Memo

To:          A National Reporter
From:     Catherine Austin Fitts
Date:      Fall 1998
Re:         Community Databanks, The Popsicle Index and How the $ Works In Your Community

Purpose of Memorandum

I write as a long-time reader. Your observations are one of the appealing features of the national newspaper for which you write. When I left church this morning, I stopped at a 7-11, got my coffee and paper and turned to the editorial page. Sure enough, there you were. Turns out you think Americans are apathetic. I disagree. I think they hate to waste their time and take unnecessary risk.

Let me share one of several things we can do that would make a difference in our willingness to invest our time and our hopes in building civic capital in our local community.

Illumination: SEC and FASB Standards for Government Disclosure by Place

Edward Deming once said a marvelous truth, "There is no such thing as bad people, just bad systems."

One of the hallmarks of a good system is that it has healthy feedback systems; it has disclosure and illumination. So it is in America's communities. Until government investment and the government securities market place offer financial disclosure to a standard currently considered minimal for corporate investment and securities, communities will find civic activism time consuming and difficult. Consequently, they will be disinclined to take responsibility for community social and economic health and performance.

Disclosure and illumination are not magic bullets. They are, however, a prerequisite for the creation of healthy communities based on reasonable time commitments of citizens. Without easily accessible knowledge about current government funding, credit, and regulations of operations in a place—and the process for related decision making—the average citizen is required to spend substantially more time trying to understand and have an impact on his or her place. Ultimately, it is a lot of time for little result. That is not so energizing. Folks give up.

When I was a child growing up in West Philadelphia, we all knew how all the money worked in our neighborhood. When mainframe computers and TVs came along, a lot of the knowledge, money and operational responsibility shifted out of small business and the grassroots and into large government and corporate bureaucracies. These bureaucracies were specialized around functions and increasingly considered places irrelevant. Their functions were the focus: consumer products, health care, transportation, single family housing, multifamily housing, public housing, and on and on. In addition, government had little disclosure and was not run on a performance-based basis. They had gained control but they did not seem to care. When I worked in the Bush Administration, we oversaw investments where HUD spent $100-200,000 per unit to rehab public housing and was losing money on single family housing in the next block that was selling at $20,000. Four could be housed for the prices of one if you could simply optimize the money by place.

More important, if the nature of housing ownership was changed; incentive systems within the community could be realigned. The greatest destruction of wealth comes not from the cost of government investment, but the damage done to equity values and behavior that is triggered by misaligned incentives, particularly lower learning speeds. The myth that there is no money is a very great and Bullworthian myth. There is a tremendous amount of money. But it is organized around creating cost plus jobs outside the neighborhood, instead of producing optimization within the neighborhood.

If we simply required disclosure to corporate standards of government resources and operations within a boundary that relates to people day-to-day knowledge, we could increase the feasibility of citizens seeing the opportunity to re-optimize the allocation of time and money within the neighborhood in a way that can increase local learning speeds and evolve the community towards health.

Return on Tax Investment

Imagine if you and your family got a monthly statement about how all the money worked in Arlington. You could see how all the investment and expenditures from federal, Commonwealth of Virginia, and Arlington' budgets and agencies were spent, and operations and performance indicators for Arlington and the citizens of Arlington. This would include disclosure on appropriations, credit and finance programs, regulations, tax, fee and other revenue raising items. You could see the investment in housing, transportation, health care and other functions within your area. Ideally, you could relate these to the Gross Neighborhood Product for Arlington and estimate a return on investment for taxpayers' investment in Arlington. This GNP could equate the health and well being of the citizens of Arlington to the prudent management of their environment, knowledge and resources. This could all be summarized by your local Community Databank, a private business run for and owned by members of your community, along with information on steps you could take to be more attractive to private capital interested in investing in local businesses. This way personal and confidential information would not have to be shared with governments and other agencies with police and enforcement powers. This way citizens could be as smart about themselves as large powerful organizations that were created to serve them.

We could look at how the investment affected different types of people in Arlington through time. Ideally, We could post comments and feedback on the Arlington website. Even better, click to Morningstar or Yahoo for Places and see how our performance was compared to other counties around the country. When we attended our monthly and annual performance meetings, our neighbors and we could discuss reengineering opportunities across different functions or in combination with reengineering private functions within the community. Alternatively, we could just call in, fax or e-mail them the ideas that our community listserv and we had brainstormed. Everyone responsible for all the different functions would, of course, be identified in your reports and on your websites.

So What if The Dow is Up; Let's Get the Popsicle Index Up As Well

One of my favorite examples is The Popsicle Index, Solari's primary indicators for the economic and social health of a community.

The Popsicle Index is the % of the people in a community who believe that a child can leave their home, go to the nearest place to buy a popsicle and come home safely during daylight hours. One reason we feel cranky in America is that despite the Dow Jones going up, the Popsicle Index is down a lot since you and I were kids.

One of the reasons that the Popsicle Index is down is that when we were kid (yup, here is the idea again) there was always a group in communities who knew how all the money worked in our community. We had feedback loops and some ability to act on them. And so if we can evolve back to this state of affairs, there is reason to believe that this will support people who would like the Popsicle Index to go up again. And there is incentive to do so. The Popsicle Index is the single most important determinant of the equity valuations of real estate and small business in a place. The biggest capital gains opportunities in America are taking the Popsicle Index of a place from low to high in some 33,000 median income and below communities. Lot's of opportunity in the other 30,000 communities reengineering investment to keep the Popsicle Index high, but in a way that creates far more financial equity for the folks who do that, whether it be parents, teachers or police and firefighters.

Imagine if you and your family got to participate in a website and faxback service that tracked the things that caused the Popsicle Index to go down in Arlington. That way you and your neighbors could maintain a dialogue over time about what you can do in your own time and own place to cause it to go up in a coordinated fashion that respects the constraints on your individual time, skills and commitments. Imagine if you created positive incentives. For example, all the insurance providers would provide discounts every time the Popsicle Index jumped another 10% Or you just illuminated the per sq. ft values in the homes as the Index went up. That means if you got the Popsicle Index up a lot, everyone could get bigger home equity lines and mortgages. Enough to capitalize the next small business that they may want to start as big government agencies lay people off. And there are also ways---once a certain percent of folks are accessible on line—to aggregate consumers by place and start private municipal corporations which are financed in the stock market. Indeed, the way to reengineer corporate and government American is by reengineering around place.

Return on Investment: Optimizing Performance & Avoiding Risk

We can invest our time; we can invest our money, we can invest our knowledge. Whichever one we invest, we want to make sure we use our resources wisely. Time that we spend on civic activities may be time we can spend with our kids. Money that we invest in the stock market was money not invested in a second home. Wisdom of our trade taught to someone who does not use it well is knowledge that could have gone to that young reporter in the newsroom who would use it judiciously and teach others.

Resources are finite: that is why we "optimize" them. That is why we are loath to "risk" them. Sometimes what looks like apathy can represent an intelligent investment decision. Why spend time when the powers that be do not want things changed? Why spend time if it would offend important people? Or if you end up doing things for free that you are paying others to do and who are not doing it for a reason? Why increase your risk?

Maps & Navigational Tools for Investing Our Time, Money & Knowledge

When we drive across the country, we use maps. We use maps to save us time. By knowing where we are and where we are going, we can get a high return on investment of our time and our car's wear and tear and our gas. We use knowledge to guide our course. Nothing saves us time and money more than good maps. We spend our whole life finding and building maps of our physical world, our financial world, and our spiritual and cultural world. That is why people read your column. You help them build better maps.

Let us look at the investment of our savings. When we invest in a financial institution, or a stock or a bond, or a mutual fund, we get monthly, quarterly, annual reports telling us what has been done with our money, what our money's performance is and what that means to us. This is typically available widely in the market place so that a swarm of other investors or investor-want-to-be's can help track and feedback.

Such open disclosure is the lifeblood of markets. It is the soul of feedback and performance. However, the swarm seeing and hearing what is going on, we learn. As we learn, we solve problems. Those solutions have unintended consequences. So we change again, and on and on. The winners are the communities and the organizations with the highest learning speeds. Shared learning also keeps silly business from going on. As Judge Brandeis said "Sunshine is the best disinfectant."

Can you imagine if all of your mutual funds and all the companies you owned stock in never sent you any information telling you what they were doing with your money and how it was doing? Imagine if none of that information was available to every day people on line and you had to spend thousands of hours putting together crude estimates? I dare say that the performance of companies and investment in this country would suffer immensely. And the roaches and rats would have a field day with corporate money. Imagine life with no SEC and FASB standards? No "mark-to-market" accounting for banks and no on-balance sheet standards for the FSLIC and FDIC during the 1980's got us a $500 billion bill. Imagine what would happen if there were no standards of illumination for all corporate money, what a mess we could have.

This is the reality for almost half the investment of money in this country. And a major portion of a taxpayer's family financial resources. I am talking about government money. All investment in education, water & sewer, roads, a lot of housing, and on and on.

Place Based Financial Statements and Reporting: Sailing into The Sky

In the Truman Show, the protagonist played by Jim Carey runs away from a life he does not wish to lead by sailing across what he believes to be a bay. His boat sails into the sky. It turns out that the sky is not the sky; it is a movie set painted to look like the sky. This reminds me of so many myths that support the current sense of what causes apathy: the problem is the people, we have bad values, there is no money, there are no solutions, etc.

Most of the private resources in this country are subject by law to accounting and fiduciary principles of optimization and risk management. The other half—government resources—are not. As a result, we have large programs and operations that have conflicting activities, goals and incentives. For an example of win/lose incentives, more and more federal enforcement agencies make money by seizing assets from citizens without proof of any wrongdoing. Money making opportunities? They re-allow a % of profits to local policemen to pay for their salaries. That means that enforcement investment is not coordinated with transportation, health care, housing and other investments in the same neighborhood. It's organized around seizures and forfeitures that generate revenues to meet the budget. These activities could serve overall performance---or destroy it while other kinds of police activities are dropped or ignored. The Department of Justice provides for overtime payments for those who are on call but do not work if their investigation can be deemed "criminal. My new favorite is the year in jail and $500 fine we get if we do fail to fill out our census form. According to the census bureau, we still have to fill the form out after we get out of jail.

Many of the problems that we face as a nation are a symptom of the gapping in learning speeds and productivity that is occurring between private and public as a result of non-disclosure on non-performance based investment. I do not believe that we are bad people with bad values. I think the American people are wonderful people. They know it is not a good investment to try to fix these things in the dark when it takes lots of time and risk. They also know that the reason we are in the dark is not entirely an accident or an unintended consequence. Large corporations, private investors and politicians want it this way.

If Place Based Financial Statements Are Such A Good Idea Why Have We Not Done Them?

It is pretty simple. We can run government to optimize return on investment to the taxpayer or we can run government to optimize jobs, position and profits for the public and private constituents who support the campaigns and careers of our current elected officials. As a result, Washington has evolved into a fisticuffs of folks rigging government into non-performance based knots to ensure that their friends get the cash flow. And we the people are responsible. The message we send Washington is send me more non-performance based subsidies or I will vote you out of office.

The way we can evolve towards a performance based return to taxpayers system is by making proper disclosure accessible. We organize all disclosure by cost and by function (no information on result or performance, including community GNP, no information accessible by place, no FASB and SEC standards, including mark to market disclosure). We only track physical and financial assets. This is not an accident. This is intentional. Congress, state, and municipal Legislatures are organized by place. The money is organized by function and only cost is disclosed. Guess who can translate between the two? Guess what constituent groups do every time place based disclosure is proposed or implemented?

So for those who despair of campaign financing reform, one alternative is to just get proper disclosure standards on all the money. Make every agency put up all their data by place, and folks like Bloomberg, GeoCities, Yahoo, SideWalk, Dive In and others will collect it all up and make great reports available to help communities. The speed at which this can be started and then evolved is marvelous. This means that Community DataBanks can spring up that are profitable businesses for ownership and management within a community.

The American people do not want to invest time in civic activities that have a low return on their time. They are smart people. They believe that they are paying a lot of money into a system that does not work because many powerful people do not want it to work. They are right. But it does not have to be that way at all. They also do not want to invite audits and investigations and federal swat teams when their knowledge about how the money works starts to translate into offense of large corporations, investors or politicians.

Y2K: As Tina Turner Says, "We Can Do This Nice or Rough"

One of the reasons that I believe that we are going back to much greater civic activities is because of the year 2000 bug. Y2K is a symptom of the fact that large government bureaucracies were designed to handle mainframe technology and can not handle network technology. That means that our top down system of production and distribution is about to hit an abrupt reengineering opportunity around Y2K. The worst defaults—and the greatest risks to corporate and small business performance—will be massive defaults on essential services by municipalities and state and federal agencies.

One of the things that would make this much easier for all of us is if we could get the data on how all the money and operations works within our place as soon as possible. Citizens can build decent businesses for themselves and prevent recessions or worse, if they have an opportunity between now and January 1,2000 to figure out how to reengineer the flow in their place to a bottom up flow. So anything you could do to illuminate this in a way that would encourage a change in policies in time would be wonderful. Entrepreneurs do successful privatization. The way we privatized the post office was to start Federal Express. Substantial privatization will occur over the next ten years as private businesses find ways of providing replacement services on a profitable basis.

Entrepreneur's Business Opportunity; Transform Nice to Rough

I can think of many things that will make it possible for American communities to grow healthy and thrive. But there is nothing I can think of that will make it politically possible. Right now, Washington and the businesses that Washington regulates feel that short-terms interests are served by a win/lose paradigm. That is not how the money works, but it is what they believe. We are in a win-win economy. In addition, the risk is growing that Bullworth politics and Y2K are heading us into the lose-lose scenario. Our prison system has quadrupled since I was a kid. We now have a federal enforcement bureaucracy with over fifty agencies with police powers, including the power to bear arms, make arrests and make arbitrary and capricious demands on our time and resources with little if any accountability.

For us entrepreneurs, I guess that is an opportunity. We are going to try to figure out if there is a way to make money during Y2K helping citizens be safe from the government and corporations created to serve them. Starting with me and my family. In the meantime, the way you could help is to let everyone know that step one to safely understanding how all the money works in our neighborhood and that if we want more money, we are going to have to create more money with our knowledge and cooperation and hard work. We can't get it any more by pretending that some group of folks in a far off place can send us something for nothing without us watching or understanding how all the money works.

If you want to keep tabs on what we are learning as we go, touch base at our website at http://.solari.com. Better yet, join the network and let's build a new world together.

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