Thursday, August 26, 2010

The New Normal

Once, when I was in the eighth grade, the boys in my class were discussing what to do with their bar mitzvah money. One of the boys mentioned something called a money market, which he explained was just like a savings account, and paid around ten percent interest. To my young, impressionable, pre-teen mind, that number became the benchmark against which all other rates of return were judged; for years, I considered ten percent to be a normal passive rate of return on money.

Fast forward many years. I became a financial advisor. I had already learned that ten percent money market returns were an aberration. In fact, no relatively safe investment could be counted on to deliver a return approaching that number. One would have to take on the full measure of volatility in the stock market to potentially average ten percent over time.

Fast forward to today.

Bill Gross is the co-Chief Investment Officer of PIMCO, a Newport Beach, California money management firm. PIMCO’s flagship Total Return Fund, under the stewardship of Gross, has grown to become the largest mutual fund in the world. Last summer, Gross and company described the economic circumstances and market conditions that they believe will face us over the coming years. They called it “the new normal.”

What is the new normal? Among other things it means slower economic growth, high unemployment, low interest rates, and tepid, “half-sized” – that is to say, four to five percent – stock market returns. In other words, you know the financial crisis we’ve been trying to shake? Well, get used to it. “All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago,” Gross insists.

The new normal will naturally have ramifications in the Jewish world, and in particular, the frum world. Consider:

• Yeshivos today, most of which were never—even at the height of the economic bubble—flush with funds, are under enormous financial strain. Some are being starved out of existence.

• While Information Technology is poised to be one of the growth areas of the new economy (along with Healthcare and Biotech), many frum people who are “in computers” do not currently possess the knowledge and skills for these jobs. According to a friend of mine who works for a cutting-edge IT firm, many are only trained for obsolete systems and have not kept up with the rapid changes in this field.

• For awhile it seemed like every former yeshiva guy and his brother-in-law were mortgage brokers, working very long days and weeks financing and refinancing properties for anyone and everyone who came along—making terrific commissions along the way. No longer. Fewer people are buying houses, fewer people are qualifying for mortgages, and those who are and do are finding that some banks (Chase, for example) are not taking mortgage loan applications from independent brokers.

• The frum world will always have its share of entrepreneurs, but with the severe tightening of credit, many are not getting the chance to borrow the money required to build, or even expand, businesses. Established real estate investors are finding deals, and many have cash on hand to finance them. But many younger people who are trying to get started in that business have it tough.

• One of the biggest supporters of kollelim in Eretz Yisrael saw his fortune—in the hundreds of millions—evaporate in a matter of weeks. I happened to meet him briefly by chance when he was borrowing office space from a client of mine, and watched as he sat hunched over on his cell phone trying to keep his kollelim from going under. He will survive, but many of his beneficiaries are already leaving kollel and returning to America.

And the setbacks did not begin in the last two years.

In 2003, The Wall Street Journal reported how Indians were quickly replacing Jews as the premier diamond dealers in Antwerp, Belgium. The Jews, who had at one point controlled 70% of the trade, saw their influence dwindle to just 25% in a few years. That number is even smaller today. At the time, Henri Rubens, one of the community’s leaders, declared the end of the glory days noting, “We were too complacent. Now that we realize it, it's too late.” Mr. Rubens went into real estate.

These past few decades have been remarkable for the Jewish nation, and for the Orthodox in particular. We have grown both materially and spiritually, and the two often worked hand-in-hand. Much of our largesse was committed to building a strong infrastructure of homes, shuls, yeshivos and mosdos.

But the last couple of years have been challenging; the infrastructure is showing strain and even some cracks. Many feel that we simply have to get through this rough period before going back to “normal.” But what if we’re in for a new normal? What if we need to adjust our thinking and our budgets accordingly—not just for a few years but permanently?

God will surely provide us with what we need; but our definition of “need” may have to be adjusted. Should a more moderate financial future face us, we must not allow it to slow down our spiritual growth. Our commitment to Torah and mitzvos, to educating our children and feeding our poor, to learning diligently and working honestly, must not waver.

But what we spend on our homes, our cars, our vacations, and even our simchas may need to be reigned in considerably.

Friday, August 13, 2010

The Giving Pledge

The Wall Street Journal last week publicized the names of those who had joined “The Giving Pledge.” This initiative, spearheaded less than two months ago by Microsoft founder Bill Gates and his pal, America’s greatest investor, Warren Buffett, asks all of the billionaires of America to donate “the majority of their wealth to the philanthropic causes and charitable organizations of their choice either during their lifetime or after their death.”

To date, forty have signed up. “Many of the names already were known,” wrote Robert Frankel in the Journal. “But the list also includes some notable new ones,” adding that “the list could become a strong financial force for philanthropy, if for no other reason than peer pressure, publicity and the inspiring example of others.”

Jews, religious Jews in particular, don’t need to look outside their own circles for inspiration or direction when it comes to charitable giving. We are, as the Sages put it, “compassionate, the children of the compassionate.” The mitzvah of giving charity is ingrained in us from a young age; even Jews who are not wealthy give charity, understanding that it’s a priority of Jewish living.

But a disturbing trend seems to have developed recently, if Dr. Marvin Schick, president of the famed Rabbi Jacob Joseph School in Staten Island, New York, is to be believed. Writing in The Jewish Press, Dr. Schick laments “the message that basic Torah education is not a tzedakah priority.”

I don’t want to quote Rabbi Schick out of context; obviously he knows about all the yeshivos and kollelim, both here and in Eretz Yisrael, which are supported by philanthropic individuals. What he is lamenting is the lack of a comprehensive funding model for Jewish day schools.

The most obvious reason for this is that the Torah education of children is an obligation, first and foremost, of their parents. Why, a philanthropist might argue, should my tzedakah dollars be spent on people who ought to provide for themselves? Priority is therefore given to causes where poverty “can’t be helped.”

Seemingly overnight, however, we are faced with a “tuition crisis.” The rising cost of yeshiva education (brought on to a large extent by good developments, such as limited class sizes and higher wages for mechanchim), coupled with factors such as the higher costs of housing in the frum community and the current economic downturn, has pushed the tuition issue to the fore. For most families, tuition is the single largest after-tax expense they face.

In response, some communities—notably Chicago and Bergen County—have set up “kehillah” funds to begin the process of moving the financial burden of education from parents to the community at large. As noble as these funds are, however, the money they raise is a drop in the bucket. I am told that the funds offset tuition, in their respective communities, by approximately $200 per child—hardly a game changer.

If we truly have reached a breaking point in the financing of Jewish education, then something more considerable must develop.

The most substantial, dollar-neutral way of lowering tuition is to convert post-tax dollars into pre-tax dollars. There are two ways to accomplish this. The first is through school vouchers. This is something that has been, and continues to be, lobbied for, without success. And with the current budget deficits facing all state governments, it is unlikely that school vouchers will happen anytime soon.

The second way to convert post-tax dollars into pre-tax dollars is for charitable contributions to supplant tuition. A family now spending $40,000 annually on tuition would save in the area of $10,000 in taxes if that $40,000 was a voluntary contribution.

Naturally, this won’t happen.

While it may work out on paper, human nature being what it is, people aren’t likely to give voluntarily the same amount they are currently giving “forcibly.” Yeshivos have tried this in the past—asking parents to donate more in exchange for lower tuition—and it hasn’t worked. This is a grand shame, because without spending one dollar more than they currently are spending, parents could save, collectively, millions of dollars in every community.

My feeling is that the weak response to these restructuring attempts is due to the fact that they don’t lower tuition immediately. They simply function as a promise for the future. In the meantime, people actually end up paying more—this year’s tuition, plus a pledge for next year.

But what if the concept were tweaked somewhat? Then could it work?

This is where the Giving Pledge comes in.

What if a group of Jewish super-philanthropists in a community agreed to fund the entire day school budget of that community for one year? The money would be raised before the school year began, with the understanding that the heretofore tuition-paying members of the community would be responsible to replenish the funds by the end of the school year. If they don’t, tuition reappears the following year.

The parents would pledge to continue funding the kehillah with the same amount they had heretofore been obligated to pay via tuition. They continue doing this every year. If the money runs out, or even runs low, tuition comes back—and they’re spending the same amount, but forfeiting a valuable tax-deduction.

I would hope that the looming threat of taxable tuition would keep the donations coming.

Now, who’s ready to pledge?