This is an obviously biased post (see the title) but I think its better to have an explicitly biased post than to make an “objective” post that can’t help but be influenced by my own opinions. Whether you agree or disagree, I hope this post is useful. Please let me know what you think below!

This is a long post, so here’s a short version of it:

• Swarthmore cares about Climate Change
• I start with the assumption that we agree (like 97% of scientists) that human-created climate change is real and if left unchecked will drastically change the way humans interact with our climate.
• I also assume that we agree that those changes will be catastrophic and should be avoided at great cost, as those changes involve at the very least massive loss of life and hardship.
• There is no doubt that this assessment and the need to act is agreed upon by the wider Swarthmore community.
• We now can talk tactics and pragmatic priorities – the Swarthmore community also cares about financial aid, the long-term success of the college, etc. and must balance those priorities.
• Divestment is useful:
• Divestment is worthwhile, but not to affect share price directly. Instead divestment is effective as a way to change the perception of the fossil fuel industry.
• Swarthmore is well positioned to affect those whose opinions have the most affect on investment in fossil fuels.
• The current college’s sustainability plan is weak and ineffectual. When looking at this tactically, divestment is a smaller cost for more benefit than retrofitting all the buildings on campus.
• Even if you don’t care about divestment…
• It’s actually not clear that divestment will cost anything – in fact we would likely avoid significant losses in the future due to overvaluation of fossil fuel stocks now.
• Divesting preserves Swarthmore’s values and brand – failure to divest chooses short-term savings at the cost of institutional integrity and perceived brand.

A Quick History of Divestment (focused on fossil fuel divestment and Swarthmore)

The Swarthmore community agrees it should help combat Climate Change

In writing this post, I assume that the entire Swarthmore community agrees on a few basic things:

1. Human-caused Climate Change is real (97% of scientists agree, it’s hard to get more certain than that)
2. If left unchecked, Climate Change will cause significant changes to how our civilization functions
3. These changes will be catastrophic, causing large loss of life and wealth, and should be avoided at great cost

Note that I don’t specify that we agree on how much cost we should bear to avoid Climate Change, nor do I suggest that there is a consensus on how to combat it.

However, these three items show that it is not “political” in the Swarthmore community to suggest that Climate Change is a problem that must be solved. Indeed, our presidents and deans have been speaking for the community recently when they have touched on the topic:

I believe we all share a deep commitment to finding effective ways to combat the myriad ills that threaten the environment, indeed, the very future of our planet. It is obvious that we agree that sustainability is among the foremost priorities facing our society—and the world—today.
– President Rebecca Chopp, April 2014

The managers of Swarthmore College agree that climate change is the most pressing issue of our time and that Swarthmore College can—and must—play a leadership role in helping to curb the seemingly insatiable appetite for fossil fuel.
– Board of Managers, May 2015

We see that Swarthmore community believes that:

1. Swarthmore is able to help tackle the issue of Climate Change
2. Swarthmore is morally obligated to do so given its privileged position

Pragmatic concerns

So we have determined that Swarthmore as a community is unanimously (or close enough) on board to help solve Climate Change. Now it just becomes a discussion about how we balance our resources between Climate Change and other agreed-upon priorities. This is the political debate – a discussion of how to allocate limited resources amongst a set of priorities.

In an ideal world, Swarthmore has infinite money, time, and focus to address all the wrongs in the world that we agree about. In the real world, Swarthmore has a few other significant obligations and goals that we must take into account.

The Swarthmore community also:

• Desires to continue as an organization as long as possible
• Desires to help less-wealthy applicants thrive at Swarthmore
• Desires to gain the highest status possible amongst universities and colleges
• Desires to end racism, sexism, etc in the wider world

That’s a lot, but we do have some powerful resources to help us:

• A $1.88 billion dollar endowment (in the top 20 in the U.S. for per-capita endowment)
• Respect amongst the academic, cultural, and political elite
• A strong network of alumni who also share these values

The first three other desires Swarthmore as a community agrees on are directly tied to the size of the endowment and the returns on it. In order to continue as an organization in perpetuity, a large endowment helps – returns from the endowment helps Swarthmore pay for buildings, faculty, etc. and serves as a reserve fund in times of need. Those funds also help offset tuition breaks offered to less wealthy applicants (and help offset full-price tuition as well). Finally, one mark of respect amongst institutions comes from the size of one’s endowment.

The last desire is a set of other socially beneficial causes that the community agrees on which we would like to help with. I don’t pretend that Climate Change is the be-all-end-all social cause, but I will argue that much progress in other causes would be undone due to the pressure from Climate Change in the future, and so it would be wise to tackle this issue with a higher priority.

Additionally, there are fewer clear paths forward for the other social causes: combatting Climate Change requires the world to emit fewer greenhouse gases and ideally reduce the amount of greenhouse gases already in the atmosphere. Simple and clear.

Influencing (as an example) the Black Lives Matter issue is not as straightforward – the Swarthmore community agrees that our society does not value the lives of our black citizens enough, but how do we help? Should we divest from St. Louis-based businesses? Should we support body cameras on police? etc. It is not quite as clear, at least yet, that divestment would be the most effective use of our resources in helping that cause. One could imagine a situation in which divestment would help (for instance divesting from Woolworth’s during the civil rights era to pressure change), and in that case I believe it would be fine to use the endowment as well.

The Logic of Divestment

So we have unanimous agreement that there is a problem and we have a clear goal to avoid catastrophic Climate Change: reduce greenhouse gases across the world. So how do we do this in practice?

The divestment movement suggests that one way to reduce usage of fossil fuels is by altering the perception of the fossil fuel industry amongst investors, particularly large, influential investors. This will inspire less investment in fossil fuels and less consumption following that decrease in investment. Note that the divestment movement does not think that selling the shares themselves will actually cause the share price to change, not without a wider change in perception.

Currently, fossil fuel companies claim large amounts of coal, oil, and gas reserves as assets on their balance sheets. These companies use investment capital provided by the financial markets to fund more exploration for new resources and to fund R&D to better exploit their current holdings. Investors fund these companies (and by extension, further exploration and consumption of fossil fuels) because it has historically been a good investment. Ideally, however, the negative externalities of carbon in the atmosphere would be priced into the costs of fossil fuels, and the value of these reserves (and therefore the value of the stock) would decrease. This is called the Carbon Bubble.

Right now, the stock prices of these companies reflect the assumption by investors that the negative externalities of carbon will never be taxed. However, for our civilization to avoid catastrophic Climate Change (see above that the Swarthmore community agrees that we should avoid this), those fossil fuels must not be burned or the negative effects of emitting the carbon should be included in the price of the fuel itself. As an example, each gallon of gas might be priced to include carbon capturing and sequestration of an equivalent amount of carbon elsewhere in the world, similar to offsets you can optionally buy on an airplane. Or more depressingly, the tax on every 100 gallons of gas might go towards resettling a Bangladeshi refugee from sinking land.

Divestment is a powerful statement about this situation:

We believe that Climate Change is real, and that the costs of burning fossil fuels will be priced into the fuel itself at some point in the future. We believe that it is unjust to push the burden of dealing with the negative externalities of carbon onto the rest of the world, and that this injustice will end sooner rather than later. We are so confident in this that we are betting large sums of money on this outcome.

That such powerful institutions both believe that this outcome of carbon being accurately priced will occur and have vested interests in this outcome occurring should encourage all investors to reevaluate the true value and future of fossil fuels. Politicians should as well take notice that fossil fuel jobs are no longer as desirable to attract as before, and that the fossil fuel industry is likely not a reliable, powerful ally beyond the near future.

Or more succinctly:

The Carbon Bubble exists, and we as an institution find that the status quo is fundamentally shifting. Divestment is our institution acting upon that finding.

This statement is somewhat symbolic, but that is the point – divestment highlights to other large institutions and investors that the world has changed, and that investments in fossil fuels are no longer likely to offer decent returns. When the elites of our society suggest that the future will look different, and back that suggestion up with the money that they steward, they’re probably onto something, and you as an investor should probably listen.

Arguments against divestment by the board

There are a few common arguments against divestment, starting with the glib response that “someone else will buy the shares”, which is true but misses the point as shown above. The Swarthmore Board of Managers (a body of individuals who elect their own successors under no obligation to listen to the wider community) asserts that divestment will be very expensive and will compromise other priorities the college cares about:

The College’s budget is dependent on the endowment to support financial aid, sustain its exceptional faculty, provide academic and extracurricular programing, and build and maintain facilities.

In particular, we seek to preserve our increasingly rare stance of need-blind admissions, funding student need with all scholarships and no loans, and expanding access to our education for those who cannot afford it. In fact, increasing the access of exceptional low-income, first generation, and minority students to Swarthmore is a top priority.

If we were not able to work with these investment managers, it would cost the college between $10 and $20 million annually based on the past performance of our current managers.

However, the Board is enthusiastic about spending tens of millions of dollars on sustainability measures on campus. So the Board and the divestment advocates agree: Climate Change is important to combat and we should be willing to spend millions of dollars to do so. The Board’s argument is not that divestment will not work or that it would not be a useful step, but that it is too expensive relative to other alternatives. I’ll detail later on why I think individual action like building a sustainable building is not actually high-impact when it comes to the collective-action problem of Climate Change.

Additionally, the Board is (rightfully) worried that opening up the endowment to divestment from fossil fuels will encourage activists to approach the Board seeking to use the endowment for other social causes. However, few causes are as apolitical as Climate Change is in the Swarthmore community – there can still be a strong barrier to using the endowment, requiring a sustained campaign to convince the Board that, yes, issue X has near-unanimous support amongst faculty, students, and informed alums.

Another suggestion which the Board has proposed is using the fractional ownership of these fossil fuel companies to push for sustainability measures. However, I highly doubt this would be effective: without a divestment movement there would always be others to purchase shares, and there is no chance that Climate activist investors will form a large enough section of the shareholder body to effect change.

As for the Board’s (paraphrased) argument that: “in the past (in 1991) an unelected body decided not to consider social objectives in endowment investments, so we will not consider social objectives today”, well, I can’t imagine any member of the community finding that argument convincing.

Arguments against divestment by Professor Burke

A separate and more interesting discussion came from professor Timothy Burke, who has a few great points and one strong concern about tactics. He suggests that:

• We need to stop treating people who disagree on tactics as if they reject the scientific consensus – there are legitimate debates to be had on the most effective use of limited funds, time, focus, etc.
• Screening the endowment for “moral purity” is impossible – the college will always end up invested in some form of exploitation
• Colleges are no longer institutions which can lead the broader nation on social issues, a condition which has been true for at least 30 years

The first point is important – the ferocity of activists turns off many people I know, and the divestment movement at Swarthmore still has a bad reputation amongst alums from when activists shut down healthy debate and discussion via chanting a few years ago.

The second point is probably true, but less interesting; complete moral purity is not an outcome which many in the divestment community are actively seeking. Impact is the more important goal of the movement.

The third point is the most interesting, as we are now talking broader tactics. Professor Burke argues that starting the divestment movement from elite bastions that have little connection to normal Americans and are often resented by a broad spectrum of the country does the movement no favors. He contrasts it with the anti-apartheid movement, a campaign that divestment supporters often reference:

The anti-apartheid coalition moved outward from progressive activism to a wider political base, and was largely careful to attend to the conditions that would facilitate that movement. It used the university as one stepping-stone because the university was part of a constellation of respected civic institutions that included churches, community groups, local municipal governments, and mainstream journalism.

That cluster of institutions was already beginning to fragment in the 1980s, and is now almost wholly dispersed. You cannot keep running the same plays if the game itself has fundamentally changed.

Professor Burke is 100% right that the game has changed. However, I don’t think he realizes how it has changed. The 1970s and early 1980s were a time of institutions and characterized by people having the power to affect change en masse. Unions, coalitions of faith groups, and student groups were successful in actualizing change. This is no longer the case, even amongst people who still belong to unions and who still belong to organized religious groups. In today’s world, star power is more important than ever, and only a few people have the power and influence to make change succeed. For policy, we can take a look at the influence of George Soros or the Koch brothers on energy & finance legislation, or how selective applications of funding from the Gates foundation have transformed large sectors of education. Even teachers unions have been continually on the defensive, and both union and church enrollments have been in decline for decades. Culturally speaking, the local pastor or union leader is an endangered species – an endorsement from Ben & Jerry is probably more valuable than the support of the Methodist churches, for instance, and will get you more press and notice from the people who actually have influence.

So trying to convince large numbers of Americans is actually not very valuable in today’s society if you actually want to get anything done, and is a hell of a lot harder than the alternative. That alternative is to convince the people with power that you are right. This is even easier than you might think as currently the 400 wealthiest Americans have more wealth than half of all Americans combined! As the divestment movement is structured, it doesn’t even need to appeal to the moral side of those with power, just to the desire for those with power to avoid the risk for the “Carbon Bubble”. As discussed before, Swarthmore actually does have a good amount of influence and respect amongst other education institutions, the media (i.e. David Brooks, Arthur Chu, etc) and the political world, and is thus a good candidate to lead the movement.

So yes, I agree with Professor Burke that Swarthmore is a terrible place to start a mass movement. However, we don’t need a mass movement – we just need to affect a very small, elite segment of the world population which holds most of the cultural, political, and financial capital. Undemocratic? Yes. Cynical? Yes. The only way to avoid effect real change and avoid catastrophe? I believe so.

Why individual sustainability actions are not very worthwhile

The Board suggests that Swarthmore should lead by example and conserve in an individual way. I find this plan weak and vain, and the money spent on building sustainability essentially wasted in comparison to how it could be used to drive meaningful change. This is a strange position – every little bit helps, right?

While individual action might buy us time in resolving Climate Change, individual action is fruitless in the long-term for this problem. Professor Burke’s criticism that Swarthmore is not the right place to start a worldwide social movement rings true – fossil fuels are consumed by individuals everywhere, and realistically no one really cares how many barrels of oil Swarthmore saves, or how many trees it plants in the Crum. Those individuals will continue to drive and consume, and if oil is slightly cheaper because Swarthmore uses less of it, someone else out in the world who has never heard of Swarthmore will use more of it.

Climate Change is a collective action problem on a global scale. The businesswoman in China starting a coal mine and seeking favorable investment from global finance will never hear about nor care about how “green” the new biology building is, she will decide to open the mine based on economic considerations. The carbon emissions of those economic considerations dwarf the savings that Swarthmore can provide, even if we became 100% efficient. It is those economic considerations you must change.

A particularly sharp reader might object that this parallels share price – when Swarthmore divests, wouldn’t someone who has never heard of Swarthmore or doesn’t care will simply purchase the shares or provide the loan for the mine? However, we have shown that the true purpose of divesting is to advance the idea that the Carbon Bubble exists and will materially affect the fortunes of fossil fuel companies. As long as an investor has heard of the divestment movement (and at this point all large investors have), understands the concept of the Carbon Bubble, and has their own self-interest in mind, that investor is less likely to invest.

If you want the college to divest, why not just donate to the special fund set up by the Board?

In May of 2015 the Board reiterated that the general endowment was off-limits for divestment, but opened a special fossil-fuel-free fund one could donate to. The argument is: Others in the past donated to the college for the explicit purpose of running of the college, not for affecting the social issues that a future generation might care about. Thus it is improper to use those funds for any other purpose.

I find this argument weak as well. Swarthmore itself was started by radical Quaker abolitionists – these original benefactors strongly believed that Swarthmore should push forward on issues the community believed in, even if these issues were not central to the day-to-day mission of education. As an example, the first Board was made up partly of women, which at the time in Pennsylvania was illegal and highly unusual. Could the college have started with a Board officially made up of only men? Certainly, and it would have been less distracted from its mission of creating an environment to educate in. However, the founders of Swarthmore decided that the morally right thing to do was not the most short-term advantageous thing to do. This is a value that Swarthmore strongly holds, and always has.

Donating to the college is not like donating to a factory trying to make as much ‘education’ as possible, but instead a donation to a living community which has agency to govern themselves as it sees fit. The donation to the college is just that – a gift, something which the community can use as it sees fit, and it is pretty obvious what values the community holds.

On a tactical level, that special fund did not get any press and is useless to combat Climate Change (again, an outcome that the community desires). The headlines are along the lines of: “Swarthmore chooses not to divest”, and are not even along the lines of: “Swarthmore allows for some divestment, going forward, which will be a very very small fraction of the funds it manages”. For divestment to be worthwhile, Swarthmore needs to indicate that the entire community sees the danger of the Carbon Bubble and has decided to avoid the risk. Silent divestment via the special fund is worse than doing nothing – at least when you’re doing nothing you know that you’re doing nothing instead of believing that you are having an impact.

Still think we shouldn’t touch the endowment for moral reasons?

Fair enough – I understand the reluctance. This section is to convince you that divestment is actually a necessary step to:

• Avoid downside risk to the endowment (aka that we’ll lose money) from the Carbon Bubble
• Ensure that Swarthmore is still seen as a leader, with the benefits that come with that position
• Ensure that Swarthmore avoids hypocrisy and maintains its values

While I could write about this, someone with better qualifications has already done a better job than I would do: http://daily.swarthmore.edu/2015/03/05/the-financial-advantages-of-divestment/

This article was written by a financial professional who spent time looking at Swarthmore’s case specifically, and who concluded that it is actually a wise investment decision to divest. The Board suggests that Swarthmore’s endowment will lose $10-20 million a year if we divest. That number is almost certainly an exaggeration, and ignores the downside risk of the Carbon Bubble, as the investment professional explains:

If we agree that climate change is a huge threat that society will act on, then it necessarily follows that divestment will occur to limit losses, that fossil fuel company prices will drop substantially and that institutions with these stocks in their portfolios will experience large losses.

He then identifies the other reputational risks that come from failing to lead:

Aside from the financial risk of being a late exiter, the moral and brand damage to Swarthmore from being a late mover would likely be large.

A January 15, 2015 letter by many of Stanford’s faculty to the Stanford President and Board of trustees puts the issue this way: “If a university seeks to educate extraordinary youth so they may achieve the brightest possible future, what does it mean for that university simultaneously to invest in the destruction of that future?”

This analysis lays a convincing argument that by divesting we avoid significant risks to Swarthmore, both financial and reputational. This is without even considering any moral argument for divestment.

So how do I help?

Great – thanks for joining us! It might seem hard to affect change, as the Board’s response recently seems final. However, the student activists at Swarthmore are not quitting anytime soon, and your power as an alum is greater than you might think.

Ways to help:

• Join in actions when you return to campus for your reunion. Email me if you want to help plan.
• Help spread this information to others. There are divestment movements on many many campuses, and many alums who don’t yet have enough information to make a decision. At the very least the conversation about divestment will be pretty interesting.
• Next time the college asks you for a donation, let the college know that you won’t be donating until they divest the entire endowment. Alumni giving rates are very important to elite colleges, and this is one of the stronger levers we have. Make sure you can explain why donating to the side fund is not worthwhile (see the section above).
• To still donate but actually put pressure on the administration, donate here
• Like these groups on Facebook: 350.org and Swat MJ
• Personally pledge to divest from fossil fuels (I find this less effective than getting an institution to divest – your personal divestment probably will make few headlines!)

Conclusion

Thanks for reading this far. Hopefully you feel informed about the debate, even if the presentation was highly opinionated.

Again, the divestment movement seems complex, but ultimately boils down to a set of simple assertions:

• Human caused Climate Change is real.
• The Swarthmore community agrees that Swarthmore College should help fight Climate Change.
• The Swarthmore is able to be a leader in changing the status quo.
• Divestment can help change the flow of global capital away from carbon-intensive fuels.
• The Carbon Bubble exists.
• Divestment will actually help the college’s endowment value in the long-term.
• There are risks to our reputation from not divesting which have not been examined by the Board.
• Divestment is a more effective strategy than individual efforts by the college and the community.

I believe that all of those assertions are true (although all do not need to be true for divestment to be worthwhile), and I hope that I have shown in this post why I think so. I am always open to new information, however, and would love any perspectives, ideas, or information that I may have missed.

How about it – do you think Swarthmore should divest?

The post Why Swarthmore Should Divest appeared first on Schimmy's Thoughts.

For those interested, here is:

• An article arguing that divestment is fiscally prudent
• An article arguing that divestment is tactically useful
• A great article by Tim Burke arguing that divestment is not the right course of action for balance

Dear Mr. Kemp and Swarthmore Board,

I know you are busy people, and I will try to be brief.

I understand your concerns and truly appreciate your stewardship of the college through presidents, new generations, recessions, and more. The steadiness and sobriety of the board is important to keep Swarthmore on the right path.

However, after much consideration, I have to respectfully disagree with the board’s decision not to divest our endowment from fossil fuels. Our college for many years has espoused ideals around sustainability, and to keep ourselves honest we must take this step and lead. Yes, we should not use the endowment as an active political tool without great hesitation. Yet, when 97% of scientists agree on an issue and the college’s public statements for years have agreed that climate change is an issue, to not act would be in violation of our Swarthmore’s principles.

Others more elegant have argued why this is useful morally, and others have also demonstrated its utility as a tactical move (it will not be an empty symbolic gesture, but an important signal in how fossil fuels are perceived).

As you all are practical people, however, I’d like to point out some reasons why this is prudent for Swarthmore, moral arguments aside:

• We must align our investments with our values, or risk reputationally being seen as hypocritical
• There is a very strong likelihood that the Carbon Bubble is real – removing our investment in fossil fuels avoids the large downside we are risking if those fossil fuels stay in the ground, which basic logic suggests is likely
• We gain reputation & prestige by leading the charge instead of following meekly

As the moral and financial evidence that this is a good idea becomes more clear, the risk that we are leading down the wrong path diminishes. Let us reap the practical gains by leading this movement, as well as some of the financial gains by being among the first to divest.

Young alums are watching this issue closely, as we know that ultimately it will be us who have to deal with the more extreme effects of climate change. We know that you are working with the best interests of Swarthmore and future generations at heart, and hope that the many arguments in favor of divestment are strong enough to stand up to your intellectual scrutiny. I believe they are strong enough, and that it is time to divest. I believe the moral, financial, and other pragmatic reasons suggest it is time as well, and that we will look back at this decision with pride as a time Swarthmore led the way to a better outcome for both humanity and for itself.

Thank you for your time,
Colin Schimmelfing 2010

The post Letter to Swarthmore’s Board Supporting Divestment appeared first on Schimmy's Thoughts.

We should divest not to force a corporation into action, but instead to clear our own minds on the issue. Humans are notoriously afraid of loss. When those invested in the university (via having attended and donated, or by receiving monthly paychecks) have an opportunity to confront climate change, it is impossible to ignore that the health of one’s investment depends, even only very slightly, on the decision being made via that opportunity.

This effect might be enough to sway a vote, or to make it less likely someone would share a 350.org post on Facebook; small stuff, but it can add up. While the loss might seem too small to affect someone’s behavior, I suspect a stronger influence given what we know about human irrationality around aversion to loss. I would like scientific validation of this idea – perhaps a psychology department at one of the universities opposed to divestment might take up the investigation…

We must enable our own leadership on the issue of Climate Change. Our voices should be certain, and our judgement unclouded by financial doubts. Divestment is an investment in our integrity and our independence, and I encourage Swarthmore College and all other institutions to take this necessary step.

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The post Schimmy’s guide to personal finance appeared first on Schimmy's Thoughts.

At Clever, we have ‘Clever Talks’, where we learn from one another about exoplanets or Magic the Gathering or bike maintenance – anything that someone at the company knows about which others find interesting. This week we had a guest, Amil Bera. Amil is a Registered Investment Advisor and was going over basic personal finance – a great talk. I would definitely recommend him as a resource! However, I disagreed with one section of the talk in particular. This section discussed the irrationality of people paying off debts with very low interest rates when they could get a better rate of return elsewhere.

The logic here is sound. If you can slowly pay off your subsidized student loan and put the rest of your savings in something that earns you much more, you are certainly better off in the long run. And yet…… when I got my first job out of college, what I started on right away was repaying student loans as quickly as possible! According to Amil, I’m not the only one, especially amongst Millennials.

Why are all of these rational people making irrational financial decisions? I’d argue that it’s not just human nature, and that there are some factors that make this at least more of a close call than the financial advisors would suggest.

First off, while I’ve heard a similar argument about investing instead of paying down debt from other people, all of those people have been well-off themselves, or have extensive support networks. Essentially, being in a financially privileged position allows you to take these kinds of risks – if the stock market crashes and you lose your job, no big deal – you can just ask your dad to help you out until you get back on your feet. Yes, the advisors say that you should have a 4-6 month window of cash savings to be able to do this yourself, but then you are battling your own psychology daily to prevent from spending any extra cash when you could be paying down liabilities which you’re still on the hook for if your career does go south. Even if right after college you didn’t have these support networks, it’s easy to look back and say that your past self was irrational. Yet this is easy knowing how the next few years played out! As always, hindsight is 20/20.

Second, I find being in debt to be very mentally challenging. The Millennials became financially aware in times where playing with debt was seen as safe (Buy a house on credit in Phoenix, AZ – You can flip it in 6 months for a guaranteed 30% gain!) but many people ultimately got burned. Similar to those who lived during the Great Depression, we’re going to have a wary relationship with debt and credit for some time, if not for life. I think this is healthy – generally credit is dangled in front of Americans as a way to pay for consumption we don’t need. If we have an aversion to that debt, we will consume less and hardly miss out as a result. This aversion to debt also weighs down on you when you have loans, even if you have a steady job. How much is it worth to release a nagging worry at the back of your mind: The worry that there is a virtually unshakable debt with your name on it which you might be paying it off for decades? Stress-wise, I’d prefer the slight regret of a missed percentage point over the daily specter of indebtedness.

Thirdly, I think that the effect of debt is to significantly chill honest self-realization. I’ve already talked about how positive financial incentives can affect your decisions in ways you might not expect and debt is a flip side to this with respect to self expression and ‘rocking the boat’. If you want to be able to think for yourself and decide who you are as a person, having debt is terrible. Having regular debt payments means that choosing to be a ‘free spirit’ is a financially suicidal decision. Jack Kerouac can’t afford to spend his paycheck on gas for cross-country trips and jazz, for instance, if he has student loans due every month. If he forgets to pay his phone bill, no big deal. If he forgets to pay his loan payments, that’s another month of compounded interest tacked on. While someone paying off student loans instead of investing still has the same problem, paying off the loans immediately gives the person freedom to choose their own way sooner instead of having to schlep to the cubicle every day.

Finally, (and this is the argument that will be most persuasive to the financial analysts), being in debt keeps you from properly exploiting opportunities that come up. Having wealth tied up in investments that may be unavailable for long stretches of time (perhaps the stock market is in a temporary downturn, for instance) means that there is little liquidity in your life’s financial structure. This liquidity matters a great deal, especially amongst those just starting their careers. Imagine someone a year out of college gets an offer to join Twitter, working for living expenses and equity. They’ve been an investment banker for a year, so they have been able to save an amount equal to the principal on the loan, which they’ve rationally invested in the stock market. Now, this would be a great career move, but unfortunately it’s 2008 and the Global Financial Crisis has just happened; the money which was supposed to be earning above loan interest is waiting on the markets to rebound. Now, over time the investment will rebound and earn more than the interest rate on the loan, but this is little consolation to our protagonist. Being a little ‘irrational’ and paying off the loans early would have wildly paid off in the long term. I have not read ‘Antifragile’, but paying off the loans early seems to match Taleb’s attitude. You are trading a few percentage points of reasonably sure gains for massive potential upsides coming from unpredictable serendipity. It is, I believe, ultimately the rational choice.

Have I convinced you? Or have I just rationalized my own irrational decisions? Let me know!

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In any case, if you’re doing your own taxes and you make enough to live in San Francisco at least semi-comfortably*, you should probably be itemizing your federal tax deduction.

So California has fairly high taxes, which includes the CA SDI 1% for disability and paid family leave. Whether you’re happy about California being more like a European socialist paradise or not, turns out that these higher taxes are deductible from federal taxes. (Don’t worry, we’re still contributing more than our fair share).

If you’re a single person renting an apartment in California, here’s a visualization of the way I think about it:

In this graph, the blue line is the percentage of your CA AGI (I assumed it was the same as federal to simplify) that the federal standard deduction represents. Since it is fixed at $6,100 for 2013, you can see that it represents less and less of your share as income increases. CA tax is the red line, and the yellow line is the CA SDI tax, fixed at 1% through 100k. Add those up and you get the bold green line- total non-discretionary items you can deduct.
Right here you can see that at about $80,000+ you should run the calculations yourself to see if itemizing is a good idea. However, I’m assuming that the readers of this blog either give a decent chunk to charity or have some student loan interest that they are working on. In that case the percentage of your AGI that you can deduct shifts upwards, and the cutoff at which you should check to see if deducting makes sense shifts back quickly. In the case of 5% going to charity, you should start running the numbers around $55,000ish.

I do have to add the disclaimer that, while I’ve spent far too many hours reading IRS docs to try to not use TurboTax, I am certainly not a certified Tax Preparer/Accountant/Lawyer/Lifeguard/Sandwich-Artist/etc.

Last PSA- give to Charity! Think about each dollar as not a dollar coming out of your pocket, but actually only 75 cents, since after reading this post you’ve realized that deducting is what you should be doing :-)

*yes, this is a sore subject- but I assume if you are reading this and working full time in the city you are in the range below

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In “Technological Revolutions and Financial Capital”, Carlota Perez argues that the technological advances and financial capital interact to create “surges”, what others generally call “long waves”. This surge encompasses the lifecycle of an entire “techno-economic paradigm”, a fancy word to describe how a society and its capitalist organization is underpinned by a set of technologies including processes, and that one form of this capitalist organization is very different from another. It is easiest to use an example, such as the “mass production” techno-economic paradigm. This started with Henry Ford et al, and is essentially waning as the “Information Age” (society’s term for the current techno-economic paradigm) emerges and dominates.

These surges have a lifecycle of the stages:

1. Incubation/gestation
2. A “big bang” of societal awareness of the new technology
3. “Irruption”: A “frenzy” of investment and installation of the new tech
4. Crash/Recession/Depression as the investment was over-hyped compared to the installed base
5. “Synergy” as the paradigm is accepted and rolled out
6. “Maturity” of the paradigm as the major gains are tapped out and capital goes in search of the next shift

Perez backs up this theory with examples of the 5 capitalist paradigms:

1. The Industrial Revolution
2. Age of Steam and Railways
3. Age of Steel & Heavy Engineering
4. Age of Oil, Autos, and Mass Production
5. The Information Age

This theory seems to hit the data points very well, and it will be very interesting to see how the next stages of the Information Age play out. Perez wrote the book right after the Tech Bubble burst in 2001, identifying that event as the crash in the lifecycle. It seems so far that the lifecycle is holding: as the broadband deployment and cell phone service extends, business models are finding traction in all areas of the economy. This seems to follow the “Synergy” phase and validate those claiming that “this time it’s different” because of such widespread adoption. For instance, online ordering of takeout food is normal to the point where people will not order from a restaurant who does not use Seamless/Eat24Hours/etc. What was once a fringe service that could not gain traction is now the norm.

Once almost every routine thing can be done online, we will be in the “maturity” stage and you can expect profitableness of new tech ventures to decrease. Note that I am not saying that everything will be done online, just routine things. Shopping for a gift? Still in person, if you want. But a new pair of jeans? Bonobos has seemingly cracked that one, and there’s no sentimental or community-building reason to keep going to Kohls and buying Levis. You might as well just order over the internet. Groceries are probably going to be handled online, as the supermarket is a big hassle for everyone.

You might think, isn’t this what everyone thought the last time? Again, yes, but that is somewhat of the point- a lot of decent ideas were floated during the bubble that were too early for their time, horribly executed, and way overvalued. As this techno-economic paradigm rolls out, we can hopefully avoid “Internet Mania” with constant reminders of the turn of the century.

So what’s the next paradigm? I’d guess robots who can navigate the real world, but we will see. The advances in battery technology and machine learning are allowing potentially explosive growth in useful applications of robotics. Or does cloud computing count as a separate paradigm? It seems as though that is not the case, but perhaps it is revolutionary enough. Perez does not seem to set defined limits for how different a paradigm can be, seemingly setting them once it is clear a technology is on a track to replace as a paradigm.

Right now I’m borrowing Paul’s copy of the book, but I think I might buy myself a copy- it is that important to think about these things! Look also for a followup in which I think about which things might be totally different this time around.

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I was recently telling a friend that he should consider investing via the Mosaic platform, a sort of crowdfunding platform for solar installations. Similar to Lendingtree or Prosper, investors see vetted projects with varying rates of return based on the riskiness of the loan, as determined by Mosaic. Mosaic takes a 1% cut, as well as origination fees for the loans, while providing risk analysis, paperwork / regulatory help to the borrowers, and a snazzy web platform for investors to analyze possible investments.

When I was explaining this to my friend, he started asking more detailed questions about how it works – who actually is getting the checks, who is liable, what happens when a loan goes bad, etc. I then realized when I couldn’t answer all of his questions that I had forgotten to do proper due diligence! The social benefit of the investments and the positive mentions of the platform was enough for me to start investing, but if I was going to recommend it, I had better know what I was talking about. So here’s my analysis, after reading a few prospectuses and the fine print. Any corrections or clarifications are very welcome.

Pros:

• Higher rate of return than your bank account, between 4ish and 7ish percent compared to 1% in your savings account
• Positive social impact, which will come back to you as ‘dividends’ in a world in which we invade fewer oil-rich countries and fewer mountain tops are blasted off for coal. If you are looking very-long-term, climate change must be dealt with for human society to be prosperous in the future
• Stocks are likely overpriced currently, or at the very least expecting 8% returns YOY is optimistic
• Small investments down to $25 are possible, which is convenient especially when you want to reinvest your interest payments
• You probably have lots of stocks and lots of cash, but few bonds (if your portfolio looked like mine before investing in Mosaic-selected loans) – diversify a bit!
• Impress possible significant others with your commitment to the environment. Although maybe not the best thing to bring up at a party…
• Mint.com integration is on its way

Interesting and Important Risks:

• Mosaic is the middleman- it has no obligation to repay in a default situation
• That inflation will rise drastically from the ~2% now to over the return of the bond in the time before bond maturity. However, this is very unlikely especially given that such inflation is not desired by Wall Street
• There is little governmental oversight. From the prospectus:
  

  “We are not subject to the periodic examinations to which commercial banks and other thrift institutions are subject. Consequently, our financing decisions and our decisions regarding establishing loan loss reserves are not subject to period review by any governmental agency. Moreover, we are not subject to regulatory oversight relating to our capital, asset quality, management or compliance with laws”

  (how the hell do they get away with that? good job, sirs)

• In the case of a default, the things you can grab on the way out (aka as collateral) are very limited: only the solar capital equipment is allowed as collateral, which is something that probably quickly depreciates especially with new tech coming out all the time.
• Mosaic can charge max(35% of the recovered funds, lawyers fees) in an attempt to regain funds in a default situation
• Early repayment can happen without penalty by the borrower, however given the low interest rates currently, this does not seem like a big deal
• Mosaic itself could go bankrupt, and that could make things very complicated. However the funds are probably safe from seizure in that case as the loan is technically between you and the business, not with Mosaic. See Mosaic’s assertion.

Annoyances:

• Mosaic takes 1% of cash sitting around in the account more than a month as well as the 1% from the loan– as payments slowly trickle in from investments it is annoying to have to clear that cash out each month. My other investment account actually gives me interest on the cash stored there (a pittance, but it keeps you happy to have cash sitting in their system and is probably a smart move long-term).
• The terms of the loans are generally around 10 years, a very long time! However ultimately this may be a good thing- short term financial outlooks are part of the reason why the Global Financial Crisis happened, and I figure if I ever screw up too badly in the next 10 years I’ll at least have a little bit of income coming in that I can’t easily raid for beer money.
• The constraints on who can invest (set by the government) mean that you can’t really recommend it to people outside of CA or NY unless they’re a ‘qualified investor’. Even in CA and NY you can’t invest more than a small fraction of your wealth (although you shouldn’t put more in yet anyway!). Unfortunately Mosaic is not covered by the JOBS act, either, so smaller investors in other states probably won’t be able to contribute for a while.

Open Questions:

• There is one item in the prospectus that I am particularly confused by:
  

  “You will not receive any payments we may receive after the final maturity date of your Note.
  The Notes will mature on the initial maturity date, unless any installment payments in respect of the corresponding Loan Obligations remain due and payable upon the initial maturity date, in which case the maturity of the Notes will be automatically extended to the final maturity date. If we receive any payments from the Borrower after the final maturity date, we may retain 100% of these payments and will not be obligated to distribute those payments to you.”

It seems as though the extension of the maturity date would cover all cases in which you would have a claim on the funds paid by the borrower… perhaps this is just cover-your-ass-legalese?

• What happens if the solar panels get destroyed?

I invested in the solar panels on the Wildwood Convention center in New Jersey, and I can easily see Hurricane Sandy v2 coming by and knocking them out. Wildwood would still have to pay off the solar panels, but how easy would it be for them to declare bankruptcy and shed their responsibility in that case? I did see in the FAQ that Mosaic ensures that there is proper physical capital insurance to handle this, but perhaps in a catastrophic event that coverage would not be sufficient. This also seems like one of the first corner-cuts that Mosaic might do if they desperately needed the revenue. See Mosaic’s take on the issue.

Also there is one open question which can not be answered currently:

• What is the default rate of commercial loans for solar panel installs?

There is a very small default rate for residential installs, but since no one has done this kind of program for a long enough time or for commercial properties, there is very, very little historical data about default rates for the types of loans Mosaic is facilitating.

Analysis:

I’m still definitely pro-Mosaic, and will suggest it to anyone living in CA or NY who is looking for a long-term place to park their cash which will give better returns than a savings account or a CD. I would still advise the person to realize that the cash is locked up for a while, and that since these types of investments are somewhat experimental they should only invest < 10% of their wealth in them, if not less.

Essentially, I see it as a relatively safe investment for the benefits, particularly for California projects. Suppose a business installs solar panels on their roof and goes out of business. Likely the buyer of that commercial property will also undertake the loan on the solar panels- after all, the solar investment was a good one at the beginning of the loan term, halfway through the investment is just as good. This calculus would only change if the price of solar electricity decreased in CA, which I really don’t see happening – we love our green energy subsidies! Since the money coming in from PG&E is pretty steady in the next 10 years, and inflation is likely to stay within a percentage point of 2% in that time as well, I feel comfortable signing up for the long term.

The list of risks is long, but much of it comes down to trust in Mosaic and in the business that they are trying to create, which Mosaic seems to understand. In a not-well-developed and somewhat experimental market, they need to do what it takes to gain trust in both the company and the investments offered. As such, their diligence on credit-worthiness is probably going to be less motivated by the short term, and more focused towards building a trusted business and keeping the stinkers out.

Additionally, I think that overall the incentives are properly aligned. They do make a good amount from origination fees, which means that the company also does have an incentive to push less-than quality loans out the door, however the 1% loan lifetime cut of the loan means that Mosaic also has skin in the game. The returns from seeing a project to completion are more than the origination fee, and the ‘business-building’ incentive to keep the quality of loans high is a strong force.

TL;DR:

Mosaic is a good, experimental investment with a definite social good and a positive fiscal return. Since it is still experimental, only put a small fraction of your wealth into Mosaic. Given how much you’ve probably put into bitcoins, you probably can spare enough to test this out ; )

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