December 15, 2000

Fortney Pete Stark
Thirteenth District, California
Congress of the United States
House of Representatives
Washington, D.C. 20515

Dear Mr. Stark:

I am writing to you to inform you of my mounting concerns for the US and world economies, and the American middle-class.

I didn't pay much attention to school work when I was in high school, I had other things on my mind. However, I did graduate and spent six years in the US Navy. A few years after getting out of the Navy I went to college and earned an MBA. When I was studying Twentieth Century US History and we got to World War II, I asked myself how could people let one crazed man do all this (I was paying attention now)?

It was not until recently that I came up with an answer I thought was correct: groups of people, in general, go along with the crowd. It's easy to reinforce this with facts throughout American History: 1) when Henry got up and said, "Give me liberty or give me death," many in the Saint John's Church thought the guy was crazy; 2) the abolitionists prior to the Civil War and for many years after the Civil War would be deemed by the crowds as being crazy; 3) even now there is an extremely popular phrase in the American Culture, that being, "politically correct," which basically means think before you speak because the crowd may not like what you hear rather what you have to say is sound and meaningful or not.

To make matters worse not only do people generally go with the crowd, but they are also very busy. I got a kick out of the coverage of the election by journalists and news reporters, they were complaining about being overworked, it was a major event for them to work 16 hours or an all nighter. I had a job in Texas that one time I worked 64 straight hours, I had numerous 16 hour days and all nighters, and we didn't have any major holidays off. The American middle-class work and when they're not working they are raising families. Unfortunately, the middle-class has delegated certain responsibilities to others, and I say unfortunately, because clearly, those who have been given the responsibility aren't handling it very well.

For example, the middle-class have delegated responsibility to politicians, the American news system, and mutual fund companies.

I would like to point out that I am completely different than the crowd, e.g., I don't vote, why vote when I know whoever is elected won't do what they say, the odds are well over 98% chance they won't. However, if I write the politicians after they are elected and try the best I can to hold them accountable in doing what they said they would do, in my opinion, I stand a better chance, even though it takes considerable more time to constantly write letters and maintain a web page to a have a public record of the letters, than it does to simply vote. The vast majority of voters spend very little time doing any research on the candidates and propositions and many even vote for an individual simply because the politician looks a certain way, is the "right" sex, "right" race, or the "right" party.

What basis of fact do I have to support that the politicians aren't doing their job? One of the biggest issues with the American middle-class is Social Security. Someone born during the "Greatest Generation" period paid the lowest Social Security taxes, but receives the best benefit package: they can retire at 65 and receive full benefits and if they decide to retire at 62 they will receive only a 20% reduction in benefits whereas someone born after 1960, but still over 40 years ago, must work until they are 67 to receive full benefits and if they decide to retire early at 62, they will receive a 30% reduction in benefits. If I was an insurance agent and increased premiums and reduced benefits (at the rate Social Security is) it would be called a rip off by any reasonably intelligent individual not to mention I would go out of business very fast. When you add to the fact that a 40 year old born in 1960 is still 27 years away from full retirement benefits, it is absolutely ridiculous to suggest to them that Social Security taxes won't be increased and benefits reduced even more in the future making Social Security even more of a rip off.

To make matters worse, the only way that Social Security can even maintain the aging population at increased retirement ages and decreased benefits is by growing the economy. Well, we can do that, right? No. The Federal Reserve beyond any reasonable doubt has told the politicians and the American people that they will never allow the economy to grow greater than 5%, no matter what. They have a fear of inflation and that fear makes them try to maintain the economy at 2-4% constant growth which is impossible. Our (the middle-class) future is at best what it's always been over a longer term: at best 2-4% growth with an occasional recession, unemplyment of 4% or greater, and a depression every 70 years or so.

So, what's wrong with that? Nothing if you're not one of the unemployed, one who gets laid off, one who gets benefits reduced, or one who sleeps in the street.

Do you know that Greenspan's fiscal policies are right out of a ECON 100 book? Even tough the economy is completely different now that what it was before, Greenspan still uses antiquated fiscal policies and antiquated reference numbers such as what is sustainable growth. The US economy is completely different now than what it was in the late 20s, the work force is completely different, productivity is completely different, inflation forces, again, completely different due to the new global economy, but Greenspan still uses old policies and old numbers.

Politicians, as Greenspan screams inflation, crawl under rocks and wait, as Greenspan raises interest rates eventually the economy is slowed, laid offs increase, profits are down, stock markets are down, tax revenues are down, world economies suffer as well and increase their interest rates making matters even worse, however, Greenspan does eventually reduce inflation from its before low numbers to even lower numbers, Greenspan yells to those under the rocks, "I have saved you and the economy, you can all come out now." The politicians emerge thanking Greenspan for saving them (Greenspan's fiscal policy did nothing to reduce the price of oil, in fact, interest rate increases scared oil companies, oil companies put off capital spending in the short-term after the rate increases, and therefore put more pressure on oil markets.)

Greenspan is not the reason nor is any Presidential administration the reason for economic boom. The success for an economy is with business, the workers, competitive advantage, globalization, capital, and yes, a little is dependent on the Federal budget. The Clinton administration and the Republican Congress got more money from tax revenues and therefore were able to have a surplus, it was not that they were spending less, they were just taking in more on the tax revenue side (you increase your kid's allowance you don't get excited because now they have a little extra left over).

For every dollar realized in short-term gains made in the stock market, the Federal government gets 28 cents and they get 20 cents for realized long-term gains. They have more tax dollars because corporations pay money on all their profits, more individuals working means more individual tax revenues. It seems like all those tax revenues will be history now thanks to Mr. Greenspan. And no tax cuts for Mr. Bush, in fact, if the Federal government doesn't do something quickly to help the economy, Mr. Bush may have to raise taxes, like father, like son? (The NASDAQ stock market in its 29 year history has made about $3.5-4 trillion in market capitalization. In just the past 9 months, it's lost about the same, with all the money that has been lost and some of it realized losses, over half the trades made on NASDAQ are short-term, it will be a long time before the Federal government is making tax revenues off NASDAQ stock market gains. Losses in stock markets affect everyone in this country as the extreme slow down in Christmas shopping shows. Mr. Stark, it also affects Social Security, rather Social Security has private accounts or not, Social Security as it is, must have a growing economy and a growing stock market to be able to pay the huge Social Security burden due the aging population in America.)

Even if Greenspan was to reduce rates next week would still not make up for the fact that he raised interest rates six times, not allowing for any preceding rate increase to be felt by the economy before raising again. It would not make up for the fact that the politicians allowed him to get away with this without demanding facts to support his inflation fears outside of "it's always happened in the past." Nor will it make up for the fact that action needs to be taken now to prevent severe problems with Social Security in the future and as I stated, growing the economy at greater than Greenspan's numbers is mandatory if we are going to achieve that. New fiscal policies need to be adapted, we need vision and innovation at the Federal Reserve.

The problems with Social Security have only gotten worse. This is a fact: any insurance program that has increasing premiums and decreasing benefits clearly has problems now. The American middle-class know simply by looking at history, that the politicians aren't going to do anything about it. But, not to worry. The American middle-class have a backup: they not only delegated responsibility to the politicians, they also delegated responsibility to the American news system. Surely, American newscasters, reporters, and journalists see these problems? I doubt it. Most of them are sheep. O'Reilly of Fox News is only one of hundreds of reporters out there who I have seen willing to challenge those he interviews or take on "politically incorrect" issues and even in his interviews nothing much comes out of them because, it seems, the American middle-class are just too busy and are more worried about Elian, OJ, and which Mickey Mouse politician is going to be in the White House than the deterioration of US and global economies. In defense of the American middle-class I will say that economic problems are slow in developing, it takes several quarters for the problems such as an over tightening by the Fed to trickle down to the middle-class, and like most individuals they don't worry too much until it personally affects them. Unfortunately though, it's way too late by then.

Another responsibility the American middle-class has delegated to others is with regard to their own personal retirement saving accounts. They have delegated the responsibility to the mutual fund industry. And many of us, such as myself, are forced by the Federal tax code to invest our retirement funds, rather we like it or not, through a mutual fund. I have written you several times on the subject and Fidelity as well. However, Fidelity simply continues to send me an excerpt from the Federal tax code saying it's the law for 403b's, as a 403b holder I have to invest through a mutual fund. Why I wrote you was I know it's the law, I believe the law needs to be changed.

On August 28, 2000 I wrote you on the subject, here's a paragraph from that letter:

"Currently, General Electric, Cisco, Sun Micro, and Intel have valuations when compared to their growths that are extremely high historically speaking. Who owns a ton of these overvalued stocks: Fidelity Investments and the mutual fund business in general. How you [via the tax code] can say owning extremely overvalued stocks is good for participants is beyond me. Maybe someday I will get some answers."

*Historical standards, 70 years ago economic growth greater than 2-4% scared the Federal Reserve, it still does today. 70 years ago inflation of greater than 2- 3% scared the Federal Reserve, it still does today even with a global economy and super tankers that get millions of oil from one place to another, thousands of miles away. Americans getting a raise still scares the Federal Reserve even though, billions of people across the world would love to have a job and make products no matter where the products are sold. With regards to stock valuations, I'm saying that just 10 years ago so-called experts were saying growth stocks should have a PE about the same as the company growth, but now they are saying it's okay to have the PE 4 times the growth (that's a difference of 400%, experts were saying don't buy a stock that has a price to revenue of over 3, but now they are buying stocks with price to revenue of over 30 (that's a difference of 900%).

Forcing individuals such as myself to buy mutual funds when mutual funds clearly have issues (which are not in the best interests of participants or the country) regarding their choices of buying stocks is ridiculous. An example of an issue is the liquidity issue which forces them to buy larger capitalization stocks even when the stocks are severely overvalued.

I have a friend who works here in the Bay Area. His company's stock has fallen 80% in just a couple of months and he's still working overtime and is expected to continue to work overtime, the company has a ton of business, the stock is undervalued. What's the problem? On top of Greenspan and his fears of inflation, the company is small, it has a market cap less than $1 billion, large institutions as a whole avoid the stock simply because of its size. Give me control of my 403b and I will buy the stock, I will give investment capital to where it's most deserving: a company growing revenue and earnings at greater than its valuation numbers. I will not turn around and buy the same junk I believe Fidelity and other mutual fund companies buy.

"James Sterngold of The New York Times described the attitude of the CEO of E. F. Hutton ...Fomon regarding Hutton's retail customers as sheep waiting to be sheared, and he often said so. He harbored no illusions about the quality of the firm's products. It was the same junk the other firms sold." (Martin Mayer, "Stealing the Market," 1992, pg. 36, Harper Collins Publishers)

If Greenspan thought there was a problem with asset inflation and/or the stock market, address the specific issue, don't kill the US and world economies. Go ask the fund managers why they continue to inflate certain stocks which is clearly not in the best interest of their customers or the country.

What about the internet blowup. Why is Fox News, CNN, PPS, and CNBC not reporting specifically and directly to what went on here (and demanding public accountability)? Large Wall Street firms having IPOs on these companies, IPOs that generated $billions when virtually none of the companies had earnings, and revenues that were only a few $million? Large Wall Street firms were still recommending these stocks after the IPO and fund managers were buying them. Challenge them, ask them why they recommended these stocks and why they bought them when there was nothing to support the stock's valuation?

Recently, on Louis Rukeyser's Wall Street Week, Gail Dudack was "expelled" from the "Elves" (Rukeyser's key to his success is his humor, I hope his humor helps those in the future who may not have the retirement Wall Street and the politicians have suggested they will get. I'm not knocking his humor, I am saying there's a time and place for everything and months ago this country was in trouble: a Federal Reserve increasing interest rates month after month, no facts to support the hikes, and politicians and news services that virtually completely ignored the hikes as the economic news shows, that is, if the news services and politicians were doing their jobs they would have seen this months ago and we could have done something before it was too late, I know, I know, you still have your job so it's not too late.) I believe the reason Dudack was expelled was because of her record as an elf. She should not of been expelled, she was right even two years ago, many stocks were severely and still are overvalued. But this is what the system does to those who don't go with the crowd, they get expelled.

Mr. Stark, we need a change, we need to answer some questions:

1. Why do current tax laws protect large institutions that are buying overpriced stocks?

2. Why do the financial news services not seriously considered, report, and find out why, Wall Street institutions recommend severely overvalued stocks like the internets? Why don't we hold them accountable for their mistakes/unsupported recommendations?

3. And most importantly, why don't we demand answers from the Federal Reserve for their unsupported rate hikes. If the Federal Reserve had problems with the stock markets and asset inflation why not go where the problem is? Why kill US and world economies?

Everywhere in business there are examples of how business must adapt and change, if not, they waste away. However, when it comes to the Federal Reserve, for some fantastic reason, they are able to live in the past, not adapt, not change. They still use the same fiscal policies they did decades ago.

Don't ask Ron Insana, or Neil Cavuto, Fox news or CNBC, ask yourself. What has Greenspan done in the last 10 years outside of academic jargon...he has either raised short-term interest rates or lowered them...the same policies the Federal Reserve used in the 1920s, a decade after its birth. (Broad interest rate hikes affect everything and everybody, when you have industries like technology growing at 30% and other industries actually turning in negative growth, broad interest rate hikes are ridiculous.)

We need vision, innovation, and a change with the Federal Reserve.

Respectfully,