The Bad Bank Proposal

We have been hearing about this for a while. We had suggested this a few months ago along with several other elements. Specifically:

1. A New Bank of the US: AKA The Bad Bank, which would buy up certain assets for cash and then resell them at some future time.

2. Insurance: The Bank of the US or whatever would provide an insurance policy like the swaps and would then allow stability on the less than bad stuff.

3. The US would take secured equity positions for a time certain in any entity it invested in to hedge the risks on the downside. There would be a call provision to call back the equity into cash at some time certain or the bank would default and the Government would "sell" the asset.

4. All employees of the banks so obtaining US funds would have salaries capped. The fear of losing them is countered to where would they go! Frankly the better ones had gone to Hedge funds years ago and the ones left on Wall Street were the arrogant dummies. Noting worse than that combination, just look at Washington.

5. Apply the tax policy we suggested; zero corporate for all non-financials and zero capital gains for the same. This would drag investment to the US with great speed.

6. Abandon the massive redistribution of dwindling tax revenues! Now.

So What is the Impact on GDP

A simple analysis of the proposed stimulus can reveal what its impact could be on the economy. We plot the percent change in GDP as a function of year for the three components. They are Discretionary, Direct and Revenue. This means new stuff, stuff there but more and tax relief. To do this correctly we must add two factors. First nothing happens instantly. Discretionary takes time to get out there, we assume three years with a burst, a peak and a drag. Then we use GDP multiplier of 1.1 to 1.3 for Discretionary and 1.2-1.4 for tax. This shows that the GDP from Q4 2008 may pop up 2% in 2009 and at best 4% in 2010 and then down to 2% and then flop. It is assumed that we have no more great endogenous drops in GDP, other than say 4% in 2009 so that the up 4% and down 4% means we stay even. However, if the money does not get out there and if the multiplier does not work, and if the economy keeps falling then this will make no difference other than getting further in debt.

We will continue watching this. I cannot see why others seem not to look at this impact. For us engineers this is a simple RC circuit follower by a gain adjusted amplifier. However there is some feedback in there which may go unstable yet!

A Thought from Milton Friedman

Friedman wrote "Capitalism and Freedom" originally published in 1962. He opens the Introduction with the following:

"In a much quoted passage in his inaugural address, President Kennedy said "Ask not what your country can do for you-ask what you can do for your country" It is a striking temper of our times that the controversy about this passage centered on its origin and not its content....The paternalistic "what your country can do for you" implies that government is the patron....The organismic "what your can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary..."

He goes on. But in today's voices over the Stimulus package all one hears if "what am I going to get out of it" from the voters and from Congress "what can we pack in to get more votes" A twist and turn on the old words but telling, things have just gotten worse!

The more one looks at this Stimulus package the more concerned one becomes. The expenditure of a dollar of government spending allegedly creates a slightly higher increase in GDP, however there is a delay from the time spent and a decay after it is spent, thus it is delayed gratification with a transitory response. But the current package is a massive one in that it displaced from today the hard decisions which will make the morrow worse.

The Budget Explosion

The chart shown here is a summary of the HR1 Budget for added spending to the amount of almost $900 billion. Several interesting observations. This does NOT include the $80 Billion going to the States! Those payments almost dwarf everything else. Instead of the States curtailing expenses this Budget which is atop of the already bloated budget sends almost half a Trillion to the States. Yet one may ask which States? California Yes, Texas NO! Fair, unlikely! Also there is $250 Billion in Other which is mostly PORK and $210 billion in Tax impact most of which is income redistribution. Anyone who is interested in this MUST read through the CBO HR1 Report issued 25 January 2009. This will establish a tremendous potential for financial collapse of this country! Also just look at the timing. There is only $30 billion for infrastructure spread out over 10 years! As they say, you just can't make this up!

GDP, M2, and Inflation

The Commerce Department came out with the Q4 GDP today and it is worth a look. The first chart is the GDP for the past few years, unadjusted and adjusted. The downturn is now quite evident. The question is could this have been anticipated.

Following this is the M2 numbers from the FED.


















Note that the M@ numbers have continued to escalate as the FED has pumped more money into the economy. But that is still just part of the story.


















Now look at the velocity, GDP/M2. It is falling off the cliff. No one is spending anything, the velocity is dropping quickly, and that is good since we are pumping the money in but the money is not turning around causing inflation. However it is like blowing air into a balloon, sooner or later it will burst.


















Now look at the impute inflation. We are concerned as to what this is what it will look like if we suddenly break this ice jam. We may be looking at a 30% plus inflation rate and we have not even touched the Democrats spending spree. More on that latter. It really is worth looking at the CBO HR1 analysis of the proposal. Even better look at the details as to where all of this is going. The Democrat House is going absolutely wild. This will make for a few thousand PhD theses in economics, if they don't go out and hunt everyone of them down first!


The current inflation rate has been in the 3-4% range. We see it dropping because of the fall in GDP numbers but this may explode again. We have analyzed the HR1 Package in our recent White Paper.

Broadband Broadband Broadband

It appears as if the folks in Washington want to use broadband as one of the major elements in recovery. The PEW Research has just issued the results of a study saying that a third of the folks are just not interested in getting on line! This is not measles vaccine! There is no public health hazard here if someone does not have broadband. We did thirty six market studies a few years back in New England, they are on our www.telmarc.com web site and they showed the same results! It is good to see PEW is spending its money wisely. The old adage, if all else fails listen to the customer, plays again. This will be a multi billion dollar give away! For people who do not want it! The other old adage, follow the money must also apply. Who is getting what for what?

The second part of this is the issue of fiber. If one gets money for fiber then one must have a franchise. The greatest delay in Verizon deployment is the franchise, just look at Philadelphia! Read Comcast. So who thinks anything will change here. Local governments are the largest stumbling blocks, Property taxes, fifth rate schools and franchise boards! Welcome to America!

An Interesting Portfolio

On December 1, 2008 I assembled a portfolio based upon a dividend yield and a mix of potentially independent stocks. I included the following:

Company	Share Price
Verizon	$31.61
DOW	$18.13
IBM	$77.60
J&J	$55.73
Kraft	$25.60
DuPont	$22.53
Alcoa	$9.46

Then I have been watching it as the market has bumped along. Dow has taken hist but IBM did well. I am a strong believer in Verizon but it is going nowhere. The Dividend from this pool based on December 1 2008 prices is 5.6%. So as long as it does not go down much I am doing well. So far it is a good package. Will keep you all updated.

Healthcare Policy Redux

We have just published a policy paper on Healthcare and have examined the Obama Plan, a proposed plan and the old Hillary Health Care Plan. We have posted this on the Telmarc Web Site in the White Papers area. It is Healthcare Policy Redux.

Harry Bailey Squirrel and His Friend Geoffrey Chaucer

We have just posted one of our most recent squirrel tales. This is of Harry Bailey who from Oxford befriends Geoffrey Chaucer and it describes how the two create Canterbury Tales. One may read into these whatever one wishes! See Harry Bailey Squirrel and His Friend Geoffrey Chaucer.

The Explosion of Bank Reserves" What Does It Really Mean?

The following graph is from the Feds recent data on bank reserves, total, excess and required. The total, dominated by the excess reserves, has exploded in the past few months. This somewhat details how the banks are holding and not loaning out funds.

I have also been looking at the preachers of total doom such as Roubini who has somewhat accurately detailed the problems with mortgage debt and how large it could become. We agree and discussed that last year. He also has come upon the commercial real estate market issue again which we discussed last year. The problem missing is the collapse of the high yields debt markets. We still wonder what is keeping some companies alive like Sirius which has billions of short term high yield and massive losses. There must be loan covenants which if not breached are at the edge and there are paybacks due shortly. We see over 100 companies with 2-% billion of high yield debt each on the precipice. This is another explosion behind the commercial real estate. Our concern is that the Roubini's of the world lay out one spoon of doom at a time with not placing it in total perspective and worse suggesting no solutions.

Google and the EMR

The EMR, or Electronic Medical Record, is a major thrust in the new Obama Budget. It comes as no surprise then that Google, its executives being major Obama supporters, have positioned Google Health as a major player in this new Market.

The first Figure depicts the current structure of Google Health. It has the patients Health Record, allows for Importing medical data, connects to online health information and then allows for finding physicians.

I have tried out the Health Record and frankly any first year Medical Student would probably fail their course on history taking with what is available any any physician worth their salt would most likely go elsewhere. But this is a start. It is cumbersome with all the manual entries. This it is even more complicated for the physician.

The Record contains the demographic data, conditions and history, procedures performed, test results, immunizations. It does not permit ready comparison of HbA1C for example to monitor Type 2 Diabetes or ESR or CA 125 or a wide variety of tests which a physician wants to see change readily. It also lacks any multimedia ability to incorporate CAT, MRI, pathology slides, and ultrasounds.







The import of medical records is attractive since it allows the patient to import lab tests say from Quest or records from your hospital or from other sources. It is a patient oriented system and functions well for a cumbersome initial attempt.

The medical records can be imported, copies, shared, converted and thus have a potential for wide accessibility. The problem again is that they are so rudimentary that they are virtually useless in any real medical environment. They also lack any Evidence Based Medicine inputs which we believe will be critical. They also seem at this stage to lack pharmaceutical interaction and of course there is no pricing or costs information, thus billing and awareness of costs is totally lacking.

The final chart below shows the details of the medical record we have discussed above.

Finally, one wonders of this is a Trojan Horse for the EMR push that is in the new Budget. Clearly Google has the technology and political connections. It seems to lack the "business side" of the equation however. It lacks what Vint Cerf and Bob Kahn assembled in the days of the Internet's beginning, an IETF type organization, an entity of involved practitioners. That, in our opinion, is an essential and critical element in getting this effort moving and accepted. It must have that ground up effort.

Some Thoughts on Healthcare Costs

We have been doing a great deal of work on Healthcare, again, since 1993 and the old Hillary Health care program. This note is a simple way to look at what can be done in a set of basic economic concepts. It takes five slides.

Let us start with demand. We show it here. Note that in today's current market the demand is fixed and there is no elasticity with a price. You just go in and get it fixed, rich or poor, and then someone pays the bill. If you are unlucky enough to not have insurance and not be really really poor, you get a bill, a large and distorted bill.

Now if we use the proposed "carb tax" or the "butt tax" we discussed before we can place some elasticity in the demand as we show in the curve.

Now let us look at supply, a costly process.

Here we show the current supply curve and then we show one which is dropped below it because we have managed to implement a program to reduce billing and record keeping costs. The cost per patient for the same units delivered is now reduced thus shifting down the supply curve, and reducing costs.

Now let us look at another option. This is in the third graph.

Here we have a change in supply by incorporating a scale economy effect such as one which can be effected by replacing the ER room with a Public Health system for those on the lower end of the economic scale. Yes this means different levels of care for those who pay, but we have that today. There are physicians on Park Avenue who accept no insurance and demand cash up front. And if you want to see them now you pay and added fee. It exists and it works.

Now we can combine these two to see what the total new Supply curve looks like, moved down and with a lower slope.

Now let us add the Demand and supply.

This gives the last chart. Not we have a new market point of dramatically lower costs and a somewhat smaller set of services. This is an example of how to think about solving the Healthcare dilemma. No, I did not even mention who pays and what the role of the Government should be. Perhaps our economics wizards in the White House could think a bit more along these lines, not just spending more, but targeting improvements for all!

Another Modest Proposal

Healthcare is another area of economic concern. Here again we have our supply siders and our demand siders. I am a demand control sider, kind of.

Here is the proposal: If we cannot change human behavior, say cease smoking, then we tax it so that it pays for its negative effects, a kind of reverse Coase approach. Perhaps a Pigou type approach. Well let's explain:

Take the following disease and their remedies:

Eating and Type 2 Diabetes: Now we have 20% of adults with T2 Diabetes which leads to heart disease, kidney failure, blindness and a few others. This is a result of one thing, carbohydrates! Carbs lead to fat people and fat people have T2 Diabetes. Medications just exacerbate the problem by having their own effects plus giving the fatty a false sense that the disease is under control. T2 costs almost 5% of our healthcare costs, $100 Billion (see CDC, www.cdc.gov ). Thus we should institute a carb tax. This was actually proposed by Governor Patterson in New York, a brilliant idea. We permit up to 150 grams of carbs a day and then we tax anything above it. Let us assume that the typical T2 patient eats 700-1,000 g of carbs a day, that is half a dozen cans of soda and a box of cookies. We know that the typical T2 patient costs us $10,000 per year. They consume 350,000 more carbs per year than most other healthy people, so we establish a "carb tax". Then we charge that "carb tax" to cover the costs, of about $0.02 per carb! It would make a Snickers a bit expensive but it would put a payment system in place to recover costs of a self inflicted disease, kind of like a "carbon tax" for the believers of Global Warming. Thus there are 20 million people with T2 Diabetes and if we use the carb tax of the type above we add $10,000 on their diet and this generates almost $200 billion!

Smoking: We know the incidence of lung cancer and other effects of cigarette smoking. Going through the same calculation we have from the same CDC sources that smoking has a direct health care cost of $75 billion per year. We have about 400,000 people a year die of smoking related causes. We have approximately 75 million smokers. The cost per person smoking is about $1,000 per person per year. To recover the direct costs, with a 1 pack a day habit, we need about $3 per pack tax. To add for indirect costs we arrive at the conclusion that a $4 per pack tax would suffice. This would generate $110 billion.

Thus just from the "carb tax" and the "butt tax" we could start to cover our major healthcare costs! The two yield over $300 Billion which is almost 15% of the Healthcare Budget! So what is the problem? Oh, by the way, I can extend this list for at least a few more pages on similar diseases, and ultimately eliminate the National Debt as well.

A Modest Proposal

After slogging through the various versions of the current economic stimulus proposals I have come to a slightly different one; I call it my Modest Proposal. Since I am not seeking election, and since most likely if I ever ran I would not be elected anyhow, I can feel free not to seek to buy votes as those in our Congress seem to do with their current proposal. Let me begin:

1. Tax Reform: Simply the first step would be a Tax Reform, not spending, and a long term reform. We all know from the now famous Romer and Romer paper that long term tax reform has the largest multiplier on GDP so let's go for it.

i. Eliminate all Corporate Income Tax for all entities except Financial companies whose Tax should be increased to a minimum of 70%.

ii. Eliminate all Capital Gains Taxes except for Financial companies whose tax should be 90%.

iii. Eliminate all Estate Taxes

The result would be a swarming of companies to do business in the US from everywhere, we would become the corporate tax haven of the world.

2. Re-institute the Bank of the United States

This would be a new Bank of the US which would take all of the bad assets that are on the books of the banks and replace them with cash, and then the new bank would work out the problems with the mortgages. Obtain equity from the Banks in return and in addition use the equity to wipe out current shareholders! Control salaries to be pari passu with Federal salaries. After all they would become public utilities.

Just a thought!

Some Thoughts on Healthcare

Some thoughts. The wizards in Washington are focusing on how to pay for an ever growing health-care budget. Another way to look at it is to ask what does it cost and why and what can be done to do it better. That is regrettably a business approach. I have been looking at the proposals from the White House, still somewhat vague but clearly lacking the strident approach of the old Hillary Health Care Plan, which would have left her solely in charge of every health decision any human would make, a rather terrifying thought, especially if one were a male!

Thus to best understand the health care problem one must first understand the costs and processes. The chart shows a model presented by the California Healthcare Foundation and is an excellent paradigm for understanding the issue. It starts with the problem, namely people and diseases and the incidence of a disease, the new occurrence of it. Then it goes to the prevalence section, namely how many ongoing event, then to the services and processes, namely what is done to treat the incidents, and finally, if you will, the unit costs. The problem starts at the beginning. One should note that 75% of the disease states are chronic and half of the disease states are due to "lifestyle" issues, namely type 2 Diabetes, heart disease, chirrosis, lung cancer and the like. Get people to be responsible and you potentially cut these issues in half! That saves 1.2Trillion a year and growing.

The following two charts indicate the costs and incidence of the major diseases and disease states. Note that Trauma and Mental Disorders are significant factors. Heart and cancer are major problems but as we have said much of the heart problems are avoidable with the elimination of smoking. better diets and exercise. The same could be said for several major cancers. In addition prostate, breast and colon cancers, the big three, can be detected early and effectively managed.


The biggest expense is Type 2 Diabetes which can be eliminated by diet and exercise in over 90% of the cases. The problem is that it is treated medically using drugs which in many cases just exacerbates the problem.

We will be preparing a White Paper on this shortly.

Debt and More Debt

The chart is an interesting example of how Bank Debt has been growing in excess of other forms of Debt. It shows also the potential for the dramatic leverage which has been occurring. We have published a new monthly report on this area as well as a detailed analysis of how to take a new look at the field of macroeconomics. The concern is that the new team arriving on Tuesday may not be any better than the old team, except it will include more Harvard types, remember the Bay of Pigs folks!

The CPI Data

The CPI was published and it begins to tell a worrisome story. It is shown here,

Recent Statistics

Here are some recent DoL Statistics

CPI	-1.7%	Nov 2008
Unemployment	7.2%	Dec 2008
Payroll Employment	-524,000(p)	Dec 2008
Average Hour Wages	+$0.05(p)	Dec 2008
PPI	-1.9%(p)	Dec 2008
Employment Cost Index	+0.7%	3rd Qtr 2008
Productivity	+1.3%	3rd Qtr 2008
US Import PI	-4.2%	Dec 2008
Unemployment Claims	524,000	January 10, 2009
Unemployment 4-week Avg	518,500	January 10, 2009

Some Latest Views from the Nest

The first is the latest plot of the quarterly change in house prices in the states we have been tracking. It is is continuing to decline as shown is the figure to the left. The decline is also appearing to accelerate.

However NY, NJ, MA are declining less than 3% per quarter whereas the CA and FL changes are getting much worse.






The graph shows the relative growth since 2000. Note that CA and FL had the greatest growth and thus the greatest decline. This all seems so relative since they are all well above 2000 baseline.







This shows the metric from 2000 using a common 100 for 1993 for all.

Yikes Again: Just Look at the Change to the Feds Balance Sheet

The San Francisco Fed published a short discussion relating to actions that the Fed may take going forward. Bernake today warned that the Fiscal actions of the Obama Plan may not be enough. Now look at the Fed Balance Sheet above. We have increased the Balance Sheet of the Fed by $1.2 Trillion just since last summer. This is in addition to the TARP of $350 billion, the next $350 billion and the Obama plan for Tax and Government spending of $775 billion. We are rapidly approaching $3 Trillion! Soon this will be real money. The good news is that allegedly the TARP and Fed numbers could be collected back at some time. The Obama numbers are just out the window,

Connect the Dots: The New Board Game

I have been looking at the economy issues from a macroeconomics perspective and I often have difficulty with the assumptions. They all suffer from what I call the "If elephants had wings..." phenomenon. That is they all make assumptions based on models which are solvable but not reliable or on data that is looking backward and fails to provide a true basis for why it is what it is. Thus I threw down some elements and suggest a Board Game, call it The Economy. Now here is the game:

Here, above, is the Board you get to play with. This is a dynamic and random process and here are a few of the things you get to do:

1. Connect the blocks so that GDP is the output

2. Introduce the time sequencing and relationships into the sets of blocks so that this becomes a dynamic economy say from Quarter to Quarter

3. Add what is missing, whatever you think it is and then connect and time sequence the new things you added.

4. Add the random effects. These can be nice Gaussian/Wiener noise type processes or you can add outlier processes to keep the guru of the Black Swan world happy!

5. Perform an optimization so that you maximize the GDP growth rate subject to constraints on Taxes, employment or whatever you like.

5. Solve and send to 1600 Pennsylvania Ave! asap!!!

The Obama Business Plan

On Saturday morning the 10th of January 2008 the Obama Transition Team issued a 13 page plan for the economy totaling $775 billion. There were several observations that are worth mentioning.

First, we analyzed the plan in some detail and posted it in the Telmarc White Papers on www.telmarc.com site. I leave it to the reader to draw their own conclusions.

Second, in a certain way this approach to opening the White House, even a little, and indeed this was a great deal more than a little, is a paradigm shift in Washington. It really can change things. The document was embargoed until 6 AM on a Saturday. Then it was posted on the web site of the Transition Team. This gave it all day Saturday for any of the web wackos to kick the ball around and to do whatever they need to on the various fire hydrants. The Obama Team could then look at the critiques, good, bad, and ugly, and then position themselves for Sunday. Brilliant! Twenty years ago, which is longer than the lifetime of some bloggers commenting, one would have some legislative assistant go to the appropriate office, cajole a copy from some confidant, copy it secretly, then fax it to the powers that be. The diffusion time to the audience at large was three to five weeks. Now we see it in seconds. The responses were instantaneous.

Third, some commentors, such as Professor Mankiw at Harvard were instantly vilified by bloggers for his questioning the Romer assumptions regarding tax cuts and their multiplies effect on GDP. I leave it to the reader to follow that war but some of the bloggers were spot on regarding certain points and Mankiw seems to have tough enough skin to survive and fight another day.

Fourth, this was a multimedia attack for Christiana Romer also put her pitch on YouTube! It was as if some nice old aunt was sitting there telling you why you should eat all of your spinach, but I assume the young kids just ate it up. Here was a controlled spin in the space of uncontrolled insanities. For after the Rome video the folks at YouTube made some bizarre suggestions. Perhaps they were targeted just at me.

Thus this new approach as I remarked in my White Paper, try and find out any detail regarding the TARP, Paulson won't divulge anything about how he is spending our money, the Obama folks are "socializing" this to the extreme and it looks as if it is to their benefit. Get the pitch out there and then get all the flack and re-pitch it to slam down anything that could affect it.

This is a sea state change of significance.

Terentius Publius Squirrel

My latest Saga on Squirrel history talks about Terentius Publius the friend of Emperor Marcus Aurelius. An excerpt:

"Antnee, and just who is this Terentius Publius, another one of your historical tales?"

He sat there, ruffled up his whiskers, and looked at me with a slight bit of disdain for my ignorance. I guess somehow I should have known of this squirrel. In addition, my ignorance of squirrel history was vast, so I continued:

"Sorry Antnee, but could you refresh me on Terentius Publius, I just am unaware."

That clearly was unnecessary for he was ready to regale me with this spot of history. He started:

"Well Sir, Terentius Publius was the confidant of the good Emperor Marcus Aurelius. Yes Sir, the personal confidant of a true Roman Emperor."

I was again a bit taken aback and said:

"You mean the Marcus Aurelius who wrote the Meditations, that Marcus Aurelius?"

Worth a read, see www.telmarcgardens.com

Yikes: And Jonathan Swift Was Just Kidding!

Today in the New York Times, that self described bearer of all that is fit to print, has just written an article on our friend the gray squirrel and that the English, those creatures to our east, across the great waters, who believe they have some competence in our language, have begun hunting and cooking our fine friend!

This is akin to the last British proposal by one Jonathan Swift in his article in 1729 entitled, A MODEST PROPOSAL For preventing the children of poor people in Ireland,from being a burden on their parents or country,and for making them beneficial to the public, which suggested that the solution to the Irish problem was to cook the young Irish children! Imagine the nature and character of a people who go out and hunt poor helpless creatures, squirrel or Irish child alike, and then cook them! I am aghast!

Then, the New York Times publishes the recipes on how to prepare this atrocities for human consumption, how horrific! Perhaps I missed the Times recipes on Irish Children, fortunately for me for I might have made a meal for some fine English gentlemen, or perhaps the Times may have published recipes on to prepare gastronomic delights from other humans being held captive by their oppressive regimes!

How cruel, how sadistic, no wonder we no longer trust such a paper, a paper which promulgates mass extermination of this sort via culinary delights! The very placement of the article, in the Times Dining Section of all places! Yikes indeed!

Is This a Premonition to 2009?

Christmas morning and looking into my kitchen was the turkey vulture. He weighed almost twenty pounds and just sat there looking in on me. Was he the economy vulture of 2009. Let's wait and see.

Happy New Year!