Tempest in a Teapot

In this lousy economy, the Tea Party’s solution will only make it worse

The late great debt debate made quite for a study in human behavior.  I mean, to ignore the mounting debt through 30 years of profligacy, then have a big fight about it, was sure to bring out the worst in everyone, and come to no good end.  I suppose there never is a good time to have a big fight, but the timing here is particularly problematic.

A down-payment on austerity may be good in theory, as no doubt we deserve the punishment.  There are few economists though, who think making unemployment lines longer right now will work well.  In a fragile and anemic economy, it may well plunge us into another recession, or into growth so slow it will seem like a recession.  That’s what a tough fix we’re in: Like too much chemotherapy, the medicine may kill us.  We will shed more jobs at a time when Corporate America is in no mood to employ any more workers any time soon.  That’s the biggest hurdle to fixing the economy.  Multi-national corporate America no longer even needs American workers, and there’s nothing else to fill the gap.  They can trade paper on Wall Street and/or “offshore” jobs and profits.

Bloomberg reports recently that the Fed secretly loaned 1.2 trillion dollars to several hundred large banks and corporations at close to zero percent.  That’s aside from the $750 billion bailout.   And those banks and corporations are still not hiring or lending to small business.  Why would they?  Getting money at lower than the cost of inflation is pretty close to printing money.  They used that money to pay back the bailout at even lower rates, some went into the speculative markets, and the rest they kept.  (Coincidentally, $1.2 trillion is exactly the value of all the mortgages in America in default or foreclosure). 

The almost 2 trillion dollars that were lent to these companies suggests they would surely have perished, and perhaps they should have, and perhaps some should have been indicted, as thousands were after the S&L scandal.  They have been little net benefit to the economy.  Spread that kind of money around lower down the food chain with infrastructure projects, or things like education and research, things that will help us in the brave new globalized world, and the outcome would have looked very different.  Since the working class spends almost all the money it has, the money would end up in the corporate counting houses anyway, but it would reverberate throughout the economy to get there.  We could try “percolate up” rather than the theoretical “trickle down.” 

So, agreed, we need to stop our high spending ways.  But let me get this straight.  The plan is to start by sticking working people with the entire bill right after the fools of finance crashed the economy, were made whole again with taxpayer money, and are now either hoarding it or using to pay back previously borrowed money.  And apparently “shared sacrifice” and “shared prosperity” are now Marxist ideas.  In income equality, the US now ranks number 68, behind countries like the Ivory Coast and Uganda.  (But hey, still just slightly ahead of Rwanda!)

I take it back, the debt debate did accomplish something.  The Tea Party was already solidly in charge of Republican Party policy.  Now, Tea Party politics is the grand paradigm, the lens through which all political discourse is viewed, by both parties.  Democrats assured that outcome by failing to take any sort of leadership on the debt issue, then twisting in the wind once again while the extreme right framed the terms of the debate.

The Simpson-Bowles Debt Commission was a balanced bipartisan result, yet it was almost completely ignored by both parties.  It had spending cuts, long-term entitlement reform that was not overly draconian (like the Paul Ryan plan is), and added some much-needed revenue (which the Tea Party refuses to consider).  Obama could have used Simpson-Bowles to get in front of the debt issue, a political pariah that few politicians have ever seriously addressed.  It might have helped his tattered reputation and given him some political cover.  Instead, into the vacuum stepped the Tea Party, and everything the Democrats had to say after that was so much noise.

The Tea Party and their Republican supporters are alone in thinking the debt can be fixed entirely with government spending cuts, which affect mostly the middle class and the working poor, and not touching corporate subsidies, tax loopholes and historically low tax rates for the wealthy.  Every sentient economic body, including the American Enterprise Institute, a conservative think tank, agree that deficit reduction has to be balanced between spending cuts and revenue increases.  But the Tea Party has a bee in its bonnet and the entire Republican Party is marching in lock step.

The idea of throttling government and freeing up money at the top of the food chain is not a new Tea Party idea, it has long been a conservative tenet.  However, this idea has not worked as advertised.  Corporations are sitting on piles of cash and are not creating new jobs.  In fact, according to Investor’s Business Daily, net private sector job creation for the last 11 years has been zero.  And this during a time of low regulation and taxes and record profits.

Believe it or not, the debt problem, as bad as it is, is not our worst immediate problem.  It will be, in the all too near future, but lucky for us, the entire Western world is awash in debt.  Europe is worse off than us.  That buys us time.  The US dollar will continue to be the world’s reserve currency, because sovereign wealth funds have no other options to flee to.  Unlike Italy, Spain, Greece and so on, we control our own money supply.  Unlike the European Union, we are not poised to disintegrate.

Timing really is everything.  Someone please tell the Tea Party about economic triage.  In the short-term, what the economy needs is more jobs, not less.   Austerity will cut some waste, but it will also harm education, research and science at a time we are already badly falling behind other countries in every metric by which successful countries are measured.  American exceptionalism is not a birthright.  Government agencies and programs are easy targets, as they are famous for being wasteful.  But so soon after feral capitalists almost wrecked capitalism, I’m not sure we’re ready for less oversight of the economy.

There are other problems with this “top down” recovery.  With 75% of the GDP dependent on consumer spending, where do these geniuses think their profits will come from?  China and Brazil?   Globalization has dismantled one-third of our manufacturing economy, and with it any allegiance corporations had to the American economy or American workers.  At least the robber barons of old built railroads and steel mills.  We had better figure out how to replace that black hole with something other than low-paying service jobs, and Wall Street financial wizardry.

We still have a bit of time to decide on long-term debt solutions, but first we need to rebuild a vigorous US economy, the only real cure for debt, deficits and recession.  Think it’s too hard?  Look at Germany, an economy that absorbed an entire basket-case country (East Germany) a mere 20 years ago.  The hard work and pain was divided evenly among business, government and workers.  Now Germany has a vigorous manufacturing sector for precision and high-end goods, and 6.3% unemployment.

Who will provide that sort of leadership at this dismal juncture of American history?   Democrats have brought little useful to politics in a good while, and the “Teapublican” party seems intent on kicking the stuffing out of the middle class and coddling corporate America.

In fact, if corporations are now indeed, in a legal sense, “people,” then they are houseguests who are emptying the refrigerator and wearing out their welcome.  They should get off their sorry butts and use their cash to make some bold decisions for long-term growth that go beyond this quarter’s results.  What are they waiting for?  More money?

I will close with an example of what government and industry could do together, but in the new political environment, won’t:  While the Tea Party is busy pretending global climate change doesn’t exist, other countries that do believe in it are innovating energy solutions for the coming green economy, which could be bigger than even the tech revolution was, and they will eat our lunch.

Doug Friesen, Age of Entitlement blog

“The Age of Entitlement Blog” Is Back!

Because the time is ripe for some intelligent, non-partisan, political discourse

American politics are at a standoff.  The GOP field for 2012 seems unelectable.  Mitt Romney’s Mormonism will never pass the conservative litmus test, nor will his previous moderate positions on any number of issues.  Ron Paul always makes a good listen, but is increasingly edgy in his views.  Newt Gingrich has too many skeletons in the closet and his stump speeches sound like college lectures.  Aside from a handful of “also ran” candidates are the Tea Party crazies, all of whom will look increasingly unhinged in the stark sunlight of a presidential campaign.

For their pick, the GOP seems willing to give veto power to the Tea Party, a group that in a recent New YorkTimes poll is more disliked than 22 other identifiable American groups, including Muslims and Atheists. And then you have the Democrats.  Talk about a failure in leadership.  In their biggest initiative, Obamacare, they were no match for the medical industry lobby, or even for the “death panel” idiots.  We’re left with out of control medical costs, now extended to more people.

The stimulus, instead of useful infrastructure projects, was a re-hashed lard list, projects saved up by Dem heavyweights that lacked vision and muscle.  Finance reform was a joke, with “too big to fail” made even worse, no indictments for white collar crimes, and Wall Street still holding the economy hostage.  The Democrats’ worst hour, and Obama’s in particular, was the recent debt debacle, so raw a wound as to need no further comment.

What to do with this mess?  For sure, Obama was dealt by far the worst hand of any modern president.  But like the saying goes, “you knew the job was dangerous when you took it.”  Any
attempt to stand up for Obama’s record ends up sounding excuse-y, because it is.  The alternative is to support a party controlled by its extreme right wing, who seem intent on waging war on the poor and middle class.

One thing I know:  Hyperpartisan bickering is not intelligent political debate, and it’s killing our entire political system.  Standard and Poors didn’t downgrade America’s ability to pull itself out of a debt hole,  it downgraded America’s political will to do something, anything.  The tough choices have too long been left for another day, and now that day is finally here.  And like many tough choices left for too long, the list of fixes is short and painful.

Partisanship is nothing more than one side blaming the other side for everything that is wrong, and accomplishing nothing useful.  Politicians from both parties used our own money to buy our votes, and now the bill is due.  There IS no “other guy,” there is only us, and some very stark economic realities poised to slap some common sense into us.

That is the debate I hope will happen in this blog.  Please read it, comment on it, share it, talk back, tell me what YOU think.  Maybe “we the people” can teach our leaders some common sense?

P.S. Look for the return of these blogs starting tomorrow…  “Tempest in a Teapot” …

P.P.S. I’m going to try and publish new blogs regularly, every week or so.   These are essay-style blogs that will contain in-depth analysis, and I truly seek feedback from all of you.  Please reply or comment on the blog so others can see comments, so we can all start an intelligent dialog, rather than the useless partisan ranting that we’ve all heard too much.   Let’s get it started!

Scott Brown, Populist Anger and the Politics of Cynicism

One year after a “right of center” nation swept Obama to power as an agent of change, Scott Brown wins Ted Kennedy’s seat in liberal Massachusetts, campaigning on a message of change.  What’s the heck’s going on here, did I wake up in crazyland? 

Clearly the word “change” is a charged word, a word whose time has come.  It certainly works swell to win elections!  But if one puts aside partisan politics (hard I know), one is forced to think about what change really stands for, I mean beyond its obvious utility as a sound-bite platitude that serves as an empty vessel.  It can mean almost anything.  People reeling from the “lost decade” fill that vessel with their unfulfilled hopes and dreams, and politicians eagerly imbibe.  Whether they care about the contents of the vessel is questionable.

Obama, you promised to be a man of the people.  But you caved into the Wall Street crybabies, who had one of their best years ever, after sucking 13 trillion dollars from the public teat.  You promised health care reform, then delivered an abomination that does absolutely nothing to reduce skyrocketing health care costs, which is what the people are really concerned about.  It only extends the existing out-of-control health care to more people.  Yes, we are concerned about those without coverage, but we are thinking “Geez that’s gotta cost me money.”  You talk of bringing the government back to the people, but you sold out to the very same greedy corporate interests and lobbies that all the other guys did, and it’s wrecking the middle class, as the parasite wealthy class parties on.

I never begrudged anyone else their wealth until I felt it getting rifled out of my own pocket.

Understandably, we the people are not amused.

Scott Brown, you campaigned as a man of the people too.  You campaigned to end wasteful government spending.  I really want to believe you.  But you see, I’ve been recently burned by someone with much the same line, so this time I’m more skeptical.  I’m wondering: you and what army are going to Washington to end wasteful government spending?   You are joining a party only one year out of office that doubled the deficit after inheriting a surplus.  Republicans were supposed to be the fiscally responsible party, but Bush was the first president in modern history never to veto a spending bill.

In 2003, GW Bush and Congressional Republicans passed the prescription drug benefit.  It was a bloated entitlement of the type you would expect from Democrats.  But this time it was Republicans looking for every last vote.  They used every dirty trick in the book.  Nick Smith (R-MI) claimed he was offered campaign funds to change his vote to yea.  The bill’s original cost was sold by Bush & Co. as $435 billion, but an administration official, Thomas Scully, had concealed the real number, and reportedly threatened to fire Medicare Chief Actuary Richard Foster if he revealed it.  The bill was passed, but took several years for the real amount, $1.2 trillion, to be revealed.   Former US Comptroller General David Walker called it “…probably the most fiscally irresponsible piece of legislation since the 1960s… because we promise way more than we can afford to keep.”   

Groan!…  Does this sound just like what the Democratic sausage-making looked like during the health care debate or what?

No wonder we are confused, and sorry Scott, if some of us are skeptical.  And as for the “every man” image, spare us.  We don’t know your net worth, but apparently you own quite a bit of very expensive real estate. Not that there’s anything wrong with that!  It’s just that it should take more than a GMC truck to convince us that you really are a man of the people (MOP).  Should, but then again this is the US we’re talking about, the same people who believed Obama was an MOP because he was a community organizer and such.

I wouldn’t vote for Sarah Palin just because she looked good in a bathing suit, and the fact that you look good without one doesn’t do a thing for me.  What is up with that anyway?  I’m told I look alright for 55, if you squint.  Perhaps more people would buy my book and read my blog if I posed provocatively!  I’m almost ready…

There’s no doubt that Martha Coakley deserved to lose, running a campaign that started as arrogant, then became way too nasty as soon as she was in trouble.  But did you deserve to win on the strength of your record?  Or were you just in the right place with the right message at the right time?  Because after all, you’re just a three-term state senator with an unremarkable record, what can reasonably be expected from you in a rough town like Washington?  No matter, that’s politics, we elected a President on not much more than that.

In an odd way, I’m glad you did win, and here’s why:  You said you’re going to Washington to kill health care, but then after you were elected, changed that to “I’m going to renegotiate health care.”  That’s exactly what we need!  My family’s health care is exactly twice what it was ten years ago, and if it’s twice that in another ten, we’re in big trouble, and I suspect we’re not alone.  We need REAL reform!

What scares the bejeebers out of me is that the Democrats have utterly failed at health care reform and the Republicans have never shown the slightest interest in it.  Scott, are you up to fighting that dragon?  Load your weapons, this is a formidable monster.  This monster spends $1.2 million per day lobbying for what they want, a total of half a billion dollars in 2009.  They tend to get what they want.

Then again, who knew that health care reform was the third rail of politics?  You have to give Obama at least an E for Effort.  If the “town hall crazies” are any indication of the mood of the people, who the heck knows what we really want anyway? 

Trouble is, Democrats put such a high price on achieving reform, any reform, after a while they were willing to settle for whatever they could get.  In the end, they did not have the political capital to achieve the near impossible.  They would have better off to admit that in today’s ultra-polarized political climate, and with an entrenched and powerful medical lobby, meaningful reform is simply not possible.

Does that mean we are stuck with a system that is twice the cost of any other country, yet ranks last of all the developed countries in overall health care delivery?  A  system that medically bankrupts even people who have insurance?  A system where health care companies’ bottom line is completely dependent on how much care they deny?  Groan…

Scott, you’ll forgive us, but how many times have we heard someone say they aim to change “business as usual” in Washington?  One and all, they get chewed up by the machinery in a very short time.  Ask Obama how it felt to be handed his marching orders by Ben Bernanke and Wall Street.  Ask Max Baucus, the chief architect of the health care bill how it feels deep down inside to so visibly kowtow to the Health Care Industry masters that gave him three million in campaign funds.

Maybe you are a new phenomenon.  After all, they called this “the shot that was heard round the world.”   Maybe because of the huge media exposure over your upset victory, and the promises you made, and because people are so obviously upset, you and your party will have to come up with your version of health care reform, and then work out the kinks between yours and the Dem’s.  Just stonewalling health care will no longer be an option.  After all, you voted for universal health care legislation in Massachusetts.  The whole country will be watching. 

You promised to work toward an end to wasteful government spending.  Will you tell the truth, that both parties make this happen?   That such a thing will require an uncommon amount of sacrifice from politicians and from the people as well?  After all, earmarks are only wasteful spending in someone else’s district, right?

Who will do the tough job of readying Americans for the grim reality of the damage that tax cuts and entitlements have done,  a soaring deficit that will just get worse, no matter what happens with the economy itself?

But look what’s happened already.   Because of you, President Obama had to completely rewrite his state of the union to include some populist rhetoric, so as to regain some MOP points.  Martha Coakley could not have accomplished that! 

So, good on you.  Few have been sent to Washington with greater expectations.  I’m hoping you really do have the strength of your convictions.  I hope the party machine doesn’t just hand you your marching orders.  But you knew the job was dangerous when you took it…

Doug Friesen 1/26/10 

 

 

Bernanke’s Dollar Bubble

 

Inflation is often called a tax on the working class.  The well-heeled have much of their wealth in assets and stocks, which tend to rise with inflation, while the rest of us see the strength of our wages eroded by the inflation of the dollar.  Since 1913, when the creation of the Fed launched our current financial system, the dollar has lost 93% of its value.  That would be irrelevant if wages kept pace with the dollar’s value. They don’t.  Wages for the individual worker, adjusted for inflation, are up less than 1% since the late 70s, while the top 1% of earners have seen their income rise over 700% in the same period (source: Bloomberg)

The economy is working great for the wealthy, not so much for the middle class, terribly for the working poor.  The current recession is a stark wake-up call for what some call the largest transfer of wealth in history.  Banking bailouts have transferred trillions in corporate debt to the taxpayer.  And more than ever, fingers are pointing at the Fed.  Conventional civics class wisdom and Fed press conference sound bites would lead one to believe that the Fed and its monetary policies revolve around protecting the dollar from the ravages of inflation and stabilizing the money supply for the benefit of all.  Now a clearer picture is emerging: a Fed obsessed with steering our wealth toward the Wall Street elite.  Its primary tools are: (1) maintaining “just the right amount” of inflation, like a low-grade fever, and (2) the use of asset bubbles to extract wealth and drive it upward.

Inflation is low now mainly because of the massive asset devaluation from the economic meltdown. The hyperinflation that would normally happen withthe Fed’s current huge (many say reckless) expansion of the money supply is said to be not in the cards.  At least not in the next few years, but after asset values stabilize, who knows?  The money supply has never been expanded this far, this fast, and only fools dare predict the consequences.  If hyperinflation does happen, it will come on fast, hit hard, and will be difficult to stop.

The big problem now is the pressure on the dollar to drop in value in relation to other currencies, which is really just another form of inflation.  The monetary regulators say they are presiding over an orderly devaluation of the dollar to relieve the pressure, and in fact devaluation is the only possible way we can deal with a debt that totals, with unfunded future mandates, 80-100 trillion dollars.  Can’t pay the debt? Devaluing the dollar makes the debt worth less (or worthless) to the debt holders.

The surge in the price of gold is the surest sign of flight from the dollar.  Although gold recently fell while the dollar is enjoying a small surge, all the trends are stacked against the dollar.  Sadly, the only hope the dollar really has is the huge and mounting government debt of just about every other G20 nation.

Hyperinflation discounters say don’t worry about it, it won’t happen.  Debt apologists are out there also, and there are Nobel laureates among them.  They claim debt this high is not such a crisis either.  They point to the huge debt after WWII, which ushered inthe longest period of sustained growth ever.  But that is a very leaky analogy.  First hole:  The WWII money was spent for a good reason, to defeat the Axis war machines and free the world from tyranny.  Second hole:  That debt was released into a frugal, motivated, and productive workforce.  To counter that, this debt was spent to have good times in relative prosperity, and I’m not at all sure how much self-sacrifice we have in us these days. Increasingly, we don’t produce much of value that the world wants.  Our biggest export to the world over the last decade was Wall Street’s bizarre new financial wizardry, which amounted to bullpucky.

The apologists point to governments like Japan and say its debt to GDP is three times higher than ours, and it’s still a functioning country.  True, but why would we aspire to be a basket-case economy like Japan?  I don’t deny the value of American ingenuity, which always finds a way to turn adversity around.  The problem is that we are piling up adverse economic trends one on the other, and I worry we may be building an insurmountable hill.

Even moderate financial writers like Newsweek’s Robert Samuelson are starting to worry about whether the US would default on its debt.  As Samuelson says, “the question is so unfamiliar that the past provides few clues to the future.”  He goes on to point out that governments of superpowers can always borrow money…at least ”until confidence that they can do so evaporates.”  The result, if that were to happen: a run on the dollar.  Hyperinflation would then be not unlikely, but inevitable.  Samuelson concludes his recent Newsweek piece by saying “even the remote possibility underlines the precariousness and novelty of our situation.”As Warren Buffet says, “we are in uncharted territory.” Don’t believe anyone who thinks they know how this will play out.

Already, China is making moves to uncouple itself from the dollar, even though they hold 3.5 trillion dollars.  The move would devalue the dollar debt they hold, but at this point they seem willing to cut their losses.  Saudi Arabia wants to start trading oil in Euros, not dollars.  That would be a huge blow to the world’s confidence in the dollar.

The easy money that defined the housing bubble is now defining our response to the bursting of that bubble:  more easy money.  “Cash for clunkers” is providing easy money to convert people’ paid-for cars into a car payment they didn’t have before.  Ditto with first-time homebuyer credit.  We’ve lived off debt for so long we don’t even know what real prosperity looks like anymore.  The so-called 2.8% growth in the GDP was 90% the result of government programs.  It’s not growth, and it’s not a recovery, it’s an increase in debt.  It’s another bubble.  Can the economy still grow when the government pulls out the feeding tubes?

Paolo Pellegrini, the stock analyst who made ultra-wealthy hedge fund guy John Paulson $3.5 billion richer by correctly predicting the sub-prime bust, calls the Fed’s easy money, low-interest rate policies “sheer lunacy.”  The effort to jump-start the economy is just creating another asset bubble, namely the stock market surge, that he calls a “one-way trip to oblivion” for investors.  Pellegrini says the only way out would be an end to easy money and a return to thrift and savings.  But for self-indulgent people, corporations and governments addicted to debt, the withdrawal from easy money would be the hangover of the century.  It’s not likely to happen of our own free will.  The party’s got to end at some point, but more likely precipitated by forces beyond our control.

This dollar bubble is clearly the result of all the cheap money coming off the Fed’s printing presses and being shipped out to banks at just over 0% interest.  With rates like that, the money is not being saved to improve balance sheets, it’s going straight into the speculation markets.  A recent report states that some banks still have 50% of their losses in hidden, off-balance-sheet investments.  Prudence would dictate adding the new money to reserves to offset these losses, which will eventually surface.  Or heaven forbid they would use the Fed’s cheap moneyto lend to small businesses to get kick-start some job creation.   “Quantitative easing,” the Fed policy of feeding more money to banks to stimulate lending is not working.  The amount of money being loaned out fell more in the third quarter than any quarter since such records were kept.  Banks would rather take the money to the speculative markets, it’s the only place there is a healthy return. 

Of course that healthy return comes with a lot of risk right now.  PIMCO’s CEO, Mohamed El-Erian, who oversees one trillion in assets is expecting a large correction shortly, and is adjusting accordingly.  He is hardly alone in that thinking.  The lack of fundamentals makes the stock market rally unsustainable.  But for the big banks, why worry about risk when the Fed will backstop whatever precarious predicament they get themselves into?  You talk about your “moral hazard.”

The business fundamentals that have gone awry can’t be fixed by government edict or throwing money at wealthy bankers.  That’s why they are called fundamentals.  The debt binge cannot ultimately be cured without an increase in real productive activity and the restoration of savings.      

The Fed’s image recently took a big hit with Special Inspector General Neil Barofsky’s recently-released report on the botched AIG bailout.  The report details how the Fed and the Treasury fleeced taxpayers to reimburse bankers’ risky investments.  The bankers, who had dangerous and mysterious derivative contracts with AIG, should have been the ones to get cleaned out when AIG went insolvent.  Instead they were reimbursed for these contracts 100% when the Fed bailed out AIG.  The contracts were Credit Default Swaps written on sub-prime mortgage investments.  When AIG imploded because the underlying investments they were insuring were worthless, the counterparties would otherwise have lined up at the teller window for a pennies-on-the-dollar payout. 

Our Treasury Secretary Tim Geithner, who was then head of the New York Fed, brokered the rotten deal, with Bernanke’s input.  Geithner claims now it was the best he could negotiate at the time, even though he held all the cards and the bankers had none.  The Truth is Geithner didn’t have the inclination, the skills or the backbone to stand up to Wall Street or Bernanke, from whom his marching orders surely came.

Barofsky’s report will not go down well for the Fed’s bid (supported by the Obama administration) to become Wall Street’s sole financial regulator.

Goldman Sachs, a huge recipient of these unnecessary counterparty payouts, something like $13.5 billion, also went on to receive billions in bailout money.  Not long after these windfalls, they went on to post the largest quarterly profit in their history, and will pay out record bonuses this year-end.  What did the taxpayers get?  Taxpayers made out OK on the Goldman stock the government bought, but they still own hundreds of billions of Goldman’s toxic mortgage investments.  And that market is not likely to come back soon, if ever.

I think we’ve had quite enough of the Fed’s benevolent protection. 

Ron Paul has a bill before Congress to open the books on the secretive Fed for the first time.  He has introduced this bill in one form or another many times before, but now the level of outrage is finally sufficient for the bill to get major bipartisan support.  It just passed a major hurdle in the Senate banking committee, against stiff opposition from the Obama administration, and just about anyone connected with Wall Street or the Fed.  The committee’s chairman, Barney Frank, a previous supporter of the bill, turned coat at the last moment.

Another bill in the Senate, rather than granting the Fed’s request for more regulatory power, would strip the Fed of most of the power it now has.  In fact, Fed rage is boiling on Capitol Hill, even though the house just passed Bernanke’s reappointment 16-7. 

In a piece published in the Washington Post, Bernanke blasts the measures, saying “they would seriously impair the prospects for economic and financial stability in the United States…Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.”  I would argue it was the Fed itself who seriously impaired the economy by cheering on, while a delusional mega-bubble was built on the Fed’s easy money policies.  The Fed wants to steer the economy?  They steered the economy off the road and now they want a bright shiny new car?

Bernanke’s pleas may fall on deaf ears.  The voice of ordinary Americans, fed up with the Fed and Wall Street, is coming through loud and clear, even through the millions in campaign contributions Wall Street funnels toward Congress.  The Fed quickly and enthusiastically reimbursed the wealthy for grossly mismanaged risk.  For homeowners who mismanaged their mortgage risk, there has been little help. For the average innocent bystander with retirement savings in the stock market, there was nothing but contempt.  There will be a price to be paid for that, as Bernanke will eventually find out.  The Senate will probably also vote for reappointment, but may require something in return, like the Fed audit.

How Bernanke gets to be a hero for putting out fires the Fed itself started, is beyond me.  The argument that the “fire” was decades of prosperity that got out of control due to unforeseen forces is a thin argument.  Forensic analysis reveals nothing more than a pack of fools getting wildly wealthy building a house of cards with volatile financial schemes that could never work.  Bernanke watched the residential sector go from $12 trillion to $22 trillion in 6 years and didn’t recognize it a dangerous bubble?  The Fed was the sole regulator in charge of putting on the brakes by raising interest rates. 

Never mind that.  What about Bernanke and former Treasury Secretary Paulson committing securities fraud in the sale of Merrill Lynch to Bank of America?  Bernanke and Paulson ordered Merrill CEO John Thain and BAC president Ken Lewis not to disclose Merrill’s real losses to shareholders until after the sale closed.  BAC shares lost two thirds of their value once disclosure was made.  That extent of malfeasance in high places should make Watergate look like a picnic.  Plenty of eyebrows were raised but ultimately no one had the guts to go after them in the middle of an economic crisis.  For more, read my blog post on the subject:  http://ageofentitlement.wordpress.com/2009/06/

Time Magazine’s naming of Bernanke as “Man of the Year,” and various sycophants in government and media, gushing about how Bernanke “saved the world,” will only briefly forestall the judgment of history and the growing groundswell of Fed rage.

The Obama administration (and Bush before it),the Fed, the Treasury, and the Securities and Exchange Commission, peppered as they are with Wall Street alums, have miserably failed to protect us from being ravaged by the robber barons of today.

Brad Delong, Professor of Economics at UC Berkeley, who declared previously there was zero chance of the US slipping into a great depression, says now there is a chance.  His reason?   The government and financial regulatory institutions have squandered what little public trust they had.  God help the person who tries to sell another bailout or stimulus to a wary and ticked-off public, even if it became desperately necessary in the event of a “double-dip” or new financial calamity.  And there are an uncomfortable number of ticking time bombs out there, everyone knows what they are.

Nobel economist Paul Krugman concurs that this breakdown in public confidence could have serious consequences should future economic interventions become necessary.   I agree with much of his thinking, even though I count him as a debt apologist.  Krugman says a great depression or double-dip recession probably won’t happen, but a Japanese-style “lost decade” is more likely. He puts those odds at 50/50.

So, those of you who believe the financial system is fixed and recovery is happening, line up over here.  The rest of us have a world to fix.

Doug Friesen  12/18/09

The 12 Step Program to Financial Sobriety

Swimming against the tide is no fun.  You feel swept away from where you want to go by forces beyond your control.  That’s the way those of us who favor market controls feel right now.  Many, if not most, are treating the meltdown as if it was a business cycle, and you just ride it out.  Unfortunately, all the wishful thinking in the world will not fix the fundamental flaws in our economy, which after all, only reflect our own flaws.  The second worst economic cataclysm in a hundred years, one that was decades in the making, will not magically right itself in a year or two.  The entitlement thinking that got us here leads us to believe it can all be made right without the hard work of reconstructing how the economy works, not to mention changing our straying values.

A debt fueled expansion 20 -30 years long made everyone think we were being prosperous.  That debt is a mountain and it’s looming over us.  Balance sheets of individuals, governments, companies, cities, states, and towns are swimming in red ink.  The current run-up in the markets is a sign of how whacked out everything is.  There are no business fundamentals supporting it.  Depending on who is doing the accounting, between 14 and 19 trillion dollars was fed into the banking system to keep the Wall Street party going.  That’s by far more money than all the wars in US history, with enough left over to end poverty in America.  A recent sobering report states that 20 million children in America go hungry at least a few days every week.  The 20 billion that will be paid out in Wall Street bonuses this year, some of it taxpayer funded, could provide enough to lift these children out of hunger.

Oops, now I’m talking like a bleeding heart liberal again.  Let’s get back to raw capitalism.  We could have used the trillions to build a new economy based on something solid.  To Hell with the banks and their stupid ass financial gimmickry!  How can that ever turn into anything like prosperity for America?  What about leading the world into a new energy future?  Many are saying that will be an economic expansion larger than the tech revolution, and right now Europe is poised to leave us at the starting line.  I don’t begrudge the fabulously wealthy their wealth.  If they were able to look beyond instant gratification, they could get even more wealthy by positioning themselves for this boom, and it would spin enough jobs to create a new boom economy for all of us, based on something real.  Sadly, like drunken fools, the financial elite are spending it at the stock market casino.  A big payday today perhaps, but it won’t create any lasting wealth for them or the larger economy.  It’s just another good time.

And where is our indignation?  We should be in the streets with torches and pitchforks.  Except that our own behavior has not been too much different, we sucked into the debt boom too.  We didn’t even think it odd to borrow money from China for another tax cut.  In fact we wouldn’t even vote for a politician of either party who wouldn’t promise us one.

 In trying to get a handle on how this all happened, it occurred to me that we are not unlike any drink or drug abuser who pushed the pleasure button once too often.   After all, there must be all kinds of dysfunction going on, and it didn’t start yesterday.  I keep thinking it started with Reaganomics.  In 1980, as Ronald Reagan took office, he lamented the 1 trillion dollar deficit he had inherited.  Apparently he started out sober.  Somewhere though, the tax cut ideologues got a hold of him and a previously tightwad deficit hawk Republican quadrupled the deficit.  Did we have a clue how wrong that was, or were our thoughts were sublimated by good feelings generated by borrowing prosperity from the future? 

Jimmy Carter, in the context of the oil embargo, had previously told us “button up your cardigan and suck it up”.  Ronnie was swept to power when he told us “it’s morning in America” and the bill will never come due.  It felt good, it felt like prosperity, so whose going to spoil the party?  George HW Bush added another trillion to that.  Clinton, that party animal, surprise, turned out to be the only sober guy in the room.  He actually started to back the deficit against the wall.  Then George W Bush, who was faking sobriety, threw one hell of a tax cut bash, doubling the deficit again.

With easy money flowing everywhere, it turned out to be the biggest party ever.  People with incomes of $37,000 a year were buying $450,000 homes with no verification.  Mortgage brokers right out of college were making a million dollars a year.  Wall Street traders were so out of control that the slightest road bump, and the whole show was headed for the ditch.  They must have all been seriously snockered on something.  I don’t know how else to explain it!  How there could have been any sober people at the wheel?  If there had been, surely someone would have told us to straighten out.

But no one did.

Every drunken bacchanal comes to a bad end, and so did ours.  We crashed the economy and hurt some people and everything was busted up real bad.  We felt bad too, so we did what most drunks do when the hurting but they’re not ready to get sober yet.  We decided to go on a bender.  We borrowed  trillions of dollars to make ourselves feel better again. 

Problem though.  Wall Street was friends with the guy who owns the liquor store (read Federal Reserve), so they took most of the booze.  Newsweek says they took 91% of this money for themselves, and gave the rest of the public 9% of it.  That’s probably why they’re still walking around grinning.  For us, the 9% was not enough to keep us high, so that’s why we have one hell of a hangover.

So now that we’re half sober, we are seriously talking about recovery.  But recovery is about more than just staggering out of the gutter, and that’s all we’ve done so far.  Fiscal sobriety doesn’t come easy and is not pain free.  Especially after a 30 year bender.  It takes a long time and it hurts like hell.  Sobriety is about faith and optimism.  Through all the guilt and self doubt you have to believe you can change.  There are programs for people like us who really want to be sober but need some help to do it.  If we were ready to change, our 12 steps would go something like this:

1.  We admit we are powerless over greed and material wealth – that our economy has become unmanageable.

Capitalism, given a chance for unfettered growth on its own terms, couldn’t have fared much worse.  Almost anything was cause for wild financial speculation, save perhaps the rubber tips on crutches.  At the heart of everything, once the scarcity of common sense is accepted, was a massive collective failure of morality.

 Part of sobriety is squaring with reality.  After multiple injections of corporate welfare, Wall Street is right back at it.  They haven’t disciplined their business model because they didn’t have to.  Unfortunately, the fragile economy is in no position to weather more storms right around the corner.  #1 is the inevitable commercial real estate crash.  It’s happening already.  The John Hancock tower in Boston lost half its value, some $700 million, in just a few months. #2 is the reset of millions of Option ARM mortgages, which will bring a fresh round of foreclosures, perhaps as bad as the first.

That’s the near term storms.  Far term is Social Security, Medicare and Medicaid starting to head underwater in a few short years.  Somewhere in there, inflation could rear its ugly head because of all the Mad Money the Fed is printing to forestall the inevitable reckoning with reality. The world may well lose faith in the strength of the dollar.  All this “Chicken Little” prognosticating gets weary, I know.  But I worry that the required frugality is not something we are familiar with, and I would rather we face into it than get hit broadside.

 Admitting our economy has become unmanageable would start with a sober look at reality.  Then we would hunker down for a long battle for an economy that has some hope for the future, because this one doesn’t.      

 2.  We come to believe that there is a power greater than ourselves, which could help us toward living more normally.

  Almost every religion on earth is based on a few clear messages.  One is the notion that you are judged by how you treat “the least among you”.  The current health care debate puts this in stark relief.  The constitution guarantees “Life liberty and the pursuit of happiness.”  But without health, none of these mean anything.  Alone among the world’s advanced cultures, we refuse to recognize health care as a basic human right.

America is the wealthiest, most powerful nation on earth, and is still a land of promise.  Yet we have the highest per capita rate of incarceration of any country, including third world dictatorships (Christian Science Monitor).  1 in every 37 people in America is in prison or on parole.  Statistically, there are few nations more violent except for countries that are at war and a handful of “basket case” countries like Zimbabwe.  (#6 in assaults per capita, #8 in murders with firearms per capita, NationMaster.com) 

 We are a nation where health care isn’t a basic human right, but owning an assault rifle is.  Maybe it’s time to get in touch with our higher power, whatever we individually perceive that to be.

3.  We make a decision to turn our economy and our lives over to something greater than ourselves.

It’s abundantly clear that out economy cannot survive when it is guided by the instinct of monetary gain alone.  Apparently we are not sufficiently evolved to put long term good above short term greed.  It’s a given that a certain amount of greed gives free enterprise it’s zip, still we were unable to stop drinking from that cup.  A higher principle of some kind is the only thing to cause the hand to put the cup down when we had had enough.

From the lowliest homeowner to the mightiest CEO, we have made Mammon our God of choice.

4.  We make a searching and fearless inventory of our economy and ourselves.

 Most disturbing aspect of the aftermath is our failure to do this very thing.  There has been no soul searching, no introspection whatsoever.  The public wants right back into the bubble economy so we can resume consuming, and the CEO wants to re-light the fuse and ride the speculation rocket.  Crash landings and collateral damage are the price of admission.

 We should be walking around repeating “never again.”  A blue ribbon panel should be picking through the rubble trying to reconstruct the crash scene.  White collar criminals should be doing time for securities fraud.  This would start to build some confidence that things can change.

5.  Admit to ourselves and others the exact nature of our economic failure and misdeeds of those we trusted it to.

 If John Thain, the ex-CEO of defunct Merrill Lynch, and the rest of the failed bank big wigs had foregone the hundreds of millions in bonuses they paid themselves after they blew the economy’s brains out, they could have funded unemployment insurance for 22 months for the 11,000 Wall Street underlings that were let go after the crash.  Never mind the rest of us and our trashed retirement savings.  That’s how far we are from step 5.

 Not a single politician, economist, stock trader, or CEO has apologized to the millions of people they hurt.  The bonus fiasco is all the information we need about how much contrition is present in the boardrooms of America.

6.   We are ready to remove the economy’s defects, and our defects of character.

The further we go in the steps the scarier it gets.  In the 1950’s, television taught us what to expect from life.  Appearances are everything and if values and common sense get in the way – they’re expendable.  Sixty years of indoctrination later it’s quite stretch to think that we would suddenly stop worshipping “the pointless dreamland of trinkets and desire.”  Any con man will tell you, you can’t con someone unless they have a little greed in themselves too.  That’s why we bought into the whole debt thing.  While we’re still struggling with step 1, step 6, seems like a mission to Mars.

7.   Humbly ask the help of others in the removal of the economy’s short comings and also resolve to work to remove these same faults in ourselves.

Quaker theologian Parker Palmer writes: “Who doesn’t know that a society where the rich get richer, while the poor get poorer, is a society that will someday have to pay the piper?  Who doesn’t know that a society that encourages us to live beyond our means and refuses to regulate greed is one in which our avarice will come back to bite us?”  In a more perfect world, the less broken help the more broken.  Our leaders in government and business are the most broken of all.  Who will lead the way?

8.  Make a list of all persons that have been harmed by the crash, and be willing to make amends to them all. 

I realize I’m stretching this analogy to the breaking point, but that in itself is an indicator of where we are in our steps.  The bailouts came from people who could least afford it and went to those who least needed it.  The socialism of government welfare is said to weaken the will of poor to struggle to succeed.  Apparently though, handouts don’t taint the powerful who find themselves in a bad spot.  Today, in America, the wealthiest 1% own more assets than the bottom 99%.  The economy has become a wealth extraction machine for the ultra rich, and never was that more evident than during this meltdown.

9.  Make direct amends to such people whenever possible.

 If step 6 is a mission to Mars, step 9 is finding life in the Andromeda Galaxy.  Making amends would have looked like a “bottom up” bailout, where mortgage holders who screwed up would have fared no worse than bankers who screwed up.  I guess that’s where it helps to be “too big to fail.”

10. We Continue to take a personal inventory and when we are wrong, promptly admit it.

Fearless soul searching is the key to self improvement.  Only by skipping this step can the economy go from mass hysteria to mass denial.    Don’t look to Wall Street, the Fed or the Treasury to change anything beyond the window dressing.  They’ve tilted the playing board their way and have no intention of changing it.  The money Wall Street pumps into the coffers of politicians guarantees they will listen to them, not us.  The big fundamental changes needed now would be disruptive to the economy.  That’s why we don’t want them.  That’s why we aren’t marching in the streets demanding fiscal sanity.

11. Seek through study and meditation to improve our awareness of the natural forces that govern life and the economy, hoping for knowledge of right and wrong and the strength to follow that knowledge.

Strength is the key element here.  Our founding fathers had the strength to challenge the status quo and free themselves from economic tyranny.  We have it so much easier than them.  Democracy still works, sort of.  But silent people will get nothing.  How long will they get away with it?  As long as we let them.

12. Having had an awakening as the result of these steps, we tried to carry this message to others and to practice these principles in all our affairs.

 They didn’t call our parents “the greatest generation” for nothing.  They grew up in modest means, unselfishly pulled together in sacrifice for the war effort, and for the most part were happy enough to live out their days in a funny looking little house down some quiet street in America.

 What legacy to we intend to leave?  Saddling future generations with our debt so we can live high off the hog?  I’m childless, and I’m worried about what the kids I don’t even have will think of me.  Eventually our society will learn to live within its means and that’s probably starting, like it or not, right about now.  It’s never too late to get sober.  

Doug Friesen 11/17/09

How to Restore Your Faith in Democracy, Part 1

“What I fear here is that we are doing Kabuki theatre in three acts.  In the first, Washington tells the American people ‘we understand your anger at Wall Street.’   In the second act, [Congress]nit-picks to death any proposal that actually affects Wall Street.  And in the third act, we bestow another trillion dollars to Wall Street under extremely favorable terms.”

Those are not the words of some extremist blogger, railing about the ongoing farce of supposedly reining in Wall Street excesses.  Those are the opening words of Representative Brad Sherman (D-Calif), a member of the financial services Committee, grilling Ben Bernanke on the recently unveiled proposal to regulate the financial sector.

Just when you think all of Congress has been bought off by Wall Street, along comes someone to keep the faith alive that we really DO have some semblance of a democracy.  Sherman did the rounds of the financial talk shows, alerting viewers just what is contained in the 618-page financial reform proposal that Treasury Secretary Tim Geithner unveiled recently.  The revelation of what was in there came as a shock even to others in Congress (none of whom had apparently read the document).  Geithner is asking Congress to give the Treasury unlimited bailout authority, no upper limit, forever, for systemically important (However they care to define that) institutions.  Sherman calls it “TARP on steroids.”

Whereas many in Congress seem to be over their heads when understanding and dealing with these incredibly complex pieces of legislation, Sherman is not.  A seven-term Congressman, he is a Harvard-educated lawyer and CPA, and among other things in his varied career, helped the government of the Philippines reclaim assets from former President Marcos.  So he knows a thing or two about ill-gotten gains.  In an era where most of Congress (from both parties) seem like the lap dogs of Wall Street, it’s great to watch Sherman, in his role on the Financial Services Committee, take Geithner and Bernanke apart in House hearings.

There’s nothing that gets by this guy, and he calls it as he sees it, often attacking policies of his own party.  He is clearly not “owned” by anyone, and seems on a mission to shine some sunlight on all the bullpucky that gets passed back and forth between Capitol Hill and the White House.  Also, and this helps enormously, he is a funny guy, and his sense of irony is usually on full display whenever he is in front of a microphone.  He is the Jack Nicholson of politics.

Here’s Sherman on how Wall Street continually whines for more money:  “They’ve created this new religion that involves genuflecting in the direction of Wall St. and believing this idea that, oh my God, if those institutions don’t get what they want, we’re all gonna be fighting for rat meat in the streets.”

I know a lot of you are videoed out, and the last thing you need is to watch some Youtube clips, but if you’re feeling helpless and hopeless, and thinking of watching re-runs of “Desperate Housewives,”here’s your antidote, watch these instead, There are only a few minutes each.  You’ll feel much more hopeful if you do…

Sherman asking Geithner if investors are still buying derivatives today, because they know if they fail, they will be bailed out:http://www.youtube.com/watch?v=rEpmRv2kAng

Sherman is mad because TARP money being paid back is being used as Geithner’s revolving fund to pay out more bailouts, instead of paying down the national debt, which is what the statute calls for:http://www.youtube.com/watch?v=zLxVlhpTFeg

Sherman on bailed-out companies using giant loopholes to get around limits to executive pay:http://www.youtube.com/watch?v=w4tEK1jgiYw&feature=PlayList&p=A1890006DADAFB30&playnext=1&playnext_from=PL&index=8

Sherman goes after Geithner for a new Treasury proposal giving Geithner access to unlimited taxpayer-funded bailout money, forever:http://www.youtube.com/watch?v=oielyQeyndE

Sherman puts the fire under Geithner for inappropriate bonuses paid to AIG and other bailed-out companies:http://www.youtube.com/watch?v=dAQQi-b1lF0

Sherman and Donald Manzullo (R- Illinois) take apart the Fed for asking for even more regulatory power, when they already had a lot and did nothing with it:http://www.youtube.com/watch?v=OcHtErq43mQ

Sherman defends his position on failed companies that, under the rules of capitalism, should have paid the ultimate price, yet are being kept alive intravenously by government money, but still want their $ million-plus bonuses:http://www.youtube.com/watch?v=gUoS0r7_sYA

You’ve got to admire this guy.  Attacking Wall Street is a thankless job, not unlike World War One trench warfare.  Its power positions are well-defended by the biggest guns out there: Bernanke, Geithner, Obama.  Yes, Obama.  Yes, I voted for him.  Like many, I was starving for change.  But the “change” at the White House was nothing more than a change of bed linen.  Silly of us to think anyone could bring down Wall Street’s field gun emplacements without some covering fire.  The joke’s on us:  on economic matters at least, “he” is actually one of “them.”  But don’t look at someone else to figure that for you.  To do anything, Obama (with the help of others like Sherman) would need big time political capital to accomplish anything meaningful, and where will they get that?  It would have to come from voters screaming bloody murder about being mugged by Wall Street.  Is that likely to happen?

Bonus Snippet on the stock market rally:

I can probably be accused of selective reporting, because, truth be told, I cruise the blog world largely to find positions that support what I think.  After all, I’m not a reporter, I’m an editorialist.  That’s why it is vindication in spades when someone from the “other camp” writes something I can quote to back myself up.

Steven Pearlstein, a Pulitzer-Prize winning Washington Post columnist, while often critical of Wall Street, was widely reviled in the blogging world when, right after the crash, he wrote column after column hailing Paulson and gang as heroes of the century.  But it became harder and harder to support such an untenable position.  Especially now, to see Wall Street using the bailout cash to run another bubble so soon after the crash.  Here is Pearlstein a few weeks ago, in his regular column:

“It turns out that all those bold and necessary steps by the Federal Reserve to prevent the financial system from collapsing wound up creating so much liquidity that it has now spawned another financial bubble.”

So all that liquidity is not being used to grease the wheels of the larger economy! Surprise, surprise, the robber barons took the money to the casino to double-down on their losses.  Well, so far it’s working, but don’t hold your breath.  The only other money floating around the economy these days is from one-time programs like “cash for clunkers” and the first-time home buyers credit.  The other fundamentals couldn’t be worse.  Foreclosures are still setting records (25% higher now than last year this time), and will be higher still next year with “Option ARMs” resetting.  In Massachusetts bankruptcy filings are up 38%.

Here’s Pearlstein again: “So, who is borrowing? By and large, it’s not households and businesses, which are reluctant to borrow during a recession. Rather, it’s hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.”

“The excess liquidity is even being used to finance a new ‘carry trade’ in which global investors borrow at U.S. rates and buy government bonds in places like Australia, where prevailing rates are higher. Because the carry trade involves exchanging dollars for foreign currencies, it has been a major contributor to the recent decline in the dollar.”

The Fed and the government have welcomed anything that looks like economic growth.  But printing money to fund fake growth instead of real sustainable growth is doing long-term, permanent damage to the standing of the dollar.  It just kicks the reckoning further down the road.

Doug Friesen

10/20/09

The Failure of Capitalism

Capitalism as a concept has sure taken a beating lately, although it is not dead just yet.  It’s not really a bad economic system either, as far as systems go.  But, it’s an under-achiever, because it will always seek to destroy itself.  That’s the take by the late Hyman Minsky, a contrarian economist who predicted this economic crash, even though he died over a decade ago.  Minsky was misunderstood during his time, and remained a reclusive figure in the world of macro-economics, although now economists and journalists are seeking out his insights.

In free market theory, the “creative destruction” of capitalism should always weed out the weak and unproductive elements and promote what works best, steering the economy to ever-greater heights.  According to this model, no King, Czar or government regulator can properly achieve this equilibrium, because to manipulate this equation is to destroy it.  Minsky believed in this model of free markets, but he also believed that human nature would always sow the seeds of instability, eventually causing the system to crash.  In fact, it’s the very stability of the economy that causes the crash. 

Here’s why:  When the economy is doing well, speculators should be satisfied with their take, but they never are.  They always attempt to ramp up the risk in an attempt to make even more money.  A stable economy, especially an economy as stable as ours was for a very long time, becomes, in Minsky’s words, a “euphoric economy.”  One in which “success breeds a disregard for the possibility of failure.”  Given enough time and enough euphoria, excessive risk becomes the everyday business model, until the economy becomes a Ponzi scheme, with more borrowed money out there than there is value or capital to pay it back.

At some point, something triggers a panic, at which time everyone realizes, at roughly the same time, that the economy isn’t wearing pants.  Then, everyone tries to shed their debt, and prices and asset values plummet.  That is what is now called a “Minsky moment.” Before Minsky died in 1996, he warned that public and private debt was getting out of hand, and that securitization of debt and other exotic financial innovations would lead to a crash.  Indeed, he was correct.  His so-called “Financial Instability Theory” was so complete, it even theorized about what must be done to clean up the mess. 

He called for the Federal Reserve to step in as the lender of last resort to restore liquidity.  He also called for “priming the pump,” creating lots of work projects requiring skilled workers.  These two things have been done in this crash, saving us (maybe) from even worse consequences.  The third part of Minsky’s recovery plan has not been done and will NOT be done.  That was to create a program to provide stability to the lowest levels of the economy by providing work for the poor and unskilled.  That would provide a “floor” to the economy and create wealth that would “bubble up” through the system, creating benefits all the way up.  

This part of Minky’s plan would be far too socialistic to have any political traction today, and I would not dare advocate it for fear of being pilloried.  My gripe is that we have become far too content with trickle-down economics.  Corporate welfare is accepted as a necessary evil, but public welfare is to be despised.  The “too big to fail” banks are even bigger, people with enough money to speculate are back at it, as is seen in the rise of the stock market.  In the real world, many are worried about making it to the next paycheck. 

Absolutely nothing has been done for the average American family, most of whom were innocent bystanders, or “collateral damage” in a class war that’s re-arranging the loot in favor of the ultra-wealthy.  We might be the first generation to never retire, because our retirement savings are now being used to send the kids to college and pay the mortgage, and social security will be wiped out by the time we get there.  Not that we’re looking for a handout or anything, we are just understandably upset that our hopes and dreams, not to mention our honest work, have been vandalized by those that inhabit the world of uncontrolled greed and speculation.

Minsky was marginalized during his time because his theories did not fit neatly into the prevailing economic schools of thought that have held sway in recent times.  One is the “Keynesian School,” (after early 1900’s British economist John Maynard Keynes) that government must smooth out some of the bumps of a market economy.  The other, the “Chicago School”, are believers in legendary free marketer Milton Friedman.  The Keynesians ruled economic thought in the 60s, to the extent that a Time magazine cover story in 1965 declared “We are all Keynesians now”.  In that time, the record broadly based prosperity was understood to have resulted from careful government guidance of the economy.  Even Freidman and Richard Nixon were both credited as having made similar claims.

But the Keynsians were badly mauled in the 80s by Friedman and the Chicago School (read “Reaganomics”).  By the 90s, Keynesians were lying so low it was hard to tell where or who they were.  During 20 years of the systematic dismantling of financial regulation, the silence of the Keynesians, such as Nobel economist Paul Krugman was deafening.  After the meltdown, however, as giant corporations were bailed out, the phrase “We are all Keynesians now” suddenly reappeared as the headline of a Boston Globe editorial.  In its current use, it meant hardcore free marketers were in the difficult and embarrassing position of explaining why they needed to be bailed out.  Or, to put it another way, there are no capitalists in foxholes.

What to do when economists admit they have no idea what’s going on?  A catastrophic failure of this magnitude has defied explanation by any of these economic models.  In fact, the entire profession of economics, and a hundred or more years of economic thought, has been turned on its ear, if not even rendered null, void and useless.  The long era of uninterrupted growth had most economists believing they had entered a golden era, where all the conundrums had been solved and the economic model was a thing of beauty.  Paul Krugman himself, in a recent New York Times article entitled “How Did Economists Get It So Wrong?” admits “It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty…”

The great unsolvable question still remains: How did everyone get it so wrong?  The crushing debt loads, the insane leverage, the business models based on sheer lunacy.  The required suspension of disbelief by millions of smart people over decades of time is hard to think about.  Rivaled in history perhaps only by that which was required for the Holocaust to take place.  Face it – government, Wall Street, the Fed, have no idea what they are doing.

The Obama administration came in riding a message of “change.”  Even if they wanted to, they were certainly in no position to change the financial juggernaut they were handed.  To see the seamlessness with which the bailout and recovery operation was handed from Bush to Obama, and to see the way Obama assembled his economic team, it was pretty clear that Obama’s marching orders came from the Fed.  The Fed and Wall Street did the only thing they know how to do, they recapitalized the wealthy.  So money is again flowing, but only in the most stratospheric levels of finance.

Capitalism is not dead, but it may be mortally wounded.  The stock market is running hot now because of all the money injected from bailouts and Fed loans.  But the free market economy depends on a successful working class and middle class sending their money up the ladder.  With so many families struggling for survival, those segments of the economy that rely on consumer spending are going to be in trouble.  The next perfect storm is this: $3 trillion dollars of excessive commercial expansion will become due for refinancing in the next few years.  That will happen in a climate where both credit and consumer spending are frozen stiff.

Greed is, in the end, the only real explanation, everyone knows that.  In their greed, the free marketers have goosed the system till they killed the golden goose.  That is the failure of capitalism.

Doug Friesen

9/22/09

Wall Street Banks as Psychopathic Terrorists?

Some banks have recently reported record profits, mostly those that the government bailed out. And some parts of the bailout, like a TARP program called CPP, have returned a handsome 17.5% to taxpayers.  Other aspects of the TARP program, like bailing out AIG, are not likely to do nearly as well.  That’s the problem:  There is some transparency in the bailout money congress approved, but none whatever in the 20 times greater Fed bailout.  It seems like now there is plenty of money travelling in the most exalted levels of banking, the bankers that have direct access to the Fed and the government.  Very little of that liquidity will ever reach you and I, unless one still believes in the trickle-down theory.

For the non-bailed-out banks, the picture is grim indeed.  Huffington Post reports that 25% of US banks (2100) are unprofitable, and 416 of these are on the FDIC’s “troubled” list.  Eighty-one banks have outright failed this year alone, eleven in one day.  Some prognosticators, whose business revolves around predicting the future of banking, like private equity investor John Kanas, says 1000 banks will fail over the next two years.  Even conservative analysts put the number at several hundred.  That’s more banks than the FDIC can prop up.  The “top down” bailout has blown way too much money on the superbanks that deserved to fail, and will have nothing for the bank on Main Street that deserves to survive.

The superbanks (and companies like AIG) were not just making disastrously foolish decisions.  Who can really believe they didn’t know any better? In the name of greed, they held a gun to the economy (that’s us) and demanded our cash.  If you think I’m taking this personally, you’re correct.  I used to think they were white-collar criminals.  But that doesn’t go far enough.  That doesn’t explain the wanton and premeditated economic destruction they caused.  So now I am thinking they are economic terrorists.  (Dictionary definition:  terrorists “stage unexpected attacks on civilians with the aim of sowing fear and confusion.”)

Economic disruption of the Western economy has long been on Al Qaeda’s wish list.  But they didn’t even have to do it, the bankers did it for them!  Not only that, the bankers did a much better job from the inside than Al Qaeda could have done from the outside.  I guess you’d have to say it was an “inside job”!

The bankers are not just garden-variety terrorists, though.  They exhibit many clinical traits of a psychopath.  Check it out:

1. They are classic narcissists, believing that they are the masters of the universe and therefore can act irresponsibly, putting everyone else at risk.
2. They will do or say almost anything to get what they want.
3. They refuse to accept responsibility for their reprehensible actions.
4. Even when confronted with their foul deeds they feel no remorse, and will turn around and do the same thing again until they are stopped.

Does the description fit?  That’s why I make this claim – these banks are psychopathic terrorists.

It doesn’t have to be that way.  Banks used to be boring.  Somehow, the green eyeshade, pocket protectored-dweeb morphed into the flashy overlord, able to leap over common sense and morality in a single bound, on the way to becoming fabulously wealthy.   

Charlie Munger knows wealth.  He’s the number two guy and co-founder with Warren Buffet of Berkshire Hathaway, a company with a reputation for making wealth the old-fashioned way, by creating value.  This is what Charlie said a few months ago: “If I were in charge, I’d take away everything from banks that wasn’t boring.  Completely shut down [credit default swaps] 100%.  What’s the harm in this?  The world worked just fine without them.  We don’t need an economy that resembles a vast poker tournament.”

Berkshire knows how to create wealth and value.  They just went to China and invested heavily in a plug-in hybrid made by the new Chinese car company, BYD.  This car blows away the Prius for about the same price.  It accelerates rapidly, travels at highway speeds and goes 100 km on $1.70 of electricity.  While Wall Street was busy spinning worthless financial transactions that enriched a few people beyond imagining but wrecked the economy for everyone else, China was busy building a “fast charge” infrastructure, so these hybrids will rarely need to use their gas motors.  It will be for sale here in a few years.  That’s creating value.

Buffet is shifting to non-US stocks like this to hedge against the inevitable decline of the debt-laden dollar.  As Buffet says, “fiscally we are in uncharted territory.”  Our debt will soon be twice as high as it has ever been, excluding WWII.   Buffet goes on to say “no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.”  The Motley Fool is also among those advising their clients to get out of dollar-denominated stocks.

Speaking of boring, look at the banking system in Canada.  Don’t get me wrong here, I’m not using boring as a pejorative.  With all the excitement we have had around here lately, I consider boredom to be a good thing.

Fifteen or so years ago the Canadian banking sector pleaded with Canada’s regulatory agency (there is only one) to let them merge into mega-banks to compete with the huge US banks.  I remember it was a heated debate, and went on for what seemed like years.  Finally, the regulators said no.  The basis of the ruling was that it there was only a downside for the banking customer.  That must be one of the few times in history anybody in charge of banks ever thought about such a thing!  At the time, banks were outraged at not being allowed to play on par with the big international banks.  Now they are thanking their lucky stars.

Canada’s banking profits for the second quarter of 2008 are up $500 million over last year (that’s a lot in Canada), some beating analysts’ expectations by 33%. In the last quarter of 08, when US banks were losing $28 billion, Canadian banks did $2.6 billion in profits.  Canada stands alone in the industrial world as the one banking system that never succumbed to the madness, the only country with not a single bank failure. 

The Geneva-based World Economic Forum just ranked Canada’s banking system as the soundest in the world.  The G7 and G20 countries are looking to it as a model.  How did they do it?  They did it by being boring.  I should know, I spent half my life there.  And again, I’m saying boring wistfully.  BTW, the US banking system was ranked at number 40, two rungs bellowBotswana.

Canada’s economy will take more than just a little shrapnel from the US meltdown, but overall it is well-positioned to take advantage of opportunities other countries cannot.  Toronto Dominion Bank (TD), last year the 15 largest in North America, is now 5^th.  Not because they grew, but others shrank.  Five years ago, TD was one of the world’s top five holders of securitized assets, when they exited that market at its peak.  Why?  TD CEO Ed Clark: “They became too complex. If I cannot hold them for my mother-in-law, I cannot hold them for my clients.”

Also, Clark couldn’t understand the derivatives market, and suspected others couldn’t either.  TD pulled out big time, taking a $200 million write-down at the time when AIG was paying Joe Casano, the king of Credit Default Swaps in their London Financial Products Division, a million dollars a month to drive their company over a cliff.  Clark said he looked at this market and said: “Stay away from this stuff, we know where it’s going.”

Although the Canadian government will run a small deficit this year, they came back from enormous deficits of 20 years ago, tightened the belt, and recorded 12 surplus budgets.  This was done across party lines, with both liberal and conservative governments turning in prudent budgets year after year.  Unlike the US Social Security System which will start to become insolvent just 7 years from now, the Canada Pension Plan is well-funded.  Health care costs as a percentage of GDP are half what they are here, with significantly greater life expectancy. 

Canada is boring in other ways too.  Take immigration, a real hot button issue in the US.  For talented, skilled and educated immigrants to Canada, there are no waiting lines or quotas, you’re in.  All others though, need to wait in line.  Microsoft just opened a big research center in Vancouver to attract highly skilled Chinese and Indians that can’t get visas to live in the US, even though many were educated in the US.

Canadian banks did not go hog wild in the subprime market either, although some had exposure through the US market.  Banks typically continue to hold their own mortgages instead of selling them to a secondary market, a factor which helped crank up the mortgage frenzy in the US.  Also, there are no gimmick mortgages.  20% down, please.  Still, Canada’s rate of home ownership, at 68.4%, exactly matches ours of 68%.

The Depression-era Glass Steagall Law, which separated investment banking from regular banking, and was scrapped in the US ten years ago, is often cited as a key reason for the meltdown here.  But Canada scrapped their similar law even earlier, without incident.  Their executive culture is just that much more conservative.  There is not such an adversarial relationship with regulators.  There is a single regulatory agency for banks, and bankers rely on it to help them manage risk. 

Has the US banking culture learned anything?  By the furor surrounding the outsized bonuses they are still paying themselves, it doesn’t seem so.  The European Union is about to enact laws regarding the bonuses investment bankers in public companies pay themselves.  Fifty percent of the bonuses will be paid out over a three year period to prevent the sort of short-term greed that wrecked the economy.  US bankers will not be happy about that if it happens here.  But, like FDR said during the Great Depression when he took some of the toys away from bankers: “Why are you so angry, I’m saving you from yourselves.”

Doug Friesen

9/08/09

The Wizard of Oz Exposed

Life in the Emerald City is tense these days.  When you make yourself out to be omnipotent, it gets harder and harder to maintain the illusion.  So it goes for the Federal Reserve.  The failure of the debt-fueled expansion created by the Fed’s easy money policy was inevitable.  Derivatives expert Satyajit Das calculated that during the debt expansion it took $4 to $5 of debt to create $1 of real economic growth.  Such a system can only work for a time, with a high rate of growth concealing the due date of the debt.  That due date is here, and no amount of Fed tinkering will sustain the illusion of a so-called “rebound” for long.

Recent money inflows into the stock market reveal that liquidity pumped into the economy by the Fed is not helping “the man on the street.”  That money went straight to speculators.  Banks are using the Fed’s cheap money to double-down and replace their losses.   As economic blogger Mike Whitney says: “With an interest rate lower than the rate of inflation, the Fed is basically selling a dollar for less than a dollar.” This is not a recovery. Those with access to the Fed’s lending facilities can then turn the money around for guaranteed profits.  It’s a government-sponsored bubble that conceals the fact that much of the economy is still insolvent and being propped up with corporate welfare.  A real recovery won’t happen in these conditions.

Paul O’Neil, Treasury Secretary under George W. Bush, and the last Treasury Secretary not afraid of big banks, nailed it with this quip in an interview last Fall:  “There is not enough ink in the printing presses of the Federal Reserve to make up for real economic growth.”  (O’ Neil was sacked by Bush for refusing to support a second tax cut)

The debt-fueled expansion was a 40-year experiment that stripped wealth out of the middle class, sent it straight to the top, and wrecked the economy.  Real economic value was slowly replaced with financial sleight-of-hand.  That model had been discredited worldwide, and pumping it back up with more debt, at a time when the world is on the verge of losing faith in US debt, is a road to ruin.  Ask Japan.  All the money to juice up failing Japanese banks in the 90s had the net effect of destroying long-term confidence and real economic value.  Their stock market lost decades of value and is still in suspended animation.

The economic model is broken.  The best indication of this?  Those in control of the economy have offered no satisfactory explanation of what happened, nor any well-considered plan to do things differently.  We seem to tolerate their being consistently wrong, because we ourselves want them to be right, and re-start the model.  When things have gone as badly as they have, how could continuing on the same course result in anything but further disaster?  They know of no other way and neither do we.  The definition of insanity is doing the same thing over and over and hoping for a different outcome.

As difficult as it might be to completely re-order our financial system, failure to do so could be catastrophic.  If China loses faith in US debt, the rest of the world replaces the dollar as the world’s reserve currency, and hyper-inflation catches up with the Fed’s spending spree, the US could find itself in an unrecoverable decline — a bankrupt nation.  That stark reality is uncomfortably close, and many sense it, but few will acknowledge it.  Fewer still offer a roadmap to solvency.

Why would they change?  The Fed and the financiers have enriched themselves beyond anything seen since the age of robber barons, and are getting away with the crime of the century.  The Fed’s reaction to everything is print money.  And why not?  Inflation is a friend of the rich.  Most of the wealthy get their money from assets, which increase in value, not wages, which decrease.  A Bloomberg article on August 18^th reported that since 1970, the richest 1% have seen their inflation adjusted income rise by an average of 758%, or a total of $30 million (each!) over the period, While the bottom 90% saw almost no gain, $286, or $8.41 per year.   The rest of our so-called prosperity was money we borrowed, or sending additional family members into the workplace.

I know it seems like the economic history of our times happened in the last 10 years, but really, this debt expansion (and inflation of the dollar) began way back in 1971, when Richard Nixon uncoupled the dollar from the Gold Standard.  That created the ability to expand the money supply at will.  But that in itself didn’t doom the economy.  Expansions created by increases in the value of goods or services can have a solid foundation, at least as long as the goods and services increase in value.  But, give people the ability to manipulate money, given human ingenuity, throw in some greed, and someone will eventually figure out how to game the system.

Value created by debt, (or “monetized debt” or “securitized debt”) was such a thing.  But you can’t re-sell debt to an investor without first selling the original debt to the consumer.  Thus, monetized debt could not have happened without consumers being willing to abandon the fiscal frugality of the post-war era to borrow 11 trillion dollars in just a few decades.  As I say in my book, The Age of Entitlement, “any good con man will tell you, you can’t con someone unless they have a little greed in them too.  So we bought the debt.”  This debt expansion created an unprecedented profit stream for the debt-sellers, and for quite a time, masqueraded as real growth.

Many bad ideas are actually just good ideas taken to an extreme, and monetized debt is one of these.   After the gold standard was abandoned in 1971, the money supply was expanded relatively slowly.  Nothing went haywire because the “value” had time to catch up with the expansion of debt.  Government deficit spending kept increasing, but the strength of the dollar and the value of “brand America” gave the debt value.  Bubbles and busts were passed off as business cycles, and were small enough that recoveries were measured in months.

The dot.com era was the first mega-bubble.  This expansion was different in that it was not created by financial manipulation.  It was created by a completely new idea, the internet, whose momentum fed on itself, and the crazy speculative run-up of dot.com was just standard Wall Street exploitation.  The bust was the value of the dot.com idea resetting itself.  But here’s where things started to get wacky.  The ability of Wall Street traders to strip profits out of the bubble was exponentially greater than any previous bubble.   The genie was out of the bottle, and nothing would ever be the same.  The race was on for the next bubble!

To think that the housing bubble was intentionally created by the Fed for the purposes of creating another mega-bubble is tempting, but it’s a distance that is too far for me to go.  I’m not fond of conspiracies that seem overly intricate; I’m just not willing to give people that amount of credit.  Certainly though, the Fed eased interest rates because Wall Street was addicted to the monetary euphoria created by irrational exuberance.  The housing bubble was nothing more than the lucky confluence of the Fed’s easy money and the public’s nesting instinct.  Where the wheels came off is where decades of bank deregulation met Wall Street’s search for a new mega-bubble.  In retrospect, how easy it must have seemed to extract the wealth out of this bubble.  And how easy it was for the Fed to package that wealth as a solid economic expansion.  Between 2000 and 2006, 70% of income gains went to the top 1% of earners, while middle-class America borrowed heavily to maintain the illusion of prosperity.

The role of the Fed in creating and sustaining the expansion and the illusion can’t be understated.  As Mike Whitney says in his excellent economic blog on www.counterpunch.com,  “The Federal Reserve is the policy arm of the big banks and brokerage houses.  Period.  Bernanke hasn’t lifted a finger for homeowners, consumers or ordinary working stiffs. All the cash is flowing upwards according to a plan.  The Fed is a social engineering agency designed to serve as the de facto government behind the smokescreen of democratic institutions…  The central task of the Fed is to shift wealth from one class to another.”

An astonishing $13 trillion has gone out of the back door of the Fed, with no authorization from Congress, to cover the toxic waste from this debt securitization orgy.  The Fed will NOT identify who got the loans, what the collateral is, and when they have to be repaid.   No one really knows how much junk is still out there.  During the course of this mega-bubble, from 1997 to 2007, $20 trillion in securitized debt was sold.   How long before these assets regain some value?  The market for securitized debt is dead and may never recover.

The Wizard of Oz has run out of tricks.  Americans, with their retirement savings wiped out and struggling to send kids to college, may never consume in quite the same way again.  And there’s little else of value in an economy where 70% of the GDP is consumption, and 40% of corporate profits is banks spinning worthless transactions.  Foreclosures are still rising everywhere.  Nevada leads, with one in every 56 houses in foreclosure.  Unemployment has only slowed its rise because the first unemployed have run out of benefits and are no longer counted.  People who can borrow don’t want to, and people who need to don’t qualify.   Businesses over-expanded to meet continuously rising consumption, creating an unprecedented over-capacity in almost every sector that will take years to wring itself out.

The economy, when the real value is sifted out from the fake, has an underlying level it must still find.  A huge contraction must still occur over a period of years to reset the economy to its realistically sustainable level.  Simply stated, we need to quit borrowing and consuming, and start producing something of value. That correction doesn’t sound impossible, but the order of magnitude needed to reverse our current situation in enormous, and will require a level of sacrifice Americans have not seen since World War II.  Do we have it in us?

Meanwhile, in Emerald City, the Wizard runs to and fro, pulling this lever, pushing that button, frantically trying to keep the illusion going.  How long will the Fed and the banks get away with the crime of the century?  As long as we let them!

Doug Friesen   8/24/09

Does My Health Care Cover Being Eaten by Piranhas?

The health care debate is as curious an American phenomenon as there ever was. And the most curious thing of all is that with all the heated rhetoric flying around today, the debate was over before it even began. The Health Insurers Have Already Won. That was the cover story of Business Week last week, hardly a left-leaning socialist rag. “The carriers have succeeded in redefining the terms of the reform debate to such a degree that no matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable.”

I have always said that Obama is, before he is anything else, a buttoned-down corporate guy, and will end up alienating more on the left than the right. It’s hard to imagine what the “town hall protest faction” think they want or don’t want from him. The anger rises to such a fever pitch I wonder if this even really about health care. Or, is the quality of discourse summed up by this sign seen at a rally last week: “KEEP YOUR GOVERNMENT HANDS OFF MY MEDICARE!” Never mind the so-called “death panels,” a notion so idiotic one is rendered speechless thinking of a response.

The funny thing is that the Town Hall crazies are turning blue trying to protect “the best health care system in the world,” when, by all the numbers and facts, dollar for dollar, in terms of actual outcomes, it’s actually just about the worst. Score 10 for the spin-meisters. But that’s the game: appeal to poorly-defined fears that will always linger among the “sound bite” news culture.

What we will get is a cobbled-together patchwork engineered by the insurance industry. It’s difficult right now to say whether it will be better or worse, but it will not be a whole lot different. The hundreds of millions in campaign donations and lobbying efforts directed toward all the key players in Congress have sealed the deal. All that’s left is arguing over semantics.

Having grown up in a country with a single payer system, Canada, but having spent the last 25 years here as a naturalized US citizen, I feel like I might have some worthwhile perspective to thrown into the mix, although I must admit it feels like dipping my toe into a river filled with piranhas.

When thinking about complicated things I usually try to pull back to the broadest possible perspective before narrowing the focus and arguing minutia. If there is one word that defines the fear that Americans have over government controlled medical care it is this: Rationing. To that I say this: All health care systems are rationed. No country on earth can provide ALL that medical science has to offer to EVERY individual. In many single-payer systems, care is rationed by waiting times. As it turns out, many times, if people must wait for a procedure, lo and behold, it turns out they didn’t really need it! Of course, yes, single-payer systems can and do apportion acute care in a timely manner. Most single-payer systems have higher life expectancies, lower infant mortality, etc. than the US private system, at half the cost. We are 37thin outcomes. Is this the best we can do?

Still, some Canadians feel they can’t get the level of care that US private insurers provide for their best customers. That’s true, they can’t. So they head south if they have to and can afford to. For sure, that truism forms the crux of what is the health care debate in Canada. It’s called a “two-tier system,” and the debate is: should we provide a moderate level of care as a baseline and then offer more expensive care to those who can afford it? That was the debate way back when I still lived there, and still rages today. Some provinces have edged toward providing that second tier while others fear it will wreck the system. In this way, that part of the debate is very similar to the “public school/ private school” debate.

But here’s the thing: When they do look for care outside of the system, Canadians typically head for the Mayo Clinic, a medical establishment so well-orchestrated they provide an astounding level of care for far less than what health care costs average in the US private system. Apparently they do it by managing the system coherently. No superfluous tests performed just to protect doctors against lawsuits, because doctors are paid by and protected by Mayo. They get to focus on just medicine and the patient.

Of course there are stories of Canadians heading south for care because waiting times were unacceptably long. These stories are exploited to maximum benefit by those arguing to stay with a private system. But what about the stories of the 14,000 people per day US health care companies drop because of pre-existing conditions or other technical violations, most of them in the midst of a health crisis. They would love to be on someone’s waiting list. Some of them are among the thousands who declare medical bankruptcy. (50% of all bankruptcies) Some just go without care. Others end up getting expensive procedures in more affordable places like Thailand or India.

Ask that same Canadian if they would like to sign up for a top-notch US plan. It will cost more than your mortgage, no pre-existing conditions please, and you can and will be dropped at any time if we feel there is a violation of our complex rules. If you didn’t read the fine print, you will either be denied certain procedures, or have to pony up a huge co-pay, especially if you didn’t “pre-authorize” the procedure correctly. You will probably have a large yearly deductible and by the way, they will kill you with red tape and don’t even think you can win. Oh, and did I forget to say that your premiums will double every 10 years? (Mine have.) I dare say most Canadians would take their chances with plain vanilla single payer, come what may.

Health care is rationed in the US, too: 47 million of us just don’t have it. Plus, all that aforementioned pre-authorizing and co-pay and denying coverage stuff is rationing too. If you’re really into tough love you can pretend that most of the uninsured and underinsured are too lazy to work hard enough to pay for a good plan. But, in a mostly Christian nation, does that seem like a charitable way to think? I cannot think that way. Go ahead and call me a bleeding-heart liberal. My heart does bleed. It bleeds for all the pain and suffering in the world, whether or not the sufferers deserve it. Health Care is a basic human right. If we can’t afford it then cut something else. If government can only accomplish two things, let it be health care and roads. Everything else is gravy.

Don’t get all bent out of shape when some socialized benefits go to “the least of you” (Jesus’ words), unless you also rally against all the socialized benefits that regularly go to agri-business, oil and gas industries, defense contractors, media conglomerates, corrupt foreign dictators and militaristic regimes. It’s not suddenly a Marxist plot when the little guy gets a break!

Speaking of gravy, the actuarial unit of United Health Care, one of the largest health care companies in America, is busy as a bee hive crunching numbers. Although they are trying to down play the results, most of them point to the incredible windfall the company will enjoy under almost any plan now being considered in the debate. Still, they are trying to squeeze the numbers further, having spent $3.4 million lobbying congress. Most scenarios would have the public still owing 25% of the cost of their care, even after the huge premiums. United Health Care would prefer something more like a 65-35 split. So, they’ll do more lobbying.

United, like all the other companies shaping this reform, will do fine. After hitting up mostly smaller employers with double-digit increases, their profits, especially in the units providing Medicare to the poorest of the poor, were up 34% last year. Single-payer is the worst thing that could possibly happen to these companies. Even a government-sponsored insurer operating as a competitor is unacceptable. That might be a “Trojan horse” to a single-payer system. Private plans have spent in excess of $19 million lobbying mostly Democratic members of congress to defeat a government-sponsored competitor.

Single-payer is not even on the table, and can’t even be discussed in polite company. By some estimates, a single-payer system might save Americans about 1 trillion dollars a year. Admittedly all estimates in something this volatile are suspect, and this one doesn’t explain what would happen to taxes. But this one comes from Business Week. Why would such a conservative publication propagate such a socialist notion? Because businesses small and large are getting killed by health care costs, especially when they compete with countries with single-payer systems. When “business” doesn’t trust the business of providing health care, why would you? Would it be impossible to run a nation-wide, non-profit health care corporation along the lines of the Mayo Clinic?

Medicare and Medicaid are held up as abysmal failures, yet what other plan of any kind in any country insures only the elderly, the infirm and the destitute? Of course it’s expensive! Private insurers want a chance to pick up that business? They do it only under contract with a guaranteed margin. Ask your grandparents if they’d like to take their chances with a private plan.

Let the debate continue, but extreme partisanship will not get us there. The current system cripples families, crushes small businesses, and drags the economy down. Let’s remove the rhetoric and have a serious debate. Single-payer already works worldwide, and yes it has its problems, some of them big. But there is no private model to go by. After big banking sent the economy on a suicide mission, how can we believe that big Pharma and big Health Care have anything in mind but this quarter’s balance sheet at your health’s expense?

So, my friends, it comes down to this: Who do you want to manipulate your health care? The government, who seemingly can’t do anything right, or the corporations whose bottom lines don’t care a pig in a poke for what happens to your particular health? Worse than that – their bottom lines are completely dependent on how many claims they don’t pay. I don’t normally advocate bigger government anything. And it ticks me off that there’s nothing between cut-throat capitalism and government incompetence. This time though, I would prefer to take my chances with a government bureaucracy, it’s a lot less like getting eaten by piranhas.

Doug Friesen
8/13/09