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18 December 2010: Much Deeper
The New York Times this morning says the Republicans want to blame the financial crisis on Fannie Mae and Freddie Mac, while the Democrats want to blame it on private players in the financial industry. They’re both wrong. The blame goes much deeper into the past.
For a long time we’ve been saying that our economic system is no longer a manufacturing economy but has become a service economy. Service industries don’t need as much capital investment as manufacturing industries. But at the same time, we’ve been structuring our taxes so as to encourage the accumulation of money for investment. An increasing fraction of our aggregate income has been going to wealthy people who are more likely to invest it than spend it. Corporations have been charged with responsibility to accumulate pension funds, which have to be invested.
The amount of money available for investment has therefore been increasing at the same time that the demand for investment money has been decreasing. Where has this investment money been going? The U.S. Treasury has been borrowing a lot of it. A lot has been going into consumer debt, such as credit card debt. A lot went into home mortgages. A lot went into just plain games. Because it had nowhere else to go.
Some of these investments turned out to be unsustainable and collapsed. And for reasons I don’t understand, we’re still being told that the rich should have more money to invest.
17 December 2010: Economic Foolishness
Continuing to think about what I wrote yesterday (below), I’m no longer arguing merely that trying to fix our economic problems by fiddling with money is a mistake. I’m coming to the conclusion that our economic system is itself a mistake.
Well, not exactly that. But it’s got serious fundamental problems. Money, you see, is supposed to be a medium of exchange. It’s supposed to make economic activity easier, by helping with the distribution of goods and services. Without money (as we’ve been told time and again) we would be stuck with a barter system. If you made shoes, and wanted a hat, you would either have to find a hatmaker who wanted shoes, or find a chain of intermediaries to barter with. You remember the story of Jack, who went to market with a cow, got into a series of unfavorable barter transactions, and came home with a handful of beans? Well, that’s why we have money - so Jack could have sold the cow for a price in money and then spent the money to buy whatever his family really needed.
But somewhere along the way, the tail got to wagging the dog. The financial industry, no longer just a minor player helping the rest of the country’s business along, was recently cited as “earning” 41 percent of all corporate profits. Then the financial sector collapsed, and it carried the whole economic system with it.
We’ve turned our system upside down. Money is supposed to support the business of the production and distribution of goods and services. Instead, our government tries to use it to control that business. And now it looks as though money is controlling the government.
16 December 2010
It’s been a while since I last expressed my anger. I’ve been busy with other things. Besides which, the laptop I was using to maintain this site lost its screen backlight, and after struggling with an external monitor I finally took it out of service - after backing up the data files on another computer. I’m now using a Mac. Unfortunately I can’t give up Windows altogether - the latest Mac OS X doesn’t support the Palm Desktop.
My real purpose in writing today is to vent my fury about the idiocy of our government’s economic policies. Doesn’t everybody know you can’t solve a problem by throwing money at it?
Look at our economic system. OK, look at any economic system. Wassily Leontief developed an input-output model that shows how industries depend on inputs from other industries. Manufacturing depends on mining, retailing depends on marketing, every industry depends on transportation, and on and on. It should be pretty obvious that if one of these isn’t doing what it should, other industries will fall short, and the whole system will be in trouble.
Yet our representatives in Washington seem to think we can get the economic system working efficiently just by setting the right interest rate and balancing the budget. Is it any wonder we’re in a slump? Send the old man a comment on this article
25 May 2010: Health Care Craziness
Pardon me for harping on the topic, but I just read an article about medical identity theft, and it struck me as, well, surreal.
I mean, the object of all our complicated health care arrangements is that everybody should have health care. If everybody has health care, why should it make any difference if somebody steals somebody else’s health care? Why would anybody steal somebody else’s health care if everybody has it?
Because we have arranged so that if your employer can afford to pay for health care then your employer pays for it, otherwise if you can pay for it you do, or if you can’t pay for it then the government will help, but if you don’t want it you have to pay anyway but you won’t get it.
In some of the countries of “old Europe” they just have the government pay for it and whoever can afford to pays a tax to cover the government’s cost. I don’t know why we don’t do it that way. Maybe because it’s too simple for our technically savvy minds, or maybe it’s because we’re an old country and can’t give up our traditions. Send the old man a comment on this article
25 April 2010: Blame for Failure
Who should be blamed when a medical device fails?
A defibrillator, or ICD (implanted cardioverter-defibrillator) is surgically inserted under a patient’s skin and connected by wires to the patient’s heart. If the patient goes into “cardiac sudden death” the ICD is supposed to deliver a shock to the heart to get it beating properly again.
Some of the ICDs made a few years ago by Guidant Corporation had a problem. In rare cases when a patient went into “cardiac sudden death” the ICD failed to deliver a shock and the patient died. Guidant did not report the problem when they learned about it and continued to sell these ICDs to doctors who implanted them in patients. As of the time I write this, a Federal court is considering a plea agreement in which the company would plead guilty to two criminal misdemeanors and pay a $296 million fine. You can read about it here.
The two doctors who originally blew the whistle on Guidant don’t like the plea agreement. They want individuals, not corporations, to be held responsible. In fact, because Guidant is now owned by Boston Scientific (another medical device company), the fine would hurt only the stockholders of Boston Scientific, a company that neither made the faulty ICDs nor covered up the problem.
Assigning blame after patients die won’t protect future patients. Companies don’t want to report problems with their products because doing so would reduce their sales and cut into their profits. They compare the expected penalty for a coverup with the expected loss in profits and if they think the fine is less than the loss they go with the coverup. If penalties are imposed on individuals you have a similar difficulty. The people responsible for reporting device problems have to choose between possibly getting caught if they cover up and probably losing their jobs if they don’t.
Only another set of incentives can prevent future coverups of this kind. Send the old man a comment on this article
20 April 2010: New Credit Card Fees
Thanks to the new credit card law, the banks are now looking for new ways to get money from cardholders. My credit card was just replaced with a newer “better” card with a different name but the same number. This time the phone call to the credit card company to verify receipt of the card was answered, not by an automated system, but by a person.
The person was trying to sell me enhanced credit card protection - for $7.99 a month they would check my account daily for unauthorized charges. I responded by pointing out that my liability for unauthorized charges was limited by law to $50, and a monthly fee of $7.99 would quickly add up to a good deal more than that. After the person and I wished each other a pleasant day and we mutually terminated the call, I also realized that they check my account daily anyway, because they would be liable for the rest of the unauthorized charges above my $50 share.
The banks apparently want us to pay for what they do for themselves. Of course they depend for survival on what their customers pay them, but as customers we want to get something for what we pay. Send the old man a comment on this article
14 April 2010: Whose Government?
An Op-Edder in The New York Times this morning was nattering about what kind of government we ought to give Afghanistan. Should we let Hamid Karzai get away with his stolen election victory, without worrying about anything except what we can use Afghanistan for, or should we maintain a presence there until we have established a real democracy? Skipping, of course, the question of whether we can give them democracy.
It’s beginning to look as though a one-word mistake was made in the text of the Declaration of Independence. It should have read:
... That whenever any Form of Government becomes destructive of these ends, it is the Right of the [People] Americans to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness....
The correction would not have altered the original intent of the document, but as applied to other countries it gives us the authority to design and build their governments to our specifications. Send the old man a comment on this article
13 April 2010: Who Was Lehman Brothers?
It’s been over a year since my last posting to this page. Not that I haven’t been angry. It’s just that I’ve been sidetracked by other things I have to do, and by the time I get around to being able to post here I’m not angry enough to take the trouble. But it’s going to be different from now on.
An article in The New York Times today describes how Lehman Brothers - the too-big-to-fail investment banking firm that was allowed to fail - bought a small company in 2001, renamed it “Hudson Castle,” and used it at least until 2004 to hide its own shaky investments. “While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees. None of this was disclosed by Lehman, however.”
My question today is: who used it to hide the investments from whom?
The Times says “Lehman” did this, “Lehman” did that, “Lehman” didn’t tell its shareholders. Who was this “Lehman”? No artificial person has any volition of its own. Who did it? Not its owners. Its board of directors? Its managers?
Lehman, like any corporation, is owned by its shareholders. The board of directors is elected by the shareholders. That should mean it represents the shareholders. The officers of the corporation, in turn, are appointed by the board, so they work for the board. Everybody else in the company is hired by the officers, or by somebody hired by the officers. Everybody in this whole chain of command is supposed to be working for the owners.
The Times says “Typically, companies are required to disclose only material investments or purchases of public companies. Hudson Castle was neither.” Let’s get to the reality of what happened. What The Times calls “Lehman” was in fact a bunch of people entrusted with the care of a vehicle called Lehman, who took it careening down Wall Street on a wild joyride without the knowledge or consent of its owners and smashed it up.
That’s criminal. Send the old man a comment on this article
