Comment from Hugh Ching, Post-Science Institute

Subject: Decisions Should Be Based On Expected Rate Of Return, Not Just Conflict Of Interest Conflict of interest is undesirable only when it reduces the expected rate of return on investment; some conflict of interest can enhance the rate of return. Rationally, decisions should be based on expected rate of return, of which conflict of interest is just one of many contributing factors. The following statement should be the basic principle for any rational government policy. "We Should Calculate The Expected Rate Of Return For All The Government Projects, Including All Funding in Recovery.gov, Infrastructure Spending And All Scientific Research Projects And Be Accountable For Our Claims In Our Calculation." An example of the calculation of the expected rate of return on investment can be seen at: http://www.infinitespreadsheet.com where item (4) gives the rate of return calculation for stocks. Firefox works better than Explorer. The Infinite Spreadsheet is based on the solution of value, which is disclosed in the patent "Quantitative Supply And Demand Model Based On Infinite Spreadsheet" (Pat. No. 6,078,901). The solution of value includes the calculation of the rate of return and the determination of the price. The former is needed for assigning funding priorities, and the later, for stabilizing the price at a rational level. Only rational market participant, with access to the rational method of valuation, can produce the rational price. One of the main characteristics of the Infinite Spreadsheet is that it demands full disclosure of all the factors in valuation or decision making and allows eventual full accountability of the factors. Partial disclosure should be considered illegal because it allows the non-disclosure of material facts. For example, an CEO can maintain a successful company during his or her tenure and allow the company to fail right after he or she leaves the company, such as in the case of Bear Sterns in January 2008. The following is a practical proposal, which illustrates decision making based on the rate of return: RE: Proposal Of $100 Billion Internet Venture Fund With Over 100% Of Return The key to solving the crisis is to wind back the clock to January of 2000 to undo what Former Chairman Alan Greenspan has done initially to the Internet industry in 2000 and later to the real estate and auto markets by rapidly fluctuating the fed rate. He hit the breaks to stop the booming stock market by shrinking the money supply from March to October 2000. The Federal Reserve first lowered the fed rate to 1% then raised it back to 5.25% in the span of six years, from 2001 to 2006. The Federal Reserve has done a very efficient job already starting in 2007 in lowering the interest rate from 5.25% back to about 0% in 2009. Unfortunately, the real estate and auto markets cannot be fully reversed; they can only be prevented from adding a further burden to the US economy. Chairman Greenspan had used up the normal supply of real estates in sustaining the economy and now there is an oversupply, which needs to be absorbed before the real estate market can start to contribute to economic growth. In the Quantity Theory of Money PQ = VM, which is favored by the late Milton Friedman in describing the economy and which could well be an empirically verified non-violable law of nature, the Federal Reserve has been working on just M. It is starting to work on unfreezing V by solving the problem of the troubled assets in 2009. I would strongly recommend that the Federal Reserve try to increase P and Q. There are two main ways to boost P and Q: (1) Money Supply for low-tech with low rate of return and (2) Innovation for high-tech with high rate of return. The Federal Reserve is doing well in (1), but (2) should be far more efficient. Innovation is difficult. Roughly, society has one major innovation for every generation or 25 years. Some examples of previous major innovations were the automobile, the computer, the microprocessor. The major innovation for the current generation is the Internet. Not understanding the fragility of venture startup businesses and the explosive growth power of the Internet, Chairman Greenspan thought the explosive growth as "irrational exuberance" and shrank the money supply from March to October of 2000 with the intent to slow down the Internet growth. There is something sinister about coining the concept of "the dot.com bubble." The notion of the dot.com bubble not only justified the action of the Federal Reserve and the mistake, if he was wrong, of Chairman Greenspan, but also permanently discouraged the normal development of the Internet industry. Today, we have clearly a very immature Internet system, which is dominated by spam mails, viruses, insufficient speed, and insufficient memory. Instead of 30 large- cap Internet companies, we could have 300, if Chairman Greenspan had supplied, instead of shrunk, the money supply needed for its explosive growth. Here Chairman Greenspan and the concept of a dot.com bubble must be discredited in order to put the Internet industry back on a normal path of growth. The near total collapse of the NASDEQ from over 5000 (5060.34 on March 10, 2000) to around 1100 (1,116.76 on October 2. 2002) forced Chairman Greenspan to lower the fed rate to 1%, which created the real estate and auto booms and turned the economy from being powered by high-tech Internet to being sustained by the low-tech housing and auto industries. The NASDEQ was already at 1673.78 on September 10, 2001, indicating that 911 had little long-term effect on the stock market and should not be used as a cover up for the mistake of Chairman Greenspan. The reason that the Internet industry grows so fast is that it takes just 3 months to train an Internet web programmer of any nationality, while it take 6 months to train a desktop software programmer, who also needs to spend from 6 to 24 months to learn English. The Internet industry is the most efficient in terms of employment and growing the economy. It would not be a surprise that a $100 billion venture fund to invest in Internet ventures with over 100% rate of return could multiply the Internet industry by an order of magnitude, which will also bring up other innovative satellite industries, such as wireless, multimedia, nano-technology, memory system, communication, and 4D computer graphics. As an added bonus to the economy, the Internet promotes price competition and will be a natural damper of inflation, which could become a major concern in the exit strategy of the economic recovery. I would like to suggest that the Federal Reserve, the Treasury, or Small Business Administration guarantees 90% or buys up venture capital loans to Internet entrepreneurs, as a repayment for the mistake of disrupting the Internet growth in 2000. To prevent future crises and solve permanently our chronicle financial crises, the Federal Reserve needs the solution of value, which can permanently stable the real estate price and rationally decide funding priorities based on the rate of return. In the future, FDIC should not insure and Fannie and Freddie should not buy mortgages which have higher value than the value calculated by the solution of value. The rate of return calculation shows that small businesses have around 40% rate of return, and the Internet startups, a proven innovation, have over 100% rate of return. The small businesses, particularly, Internet entrepreneurs, are the key to revive the economy. If we can grow the Internet industry fast enough, we might not need to work as hard on the financial system as we have done. The explosive growth of the new Internet industry might take up the slack left by the failing too-big-to-fail financial institutions in a normal process of creative destruction. On a long-term basis, encouraging small businesses with new innovations will be the most rational and natural way to control the growth of too-big-to-fail big companies and to maintain a dynamically stable economy. The solution of value will prevent all future under and over-valuation and will allow us to make rational decisions based on the calculated rate of return on investment. Economy must also advance from the Free Market of Milton Friedman to post- Friedman and post-science market, which is regulated by non-violable laws of nature in social science, and not move back to a pre-Friedman and pre-science market, which is regulated by man-made regulations. In particular, the Federal Reserve must set the interest rate based on the logical order that the interest rate should be lower than the rate of return and higher than the inflation rate. ### Thank you for your consideration. Hugh Ching, Post-Science Institute, March 23, 2009