Tuesday, April 29, 2014

Where have you gone Double-Entry Accounting?

SOMETIMES it seems as if our lives are dominated by financial crises and failed reforms. But how much do Americans even understand about finance? Few of us can do basic accounting and fewer still know what a balance sheet is. In fact, when was the last time you balanced your checkbook? If we are going to get to the point where we can have a serious debate about financial accountability, we first need to learn some essentials.

The German economic thinker Max Weber believed that for capitalism to work, average people needed to know how to do double-entry bookkeeping. This is not simply because this type of accounting makes it possible to calculate profit and capital by balancing debits and credits in parallel columns; it is also because good books are “balanced” in a moral sense. They are the very source of accountability, a word that in fact derives its origin from the word “accounting.”

If we want to know how to make your own finances and companies more accountable, we would do well to study the Dutch. In 1602, they invented modern capitalism with the foundation of the first publicly traded company — the Dutch East India Company — and the first official stock market in Amsterdam. But it was through an older and well-maintained culture of accountability that they kept these institutions stable for a century. The spread of double-entry accounting to the Netherlands during the early 1500s made the country the center of accounting education, world trade and early capitalism. Well-accounted-for provincial tax returns allowed the Dutch to float bonds at dependable 4 percent interest rates. The Dutch trusted their managers to know how to keep good books and make regular interest payments, while paying off state debt.

Over the past half century, people have stopped learning double-entry bookkeeping — so much so that few know what it means — leaving it instead to specialists and computerized banking. If we want stable, sustainable capitalism, a good place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, as they were in Renaissance Florence and Amsterdam. I teach a summer business program for high school business students. Many of them know nothing about bookkeeping let alone how to manage cash.

A population well-versed in double-entry accounting will not immediately solve our complex financial problems, but it would allow average citizens to understand the nuts and bolts of finance: balance sheets, mortgage interest, depreciation and long-term risk. It would also give them a clearer sense of what financial accountability really means and of how to ask for and assess audits. The explosion of data-driven journalism should also include a subset of reporters with training in accounting so that they can do a better job of explaining its central role in our economy and financial crises.

Without a society trained in accountability, one thing is certain: There will be more reckonings to come. So balance your checkbook, understand your debt, and above all else kiss an accountant.

A special thank you to Jacob Soll, a professor of history and accounting at the University of Southern California.

JACK ASS OF THE MONTH – A tough one this month, Donald Sterling. What a putz.

SPORTS TELEVISION -- Johnny Weir and Tara Lipinski are bringing their sense of style to the Kentucky Derby. NBC said last week the announcing team will comment on the fashion and party scene at horse racing's signature event next week. Their addition reflects how the Derby has become one of the most female-friendly televised sports events of the year. Last year's race was the second most-watched Kentucky Derby in 25 years; 51 percent of the viewers were women. Weir and Lipinski were rookie announcers covering figure skating at the Olympics. ... They subsequently commented on fashion coverage at the Academy Awards for 'Access Hollywood.' The Derby will also mark the NBC debut of Josh Elliott.

HAS GOLDMAN LOST ITS LUSTER? - Goldman Sachs remained a partnership long after its rivals went public. When it finally took the plunge, in 1999, it revealed almost absurd levels of profitability: returns on equity of more than 40 percent in some years ... A decade later, under chief executive Lloyd Blankfein, Goldman avoided the fate of Lehman Brothers, Merrill Lynch and Bear Stearns. ... Surviving the crisis and then immediately thriving was the crowning glory of an investment bank that has inspired more respect, envy, fear and loathing than any other. But over the past few quarters something strange has happened: Goldman is starting to look unexceptional.

Reporting first-quarter results last week, chief financial officer Harvey Schwartz was able to boast of a 'pretty dominant performance in investment banking,' a 'quite solid performance in fixed income; and a return on equity that was 'the highest in our peer group'. All true. But this is hardly setting investors' hearts racing or leaving rivals quaking in their boots."

A FORD IN YOUR FUTURE - After a more than seven-year run, Ford Chief Executive Alan Mulally will leave the auto maker earlier than expected, we report. His successor will be Mark Fields, a Ford veteran who survived management turmoil in the years before Mr. Mulally's arrival. Our story examines the impressive progress that took place at Ford under Mr. Mulally's tenure, and we report on the role Mr. Fields has played in the company over the past few years. We note that he is expected to step easily into his new position. One person familiar with the matter referred to him as the acting CEO, adding that Mr. Mulally has been playing an increasingly "ceremonial role." Meanwhile, we have an interview with Mr. Mulally—conducted before news broke about his successor—in which he talks about Mr. Fields, business in China and the new F-150 pickup truck.

COLLEGE CHRONICLES  - As concerns over tuition costs mount, the U.S. government officials are trying to rein in increasingly popular federal programs that forgive some student debt. At issue are two federal-loan repayment plans created by Congress, originally to help students with big debt loads and to promote work in lower-paying jobs outside the private sector. Under the faster-growing of the two plans, the unpaid balances for those working in the public sector or for nonprofits are forgiven after 10 years. The move to rein in the programs, we note, reflects concerns in the administration, not just about cost to the government but about the risk that promising huge debt forgiveness could make borrowers and schools less disciplined. For instance, colleges might charge more than they would otherwise, which would only lead students to borrow more.

The U.S. Supreme Court on Tuesday ruled 6-2 that states may end racial preferences without violating the Constitution, leaving in place the outcome of a 2006 Michigan ballot initiative where voters backed an end to so-called affirmative action at state schools. Our story examines the opinions of the justices, reports on the reactions from civil-rights advocates and other activists and provides background on the long-lasting debate over preferential treatment for minorities. While the ruling upholds the right of voters in states to bar racial preferences at public universities, justices are far from consensus on when affirmative action may be allowed—an issue that will probably return to the court in the coming years. For more information on the decision, here's a handy explainer.

CHINA KEEPS SLOWING - A Chinese manufacturing gauge signaled a fourth month of contraction, indicating that government efforts to counter an economic slowdown have had only a limited impact. The preliminary Purchasing Managers' Index from HSBC Holdings Plc and Markit Economics was 48.3 in April, matching the median estimate ... The reading rose from March's final figure of 48 while remaining below the expansion-contraction dividing line of 50. The yuan touched the lowest level since 2012 after the report, which followed data last week showing China's expansion moderated to the slowest pace in six quarters.

DOLE'S CRYSTAL BALL - The World War II veteran clearly remains sharp in his 10th decade, working hard to move around but still reeling off his patented one-liners and dispensing Sunday show-style political wisdom for the election year. "He expressed dismay at the failure of Congress to pass immigration reform to and said the next GOP presidential nominee must be 'somebody with a program' ... 'We can't be against everything,' the former senator said in a brief interview ... Dole said Republicans have a '50-50' shot at taking the Senate this year and singled out two members of Congress - former vice presidential nominee Paul Ryan and House Majority Leader Eric Cantor - as rare lawmakers offering constructive agendas."

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this week to: Judy Collins (75), Penelope Cruz (40), Chris Krich …The Coach, Harper Lee (88), Kosuke Nakamura …famous International Student, Jerry Seinfeld (60), Frankie Valli (80), Brian Williams (55).

LIVING HISTORY - "Pope Francis declares John Paul II and John XXIII as new saints" in front of a crowd of hundreds of thousands - BBC/Vatican City : "He praised his two predecessors as 'men of courage' at the Vatican service, the first time in history that two popes have been canonised at the same time. The Mass was attended by Pope Emeritus Benedict, who quit as pope last year, and roughly 100 foreign delegations. ... Francis is trying to balance the conservative legacy of John Paul with the reforming zeal of John. ... The ancient rite of canonisation unfolded under grey skies in a packed St Peter's Square. ... [O]rnate, silver containers holding holy relics of new saints were shown: a trace of blood from John Paul II, and sliver of skin taken from the body of John XXlll. ...

"At the climax of the service, Pope Francis said in Latin: 'We declare and define Blessed John XXIII and John Paul II to be saints and we enrol them among the saints, decreeing that they are to be venerated as such by the whole Church.' Relics of each man -- a container of blood from John Paul and a piece of skin from John -- were placed near the altar.


DOWN THE STRETCH THEY COME – The Swami’s Kentucky Derby picks:
Win – California Chrome, beat those east coast snobs; early odds 2:1
Place – Hoppertunity, Bob Baffert’s long shot becomes a favorite; early odds 10:1
Show – Candy Boy, a ULV connection will surprise; early odds 20:1

SCIAC GAME OF THE WEEK – SCIAC Golf Championships: (1) La Verne Leopards, (2) Claremont McKenna Republicans, (3). Redlands Bulldogs.

2014 Season to date (25-27), ouch!

Market Week - As investors await another meeting of Fed policymakers this week, the markets continue their longest period of indecisiveness in 7-1/2 years. The S&P 500 has alternated between weekly gains and losses for eight consecutive weeks, the first time that’s occurred since September 2006. This is a huge week for U.S. economic data and events, including GDP and the employment cost index ... for Q1, lots of monthly indicators for March and April and an FOMC meeting. We expect the growth data to signal reacceleration in Q2 after exaggerated weakness in Q1. ... We estimate real GDP rose at just a 0.9% annual rate in Q1, down from a 2.6% Q4-to-Q4 pace in 2013. ... Most of the sharp slowing appears to be due to the harsher-than-usual winter weather and other sources of volatility ... We continue to forecast a 3.5% pace for real GDP in Q2, followed by 3.3% in Q3 and Q4.

DRIVING THE WEEK -  President Obama continues his Asia trip in the Philippines ... House Financial Services holds a hearing on Tuesday at 10:00 a.m. with SEC Chair Mary Jo White on the agency's rule making agenda ... House Financial Services subcommittee on Tuesday will hold a business meeting to issues CFPB subpoenas ... Senate Banking on Tuesday will markup the Johnson-Crapo housing reform bill and vote on Fed nominations including Stanley Fischer to be vice chair ... Tons of big economic data including Case-Shiller home prices at 9:00 a.m. Tuesday which are excepted to rise 0.7% ... Consumer confidence at 10:00 a.m. Tuesday expected to rise trivially to 83.2 from 83 ... ADP employment Wednesday at 8:15 a.m. expected to rise 206K ...

Employment cost index at 8:30 a.m. Wednesday excepted to rise 0.5% ... Q1 GDP on Wednesday at 8:30 a.m. expected to increase just 1.2% ... FOMC announcement at 2:00 p.m. Wednesday expected to including another $10B taper to $45B per month. There is no presser ... Personal income and spending at 8:30 a.m. Thursday expected to rise 0.4% and 0.6%, respectively ... ISM manufacturing at 10:00 a.m. Thursday expected to rise to 54.3 from 53.7 ... April jobs report at 8:30 a.m. Friday expected to show a gain of 215K with the unemployment rate dipping from 6.7% to 6.6% ... Twitter releases Q1 earnings on Tuesday.

Next week: Shrinkage and movies.

Until Next Monday, Adios.

Claremont, CA

April 28, 2014

#V-2, 211

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