Kim Corson
03/24/2010, Neiafu, Vava'u, Tonga

Another view of the same cluster
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On Aspects of Reality

From an Article by Robert Lanza, M.D., entitled "Why Do We Exist? Experiments Hold the Answer."

* * *
"Later on, I thought of the secret denied me at dawn when I peeped through that little ice-crystal hole into the morning. "We are too content with our sense organs," Eiseley once said. "It's no longer enough to see as a man sees" even to the ends of the universe." Our radiotelescopes and supercolliders merely extend the perceptions of our mind. We see the finished work only. We don't see how we are part of the whole, save for a space of perhaps five seconds on some glorious winter morning when all the senses are one.

"We scientists have looked at the world for so long that we no longer challenge its reality. Here is the Universe: our sense organs perceive atoms and galaxies to some 14 billion light-years, although we can't see with the eye of reason, that the world is for us merely a bundle of sensations unified by laws which exist in our understanding. We can't see the laws that uphold the world; and that if they be removed, the trees and the mountains, indeed the whole Universe, would collapse to nothing.

"According to biocentrism, time is the key. Physicists find that almost all models for reality from Newton's laws through Einstein's field equations, have no need for time.

[Not true, some equations of both are time defined but it is because they made them so.]

Time is a biocentric fabrication.

[Time is our arbitrary measuring stick for motion. It is our invention, to be sure and not intrinsic to reality.]

"To understand this, consider a movie of an archery tournament. If the projector stopped on a single frame, you'd know the position of the arrow with great accuracy - its 20 feet just above the grandstand. But you've lost all information about its momentum. It's going nowhere - its velocity is no longer known. This is the fuzziness described by the uncertainty principle: sharpness in one parameter causes blurriness in the other.

"Experiments show that such uncertainty is built into the fabric of reality. This only makes sense from a biocentric perspective: Time is the inner form of animal sense that animates events -- the still frames of the spatial world.

[Events are animated in and of themselves or by us. Time is what we use to measure animation.]

The mind animates the world like the motor of a projector, weaving spatial states into the "current" of life. It's happening to you right now. Your eyes can't see through the cranium; everything you perceive -- even this page-- is being reconstructed inside your head.

"At each moment we're at the edge of a paradox described by the Greek philosopher Zeno. Since an object can't occupy two places simultaneously, he contended an arrow is only at one place during any given instant of its flight. To be in one place, however, is to be at rest. The arrow must therefore be at rest at every instant of its flight, and motion is impossible.

[This last sentence is not true, given the way we use time to measure motion. Because we use time to freeze an animated arrow does not mean the arrow is at rest in fact.]

But is this really a paradox? Or rather, is it proof that time [motion] isn't a feature of the outer, spatial world, but is rather a conception of thought?

[The latter.]

"Experiments confirm that Zeno was right. Scientists proved what in the world of quantum physics is equivalent to demonstrating that a watched pot doesn't boil. This behavior -- the "quantum Zeno effect" -- turns out to be a function of observation. "It seems," said Peter Coveney, "that the act of looking at an atom prevents it from changing." Theoretically, by the tenets of the Zeno effect, if a nuclear bomb were watched intently enough, it wouldn't explode, that is, if you could keep checking its atoms every million trillionth of a second.

[If the act of looking at an atom prevents it from changing it is only because it has our consciousness focused upon it and, at another level, it is our consciousness that sustains and supports physical reality. The atom could change if we refined our consciousness to allow it to within broader parameters of what is reality. It is a limitation of our consciousness that creates this effect, not of reality or an uncertainty principle of reality.]

"Bizarre? It's hard to believe the Zeno effect is real. The problem lies not in the experiments, but in our way of thinking, in our failure to accept the evidence. While it's true Zeno's paradox can be "explained" through the application of sophisticated mathematical concepts, mathematics is just a way to quantify phenomena and shouldn't be considered a replacement for it. The Zeno effect is a fact.

[I do not think it is a fact. Also, mathematics is not just a way to quantify phenomena. Set up and used as a model, it can also reveal and predict phenomena.]

The uncertainty principle is a fact.

[I do think so, at least not an intrinsic fact of reality. The phenomenon is created by our collective consciousness being held in a steady state.]

Biocentrism is the only humanly comprehensible way to explain them (quantum phenomena are only 'weird' in the context of the existing paradigm).

[True enough, I believe]

"Time is the glue that holds the world together.

[Nonsense. Time is only our measuring stick to make sense of and measure motion when and where it exists. Our collective consciousness of underlying reality is the glue that holds reality together.]

Without rules to relate one frame (the "past") with the next frame (the 'present') there could be no motion -- indeed, life couldn't exist.

[Again, this is backward. Reality animates itself or we animate it. We use time to stop animation and study it. Animation is the reality.]

When asked if he believed in God, Einstein replied "There must be something behind the energy." Indeed, that something is the mind. At the most irreducible level, space and time are defined by electromagnetic energy (E=mc2 tells us that all matter is made up of energy).

[Very true.]

The electric component generates a magnetic field, leapfrogging through space (at the speed of light) via a mathematical relationship that infuses temporal information into the bottom of the world.

"This isn't, you understand, an illusion. Spinoza's genius sensed this back in the 17th century. To be conscious of space and time, he explained, is to transcend space and time.

[Agreed. Principle transcends reality. It is an aspect of our consciousness which also transcends reality in the sense that it is not of reality, but above it and separate and collectively controling.]

The mind transcends space and time in the sense that they are for it and it's not in them. This is why, in real experiments with entangled particles, it appears that things are instantaneously connected behind the physical world as if there's no space or time between them. This is also why, in yet other experiments, particles seem to spring into existence only when they're observed. However, this is -- the critics will charge -- on the one hand, old news; on the other, headline-simplified."

* * *

Comments [0]

Kim Corson
03/23/2010, Neiafu, Vava'u, Tonga

A leaf configuration drifts by
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Flack from the Right: Misrepresentations and Lies for the Status Quo, an Exchange

Mr. X gets entirely too much wrong here to be proceeding in good faith. He should not be listened to. I have flatly proved him false on most below.

"1. The differential in what we spend as a percentage of GDP is largely related to the fact that healthcare is actually more accessible in the US versus other nations."

The differential by which we spend more on health care is due to its excessively high prices and therefore more limited quantities of health insurance, drugs and medical services we receive in the face of relatively inelastic demands. That is what it means here to have oligopolistic pricing and output regarding health insurance, drugs and medical services. Economics 101. In fact, insurance, drugs and medical treatment are less available to the population in the US than elsewhere for that reason and profits in those areas are larger than they should be. You have it precisely backwards and do not understand the economics involved.

2. "70% of people in England buy private insurance and won't have anything to do with the Gov't run care."

This is pure nonsense and a bald face lie. The correct figure on private insurance in the UK is 8% and it is as a supplement. Here is the data from http://en.wikipedia.org/wiki/Health_insurance "The UK's National Health Service (NHS) is a publicly funded healthcare system that provides coverage to everyone normally resident in the UK. It is not strictly an insurance system because (a) there are no premiums collected, (b) costs are not charged at the patient level and (c) costs are not pre-paid from a pool. However, it does achieve the main aim of insurance which is to spread financial risk arising from ill-health. The costs of running the NHS (est. £104 billion in 2007-8) are met directly from general taxation. The NHS provides the majority of health care in the UK. Private health care has continued parallel to the NHS, paid for largely by private insurance, but it is used by less than 8% of the population, and generally as a top-up to NHS services."

3. "65% of all of Medicare costs are currently administrative."

This is patently absurd. Not even close. The Congressional Budget Office (CBO) has found that administrative costs under the public Medicare plan are less than 2 percent of expenditures, compared with approximately 11 percent of spending by private plans. The CBO study suggests that even in the context of basic insurance reforms, such as guaranteed issue and renewability, private plans' administrative costs are higher than the administrative costs of public insurance.

4. "Restriction of medical schools is a ridiculous point. Medical School enrollment is at an all time low."

This is flatly incorrect and false on both counts. The AMA has in fact restricted new and expanded medical schools and it has done so for years. That is why we have so few doctors per 1000 people compared to other developed nations, as I have shown. It is not coincidental. So few doctors per 1000 people and their high salaries is one reason medical costs are so high in the U.S., given our "free market" health care system.

Now the AMA, under considerable pressure, is allowing expanded enrollment and the current AMA figures in the US for medical school enrollment are:


2002 ......2004.......2005......2006......2007.......2008.......2009.......year
69,930...70,313.....71,028...72,000....73,115....74,524.....77,722.... students

And this is with (a) the recession and (b) the lack of general tuition and other costs help available. It is not at all a question of not being able to interest students in becoming doctors because of doctors' salaries. That enrollment is falling is a bald faced lie. Enrollment is monotonically increasing.

5. "Most Americans do realize the system is problematic. Yet the same polls show that the vast majority of Americans are happy with THEIR coverage."

This is also wrong. Americans are not at all happy with their insurance coverage. The practices recounted in Moore's SICKO are far too prevalent. Americans are irate about it. Indeed, 95% do not believe our health care system Mr. X likes so is working or workable. Americans are happy with their medical treatment if and when they can get it, but so are people of other nations happy with their own medical treatment on average and they don't have to hassle with insurance companies like we do.

6. "The 45 million without insurance is just a myth.' Many are illegal immigrants or COBRA transfers."

FALSE. The 45 million uninsured Americans includes eight million children and only US citizens, not illegal immigrants. COBRA transfers are included as insured parties and so are also not counted. Most of those without insurance now, feel they cannot afford it except for the super wealthy who self insure.

7. "Oligopolistic pricing could largely be addressed by allowing insurance companies to do business across state lines."

Except for Kaiser Permanente which is repeatedly blocked as a threat, most insurance companies can and do cross state lines without a problem. All you have to do is qualify in the states where you want to do business. Most insurers do that without difficulty. Two health care insurers that operate nationally account for 1/3 of all health insurance written. Oligopoly pricing is the problem. We are being gouged right and left and at all levels.

8. "Preventive medicine does surely makes logical sense from the stand point of your personal health. However every study shows it has no long term impact on reducing cost. On the contrary it actually marginally increases the cost."

This is false. According to the CBO, researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness. However, experts have also concluded that a large fraction of preventive care adds to spending but should be deemed "cost-effective," meaning that it provides clinical benefits that justify those added costs: Roughly 60 percent of the preventive services examined in the review cited above have additional costs that many in the health care community consider to be reasonable relative to their clinical benefits.

9. "Drug companies engaged in fraud. This is even more ridiculous for a # of reasons. But one example is this. The current regulations the FDA places on a medications expiration date is far more strict in the USA then elsewhere in the world. And the companies are even more strict in some cases due to the litigious society we live in."

Pfizer has been fined three times in large sums by the US governement in the last ten years for activities amounting to fraud. They just keep doing it. The major drug companies cheat on the rules all the time. They buy off companies that manufacture generic drugs. They slander products other than their own ("out of date;" "weak;" "dangerous"). They engage in serious oligopolistic pricing and much unfair competition. A big crackdown is needed. But it is for their other stuff that drug companies have paid a total of $1.6 billion since 2001 to settle lawsuits brought by whistle-blowers that accused them of marketing fraud and overbilling Medicare and Medicaid, according to a report released recently. More big fines are coming. The drug companies just pay the fines and go on cheating. They are inveterate cheaters because the fines are too low. See, http://www.uow.edu.au/~bmartin/dissent/documents/health/pharmfraud.html

10. "The Dr Compensation is the best one of all. A typical Dr nets about $30.00 in an office visit before taxes. As it stands now, a NYC bus driver makes more money in salary and benefits then the average general practitioner."

Your comment is absurd and outrageously misleading. Here are the actual data:

"The American Medical Association' annual physician income survey shows that, an average, doctors are making close to $200,000 a year." Too, here is average compensation by primary specialties.

Total compensation of Physicians by Specialty; 2002

Anesthesiology $306,964
Surgery, general $255,438
Obstetrics/Gynecology $233,061
Internal medicine $155,530
Pediatrics/Adolescent medicine $152,690
Psychiatry $163,144
Family Practice $150,267

Much, much falsehood and many lies here by Mr X.

Comments [0]

Kimball Corson
03/18/2010, Neiafu, Vava'u, Tonga

And a final view of our pedal ship.
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Rightwing Republicanism as Religion

For too many, being a Republican has become an emotional, qua religious experience in the sense that facts don't matter, only right wing Republican positions do. Facts are displaced by "beliefs" and true facts which conflict with such "beliefs" are quickly rationalized or deflected away, or more often just ignored. This is a painful process for reasonable and logical people to watch, regardless of their political persuasion.

The mental "belief" process applied by these people is the same as that adopted by religionists regarding the anti or supernatural aspects of their various religious beliefs systems, e.g., Islam: Mohammed physically ascended to Heaven on his white horse from the Temple wall or Christianity: Jesus physically ascended to Heaven after his resurrection from being dead. People who believe these things actually happened simply will not listen to any suggestion that they are physically impossible or may be the result of hallucinations. Again, facts in these cases simply do not matter. Emotional "beliefs" that are too largely independent of the facts, control. This is what it means to be a "religious nut" in politics these days.

Beliefs too much supplant facts in both religion and right wing Republican politics. Fair minded inquiry and sensible analysis are foreclosed or much worse, simply feigned for the sake of appearing sensible. Feigning sensibility and earnest inquiry on the facts is simply a temporary recloseting of religionist sentiment for the sake of appearing sensible among "normal" people. In fact, one could well argue that what separates a "belief" from a fact is that "beliefs" are held onto regardless, virtually as a matter of faith, whereas factual inquiry looks fair and open mindedly to the circumstances, what occurs and what is being done, said and will most likely occur. Factual inquiry is amenable to open discourse and the free exchange of ideas. This is not the case regarding belief systems.

Regrettably, the right wing religionist "nuts" have now become too much the dominate public voice of the Republican Party. The thinking, moderate Republicans have become a silenced minority driven into a corner by threats that the campaign contributions to them from the wealthy -- who are profiting immensely from the status quo --- and the support from the RNC will be withheld if they speak out in opposition to or vote against the new religion. It is a regrettable state of affairs. Too, the Tea Bagger crowd mentality infuses too much here. Crowds are not a good vehicle for thinking and careful analysis; they are a means of disseminating misinformation by repetition and rallying people to believe in it.

For example, those who are "believers" and love Fox News, should read the book Lies, Liars and the Lies They Tell by Al Franken and his Harvard research staff. However, because right wing Republicanism is too much a religion, I am sure nothing said here or in that book will matter to the religious "nuts" in the slightest, as it would to sensible, neutral-minded people not of that belief system. Hard and unequivocal proof of repeated bald faced sequential lying by O'Reilly and many others on the Network will not matter to them because they are working at an emotional, religious level grounded in "beliefs" and not at a neutral brain level dealing with facts. Again, the true facts don't matter. They are to be lied past. Only right wing Republican "beliefs" are important. So it goes with rightwing nuts.

My observation is that serious, systematic lying across a broad range of issues was never the problem it is now in American politics until the fundamentalistic religionists emerged from the closet at the initial aegis of Jerry Falwell and then became a dominate part of the Republican party. Many such religionists have long held the view that lying is a means that is justified by the ends where it is God's work that is being done, and a great deal of lying is now implicitly being justified under that silent rationale because, as I explain, right wing Republicanism now has developed the characteristics of a religious belief system.

It is truly a lamentable state of affairs for sensible, informed discourse of which we have had too little lately and for the fate of American politics. This is a truly a bad time to be living in America compared to other periods of American history, in very large part for this reason and what it has caused to happen with American political discourse and government. Nietzsche would, I suppose, view this broad state of affairs as the final death throes of religion in America, as a sort of dummied down, reactionary and fundamentalistic backlash to an ill-understood postmodernism

Comments [1]

Kimball Corson
03/18/2010, Neiafu, Vava'u, Tonga

Another view of the flower vessel.
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The Health Care Reform Agenda (Revised Version)

While many have strong feelings for or against the initial health care reform legislation, few Americans understand the economic issues involved. Popularization of the economics of health care has been neglected. This is one reason reform has been so difficult.

1. Why health care reform is necessary.

Before passage of the New Health Care bill, we were the only developed nation without a national health care program. Yet, we spend 16% of GDP on health care. That is almost 1/6 of our entire economy, as measured by GDP. It is as large as our housing sector. Yet little is written here or elsewhere for the public to understand the issues and economics involved with the sector. Housing, on the other hand, gets lots of ink.

However, according to recent polls, only 5% of Americans believe that the health care system we had was workable or working. This can in part be seen from the Congressional Budget Office's (CBO) projections for the old health care system. In the absence of the changes in federal law, that is, the heath care reform just passed:

1. Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.

2. Federal spending on Medicare (net of beneficiaries' premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.

Between 2000 and 2005, insurance industry administrative overhead - including both administrative expenses and industry profits - increased 12% per year. Health care premiums have skyrocketed, increasing over 87% over the past six years. What is going on in health care is America's dirty little secret. Those raking in the money and their friends don't want the word to get out or any reform to pass -- just say "no" has been their position. The problem is they have over reached and the present situation is obviously not a viable prospect and most seem to understand that intuitively, except those wanting to maintain the status quo and the profits it affords.

2. The health care problems we face.

The problem is optimal effective reform is not possible until people understand specifically how the markets in this area are in fact distorting resource allocations, at the most basic level, theory aside as I have learned. Consequently, most people's proposals for reform or change are (1) non-existent or (2) incoherently all over the place. There is little understanding or agreement. Some even urge the old system that 95% of Americans correctly recognize is malfunctioning!

Among the public and politicians there has been too little practical understanding of the problems in the markets involved and even less useful thinking about how to fix them by what has to be government intervention to produce the kinds of results obtained in other areas of the economy by free markets that work, i.e., good resource allocations and cost effective pricing.

The reason the Republicans lost here is (1) they are apologists for and sometimes enablers of excessively high prices in the relevant markets; (2) many don't understand the problems of markets in this area. (3) they made no systematic and sensible alternative proposal for reform, especially reform that included protecting those not receiving adequate medical care, and (4) by just saying "no," to any reform proposal they cast their lot with the old health care system that 95% of Americans recognize was not working. This was not the best way to go.

The problems the old health care system faces are clear, although few wanted to admit them and even fewer understand them as an interactive package. They are:

1. Excessive oligopolistic pricing of health care and malpractice insurance by insurance companies ineffectively regulated by the states, but which are exempt from the antitrust laws and which are relative few in number because they have eliminated their competitors (There have been over 400 health care mergers in the last 10 years and just two companies dominate a full third of the national market.);

2. Some patients being treated for free creating a cross subsidization in their favor on hospital charges and doctors fees and against those who are insured or pay for their own treatment;

3. Excessive prices for doctors' services (a) due to AMA restricting number of doctors by restricting number and size of medical schools*, and (b) due to excessive charges for malpractice insurance for reasons cited in (1) above, causing (c) too much expensive, defensive medicine being practiced by doctors which is not cost effective, and (d) due also to an excessive paperwork load on doctors that cuts into to their treatment time and compensation;

4. Lack of systemic incentives to practice preventive medicine;

5. Drug companies engaged in fraud (e.g., Pfizer, repeatedly), oligopolistic over-pricing and other misdeeds and abuses; and

6. Inadequate economies of scale in the treatment of patients, including underutilized facilities, due to so many being excluded from the medical care treatment system because of (1) and (3) above.

3. The health care reforms at hand.

The question has been how and where to have the government intervene, but it is now with a new wrinkle: as a matter of public social policy, it has been determined that "everyone" is to be covered by health insurance for medical care. No one is to be left uncared for. This is a quantum leap because, under the old system, over 45 million Americans "including over 8 million children "lack health insurance and 80% of the uninsured are in working families. A good part of that omission however was due to the failings of the markets involved.

In other words, we have two proposals at hand, (1) intervene to correct the markets' misallocations in the area, and (2) try to expand and extend medical care to everyone by extending insurance coverage for all. The two goals are very much related and interactive, given the problems in the relevant markets.

The needs of the system to emulate free markets are simple but not that easy to implement because of seriously entrenched economic interests that profit from the status quo. That is part of the reason issues have been confused and opposition has been so strong to the changes coming.

In a nutshell, the reforms needed are:

1. Insurance premiums for both health care and malpractice have to drop to more competitive levels, which will be easier if more people are insured, malpractice claims are reduced, doctors cut back on practicing defensive medicine and the government aggressively applies the antitrust laws and laws of unfair competition;

2. Doctors salaries need to drop, medical schools be expanded, more tuition help needs to be available in exchange for service time, and doctors need to stop practicing so much defensive medicine and be more cost effective; Medicare compensations are already starting to be dropped by 20% to force the issue because it will take time for the number of doctors to change;

3. Malpractice suits need to be screened when they are filed to eliminate "strike suits" and frivolous or bogus claims so they are not an expensive and silly burden on the system;

4. People need to be able to buy their drugs worldwide at the cheapest prices; the antitrust laws and laws of unfair competition need to be more aggressively enforce against the pharmaceutical companies, with the term of patent protection individually tailored to actual R&D cost amortization and a reasonable profit for each drug and the drug companies need to get their oligopolistic prices down;

5. Outlaw drug companies from fraud, unfair competitive practices such as blocking or buying off generic drugs that would otherwise be available to consumers at much reduced cost and finally also allow cooperative drug purchases by groups at lower negotiated prices;

6. Have health care policies encourage wellness check-ups and promote preventive medicine similar to Kaiser Permanente because it is cheaper in the long run; and

7. Everyone needs to be insured and pay as much of their own way as they can, with taxes levied to make up the difference for those less fortunate financially, which taxes will be less than they otherwise would be because (a) premiums will be lower because (b) doctors will charge less, (c) hospital charges will be lower (no more cross subsidization), (d) the cost of medicines will be less, and (d) much greater economies of scale will be possible with more people insured.

This is a tall order, given where we are, but where we are is not a position in which we can remain. The system is interactive and if properly handled can be made to work, but expect continued fighting from those getting unfair oligopolistic profits from the status quo. They very much want to hang on to their ill gotten gains. Too, for the apologists out there who want us to stay put, it is important for them to know what is wrong with the system for they are apologizing. Regretably, there are many lies and much deceit coming from the opposition. However, this is the basic, not so hidden agenda for health care reform at this point, looking off into the future.
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footnote *
Doctors per 1000 population

3.40 per 1000 people Germany
3.40 per 1000 people Austria
3.37 per 1000 people France
3.90 per 1000 people Belgium
3.82 per 1000 people Israel
3.60 per 1000 people Switzerland
3.20 per 1000 people Spain
4.20 per 1000 people Italy
4.50 per 1000 people Russia
4.40 per 1000 people Greece
vs.
2.30 per 1,000 people USA, on par here with
2.25 per 1000 people Slovenia

In "free" markets, it is simply supply and demand: fewer doctors => higher doctors' salaries that in turn means higher medical bills => higher insurance premiums => fewer people can then afford health insurance => fewer people insured => more people uninsured and without medical care.

Canada and the United Kingdom have 2.1 and 2.2 per 1000 respectively, for similar reasons, but both have national health care systems that cover everything for everybody (instead of the seriously malfunctioning "free" markets we have in the U.S.A.) and that are much, much more efficient at delivering medical treatment than ours because of massively less bureaucracy, overhead, red tape, hassle and paperwork.

If we wanted similar results to what they have, we could adopt either of their systems or some hybrid of the two. The core problem is entrenched financial interests have been making a ton of money off our "system" as it is and they don't want any change. That is much more the problem than what changes should we seek. Because of the opposition to change, Obama has chosen the path of least resistance, politically, which is probably not optimal and will be much more time consuming to fully implement. America has a mean-spirited greed problem and not just in the medical area.

See Michael Moore's highly anecdotal movie SICKO outlines our problems by examples but don't believe quite everything you see and hear. He describes more how things are than how to fix them. Much of that is shocking
______

Also rejected as an article without footnotes by Seeking Alpha.

Comments [3]

Kimball Corson
03/18/2010, Neiafu, Vava'u, Tonga

Just drifting by after a rain, a boat with pedal sails.
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The Economics of Health Care (Revised Version)

While many have strong feelings for or against the Health Care bill, few understand the economic issues involved. The economics of health care has been developing for a while, but is not at all well understood by too many. If it were, people could better understand the problems the old health care system was having and why it was so difficult to reform it. Before passage of the New Health Care bill, we were the only developed nation without a national health care program. Yet, we spend 16% of GDP on health care. That is almost 1/6 of our entire economy, as measured by GDP. It is as large as our housing sector. Too, according to recent polls, only 5% of Americans believe that the health care system we had was workable or working.

This can be seen from the Congressional Budget Office's (CBO) projections for the old health care system. In the absence of the changes in federal law, that is, the heath care reform just passed:

1. Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.

2. Federal spending on Medicare (net of beneficiaries' premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.

We would have been pushed to health care reform at some point anyway. But first we need to understand why the earlier health care system did not work properly.

To start with, free markets do not function correctly to allocate resources optimally in the face of excessive uncertainty. Nobel Laureate Kenneth Arrow has shown us that and why in regard to health care. There is now a considerable economic literature on point. However, it is not well understood widely. Absent free markets that function properly, it is clear that government has to be involved to assist in achieving results similar to what we might get from free markets if they could work in this area, that is, cost effective and efficiently provided medical care.

In a typical market, say for widgets, the product and the price are known well in advance. Quality, reliability, warranties and who you might buy from are also well known in advance, if you are interested. Too, unlike health care, widgets are a low dollar item and involve only a single market set, perhaps with some quality and minor price differences. None of this is usually true for the markets involved with health care.

The reason markets do not work correctly for health care is two-fold (1) the nature and varieties of uncertainty involved are too great for free markets to handle, and (2) doctors feel morally obligated to treat whoever comes to them, regardless of whether they can pay. Consider first, the varieties of uncertainty involved in purchasing medical care on free and open markets:

1. You don't know when you are going to need it.
2. You don't know what type of medical care you will need.
3. You don't know what treatment will thought to be required.
4. You don't know who (what specialist) will provide it.
5. You don't know whether the proposed treatment will be effective or
whether further treatment will be required.
6. You don't know what the medical care will cost.
7. You do not know where you will be when you need it.

Such serious price and product uncertainty to both buyers and sellers are enough to cause any market to malfunction, but add in the remaining elements of uncertainty and free markets have little chance, especially given the possible magnitude of the expenditure by a person, which can rival buying a house. Resources cannot be allocated efficiently at a micro or personal level, given these uncertainties and the ethics of doctors favoring treatment. Just making it to an emergency room usually assures treatment regardless of capacity to pay. All of these factors together destroy the free market mechanism for efficiently allocating the relevant resources in this area at minimal cost. That doctors practice, or try to practice, medicine to a uniform, single high standard of care further compounds this problem.

On the second major point, as a result of doctors' refusal to not treat, we have the ensuing situation of non-paying patients being subsidized by those who can pay or are insured. This cross subsidization in large measure accounts for hospital bills to patients and insurers being so high. Call it socialism of a sort, if you will, but it exists under the old health care system before reform. Excessive compensation to doctors, who run many hospitals economically as though they were doctors' cooperatives, accounts in further part for high treatment costs. Too, there is economic literature addressing this analysis. The AMA has worked dutifully for years to restrict the number and expansion of medical schools and the supply of doctors. State licensing requirements have additionally involved the same ends.

Then, into this mix, we throw health insurance companies seeking to make a good profit and the problems become compounded. Insurers would like to insure only the young and healthy, screening aggressively for pre-existing illnesses and denying coverage to the elderly, even if they are healthy. That is how their greatest profits are earned. Now, however, the recession has added a new and deadly twist that works against the insurers.

Many of the young and healthy could not afford health insurance without the reform and so they have been dropping it, leaving a higher percentage of those sick or ill among the insured. Insurance companies now feel compelled to raise their rates and are doing so by as much in some instances as 35% to 50%, but then even more young and healthy drop their coverage and the situation is spiraling out of control. Some insurers came to believe some form of national health insurance was necessary. Nearly everyone seems to agree that the old system was not workable and could not survive. The CBO provides data showing as much.

While individuals face excessive uncertainty and so do free markets in trying to address individual health care needs, the situation is different at a super macro level if the federal government is involved and does its job well. If everyone is included in coverage, then the law of large numbers kicks in very aggressively and, with some time and experience, we can develop very good estimates of the number of different treatment types and profiles the public will require. We can also estimate, and within limits, control aggregate costs and by experience and regulation based on that experience, come to moderate medical costs quite well. In our old system, experts agree that we pay more and get less of the care truly needed than in most other nations. Doctors themselves control quality or the standard of care, for the most part.

To some extent, of course, large insurance companies have the advantage of the law of large numbers as well, at least when the market for health insurance is stable, which it has not been for a while now, for reasons I have explained and for other reasons as well. Insurers' profits are under fire, just like doctors' salaries. But adjustments in both these compensations are in substantial measure required if we are going to provide cost effective and efficient health care under virtually system. Medicare payments are in the process of being reduced by 20% and there is the expectation that some insurance companies might well follow suit with more and lower caps, as a means of controlling their costs.

Expect much shouting from doctors, however. But they have taken advantage of their oligopolistic pricing, afforded by the AMA, for too long and it is time to get serious. If the problem is medical school costs are too high, more such schools, a bit of competition between them and substantial tuition aid with a service requirement taken back, is a good means of handing the adjustment required in doctors' salaries. That is what is done in many developed nations. While most don't, many doctors do earn between $500,000 and $3 million a year and think of their practices as businesses to earn a profit. This viewpoint and these compensation levels are inconsistent with cost effective treatment provided in an efficient manner. Even the AMA now recognizes the need for health care reform.

How to have national health care was the question. Watching the law being made, as the old saw has it, was too much like watching sausage being manufactured -- not a pleasant sight, nor a principled one. What the health care bill attempts to do, in every way possible, is to get everyone under the tent of health insurance coverage initially or as quickly as possible, and then sort out many of the smaller details based on present knowledge and future experience as we go. This is not necessarily an optimal solution, economically, but given that acceptability was a key issue, the legislation alters existing institutional structures as little as possible, according to some. Getting everyone covered is no small feat, but that prospect now appears likely under our new national health care system, and for the first time we become like other developed nations.

Many opposed the health care bill and predict that, with its implementation, there will be dire results, but no one seriously proposed a well thought out alternative and there was a developing consensus, even among insurers that something needed to be done. Points to keep in mind here are that (1) virtually no one thinks that the old health care system was working or workable, and (2) we needed to do better than spend 16% of our GDP on a system that was broken, did not work well except at the very top end and did not help everyone.

The CBO -- about the most neutral and accurate group of estimators around -- has just released its report saying that the $940 billion, ten year health care bill - that is, $94 billion a year, compared to our $663 annual defense budget, not counting almost an additional 100 billion of discretionary war spending -- would actually cut the federal deficit by $138 billion over that ten year period.

That is based on a 3.8% Medicare tax on unearned income and a drop in Medicare compensation levels by almost 20% which is already being implemented. Some 32 million Americans, earlier without health care coverage, are now to be covered. The legislation assures that 95 percent of all Americans have health insurance coverage. The bill also assures the solvency of the Medicare program for the elderly for about the same length of time and assists Medicare patients to obtain the medicines they need.

The 3.8% Medicare tax on unearned income only applies to people with incomes greater than $200,000 for individuals or $250,000 for couples and the bill scales back an excise tax on high-end insurance plans that was in the Senate version. That tax on what are called Cadillac insurance plans will raise $32 billion over 10 years, much less than the $149 billion earlier planned with a higher tax rate.

In time, we will see what we can be made of the new reform system. Clearly, we had to move beyond what we had at some point soon because, given the economics of health care, what we had could not have survived much longer. With 16% of the GPD involved, the implications for markets currently trying to address heath care are substantial.
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Posted on SeekingAlpha.com and rejected as originally written as being too political; revised and reposted as here but rejected again. Apparently, there is political hostility on the board toward the general topic because it cannot be a lack of relevance to the economy.

Comments [0]

Kimball Corson
03/17/2010, Neiafu, Vava'u, Tonga

I found these leaves interesting, but, hey, that's me.
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So We're All in Debt; What Did You Expect from Our Tax Code?

American government seems to have had great reluctance to intervene in markets to assure fair play and a lack of abuse in and to those markets. This is unfortunate, as we have seen. However, the federal government has had no reluctance at all to interfere in markets to misallocate resources and induce debt, as we have also seen. Government is getting it precisely backwards here. Let me explain.

Considering what we have just gone through and looking back, a whole bunch of things are becoming clear. First, for years the government induced overinvestment in housing and therefore the housing related sectors by creating and supporting the secondary mortgage loan market and by inducing excessive home loan borrowing by interest tax deductions, deductions of closing cost costs and now a tax credit for first time home buyers. Seems we can't get enough of housing, although we are now drowning in an oversupply of it. Government messed up here.

But that wasn't enough. At the urging of Paul Krugman, our Nobel Laureate, Paul McCulley of Pimco and others, Greenspan thought it would be great to further crank the housing market up by excessively easing credit and pushing down interest rates, while at the same time not regulating mortgage brokers or Wall Street and removing, with Larry Summer's help, such little regulation as there was, so as to create a housing bubble. Government messed up here again and did it on top on its earlier housing sector mess-up, one reason the results were so disasterous.

With eased credit and lowered interest rates, homeowners piled on the debt and often used second mortgages and home equity loans to do it. The tax break from borrowing here was a real incentive to pile on the debt. Lax regulations at all levels made it all the easier. Again government messed up here.

The truth is government has been messing up for a long time now and one disastrous result of its policies and the Tax Code is American is loaded up to its eyeballs in debt. Consider the broader picture.

Corporations and other companies are allowed under our Tax Code to write off as a cost interest paid on their debt. Corporations can obtain capital basically in one of three ways: they can borrow it; they can sell stock or they can use retained earnings. The Tax Code encourages borrowing because of the interest cost deduction.

Jason Furman, then with the National Economic Council, estimated a few years ago that because of the "debt bias" built into the Tax Code, it was as much as 42% cheaper to borrow in order to raise capital as it was to float new equity. Not surprisingly, corporate and business American has piled on the debt. They are overleveraged. Again, governement has messed up, and, again, it has done so by interfering in markets to alter resource allocations, not to police them.

The Tax Code has biased our nation toward debt, keeping the country in line with government's own propensity to take on too much debt. The net result is we are awash in debt on all sides. Government has messed up here, even on its own account, and it can barely manage its own debt.

It is interesting because high government and business debt levels are typically associated with either rapid growth where all available means of captial are used to finance what is often accelerating growth, or with balance sheets that are in serious trouble with waning income statements. We rarely see debt at such levels when we are in between those states. What we have now, obviously, is a seriously debt ridden economy that is badly struggling, no thanks to its federal government or to the Tax Code, which almost no one has bothered to mention in all this brouhaha, from this standpoint.

The mortgage loan interest rate deduction is a sacred cow. Even think about touching it and the NAR and real estate lobby go hysterical, claiming that droves of fine Americans will be totally cut off from homeownership forever. The problem is this just isn't so. Cross sectional studies of homeownership in other countries without the deduction, find comparable rates of ownership and more importantly they find that tax deductible interest simply inflates housing prices. Our government seems not to understand and it is misallocating resources.

Too, while the business deductibility of interest expense may lower a corporation's overall taxes, it likewise means the overall corporate tax rate needs to be higher to yield equivalent revenue, giving companies with debt an unfair advantage, at the same time financial resources are so misallocated. Here our government is not only messing up again, but it is largely clueless.

Too often in this country, business decisions are made, not solely based on the underlying economics involved, but on the U.S. Tax Code. At every instance where the decision is altered because of the Tax Code, we have a misallocation of resources due to the Tax Code. Each of you knows or senses how often that problem arises and therefore you know or sense how often resources are misallocated. One very major argument for a VAT tax instead of our income tax is to avoid much of this misallocations of economic resources. Washington does not really understand this either.

Another problem of debt in excessive quantities is that it generates financial instability and forecloses compensatory adjustments that are sometimes needed. We see this in households as well as at the federal level. Rienhart and Rogoff have written about this instability and the kinds of threats it poses for national governments. Again, on this score, it seems our government has messed up and is largely clueless.

But getting change, with our entrenched and bought off Congress, is quite difficult. A special residential panel in 2005 on tax reform recommended doing away with the business interest deduction. Of course, that went absolutely no where. The only noteworthy gain that comes to mind is the elimination in 1986 of deductible interest paid on credit cards. One small step forward decades ago.

While other countries have gone forward to eliminate or reduce interest deductibility, we remain largely stuck in the mud. Republicans are proposing next to nothing that is remedial and are opposing everything the Democratic administration proposes. The Democrats, for their part, seem to have trouble getting themselves comparably organized. This seems to leave a huge logjam in Washington where far too little that is needed is getting done.

The debt incentives of the Tax Code are just one more unremedied failing of our federal government, which does not seem to care or catch on here. Our representatives fail us.
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Posted on SeekingAlpha.com but not yet published as an article there (too soon).

Comments [0]

Kimball Corson
03/16/2010, Neiafu, Vava'u, Tonga

Two story houses are not typical in Tonga.
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So Why all the Angst Now on What Caused the Great Recession?

This seems like this is a good question to have answered before we run off and regulate Wall Street and hopefully the mortgage brokerage industry as well. Robert Shiller at Yale, an expert on housing, has written:

"Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either."

It is truly distressing that if you ask a simple question, 'what is the single most important factor in explaining why the recession occurred,' there is very little consistency in the answers given by economists, according to Shiller. NPR still doesn't recognize that there was even a bubble and collapse in housing prices. The Washington Post, too, has odd takes on the matter and so does the Wall Street Journal.

In fact, while Shiller himself has written a book explaining the causes of the recession, Paul Krugman has taken economists, himself included - or more correctly "economics"--to task for not understanding things well enough to see it coming. But he over generalizes. Many did see it coming and understood what was happening. Unfortunately, those people were not in power, were making too much money from it or did not have the bully pulpit and no one wanted to listen. The big money was flowing at the top just fine, thank you.

Before the Great Recession, Nouriel Roubini, Shiller and several others, myself included, predicted the housing crash and that it would take the economy down with it. While Brad DeLong of the University of California, and Paul Krugman, Nobel Laureate in economics, busied themselves throwing stones at the Chicago School, it was in fact a University of Chicago economist, Raghuram Rajan, at a 2005 conference held to honor Greenspan's tenure at the Fed, who presented a paper warning that the financial system was taking on potentially dangerous levels of risk and was faced the prospect of a collapse. He was mocked by those present, including Larry Summers, who all put patted him on the head and did say the poor fellow and his warnings were "misguided."

For his failure of foresight, Summers was promoted to the current President's Chief Economic Advisor, and Paul Krugman thereafter won a Nobel prize, after being so surprised by the recession and after earlier in fact recommending that what we needed was a "housing bubble" to get the economy moving again after the dot.com bust. I mean the boom-bust model was right under his nose.

Go figure.

A further irony was that the conference was to honor Greenspan, "a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control" as one economist described Greenspan's views and actions.

More irony here was that it was Larry Summers, then working in the Treasury, who did all he could to repeal and nullify regulation in the financial markets before the recession and crash. Later, however, it was Greenspan who was saying that he was in a state of "shocked disbelief," because "the whole intellectual edifice" had "collapsed" into recession. He and Krugman. Krugman wrote his sort of "mea culpa" piece for the New York Times, which really, in the last analysis, blamed it on the state of economics. This was just a diversionary cover-up that hoodwinked too many. Summers was smart enough to be quiet as a mouse.

So how was the recession predictable? Certainly not by devising a measure to gauge waning "animal spirits" and certainly not by understanding the nuanced disputes between the saltwater economists and the freshwater economists. It was predictable by knowing something about what was going on Wall Street and by understanding the housing market. That was what it took and that is where so many economists failed, including Krugman, Greenspan and Summers (who talks a mile a minute and runs over anyone who disagrees with him like a steamroller).

Krugman, in particular, should have known better for earlier having asked for and then, with Greenspan's cooperation at the Fed, having gotten a "housing bubble." Bubbles do burst. Moreover, the fact is, as many good economists understand, the real prices of houses, real rentals and real house construction costs have to, and for many years did, move together or there would be what amounts to arbitrage possibilities between those markets. Housing began to bubble up and real housing prices rise much faster and out of alignment with real rents and real construction costs starting soon after Krugman and a few others called for a "housing bubble" and Greenspan listened, starting just after the mid 2000s.

The Fed accommodated, by easing credit and dropping interest rates excessively and by rejection of calls for regulation of everything from mortgage brokers, to derivatives, to mortgage backed securities. Larry Summers, meanwhile worked hard to not only block new regulation but repeal what was in place. The net effect was the housing market boomed horrifically. Everyone and their brother were after the big upfront fees on mortgage loans, CDSs and other derivatives and on MBSs and no one cared about the consequences. It was grab the money and run, all facilitated and made possible by Greenspan, the Fed, Krugman, Summers and several others of like mind and disposition.

The systemic financial risk was obvious to anyone who was not an idiot. CDSs had no reserves or backing, CMOs were being overrated by the credit agencies after being pressured by the Houses and housing prices would obviously at some time have to drop, inasmuch as that is what happens to bubbles -- they burst. The prospects of danger were redoubled and made much worse by the fact that the housing and housing related sectors of the economy were, by artificial means, already hugely overinvested and bloated substantially beforehand because of long and persistent government interference in the housing market.

Such interference included the interest tax deduction on mortgage loans, closing cost deductions, and the development of the government backed secondary mortgage market, involving both Freddy Mac and Fanny Mae. All of these factors made for excessive investment in housing relative to other markets, before the engineered "housing bubble" even got going. More than 1/6 of all employment was in those markets and almost all new growth in employment soon came to be in the housing and housing related markets. Red flags were flying everywhere. Some were asleep at the wheel. Others had no clue. Yet others were rapidly engineering the foundations for the Great Recession.

That some economists missed what was going on shows either how little they knew or how badly they were not paying attention. Many, of course toil, away with models and teaching in academia, and don't have a clue about Wall Street or the housing and housing related markets. Others of considerable prominence just flatly missed entirely too much to now be seriously involved with US economic policy making or recommendations. Their credibility is compromised; only the problem is too many don't know it. It is all part of the great cover-up on who is to blame for the mess. There is to be no pointing of fingers or casting of aspersions, which is exactly what I am doing here as to economists.

Well, when the housing bubble burst, a major portion of the economy quickly collapsed and Wall Street's house of cards came tumbling down, which impacted and damaged other portions of the economy and the negative and adverse effects of falling aggregate demand and rising unemloyment spiraled throughout the economic system to give us the Great Recession. First subprime, then prime and finally other mortgage loans categories tanked and the financial Houses could not made good on their CDSs, MBSs and CDOs as housing went underwater, credit markets froze and the house of cards collapsed in panic.

Is this all too hard to figure out, or is the latest feigned ignorance or "confusion" about what caused the Great Recession simply a part of the grand cover-up, so the public does not learn the names of those at fault and what they did? I leave that one to the readers.
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Posted on seekingalpha.com and published as an article there. Copyrights for all such articles belong to seekingalpha.com and not the author. Articles are distributed to other publishers for further distribution as well.

Comments [2]

Kimball Corson
03/09/2010, Neiafu, Vava'u. Tonga

From The Huffington Post, we get this:

"For those rich enough to have debated between buying both an island and a yacht, the good news is the need to choose may no longer be necessary.

At the Abu Dhabi Yacht Show last week, design plans were unveiled for a so-called "moving island" yacht called the WHY 58x38. Price tag: $160 million.

The boat's specifications are impressive - at 190 feet long, guest areas reach 36,000 square feet. The three floors have space for 12 guests and 20 crew members, and the boat features a 426-feet long promenade, a spa, a library, a 'beach,' an 82-meter swimming pool, and a helipad.

The ship is a collaboration between Monaco-based yacht brand Wally and Parisian fashion empire Hermès, hence the "W" and "H" of the WHY. The boat is designed to be environmentally friendly, using far less fuel that other yachts of a similar size, in part thanks to wide use of solar panels on the ship.

On the promotional website for the ship, Wally's president Luca Bassani Antivari writes 'Everybody's dream is to live on an island, in complete freedom, without constraint, with the independence that only self-sufficiency can provide.'

Pierre-Alexis Dumas, creative director, of Hermes also manages to avoid hyperbole, writing, 'From the invention of the compass to block capitals, from the rudder to the first steps on the moon, man discovers and pursues his dreams.'"
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Those white strips in pairs are deck or lawn chairs, folded back. Now this is a bit bigger than my boat. Notice the lack of sails. I wonder what its power plant is like and what kind of speed it can make. Can it carry enough fuel to cross the Pacific from the Galapagoes to the Marquesas -- the longest, direct stretch of open ocean? I would have to check the website and I haven't done that yet. To my practiced eye, the boat looks a tad beamy.

photograph not mine.
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On Many Americans Being Scientifically Illiterate and Daft

"An Agence France-Press report estimates that some 40 percent of the United States believe in creationism, which holds that the Earth was created by God only several thousand years ago. Students are flocking to Liberty University [a religious college] to study this literal interpretation of the Bible, much to the dismay of scientists." from HuffPo

How can we progress with this foolishness? How can we have an informed electorate? How can the complex issues of the day be understood by such simpletons? How can they vote sensibly? How limited is their capacity to read and assimilate information? What can our future be with these people?
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Comments [6]

Kimball Corson
02/25/2010, Near Neiafu, Vava'u, Tonga

Getting my windvane steering repaired from the damage to it by the tsunami in American Samoa. We rebuilt it at the same time, from my spare parts kit, installing new key pieces and new bearings. The metal work was done by a resident Australian here who cannot believe that a country as strong and powerful as our does have a national health care system. I explained to him that our defense budget for the year is about $663 billion, but the Senate Health Care bill would cost us $87 billion a year. He was flabbergasted.

Note, I still have not put my dodger and bimini back on since the cyclone.

Also, Arizonans should note the hailing port written on my stern: "Lake Pleasant, AZ," a location to carry around the world!

Here, a "local" is diving for a dropped part which he easily found. My keel was in about 9 feet of water further out and I draw six feet. He was in about 4.5 feet of water.
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America Needs to Raise Taxes on the Rich and Redistribute Income

Les Leopold, author of the book, The Looting of America, has written an interesting article. His core argument is we need to more heavily tax the rich to equalize the income distribution, a point I have been arguing for on Seeking Alpha for some time, generating considerable controversy, but not much by way of coherent and articulate responses.

As Les Leopold contends:

"We are told that we're already living well beyond our means -- that entitlement programs like Medicare and Social Security will bankrupt us. Forget the solar panels, the smaller classes and the new jobs -- we've got to cut back on government programs. . ."

This is the favored pitch of the rich and wealthy. The middle and lower classes should tighten their belts as the time is here to shrink the entitlement and benefits programs and thereby make government smaller. This is the big pitch the wealthy and their lobbyists sing as a chorus.

But currently, at their end, the inside song is much different. As Les puts it:

"Meanwhile, the super-rich are still having a ball. In his annual shareholder letter, mega-investor Warren Buffett wrote, 'We've put a lot of money to work during the chaos of the last two years. When it's raining gold, reach for a bucket, not a thimble.' And Forbes Magazine adds, 'Many plutocrats did just that. Indeed, last year's wealth wasteland has become a billionaire bonanza. Most of the richest people on the planet have seen their fortunes soar in the past year.'"

So what is going on here? The answer in a nutshell is massive income and wealth is being transferred from the middle and lower classes to the wealthy, while government benefit bones are being tossed to the rest of us with the admonition that they will soon be cut off. But lets put the situation in perspective. As Les writes:

"In the 1950s the marginal tax rate on those earning more than $3 million a year (in today's dollars) was 91 percent. By 1990 it was 28 percent. The IRS says that the top 400 richest tax filers actually paid a rate of just 16 percent in 2007 (the latest numbers we have). Yep, the richest earners -- people who took in an average of $343 million each -- probably paid a lower rate than you did. Something to consider as you sign your 2009 return. By the way, those 400 people who do so well on tax day have a combined net worth of nearly $1.37 trillion. (According to Forbes Magazine their wealth has gone up on average by more than 16 percent over the past year -- the worst economic year since the Great Depression during which 29 million Americans are without work or forced into part-time jobs.)"

The obvious resolution to this problem, in light of these numbers and the increasingly bad distribution of income and wealth, is to raise taxes on the rich and lower them on the poor. As matters stand, 22% of all income goes to the lower 59% and 6% goes just to the top 1/10 of 1% and it is estimated that more than 80% of all wealth is concentrated in the top 10% or so. Too, we are just about to all but do entirely away with the federal estate tax, another crime in the making.

So why are we so hesitant about taxing the super-rich?

First, they have a huge and effective mega group of highly paid lobbyists who would try to block such efforts and, following Bush, contend that even more tax cuts for the rich are needed, to have the economy recover well, of course. Beyond that they have a set of intellectual arguments with which to defend themselves against higher taxes. They are, succinctly put:

1. We've earned it.

The concept of "earned" it here has obviously shifted. This is especially true in light of the low tax rates for the wealthy, the bailout of the big banks, AIG, GM and others, too largely at taxpayer expense, the tax breaks for the wealthy and the million and one ways the rich and wealthy, with their lobbyists, have figured out for looting government. The successful urge most government functions or activities to be outsourced, to their own companies of course and they turn around and charge the government outrageous prices that the GAO cannot stop talking and writing about.

Government subsidies to farmers, often for not growing anything, is another example of how they have "earned it." In 2009, the Wall Street wizards collected about $150 billion in bonuses - a reward for crashing our economy no doubt, instead of losing their jobs, as they should have. Yeah, they earned it alright, like hell. Or we have Warren Buffett buying options for Goldman Sachs preferred stock big time just before the rest of us learned that Uncle Sam was going to bail out AIG so it could make good on all Goldman's CDSs and have the company do well. Yeah, Warren earned it alright, the new fashioned way: by looting government, directly or indirectly.

As Les writes, "You'd think we'd be crying out for a windfall profits tax to reclaim our money. But no." I suggest that we are being sucker punched here. Just like America was sucker punched by Carl Rove into voting against their economic interests big time and in favor of sillier things like no abortions, down with gays, family values, etc. Great distractions to the looting of America at their expense which has been going on.

2. Redistribution of Income is Un-American.

I catch this one all the time. I am a communist. I'm a Marxist. I don't know what I am talking about. I have never earned big money (not true). I don't understand. The rich will quit work if their taxes go up. Raising their taxes is unfair because they have earned it. But the interesting things is no one opposing me ever addresses the facts or arguments I raise, especially this one which I have repeated several times:

The US economy is being damaged by the maldistribution of income because the rich have a lower average propensity to consume goods and services and a higher average propensity to buy financial assets, especially on secondary markets. Therefore, aggregate demand and GDP is relatively depressed and financial asset prices are relatively inflated. This is injurious to the national economy because GDP is lowered permanently relative to where it would have been with a more optimal distribution of income.

After WWII, our economy boomed with a marginal tax rate of 92% on the rich. At the time, we had one of the fairest income distributions in the world. Our economy did real well. Not anymore. Today the gap between rich and poor is wider than at any time in U.S. history. A key sign of the times is this: in 1970, the compensation ratio of the top 100 CEOs compared to the average worker was 45 to one. In 2008 it was 1,071 to one. What did those CEOs do to be compensated so much more highly: give us the Great Recession with their shenanigans? Are we daft or what?

Silence is all I ever hear regarding the economic arguments. Instead, I am just called a Marxist and told the government should not take the money of the rich, because they have earned it.

Yet the fact is, while the naysayers say no to income redistribution, income redistribution is going on right under their very noses and they have no problem with that. I guess it depends on whose ox is getting gored. As Les explains:

"Just think of all the scams corporations and the rich are running: ever-rising credit card fees, predatory mortgages, usurious interest rates, check cashing ripoffs, monopoly pricing. They turn income into lower taxed capital gains, find offshore tax shelters, collect subsidies for their runaway shops. And then they netted the big one: Wall Street bailouts. Post-bailout, these too-big-to fail companies are getting even bigger. It all adds up to a major redistribution plan -- from the many to the few."

3. If we tax the wealthy, we'll hinder investment and kill jobs.

This is nonsense. The rich have worked much more honestly and harder under higher taxes in the past than they are now, acting to loot America and get something for nothing or too little. As Warren Buffett has said repeatedly, if you tax the rich more, from all he has seen and knows, they will simply work harder.

Being at or near the top is not just about compensation as any idiot knows. Too many other factors, prerogatives and social aspects attend such positions. Indeed, studies show it is relative income that matters most: how is your compensation relative to your nominal peers? But this foolish goes on and we daft believe that if the rich are taxed more they will quit work. Indeed, look what has happened after we cut taxes on the rich under the Bush administration. As Les explains it:

" When we cut taxes on the super-rich, we got a different kind of investment boom than the politicians and economists had promised. The wealthy literally ran out of investments in factories, equipment and even services. So they flocked to financial investments -- which were supposedly safer and more profitable anyway. The super-rich laid their money down in the Wall Street casino, and helped puff up bubble after bubble. Profits in the financial sector soared. In 1960, the sector accounted for about 15 per cent of all corporate profits. By 2008 (before the crash, that is), it was almost 40 percent. The financial sector crashed as the direct result of tax cuts for the super-rich and Wall Street deregulation."

4. Government's too big already. We should be cutting the public sector, not raising taxes to expand it.

This is disingenuous. What is in fact being said is we want entitlements and benefits cut, but never the defense budget. That is one of the key ways we can we sell government overpriced products and services and get rich. No one rich ever mentions cutting the defense budget of $663 billion this year.
No, they attack the senate Health Care bill which puts everyone under coverage for a relatively cheap $87 billion a year and which the CBO estimates will actually reduce the deficit in time.

Again, are we daft or what? We believe these foolish arguments, just like Rove persuaded the American public apple pie, Mom and family values were more important than their own economic interests. America was induced to actually vote against its own economic interest. Not too smart, I say.
Government has largely expanded in response to the efforts of the well-to-do and their lobbyists to add government outsourced and in house programs and enlarge certain budgets so as to enable them to better loot our government in more and different ways.

We need to understand that. It has been going on since Eisenhower warned of us the military and industrial complex and yet, somehow, we seem too daft to see or understand it. In that sense, we are getting just what we deserve. But we should understand better and fair better too, I believe.

America needs to wake up, understand well what is going on and demand in a loud and clear voice that the taxes on the rich be raised to sensible historical levels and that income in America must be more equally and fairly distributed, again, so the economy and middle class can revive.
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Posted on seekingalpha.com and published as an article there. Copyrights for all such articles belong to seekingalpha.com and not the author. Articles are distributed to other publishers for further distribution as well.

Comments [0]

Kimball Corson
02/20/2010, Neiafu, Vava'u, Tonga

About two feet plus across.
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The Problem of Reverse Moral Hazard from Government Inaction

Comments to a recent article brought to mind an underlying conflict among many about how to view a recession or depression. One view is to argue that an unrestrained down turn, performs a useful, necessary and inevitable function because it (1) cuts back on excesses, (2) prunes the "dead wood," out of the economy, putting lesser companies and people out of work, and (3) corrects imbalances in and between markets. I call this the "let's have the worst recession at all costs" viewpoint, or for short, the moral retribution approach.

The problem of reverse moral hazard

Others, while agreeing that a down turn can do these things, argue (1) the costs are too high from that approach and (2) too many companies are destroyed and people, thrown out of work, who essentially did nothing wrong, except get caught up in the national economic tail spin. The analogy is a good, well-valued stock that goes down with the rest of the market. I call the second problem here for those injured the one of reverse moral hazard. Companies and employment are lost in great quantities by people who did nothing seriously wrong and injured no one. That is the core problem with the retribution approach and the reason governments should act and intervene.

Fortunately, good public policy, while certainly not perfect, seeks to avoid reverse moral hazard problem and is more neutral, not seeking to injure and being less imbued with a sense of retribution. It provides general stimulus programs for interim help -- to provided time for hopefully successful readjustment by companies and employees in less precarious economic positions, recognizing that the worst companies and employees are going to be - what is the word - "pruned" away by the down turn. Obviously, this is a more effective and less costly approach to do what often paniced markets are trying to do with an indiscriminate sledge hammer.

Understand well that, although I am a Chicagoan, markets often do badly, overact and much of the time get things wrong, from the vantage of hindsight. Markets are only truly efficient at getting the net results of what people mistakenly or correctly think. In a panic, you get panic market results.

The special case of too big to fail

Too big to fail is an exception which raises the problem of moral hazard. Here direct aid to specific companies is provided, over and above general stimulus aid. In such situations, managements may stay or go, depending what government decides. In the case of GM, they went; in the case of Goldman Sachs, they stayed. The assumption behind too big to fail, which is correct, is that if those companies went under, the consequences for others would be too broadly dire and the costs to them, too high. The reverse moral hazard, if you will.

Big banks, for example, got direct help: the benefit of Fed MBS purchases, TARP I and II, super cheap loans from the Fed and the ability to park their reserves with the Fed and earn interest on them. This, along with the abandonment of the M2M rule, affords them even more time to readjust, to use profits to repair their balance sheets and emerge whole.

One difficulty, of course, is direct aid is very expense and the burden this time around was far too much on present and future taxpayers, creating again the problem of reverse moral hazard. There is a net income and wealth transfer from taxpayers to big banks, their officers and their shareholders that cannot be morally justified, especially in light of the banks economic misbehavior and their moral hazard problem. It did not have to be this way, however.

Looking back, with the advantage of hindsight, the officers of the big banks should have been replaced, TARP I and II funds should have been provided, upon that condition, in exchange for equivalent stock back, thereby diluting existing shareholders, and the TARP funds provided should have been in a sufficient amount to just allow the big banks to survive and then clean up their balance sheets from subsequent profits. Also, acceptance of serious regulations established as positive law, leaving no discretion with regulators to be "influenced," should also have been a precondition for help, but unfortunately no one thought that far ahead. Sonnets are not written while the ship is sinking.

The problem with letting the big banks fail

Consider, realistically, what would have been the consequences for most good businesses if we had taken the market orientated, moral retribution approach regarding just the big banks and let them fail almost all at once, as Lehman brothers did, even if we had had a general stimulus program in place. In other words, reject the idea that they were too big to fail and let them sink or swim like other companies. Too be sure, we would be rid of Blankfien and his ilk doing God's work, but what would have been (1) the impact on the economy and (2) what would have occurred in the banking industry?

The economy would clearly have gone into a serious tail spin that probably would have reached depression proportions. Many, many good businesses would have failed. Many more people would have become unemployed. A near term massive credit crunch and crash in the financial markets would have been much greater, longer, larger in scope and worse than any we have ever experienced. The stock market would have collapsed, destroying a lot of good "value." Banks would have been shoved through FDIC insolvency proceedings and smaller, cleaned up banks would have emerged -- after the officers and share and bond holders had been largely scraped off -- to be sold to the public, but could anyone afford to buy them?

This outcome over time would have been more optimal for the banking system alone, but at what price to everyone else? The reverse moral hazard problem, again.

The reverse moral hazard conclusion

Recessions and depressions do not simply "prune the dead branches." Instead too many good businesses and good workers have their economic existences destroyed as well. Too many are rendered unemployed or thrown out of business who in fact were doing well or at least well enough. The moral retribution approach overlooks far too much and allows too many to be injured. There is simply no good reason why so many more people who don't deserve it should have their economic lives destroyed. The moral retribution argument of keep government out of it and let the recession or depression happen is unthinkingly fraught with serious reverse moral hazard problems. It is too short sighted and simply wrong.

That we have not handled the banking situation optimally or the stimulus program optimally is not an argument in favor of moral retribution. It is an argument that government action should have done much better.
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Kimball Corson
02/20/2010, Neiafu, Vava'u, Tonga

Sort of an orgy.
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Why Our Present Economy Is Not Sustainable

Most of us are not going to like to read what I write here, but, after careful consideration, I believe it is the truth, whether we like it or not. However, I doubt that we will be able to face up to the problem and fix it. Succinctly put, the problem is this--

Within the U.S and some other nations, the levels of consumption required to sustain our existing economic and productive arrangements are inconsistent with our present distribution of income.

We cannot maintain our expected, post recovery social and economic arrangements with the present distribution of income in the US. Given our trade deficit and increasing productivity in manufacturing, and in light of that maldistribution, aggregate demand will continue to be deficient, even if consumers dropped their savings rate to zero and had minimal debt to service.

With only 21% or 22% of all income going to 59% of households, and the rest to the top 41%, with the very top 1/10 of 1% getting 6% of all income, the prospect for aggregate demand, because of the income class differentials in the propensity to consume, is simply too low to generate full employment or use up our existing excess manufacturing capacity.

Savvy economists who have thought about this and studied the numbers realize this is true but are not willing to raise or discuss it, given the sources of their or their institutions grant support. It is a secret that needs to be put on the table.

As one economist, who will remain nameless, has put it:

"Social and economic stability, therefore, depend upon redistribution for which there is no overt legal framework or political consensus."

In an effort to try for sustainability, ever greater government consumption expenditure or transfer payments to the poor are needed and occurring to partially make up for the deficit in consumption by the middle and lower income classes. This increases our federal deficit unsustainably and induces increases in the money supply to finance that deficit.

At the same time, government is using all available means to redistribute income from government revenues to the higher income households, while enriching governmental participants in the process along the way. The system may be thought of as one for looting the government and the middle and lower income households by the well to do or rich. None of it is sustainable in the longer term.

Rerouting so much income to the higher income households causes the average propensity to consume to drop, aggregate demand to drop and increases the demand for financial investments. Secondary financial markets become overvalued relative to the economy. Booms are fueled to induce greater private consumption, but they invariably result in messy busts. The Fed goes along with the need for the moment, not realizing what is going on at the macro level. The stock market largely stays up because there is so much wealth and so many wealthy supporting it.

But the core proposition is that the economic system as we know it is not sustainable, with the present resulting maldistribution of income and what is going on that will worsen it and damage the government, already very badly in debt. Things simply cannot stay this way. The economic system will eventually collapse and indeed, I submit, it is already starting to so.

Most people do not have a clue about what is going on. All they know is the US government is a mess and it has let them down relative to their expectations and the economy is not recovering too well, while the wealthy seem to be doing fine and getting wealthier. They see the results, but not the mechanism. I call it "the looting of America by the rich." There are limits to how far it can go on before government, the economy or both collapse or fail badly.

Support programs for bad economic times, such as unemployment benefits, and some entitlement programs are the countervailing band-aids being used to literally maintain social stability at the price of ever increasing deficits. Without them, the economic system would sink altogether and social unrest would quickly move toward revolution. While funds for these purposes are borrowed or money printed to maintain this end game, the shoveling of revenue and income toward the wealthy by government continues largely unabated, with government employees taking their cut along the way, in one form or another. Witness the revolving door between government employment and employment in the industrial complex that lives off Washington.

Production and consumption in America are too badly out of whack. Government is shoveling funds as fast as it can in both directions, but the effort is not sustainable. Funds for the bottom end are too largely borrowed. Government cannot handle the ensuing debt load and the longer run prospect of inflation. On the other hand, not to provide those funds, such as unemployment benefits, is to court social disaster. The looting of the middle and lower classes and of the government by the wealthy likewise continues unabated.

The on-going maldistribution of income must stop if we are to have any chance to rebalance and save the economic system, the less fortunate and our government. However, too many seem absolutely clueless or too badly caught up in ideology over the matter or worse, unmitigated greed, to the extent they do realize what is going on. The situation developing longer term is therefore increasingly hopeless, in my view.
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Kimball Corson
02/20/2010, Niafu, Vava'u, Tonga

A major pod of these showed up near to my boat. They were too engaging not to study.
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Medical Tourism Is Taking A Hold Big Time

Medical tourism (also called medical travel, health tourism or global healthcare), is what it is called: going abroad for elective or major surgery or medical treatment.

A forecast by Deloitte Consulting published in August 2008 projected that medical tourism originating in the US could jump by a factor of ten over the... next decade. The report estimated that a 1.5 million Americans would seek treatment or surgery outside the US in 2008. The growth by a factor of ten would have the figure at 15 million by 2018. The growth in medical tourism has the potential to cost US health care providers billions of dollars in lost revenue. The industry is already at $40 billion a year now.

A Univ. of Delaware publication writes, "The cost of surgery in India, Thailand or South Africa can be one-tenth of what it is in the United States or Western Europe, and sometimes even less. A heart-valve replacement that would cost $200,000 or more in the US, for example, goes for $10,000 in India--and that includes round-trip airfare and a brief vacation package. Similarly, a metal-free dental bridge worth $5,500 in the US costs $500 in India, a knee replacement in Thailand with six days of physical therapy costs about one-fifth of what it would in the States, and Lasik eye surgery worth $3,700 in the US is available in many other countries for only $730. Cosmetic surgery savings are even greater: A full facelift that would cost $20,000 in the US runs about $1,250 in South Africa." Other figures from Forbes magazine in 2007: bone marrow transplant, $400,000 in U.S.; $30,000 in India. Liver transplant, $500,000 in U.S., $40,000 in India.

Hospitals and doctors doing the surgery abroad are often as good or better than typically found in the U.S. Many doctors are US trained or actually Americans. Many hospitals are newer and have the latest equipment.

Isn't competition wonderful?
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Comments [2]

Kimball Corson
02/17/2010, Neiafu, Vava'u, Tonga

Abandoned dock of closed-down Paradise Hotel after big restaurant fire.
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New Forecasting Index Predicts Economic and Stock Market Decline

Economists have long sought an effective financial indicator that gives us an accurate forecast on where the economy is going. Results have been mixed. Examples here are plentiful. One is to look at the term structure of interest rates and gauge the spread between short and long term bond yields.

Another is to look at stock prices and yield spreads as in the Conference Board's Index of Leading Economic Indicators. Bloomberg also has its Financial Conditions Index and others have similar indices. Many prefer to look at the spread between riskier yields and safer yields to estimate where the economy is headed.

The more technically minded have looked at measures of financial stress as a leading economic indicator, such as the difference between actual and predicted yields from various interest rate models or, more simply, the LIBOR-OIS spread.

However, rarely are these measures very successful when applied retroactively against actual historical data, especially in predicting amounts of future change. That is the rub.

Recently, however, a team of economists -- Jan Hatzius, from Goldman Sachs, Peter Hooper, from Deutsche Bank, Rick Mishkin, from Columbia, Kermit Schoenholtz from New York University and Mark Watson, from Princeton - have worked hard to develop a financial conditions index which does just that and it does it pretty well, too. The work behind it and the index itself have recently been presented with explanations to top Fed officials who are said to have listened with considerable interest.

To develop their financial conditions index, which I have mentioned here on Seeking Alpha before in passing, they have developed an integrated formulation of some 44 separate time series of data, including, predictably enough, many of those identified above.

The goal was to develop not only a good gauge to show us where we stand in regard to our financial sector, but also one which tells us in which direction the economy is headed. They have done so by a major effort to isolate the relevant data from the general underlying business cycle, with the goal being to predict real GDP growth from the financial index they have developed.

Applied against historical data, the formulation does better in some periods than others. But that is more in predicting actual GDP than it is in gauging the direction of GDP movement relative to the present, where the index fairs much better and exceptionally well compared to most.

So what does the new index show us for the here and now? The results are not as encouraging as we would like. The indication is, as I have been arguing, that we are having a contraction in the financial sector that portends the possibility of a double dip recession at worst and a mild mid-recovery dip, at best. Chartists will undoubtedly notice the trend of lower highs since about 1992 or indeed, with some slippage, all the way back to 1970.

[Chart of the index cannot be reproduced here, but shows a marked, serious and recent drop.]

This result obtains, notwithstanding an expanding stock market, a steep yield curve and other favorable variables. But contrary indicators include declining M2 and M3, a falling monetary multiplier, a decline of issued and outstanding commercial paper and a decline in the issuance of mortgage backed securities. All signs of contraction in the latter category.

Although we seem to be fine for now, this is a forward looking, predictive indicator. In part, it is based on the deviation of various financial indicators from what is predicted for those indicators from recent economic conditions. Some indicators have not improved much, in light of our recent GDP growth. That is a bad sign. Secondly, the index uses not only flow variables, but also underlying stock variables and many of the latter are relatively stagnant, too.

It is clear that we are not out of the woods, by any means and likely will be headed toward worse times.
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Comments [2]

Kimball Corson
02/17/2010, Neiafu, Vava'u, Tonga

Tool shed guard pig. A real assault porker. Bacon protection.
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The Financial Condition of Big Banks

Study of the consolidated and dummied up bank balance sheets for all large American banks in the US, not seasonally adjusted, shows several things. See here, H.8, Page 11 as of March 5, 2010. These data are published by the Board of Governors of the Federal Reserve System. They are an embarrassment to the government and to the basic principles of bookkeeping.

As note 19 explains, prior to July 1, 2009, the components of assets and liabilities do not sum to the totals of assets and liabilities by the amounts of data in items or entries not previously published, until now. In fact, they still don't. Therefore, I have used the non-seasonally adjusted data and have done the totals myself with the new included data. What a pain.

Imagine, double entry bookkeeping that fails the double entry requirement for the totals of assets and liabilities. But as we shall see, this problem is the least of it. The big banks, it turns out, are using a loss or write down figure on booked loans and MBS of only about 1.3% of face value. Greater disingenuousness is hard to find. Leave it to the bankers.

Looking at the reconstructed balance sheets indicated, several things can be observed or deduced. First, since the end of December 2009, bank credit has fallen slightly and all of the following figures are also down slightly, continuing a trend that started in about mid 2009.

Loans
Commercial and Industrial Loans
Real Estate Loans
Home Equity Loans
Commercial Real Estate Loans
Consumer Loans,
Credit Card Loans, and
Mortgage Back Securities ("MBS")

On the other hand, Treasuries held is slightly up and trading operations are substantially up. We are not talking about marked changes in most cases here, but slow and incremental ones consistently moving in the same trend direction since about mid 2009. This is a part of the monetary contraction I have written about on Seeking Alpha.

When MBS are combined with the foregoing listed categories of loans, they make up about 55.0 % of big banks' total assets, aside from interbank loans, trading operations, cash on hand, derivative valuations and the like which are categorized differently on the consolidated balance sheets for the big banks as published by the Fed.

The real shocker to emerge here is that, when we pull out assets such as the interbank loans and the others I have noted above which are categorized differently, banks' own allowance for loan losses and bad debt comes to only 1.32% of the remaining assets, mostly their total loan and MBS portfolios and deposits. More realistic current guesstimates range from 25% to 50% on those portfolios. Games are definitely being played here under the M2M rule. 1.32% is laughable.

Using the big banks 1.32% loan and MBS loss figure, total big bank assets come to $20,369 billion and total liabilities come to $16,652 billion. Shareholders, whose equity appears nowhere on these balance sheets, seem still have their heads above water. But now let us change the assumptions regarding loan and MBS losses to more likely figures.

Creating the new totals of assets and liabilities, as above, with all the omitted data now included and using more realistic percentage estimates of losses on the loans and MBS portfolios, we get the following results:

The difference between Assets minus Liabilities in billions then comes to --

$1,043 billion, with about 13.7% of total assets reduced, with a 25% write down on the loan and MBS portfolios,
($235) billion, with about 19.4% of total assets reduced, with a 35% write down on the loan and MBS portfolios,
($651) billion, with about 22.0% of total assets reduced, with a 40% write down on the loan and MBS portfolios, and
($1781) billion, with about 27.5% of total assets reduced, with a 50% write down on the loan and MBS portfolios.
Some observations

1. Big banks loss estimates are a joke.

2. Big banks have vamped up other parts of their balance sheets, such as trading operations, to reduce the impact of their losses on their balance sheets,

3. Some big banks seem not to know what their "true" or "shadow" balance sheets might look like, except perhaps for some rough figures on a napkin.

4. Shareholder equity is not so impaired as some of us thought.

5. Shareholder equity has been material aided by the following Fed and government policies:
----massive purchases by the Fed of MBS and impaired RE loans
----a zero interest rate policy to support stock and other equity prices
----first time home owner purchase credits
----TARP I and II
----Abandonment of the M2M rule

6. With 700 banks on the FDIC's unofficial troubled bank list, the big banks are well positioned to take over much territory and many customers of medium and smaller banks in the future with the net effect being the creation of a stronger oligopoly in banking with higher market share concentration in the big banks.

7. The obvious game plan here of the Fed and government is to keep suspension of the M2M rule in place and allow banks to use their earnings especially from trading to whittle down their loan and MBS losses over time,

8. Banks are fighting proposed federal bank regulations that would impair or compromise their ability to trade in a riskier fashion for profits that can be earned more quickly than by traditional banking operations.
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Kimball Corson
02/17/2010, Neiafu, Vava'u, Tonga

Checking out a new place.
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Will Banks and their Bad Debt Recover?

It is unclear what federal policy is regarding the bad debt on banks' books. Aside from shuffling some of it from certain banks to the Federal Reserve banks, not much has been done, except to abandon that effort.

As I have written recently, one approach would be to have bankruptcy-like bank reorganizations presumably in the form of FDIC proceedings to
scrape the bad debt off, along with the stockholders and managements of the banks, and sell the reorganized and smaller banks back to the public. No moral hazard attends this solution. Yet if deeds and actions could speak, it seems this alternative is not acceptable to our government, probably because of the politics of it -banks want their cake and to eat it too.

Many other options entail much moral hazard and they are certainly not on the table. They would too much rile the public, which is growing sensitive to being gouged.

My preferred solution is to have the Fed buy the bad debt of banks at face value with newly created money and take equivalent stock back for the difference between face value and market value, diluting existing shareholders. The new money, when deposited in the banking system, could then be mopped up using a higher reserve requirement. Some bad debt could be sold at market and some held. The government might actually make some money here if bank stock later appreciated. The real losers under this option are the shareholders.

However, the government and the Fed have not shown any recent interest in any option like this one either, probably again for political reasons. Those associated with banks may not be harmed unless they are solely depositors who can recover.

The Fed's and government's approach seems most benign, not wanting to injury anyone associated with banks, except perhaps the taxpayers in passing. This interpretation is consistent with the observed political lay of the land. It also comports with the reasons for setting aside the mark to market rule.

So what is federal policy here? My take, based on what is being done or not done is that the unexpressed policy has two components. The first is to let the housing market reach what we can agree is the bottom and have it settle out. The other component is to then assess is what I will call the "Latin America default" model, to gauge whether it could then be a workable solution in that situation. I explain.

Consistent with the thoughts under lying suspension of the market to market rule, the implicit view here is that the housing market is out of whack and does not provide fair valuations for the debt on banks' books. Once that market stabilizes and the economy recovers, we can then gauge the situation and determine whether the Latin American default model is workable and if so, use it. What is that model? Let me explain.

The relevant history in a nutshell is as follows:

Beginning in the late 1960s and through most of the 1970s, many Latin American countries, notably Brazil, Argentina and Mexico, borrowed huge sums of money from international creditors and U.S banks for industrialization, especially for infrastructure programs. These countries had rapidly growing economies at the time and the banks were happy to continue to provide loans.

Between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4 percent. Latin America quadrupled its external debt from $75 billion in 1975 to more than $315 billion in 1983, or about 50 percent of local GDP.

Then the world economy went into recession in the late 1970s and early 1980s with oil prices skyrocketing, and the debtor Latin American countries found themselves found themselves in a real liquidity crunch. At first, the oil exporting nations financed some of the Latin American debt interest, but as interest rates rose, the Latin American countries could not repay their debt when much of it came due and they defaulted.

U.S. banks, which held much such debt, were basically rendered insolvent over night. The question was what to do. The answer was essentially nothing -- just to sit on the situation. By later in the 1980s, many Latin American countries had recovered and were experiencing strong economic growth and much development. Under pressure to do so, they initiated debt management, repayment and rescheduling programs. The net effect was essentially to make good on enough of the Latin American debt held by US banks to bring their insolvency down to manageable levels which could be eliminated over time from profits.

It seems as though the Fed and government have adopted the Latin American default model for the current insolvency crisis of banks. But the question is, is that reasonable? I suggest it is not.

Defaulting countries in a recession differ markedly from defaulting home buyers who have already gone through foreclosure or repossession, especially in states with anti-deficiency laws. As the economies pick up in both situations, the public debt of foreign countries can be repaid and rescheduled, but not the debt of defaulted home buyers who have long since left their homes. This difference is enormous.

Too, while it is reasonable to expect an entire economy to recover to previous or better levels, it is patently absurd to expect the housing market in the US to recover to its former bubbled up condition, with such high and unsustainable prices and attending mortgage levels. For these reasons, I submit the Latin American default model is not a good federal policy for the U.S.

That leaves us only waiting for the housing market to level and bottom out to decide what we should do about the insolvency problem with our banks. There is no silver bullet here. A perpetual stall mode will not work. A recovery is not going to increase banks profits sufficiently to let them dig out over time by themselves. Not even mega trading profits will permit that. At some point, our government is going to be forced back into one of the options I have outlined here or earlier.

Stalling may help a bit and clarify the situation, but there is no way out along the present path, though many might wish that were so.
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