Another idea of Fareed’s  I support is to get realistic on the entitlements.  Regardless of many promises made decades ago, and many were more assumed that made, we simply cannot afford to give generous entitlements to voters who do not need them.  It seems inevitable that Social Security and Medicare will be means tested. Otherwise the share of these bills will drive the taxes on the young so high they will refuse to pay them.

What Social Security is doing with participants is little different than what Bernie Madoff did with his investors; he paid off current withdrawals with other people’s money. But the irresponsible management of Social Security does not hide the fact that these entitlements are killing us.  We must do what we need to do and take the medicine.

At the same time we should encourage the young to save more and younger to relieve further dependency by giving more generous deductions and credits for their own retirement savings. New accounts should be segregated and the Madoff type fraud should cease.

The retirement age must be raised, gradually but substantially, and the benefits must be means tested. It will be a bitter pill for many, but it is inevitable.

March 10, 2010

Reconciliation and the Senate Bill

By Marilyn M. Barnewall

excerpt:

Using reconciliation to ram through complicated, far-reaching legislation is an abuse of the budget process.  The writers of the Budget Act, and I am one, never intended for reconciliation’s expedited procedures to be used this way. These procedures were narrowly tailored for deficit reduction. They were never intended to be used to pass tax cuts, or to create new Federal regimes. Additionally, reconciliation measures must comply with Section 313 of the Budget Act, known as the Byrd Rule, which means that whatever health legislation is reported from the Finance Committee or legislation from any other Committee that is shoe-horned into reconciliation will sunset after five years. Additionally, numerous other non-budgetary provisions of any such legislation will have to be omitted under reconciliation. This is a very messy way to achieve a goal like health care reform, and one that will make crafting the legislation more difficult.

In the March 8^th Newsweek columnist Fareed Zakaria proposes three solutions to the debt crisis in “Defusing the Debt Bomb.”

His second proposal was to “end the massive , distorting subsidies for homeownership, healthcare, and agriculture.”  I agree with him.

Canada and Britain have no home mortgage deduction  and they have a higher rate of home ownership.  Our mortgage tax deduction was  the result of using the tax code for social tinkering, in this case to encourage home ownership. The home mortgage deduction is regressive, giving a bigger tax deduction to the wealthier with more expensive housing.

Health care is also distorted by the tax deduction. We are actually encouraged to have too much first dollar coverage. Obama tried to address this is in some limited way with the tax on Cadillac plans and this was one of the few parts of the bill I liked. Removing the tax preference for employer controlled coverage would be a critical step toward restoring control of health insurance to the individual and get the employer out of it completely.

Farm subsidies are just ridiculous relics from the Great Depression. Obama spoke of eliminating such programs, but he lacks the ability to sell it after the poor way he handled health care.

Elimination of these tax subsidies may have to be gradual.  Such radical shifts especially in this market would cause pain but the end objective should be to eliminate them.  According to Zakaria these deductions cost the government $250 billion a year. But the pain they have cost in distorting the markets has been even worse.

We should see a reduction in the tax rates to offset some of the lost benefits.  Congress is certainly capable of spending every dollar they can find a new way to raise, and we still need to insist on spending prudence even though that almost seems laughable today.  I wonder if the populists and tea baggers who are truly concerned with the deficits will be ready to restore some common sense to these subsidies. Will they remain committed even if it affects their pocketbooks?

My first wife, Renee, died of cancer in 1995. She was 42. I returned to the Winship Cancer Center in Atlanta to see what progress has been made in diagnosis and treatment.

Dr. Carl D’Orsi, head of radiology noted that we have a cure for cancer; early detection. Big advances are being made in imaging and diagnosis.  Dr. D’Orsi demonstrated a topographical mammogram.  This experimental machine can take a remarkably clear image of a tumor too small to be detected by a traditional mammogram . This same machine can also read a section more clearly that may look suspicious in a mammogram and see that there is no tumor, effectively avoiding unnecessary biopsies.

This machine will likely be able to increase the effectiveness of treatments by catching it earlier. But it is expensive, and it is experimental. Few places have them.   I saw other imaging systems that are also experimental and offer great hope.

I also saw huge laboratories involved in new techniques of delivering chemotherapies such as nanotech  targeting systems.

They have developed genetic testing that can  determine your odds of getting certain types of cancer. This aids the patient is selecting treatments that can dramatically reduce the chances of contracting cancer even in a high risk pool.  One of these tests costs $3,000.

Because of the costs of these treatments it is used selectively only for those whose risk profiles merits the extra expense. But the underlying point is that our health care system may be expensive because it is just so damn good. Anyone who has dealt with the fear and trauma of cancer know the value of these new developments; but we also must realize it is not cheap. Otherwise we risk never making these improvements available.

While the large insurance companies are commonly demonized, the reality is that their annual profits would not cover our health care bill for 48 hours.  The far more significant costs drivers are the quality of the technologies that deliver the best treatment systems in the world.

The cancer specialists at the Emory Winship Clinic were  troubled over the new government standards restricting mammograms for younger women. The committee establishing these new standards, which will likely be adapted by the insurance companies, did not have a single radiologist or oncologist on them.  Clearly these standards should rely more on individual case histories than simple age categories.

I would much rather trust my health and the health of my family to the professionals at the Winship Center and other advanced centers than to the government data crunching agencies that know nothing.  They may not be a death squad but such irresponsible regulations accomplish the same goal.

Perhaps it is not the end of the world if our health care system is expensive. Perhaps it is worth it.

Yesterday the House Foreign Affairs Committee yesterday declared that the mass deportations and massacres of Armenians by the Turks  during World War I ought to be called a genocide.  What is the purpose of this action?

I do not doubt that the Armenians were ruthlessly starved and slaughtered by the Turks. It was a black page in anyone’s history.  But is it the place of the American Congress to rectify every case of mass inhumanity in history? Is it worth straining our relations with the few Arab allies we have in the Middle East.

The Armenian genocide is real and should be taught….. in history classes.

The health care summit accomplished very little, nor did many expect it to. The ruling party has made the tragic mistake of breaking the trust of the electorate.  The Louisiana purchase, the Nelson Nebraska bribe, the failure to keep the promise of openness and transparency has destroyed the trust of the voters.

In business one can easily recover from a mistake, but it is far more difficult to recover from a betrayal of trust.

This betrayal is compounded by the arrogance that flows from the ruling party.  When the opposition is treated as devoid of intelligent thought or is treated as having questionable motives there is little room for coming together at any summit.

If the president seems to kill this disastrous health care bill a little more every time he has addressed it in the past why would he think that addressing it in a summit with the cameras rolling will now help it; especially if he has not changed his message or his style.  A note on leadership and power: If you have to state that you are the president you are stating that you have the power and control. If you have to state this, if it is not apparent and obvious from those around you, then you do not have the power nor the respect of the people in the room.

But this summit did succeed is highlighting two significant differences between the two parties. For one party health care is a right, and for the other it is a responsibility.  There is a distinct difference between a right such as free speech which requires no transfer of wealth to bestow and a right to an expensive service which must be paid for by another party.  The former is made available equally to all citizens; the latter requires the force of government to rob one citizen to give to another. The former empowers all citizens; the latter fosters dependency.

The second highlighted difference is the emphasis on the emotional verses the rational.  Trillion dollar policy should not hinge on emotionally laden anecdotes. “I’ve seen grown men cry,” noted Pelosi.  We have to have a clear understanding of the issue supported by accurate numbers.  Numbers are thrown around so loosely nobody believes them. The 46 million uninsured has now been dropped to 30 million and some estimates have at a much lower number.  And uninsured is not synonymous with  being without coverage.  Ask any doctor.

The numbers may not paint a complete picture but they cannot be ignored.  It is better to have an imperfect system that is sustainable that a better system that is not.

Finally there is the comprehensive trap; the belief that a big problem can only be approached with a big solution.  Big systemic solutions are fraught with unpredictable consequences, hidden costs, uncontrolled bureaucracies and endless expensive patchworks adjustments.  Most less complicated and ambitious reforms have far outstripped their cost estimates.

There are real health care problems and real health care solutions, but the big systemic solutions that focus on the fundamental philosophical differences between the two parties was doomed to fail from the beginning . No summit could change that.

The best cell phones are not nearly as clear as a land line. I hate talking on a cell phone. I have to ask people to repeat themselves due to poor connections, wind noise and the positioning of their mouth.

In my office I have no distracting noise and I can concentrate on the call and the other party.

While on the subject,  cell phones in the car are dangerous. Texting while driving is as dangerous as drunk driving.  In the time to enter a single character you can go 160 feet. But even talking, even hands free, is more distracting than you realize. It is not the same as listening to the radio. On the phone you are engaged in something other than driving and safety.

Constant attention to your Blackberry or iPhone while you are meeting or dining with others is just plain rude.

Another  phone thing that bugs me-  If you do not have time to talk, then don’t answer the phone.

Some people are engaged in business that requires one to be constantly in touch. But most just labor under the delusion that they are indispensible.  There is a lot to be said for calling from a quiet distraction free office.

Being in the middle of a record economic crisis presents a rare learning opportunity.  Several books are worthwhile for those seeking to understand what just happened.

Too Big to Fail by Andrew Ross Sorkin details the action of the Fed under Benanke and Treasury under Paulson during the crisis period between August and December.  While Geitner as head of the New York Fed was also featured the central player of this crisis was Hank Paulson.

Monumental decisions involving billions of dollars of assets were made in days, sometimes hours.  Both Paulson and Geitner had a sense that the market was due for a correction long before the crisis hit, but they probably did not see it coming as fast and as broad as it did. Bernanke noted that just as there are no atheists in foxholes there are no ideologues in economic crisis either. Neither Republicans or Democrats wanted to bail out Wall Street , but the crisis dictated actions that were against the grain of capitalists of both parties.

Paulson worked tirelessly to find appropriate merger partners for weak players like Merrill Lynch, Wachovia, and Lehman.  He almost had Barclays ready to buy Lehman when the British Financial Services Authority ( FSA) refused to approve the acquisition/merger because of the risk it brought to the British financial system.

Lehman was singular in the fact that it was not acquired or bailed out and thus had to go bankrupt.  Part of this was timing; Congress was just in no mood to bail out a Wall Street player.  Part of the reason was George Bush’s cousin who worked for Lehman and his brother Jeb’s association with the firm. Such close political relations probably worked against the interests of the firm.

In retrospect bailing our Lehman’s may have forestalled the panic that engulfed the rest of the system. With Bear Sterns gone and now Lehman’s gone, depositors wondered who was next and there began a run of the other banks like J.P Morgan and Morgan Stanley.

While Paulson’s association with Goldman was suspect the fact was he had to severe his tie and sell his stock ($485 million worth) in order to take his job at Treasury. Since his actions were so scrutinized he was careful to avoid even conversations that would indicate favoritism toward his old firm.

The most difficult decision was to bail out AIG whose credit default swaps acted as insurance against many of the cdo’s (collateralized debt obligations) that infected the financial markets. As the underlying assets plummeted in value AIG was downgraded and had to put up more capital that it could not provide.

Having to make such massive changes and decision in such short time meant that perfection was not obtainable. Barney Frank justifiably wanted some assurance that compensation to the executives would suffer from their misdeeds, but there simply was not enough time to rule of thousands of contracts during the time period that decisions had to be made.

Wall Street clearly engaged in risks it did not understand, but neither did the regulators such as Greenspan and his successor Bernanke. Complicated risk models gave the CEO’s delusional certainty, but eventually the party came crashing down for the same reason all bubbles burst;  lack of trust and confidence.

But Sorkin spends little space getting into the detail of the causes of the crash and suitably stays focused on the urgency and the actions required in response. 

For more information on the background that caused the crisis I recommend The Housing Boom and Bust by Thomas Sowell,  Financial Fiasco by Johan Norberg, most of all After the Fall: saving Capitalism from Wall Street - and Washington by Nicole Gelinas.

Sowell and Norberg focus more on the misguided Government fiscal and monetary policies that inflated the housing bubble, but Nicole Gelinas also analyzes which good regulations were unfortunately removed (and by who) and which bad ones were inappropriately applied.

A crisis of this nature required the perfect storm of many great errors to all focus their retribution at the same time. Unfortunately the media large engages in partisanship and demonization and few people will take the time to understand what happened and why.  It is complicated but engaging the problem reveals basic principles of sound policy that were violated as they were in previous bubbles.

History repeats itself but never the same way.

While I share the great concern about her destructive economic policies of this administration, I am getting a contrarian tick about the dollar and gold.

Every right wing talk show and business TV show is flooded with adds selling gold to consumers.  “The dollar decline is inevitable” the pitchmen warn, “Gold is the only safe money.”

When there is this much noise and whenever anything is inevitable it is time to be cautious.

I remember during the seventies when inflation seemed inevitable. The doomsday newsletters like Harry Brown and Howard Ruff had middle class investors buying gold coins, opening us accounts in Swiss banks and investing in Swiss Franc CDs.  Gold reached over 800 dollars an ounce.

And then the inevitable did not happen.

Volcker and Reagan wrestled inflation out of the system, the dollar soared and gold plummeted. Silver which ran as high as $50 an ounce came crashing down to under $5. The real reason for its rise and spectacular bubble was not the desire for sound money but the manipulations of the notorious Hunt brothers.

Middle class investors who bought into the fear and invested heavily in foreign currencies and gold were badly damaged.

It is challenging enough to get accurate information about domestic stocks. Understanding the factors affecting currency values and foreign markets are far beyond the scope of middle class investors (and most professional investors as well.)

Interest rates are near zero. They cannot go down any further, and given the deficit will likely go up.  When interest rates go up the costs of holding a non interest bearing asset like gold goes up, and this puts down ward pressure on the price of the metal.

While the dollar may seem vulnerable its value on world markets are relative to other currencies. As we see the Dubai fantasy teetering on the brink of bankruptcy and countries like Greece nearing default, the dollar may start looking better if for no other reason than other countries are looking worse.

The amount of uncertainty multiplies greatly when you leave our borders. If you are concerned and want some gold limit your exposure to 10% of  your assets and even dollar average that to avoid buying at a top. Consider gold stocks like Newmont or Goldcorp that you can sell easily and quickly if the market turns against you.

Do not put gold in your 401k or retirement account. The tax protection is better suited to income investments, even low yielding but secure Treasuries. If you think interest rates are going up (I do) avoid long term bonds of any nature. Bond face values drop as interest rate rise.

Successful investing requires controlling your emotions.  Anger and fear over this administration’s policies can easily influence your investment decisions.  Rarely does such emotional influence lead to better decisions.

Human beings can exist in one of only two modes: by controlling nature, or by controlling those who control nature. Those in the first category survive by acting in accordance with the facts of reality. Those in the second survive by manipulating the perceptions of other men. The method of thinking required for one is the opposite of that required for the other, and cannot coexist in the same man. Those most successful at manipulating the perceptions of other men (the political elite) will always be those least connected to reality.

We are ruled by parasites, who must constantly evade the knowledge of their own dependency, and who have no conception of their hosts’ limits. They will suck us dry, while neither knowing–nor caring if they did know–that their own deaths must necessarily follow.