Archive for August, 2009

I pride myself for being a hack, weekend economist.  I admit it isn’t going to make me rich, but it is interesting.

It is easy, at first pass, to answer the “why did we bailout the financial sector” question.  The answer is because they are rich and have powerful lobbyists, and there is intuitively some truth to the claim that without a finance sector to grease the wheels of the economy, that it would grind to a halt.  So whether or not the companies are to blame for their own mess; we need them, so we have to save them….I guess.

But why do we need them?  Why, if too much credit got us into this mess in the first place, was there a deafening cry from Washington to get credit flowing again.  How could the disease be the cure? (BTW:  that was the premise of the bailout:  We want this bailout money to go towards lending.  Lending had stopped because risk couldn’t be accurately gauged.)

The question then becomes, “Why do we need lending?”  What is so important about the ability to keep credit flowing that we literally cannot do without it, even for a little bit, while the financial sector shakes out and healthier companies (those without exposure to bad debt) take the place place of the old financial sector?  How long could that take?  A year?

Why the cry from Washington of “We must act NOW,” as in RIGHT now.  They passed the TARP bill almost immediately with no rules attached, and started handing out money willy-nilly….compare that with healthcare: In healthcare there is a near endless debate over a change everyone agrees in theory needs to happen (overhaul of costly system) and for which there is a moral imperative (richest country in the world with 47 million uninsured citizens)….then TARP:  No debate, no moral imperative, very costly, no oversight/enforcement, benefits only a few.  How did that happen?

I think I figured it out, and I figured out a few other things in the process:

Money is debt.  That is why we need debt.  Without it there is no money….literally.  95% of all money in circulation is debt.  If all that debt were paid off……..there would be almost no money, and thus no economy.

The government doesn’t create money in our monetary system.  The banks do. They do so through loans.  To simply a bit, when you take out a loan, that is new money.  It isn’t taken from another person’s deposit and given to you.  The money didn’t exist before.  When the bank credits your account for the amount of the loan the money comes from nowhere…it is created with a digital keystroke. Money can be thought of as a series of IOUs (debt), which, if they are all paid back….equals zero.

(This answers the question as to why banks are so profitable.  They don’t actually need any money.  They give you money they just created from thin air, and then you have to put up the house/car/etc for collateral (which you may end up losing to them) and pay them back interest.  Interest on what? They didn’t risk anything…..they didn’t actually put up any money on their side.  They don’t stand to lose much, since they can buy insurance on loan failures and they get the collateral if you don’t pay.)

So back to the bailout:  Why must the debt keep flowing?  Why MUST banks lend or the economy comes to a screeching halt?

Two reasons:

1) Loans are always being paid back (which destroys money; money lent is money created, money paid back to the banks is money destroyed), so for the money supply to continue to increase, there must always be more loans going out than there are payments coming back in.  If loans don’t go out, the money supply contracts and deflation occurs. Deflation is a hard loop to get out of, and is definitely bad for the economy.

2) If I borrow a dollar from you and then you borrow a dollar from me and we later pay each other back, then all is good.  But what if we decide to charge interest (which banks do)?  There is only two dollars in our economy…the money simply doesn’t exist.  One of us has to go bankrupt because we won’t be able to pay.  The only way to pay is to borrow money from a third party (or borrow more your original lender).  This is how our economy works.  You always borrow the principal of the loan, but you must pay back principal plus interest.  Where does the interest come from? We borrow it (because that is pretty much the only way to create money).  Individuals may be debt free; that is true…but the system as a whole must always borrow an escalating amount because the system must always pay back principal plus interest on the original principal or people (the system) goes bankrupt. That is what we are seeing now.

And that is why lending must happen.  That is why we saved the financial sector.  Debt is money.  Without the debt/credit/banks….there is no money and no economy.

I think if everyone were a little more educated on how our money system works this would be a better country to live in.  All that shit they do in Washington is just smokescreens and old, self important white men thinking they know something.

Permit me to issue and control the money of the nation and I care not who makes its laws.” — Mayer Amsched Rothchild

If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.” — Thomas Jefferson

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Sometimes I think so.  It can’t be true though.  IQs are going up (Flynn Effect).  I do think people are uniformed, but certainly people have always been uninformed.  With the Internet providing more information that we can ever possibly wade though, and college attendance at an all time high, there is no excuse for being uniformed…moreso I believe that since all that information wasn’t even available in the past that people are actually more informed now that ever.

So…people are smarter and more informed than ever.  Why are they such idiots?

Hmm….well, maybe they are informed, but informed of the wrong information (which makes them seem dumb)?  That is a hard hypothesis for me to get my head around since if I were also misinformed then me commenting on other people’s misinformedness would be making the problem worse.

I know people are misinformed (including myself); however I know that; so not being an idiot might simply be knowing that you don’t know.  A healthy skepticism (even of yourself) is not exactly inspiring, but it is a useful bullshit detector.

I think people are apathetic.  They may be relatively well informed and intelligent; they just don’t give a fuck.  Republicans or Democrats?  Why does it matter since they both pander, lie, and misrepresent?  Fox or MSNBC?  Doesn’t matter.  They both spin. 

You just give up maybe.  After all, you still have to get out of bed in the morning…focus on what you can control.

Anyway, my bullshit detector is stuck permanently on, so here you go:

Health Care:

Lots of debate these days about this. 

Spin: “National Health Insurance will ration my care.  There will be long lines.  I’ll die on a government list waiting for my surgery.” 

Fact:  Yes.  Your health care will be rationed.  HOWEVER, IT IS ALREADY RATIONED….by money.  The rationing goes like this:  If you have money, you get care.  If you don’t have money, you don’t die on a government list waiting for treatment, you die at home unable to even see a doctor.

Why must health care be rationed?  You can’t provide unlimited use of something and expect that it won’t eventually consume all resources.  Everything is rationed in some way; most things are rationed by money (others by law, etc).

So does that mean you will not receive some services that you want, or if you do, then you may have to wait?  Yes.  That is what it means; however, bear in mind that this is ALREADY the case.  Public health care just changes the means of rationing.  Besides, as shown below with life expectancy, rationing doesn’t seem to change health outcomes.

Why not let money continue to ration?  I guess that is fine, except that our current course is unsustainable (costs too much), and what happens when you don’t have the money/lose your insurance (Medical bills prompt more than 60 percent of U.S. bankruptcies.)?  Are you willing to risk that?  US insurance is tied to jobs, and people change jobs a lot more than they used to…you will get caught in between at some point and find out that private health insurance is unaffordable (the same private insurance industry that says there is no need for reform). 

Spin:  We have the best health care in the world.

Fact:  People with money have the best health care money can buy.   On average we do not have the best health care in the world. 

In fact, we are 50th in the world in life expectancy.  Most/All the countries in front of us have some sort of government supported health care and so must also ration care in some form.  Despite that (or perhaps because of it), they are in better health than us.  Additionally, Cuba is 55th…with a life expectancy pretty much the same as ours (78 years).

Why is life expectancy an important metric?  Easy:  Shouldn’t all health care improve health?  Isn’t the ultimate reason for being healthy to stay alive?  You can argue about quality; however, quantity (life expectancy) is a good overall measure, and we are losing to other countries with socialized medicine.

Spin:  The Free Market will save us.  The answer to all economic questions is capitalism.

Fact:  I can’t even begin to tell you how fed up I am with the free market religion. 

Let’s talk about the free market incentives for the health care gatekeepers:  Insurance companies.  Ultimately, whether you get health care or not (at least in the US) is about whether or not you have insurance.  Try paying cash.  You’ll go bankrupt.  (The reason for this is beyond the scope of this article.)

Here is how the free market is supposed to work (I’m self-selecting an example that shows free market incentives in a positive light):  Mitsushiba (or any company) makes a TV.  It is the best TV, but it is expensive.  You don’t even really need a TV though; it is elective.  You can do without.  Still, Mitsushita is proud to offer an awesome TV at a good price, and they make a profit.  They make the profit by selling you what you want (the ability to watch TV) for a price you are willing to accept (after all, there are other TVs and in the end you didn’t HAVE to buy a TV at all). 

Now let’s examine the incentives of the health insurance industry:  HealthCon (or any company) sells health insurance.  It is expensive, and you HAVE to buy it (unlike a TV).  There are a few other alternatives (a handful of major players nationally), but their prices are all similar (expensive), so it doesn’t much matter which one you go with.  They make a profit as well, but not by providing you with the service you want (health care) in exchange for the money you provide.  They make a profit ONLY if they deny you the service you have paid for.  Let me repeat that:  Health insurance companies only make a profit if they don’t provide health care (the very thing they are supposed to be in business for).

In short, to argue that the free market can save health care is simply….misinformed.

Spin:  We need a limited public health option, if any.  Any public option that competes openly with the private health insurance industry will eventually lead to nationalized medicine.  (I’ve heard this poppycock many times as an argument against the public option.)

Fact:  Left unencumbered, the public option would indeed compete with private health insurance.  Why is that an issue?  Isn’t competition good?  The only scenario under which a public option competing with private health insurance would lead to nationalized medicine is if private health insurance couldn’t compete (ie.  people CHOOSE to go with the public option because it was cheaper or better). 

By arguing for a restricted public option, private insurers are basically saying “We couldn’t compete with an open public option.  It would drive us out of business.  We couldn’t make a profit.”  Really?  I thought anything government-run was inefficient and wasteful and private industry would always beat it.  I guess big business is all for competition, as long as it doesn’t compete with them.

Also, there is no competition presently.  Health insurance is an oligopoly…not much different in effect than an monopoly.

Spin:  Governments are inefficient.  They make a mess of any market they enter.  Private industry is superior.

Fact:  Let’s go one by one:  “Governments are inefficient.”  I agree they often are in practice, but that needn’t always be the case.  If you look at admin costs as a percentage of health care expenditures for other countries; theirs comes in below the US’s private industry number.  Also, it is a little two-faced for the health care industry to argue that governments are inefficent; private industry’s inefficiency (bulging costs) is how we got in this mess in the first place. 

“Government makes a mess of any market they enter”:  Again, no.  Think of the FLSA (Fair Labor Standards Act).  People (of any age) worked all day long in terrible conditions before the government stepped in to regulate.  Governments do make messes…..but so does private industry (think financial meltdown); again, it is two-faced to say governments mess up markets when the private industry also messes up markets even without government intervention…..which then requires large government bailouts on the taxpayer dollar.

“Private industry is superior”:  Taking my two examples above of  TVs and Health Insurance, Private industry is good at providing TVs (when that set of incentives is in place), but bad at providing healthcare (the incentives are wrong).

Spin:  Public health care costs too much.

Fact: Uhh…


Public health care will cost too much?  Seriously, it ALREADY costs too much.  That’s why we’re having this conversation in the first place.  If that isn’t the pot calling the kettle black.

We already pay for it; we just don’t get anything out.  If you mean public health care as it is in European countries, then it will cost LESS than it currently does.  The reason we will never see that is that any system we put in place now will have to pander to the current system, so we’ll end up with some messy compromise. 

Alternative Energy:

Alternative energy is important.  Oil is not sustainable (nor are humans).  We must make changes; however, some I think aren’t so well thought out.

Spin:  Biofuels are the future!

Fact:  If you mean turning corn, grass, or basically anything organically grown into fuel….its a terrible idea.  Food prices will rise worldwide as that land is used to produce fuel instead of food.  Those billions of people worldwide who barely have enough to eat care far more about corn or rice than they do about whether we can drive our Priuses around using biofuels.  You can’t eat a Prius.  You can quote me on that.

Spin:  Batteries dude!  

Fact:  Batteries are not power, they store of power.  I’m not arguing against more efficient batteries; I’m just saying batteries are not a substitute for oil….they are a complement.  Oil produces electicity, which is stored in batteries. 

To that end, oil itself can be thought of as a battery.  It is storing power in the form of hydrocarbon bonds that we release to do work (eg. make energy, run cars, etc).

The difference is that nature, in the form of oil, has already gathered the energy, already stored it in a fairly stable form.  In the case of batteries, we still need to provide the energy as input. 

Again, batteries are not an alternative energy; they are an alternative store of energy.

Myth:  Solar energy is the future!  Nuclear power is the future!

Fact:  Solar energy is the future!  All life on earth is powered directly by the sun (plants) or indirectly by consuming things that are powered by the sun.  Nuclear energy is the future!  If all things on earth are powered by the sun…..what is the sun powered by?  Nuclear energy. 

Bottom Line, we should take note:  Nature has a way of pointing out the most efficient mechanisms for things (except the wheel….how did it not invent the wheel?).

The Cost of Doing Nothing:

Spin:  “It would’ve been worse if we had done nothing.”  “We must act now; the cost of doing nothing is too great.”

Fact:  I hear this all the time in the media, in politics, in business.  Is the cost of doing nothing greater than the cost of acting now?  The answer is easy:  Impossible to say.  Untenable.

We hear the cost of doing nothing argument currently about health care; we also heard it with the financial crisis.

People use the phrase as a way to promote expediency.  “We must act now…or else!”  Or else what?

The suggestion (or whatever we must act now on) may or may not have merit, but often it is simply impossible to prove what would’ve happened otherwise.  What was the true opportunity cost that decision?  We don’t know in most cases.  You can search for analogies in the real world to try and see, but it is easy to argue those away.

In the end, the “cost of doing nothing” argument is a complete waste of breath.  It doesn’t signify anything.  It is unsupportable and does not promote dialogue.  If you must do something then the merits stand on their own, not as an alternative to “or else”.

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