. I'll be following Tom Daschle's proposals on how to improve our health care system with great interest, assuming he is confirmed as HHS Secretary, which is still under review by the senate committee.

American Spending

I came across this article, which I found fascinating; this, in particularly, is astonishing:

"The cutbacks by the Muirs and others their age mark a particularly profound shift. In the American buying spree of recent years, the most profligate spenders were those under 35. As recently as 2006, for every $100 these Americans earned, they spent about $117. Those aged 35 to 55 had negative saving rates nearly as large. Only the large number of Americans 55 and older, who have always had high double-digit saving rates, kept the overall saving rate above zero, according to data from Moody's Economy.com and the Federal Reserve."

I know we want to get the economy back to good, but isn't spending $117 for every $100 earned, and then hoping that your house, or your mom, or the lottery, will bail you out, utterly unsustainable? How can people expect increased spending to get us out of this recession? I know this has worked in past recessions, but as with everything, it seems we've come to a day of reckoning with regards to our spending. If American's habits change, as they are, we'll have a prolonged recession. This however, is the painful process that is needed to get us back to a healthy economic place! We need to stop overspending and learn to live within our means. While this may astonish some people, you need wealth to create wealth. The way to gain wealth is to live within your means and then use your discretionary income to generate wealth by making wise investments. This downward adjustment in both personal spending habits and overvalued assets is needed in order for our country to regain a strong economic foundation.

On a more pragmatic level, I hope my wife doesn't get laid off, cause she wouldn't be happy sharing my meager income, and we'd lose the house, and life would really suck.