Hyperliterate & Illiterate

Ever since the housing bubble burst and the market crashed for financial derivatives tied to home mortgages, it has been a mystery to me how citizens and politicians could have let this happen. My theory to-date is this – the citizens who fell into this trap were financially illiterate, and the financiers who engineered the trap were financially hyperliterate. That is – ordinary people abandoned their common sense and felt they had to buy a home because prices would keep going up – accepting mortgage obligations no financially literate person would tolerate, and elite financiers were similarly unable to see the forest for the trees because they knew so much they lost their perspective – their hyperliterate quantitative models gave them a false sense of security.

No wonder the science of economics is not only dismal these days, but in the grip of a well deserved intellectual crisis. But there is another theory that is taking hold among a sorely disgruntled American population, a theory that if it spreads, will abruptly and severely rearrange the American political balance of power – hopefully for the better. That theory holds that this crisis was caused by a decade or more of bipartisan, elitist abandonment of the interests of hard working American citizens in favor of big government, big labor, and big finance.

A commentator of extraordinary lucidity who provides useful insights on this topic not always available in the American press can be found at Asia Times Online. Writing under the pseudonym “Spengler,” he offers a perspective on the world, and the United States in particular, that is stripped of hyperliteracy – financial or otherwise – and cuts to the chase. Here is how he characterizes what happened, and is happening, in Washington today:

The one-trick wizards of Wall Street had one idea, which was to ride the trend and pile on as much leverage as credulous investors and crony regulators would allow. It has gone pear-shaped, and those who didn’t cash out early along with the cynics are poor. Fortunately for them, Obama will let them play with the budget of the US federal government for the next four years.

Failed financiers run the Obama transition team. It used to be that the heads of great industrial companies got the top Cabinet posts. Now it is the one-trick wizards. After George W Bush fired former Treasury Secretary Paul O’Neill, who had run Alcoa, the last survivor of the species was Vice President Dick Cheney, the former CEO of Halliburton. Obama’s bevy of talent comes from finance. American industrialists have become figures of ridicule, like the pathetic chief executive of General Motors, Rick Wagoner, begging for a government loan.

America, and Americans, have been accumulating debt for 40 years. Back in 2007, in a post on EcoWorld entitled “Inflation or Deflation,” I attempted to quantify this debt, quoting Paul Rubino from www.dollarcollapse.com, who said “the past two decades of low inflation and steady expansion have been purchased with ever-greater amounts of debt. In the 1960s it took about a buck-fifty of new debt to produce a new dollar of GDP. Today it takes about six bucks…” and “Total debt in the U.S. economy grew at a seasonally-adjusted annual rate of $3.7 trillion, and now stands at $46 trillion, up from $29 trillion in 2001…”

Now our Obama administration is well on their way to more than doubling our federal debt before the end of the first term – projections now put federal debt at 17 trillion by then. This will trigger inflation – indeed the painful reality is despite the fact that failed (but hyperliterate) financial foxes are guarding the nation’s economic henhouse in Washington, this massive spending is the only way to avoid deflation, which would be far worse. Let’s return to Spengler for more on this:

For a quarter of a century, the inbred products of the Ivy League puppy mills have known nothing but a rising trend in asset prices. About the origin of this trend, they were incurious. The Reagan administration had encountered a stock market in 1981 trading 50% below its the long-term trend. Reagan restored the equity market to trend by cutting taxes, suppressing inflation and easing some regulations. The private equity sharps were fleas traveling on Reagan’s dog. They simply rode the trend with the maximum of leverage.

Now that the stock market has collapsed, the private equity strategies cannot repay their debt, and their returns have evaporated. Note that equity investors spent a decade in the cold, from 1973 to 1983; it may be even worse this time. The maturities on debt issued to finance private equity deals will come due long before the recovery.

Over the long term, we know that the average investment cannot grow faster than the economy, for investments ultimately are valued according to cash flows, and cash flows stem from economic growth. Real American gross domestic product grew by 2% a year on average between 1929 and 2007. Whence came the enormous returns to the Ivy League? Some of them surely came from betting on the right horses, but most came from privileged access to leverage.

For all Obama’s bashing of the rich, it is arguable that Obama’s administration is a product of public sector labor union power married with Wall Street power. Look no further than our public sector employee pension funds, who invested hundreds of billions – in aggregate, trillions – with hyperliterate Wall Street brokers – and all of them actually believed they could earn double-digit real returns on trillion dollar funds for generations.

For much more, read “Obama’s One Trick Wizards,” or anything by Spengler.

Healthcare in America

As someone who has either owned small companies or worked for small companies, I have had to frequently change health care plans. Sometimes my healthcare was earned as an employee benefit, sometimes I joined a small group plan as the principal of my own company, and sometimes I participated in a COBRA program through a former employer.

With this background, it is fair to say I know what it takes to get health insurance coverage in America. For nearly 30 years now, two things have always been true: I have never been unemployed, and I have never been without a quality PPO health insurance plan. And it hasn’t been easy.

The problem with Obama’s health care plan – similar to pretty much everything Obama is doing – is that it is aimed at helping anyone but people like me. Why is this? Because I have been responsible. I have always found work, often without benefits, and I have always made sure to purchase quality health insurance – one way or another. And there is no way Obama’s health care plan is going to make health insurance better and cheaper than the health insurance I currently have – this despite the fact that as a healthy 51 year old Californian, without COBRA (which will expire soon, yet again), I will have to pay $750 per month for a good PPO. If Obama’s plan is enacted, I will have no choice but to enroll in a rationed publically administered health insurance plan. Individual plans for a person my age, if they are available at all, will cost more than $750 per month, probably much more.

There are a host of reasons why healthcare insurance has come to this juncture – but most of all we are at this juncture because of what one might call “the great leveling” is happening. That is to say, the bell curve of individual economic status is flattening, with more and more poor people at one extreme and more and more rich people at the other – and the legislation and regulations (or lack of legislation and deregulation, it depends) that have faciliated this trend have been bi-partisan.

Those of us who are too well off to collect free benefits, yet too poor to be able to pay punitive prices for insurance coverage (along with electricity, water, education, transportation and housing – all being made more expensive in the name of social justice and the climate “crisis”) – are having everything we’ve worked for systematically confiscated through higher taxes and fees and regulated prices. It is sad to see mainstream media commentators – most of them quite wealthy – describing those who criticize this trend as merely “fringe” groups. All we ask for are reforms that first recognize and reward responsible behavior before enacting policies that will make us pay more for the “disadvantaged” and “exploited” classes.

The reality of healthcare in America is that everyone does get healthcare. If people aren’t able to afford health coverage, they go to emergency rooms. This isn’t perfect but it works. There are no easy answers, and nobody is suggesting reforms shouldn’t be on the table, but it is getting very tiresome to have our President – through his proposals – pretend that personal financial stability achieved through hard work and merit are only accidents of privilege, and therefore actively design policies that punish us.

American healthcare reform should start by eliminating barriers facing those who are willing and able to pay for quality healthcare, and see what that does for overall costs. The results might be quite positive for everyone. For example:

(1)  Allow individuals the same tax deductions for their health insurance premium payments as businesses receive.

(2)  Make it easier for associations and organizations to offer group health insurance plans, instead of only favoring companies who may or may not provide an individual a job for life.

(3)  Eliminate interstate barriers to health insurance companies so they can operate and compete in every state.

(4)  Enact tort reform so malpractice lawsuits are reined in. Not only do the inordinately inflated premium payments increase costs, but far more significant are the costs of over-testing and over-treating as a precaution against lawsuits.

These four reforms would be a good start towards improving America’s health care system. The idea that government should launch a “competing” public health care option sounds good, but in reality this would kill the market for individual insurance. The only private insurance plans left would be those enjoyed by employees of large private companies, and – ironically – by public sector employees. Entrepreneurs would be forced into the government program.

Maybe someday, when labor unions in the public sector (along with their “work rules”) are declared illegal, and merit (instead of seniority or belonging to a “protected status group”)  is the sole criteria for better pay and career advancement, and public sector employees get social security and medicare when they are retired, just like the rest of us, it might be possible, even palatable, to create to a publically administered health insurance plan to compete with private sector plans. Maybe then we can trust the public sector to take on more projects, but not before.

There is absolutely nothing the Obama administration is doing with respect to health care, financial reform, or environmental “crisis” management, that is doing anything for the small business, or any true entrepreneur who still respects the meaning of the word. To-date, President Obama has the most anti-entrepreneurial administration in the history of America, because his policies – however well intentioned – reward irresponsibility and indolence, and punish individual industry and initiative.