Now the Russians are Buying GM Parts

Deutsche Welle states that a Russian Bank is financing the purchase of Opel. Specifically:

"With Magna pledging to keep all four German Opel factories open, it appears that Merkel has found the positive solution she was looking for - although some may find it almost as complex as the problem it tries to solve. The agreement includes a 1.5-billion-euro ($2.1-billion) bridge loan from the German government aimed at preventing Opel itself from going bust before Magna can make its financing available.

Magna's bid, meanwhile, is to be bankrolled by Russia's state-owned Russian Sberbank, which will consequently gain a 35-percent stake in Opel. And Berlin will provide 4.5 billion euros in loan guarantees for Magna and Sberbank. All of this is meant to help Opel gain autonomy from its beleaguered parent company GM."

As Sberbank states:

"Sberbank today is the largest credit institution in Russia and CIS, accounting for about a quarter of the aggregate Russian banking assets and a third of banking capital. According to The Banker magazine, as of July 1, 2008, Sberbank was ranked 33rd in the world in terms of Tier 1 capital.

Established in 1841, Sberbank has grown into a universal commercial bank with diversified business. Sberbank is the biggest taker of deposits in the country and the key lender to the national economy. As of 1 February 2009, Sberbank accounted for more than 50% of retail deposits and had a 30% share in Russian loan market"

The Moscow Times has reported that Sberbank, with close cooperation with Putin, has been aggressively buying up assets in Russia and elsewhere, and recently:

"Russia's biggest shipyard on the Pacific coast, the Amur Shipbuilding Plant, has been renationalized for a symbolic sum and will receive hundreds of millions of dollars in state aid, Prime Minister Vladimir Putin said Monday.

The Komsomolsk-on-Amur-based plant, which builds nuclear submarines but found itself on the verge of bankruptcy, will be transferred to the United Shipbuilding Corporation, or USC, the government-controlled holding in which the state is consolidating the country's shipbuilding industry, Putin said.

The plant, which employs 15,000 people, has accumulated a debt of 36 billion rubles ($1.1 billion), including 13.6 billion rubles ($420 million) to state-owned Sberbank, Putin said during a visit to the plant, according to a transcript of his meeting with the plant's workers posted on the government's web site.

"The day before yesterday, Sberbank and a group of private shareholders signed an agreement to sell a 59 percent stake to Sberbank," Putin said, adding that Sberbank would sell the stake to USC, which is 100 percent owned by the state."

It should be interesting to see what conflicts will arise out of this deal. The German and Russian interests are conflicted from the outset.

Yield Curve for May

The following are the yield curve data on Treasuries for May. Note that there is some growth in the tail but at these rates they may very well still reflection deflationary trends as of yet. Movement in the 30 year rates should be watched on a month to month basis.



















The following is the 30 year rate per day. We can see the movement upward and then the drop on the last day of the month. The curve may be showing volatility and not a trend yet.



















The following is the variation in the 30 day rates. This is most likely just volatility.

Could Louis Brandeis Make the Supreme Court Today?

In 1890 Louis Brandeis and his law partner Sam Warren wrote an article for the Harvard Law Review entitled The Right to Privacy. In view of the appointment process to the Supreme Court today perhaps looking at this article in the context of Brandeis as a Justice would help. Remember it was 1890, almost 120 years ago, and quite a different world.

The article was written because Brandeis felt his and his family's privacy was violated by the Boston Press who invaded his daughter's wedding. There frankly is no right to privacy in the Constitution in a clear and unambiguous manner. Also when Brandeis got to the bench he actually overturned any please for rights to privacy. Thus this one paper brings to the fore many of the interesting issues we see again today. I have no opinion regarding the current state of affairs but I am a frequent reader of Brandeis and especially of this paper.

The paper starts out saying:

"That the individual shall have full protection in person and in property is a principle as old as the common law; but it has been found necessary from time to time to define anew the exact nature and extent of such protection. Political, social, and economic changes entail the recognition of new rights, and the common law, in its eternal youth, grows to meet the demands of society."

Thus to Brandeis the law evolves and is not static. Is this all law, is it the Constitution, or just common law, or is it a reflection of the ongoing legislative process as we know it? He continues:

"It is our purpose to consider whether the existing law affords a principle which can properly be invoked to protect the privacy of the individual; and, if it does, what the nature and extent of such protection is."

He at least presents the case that he will examine whether the law deals with privacy at all. He continues:

"The common law secures to each individual the right of determining, ordinarily, to what extent his thoughts, sentiments, and emotions shall be communicated to others."

Now he uses precedents, starting with English Law, which given this was an argument from common law principles is most likely acceptable. He states:

"Thus, in Abernethy v. Hutchinson, 3 L. J. Ch. 209 (1825), where the plaintiff, a distinguished surgeon, sought to restrain the publication in the Lancet of unpublished lectures which he had delivered at St. Bartholomew's Hospital in London...In Prince Albert v. Strange, 1 McN. & G. 25 (1849), Lord Cottenham, on appeal, while recognizing a right of property in the etchings which of itself would justify the issuance of the injunction, stated, after discussing the evidence, that he was bound to assume that the possession of the etchings ....In Tuck v. Priester, 19 Q. B. D. 639 (1887), the plaintiffs were owners of a picture, and employed the defendant to make a certain number of copies."

Now what rights is he discussing. He states:

"We must therefore conclude that the rights, so protected, whatever their exact nature, are not rights arising from contract or from special trust, but are rights as against the world; and, as above stated, the principle which has been applied to protect these rights is in reality not the principle of private property, unless that word be used in an extended and unusual sense."

He states that these rights are rights as against the world, and this in itself is a broad and new statements. He in effect creates common law rights as extensions of English Court extensions.

The to all those who object to the use of foreign law, possibly excluding English Common Law, he states:

"The right to privacy, limited as such right must necessarily be, has already found expression in the law of France."

He interjects the use of French Law, circa 1890 as a basis for his argument. In today's world this would fly in the face of many legal scholars and jurists. He ends with:

"The common law has always recognized a man's house as his castle, impregnable, often even to its own officers engaged in the execution of its commands. Shall the courts thus close the front entrance to constituted authority, and open wide the back door to idle or prurient curiosity?"

Here it is clear he uses Common Law and not Constitutional Law. When he ascended to the Bench at the Supreme Court he in many ways on this issue of privacy, time and again, found it lacking in the Constitution. Yet he found the fundamental right to exist, and perhaps the Common Law Right could arguable be covered under the Constitution's extension to such rights as being those un-enumerated rights. Remember the 9th Article of the Bill of Rights says:

"Article [IX.] The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people."

Thus the Brandeis argument could be that if one could justify privacy via Common Law, and Common Law is what the 9th Article is referring to then there is a Constitutional right via this nexus. This was not the argument in Roe v Wade and its predecessors such as Griswold. Nor did Brandeis argue this when faced with similar issues.

However we see Brandeis: (i) allowed for interpretation, (ii) permitted the current milieu as a means to judge, (iii) allowed for use of foreign precedents as a basis for US precedent, and (iv) used his personal relationship to the legal matter to drive his judicial judgment. In today's world that may very well be a disqualification from sitting on the highest bench.

In 2002 I wrote a paper on Privacy in the Internet Environment and I argued even for anonymity. I believe that Brandeis was not only correct in the context of Common Law but in Constitutional law, penumbra not withstanding.

Yield Curve and M2

This is the yield curve as of yesterday. It is slowly increasing on the 30 year Treasury while the short term Treasuries are still quite low. The concern would be that the lack of interest in Treasuries in the long term will continue to drive this up. We will continue to watch this closely.


















This is the M2 data since last September. It is still increasing but not as fast as we would anticipate given the growth of the Balance Sheet assets of the Fed. We are still concerned that the ratio of M2 to Fed Assets is still too low showing the hording of cash or just the absorption of cash for bad assets. he lack of Fed transparency makes this quite difficult to ascertain and thus presents a massive risk to long term investments.


















Remember that the graph below demonstrates the overall M2 growth as to last week. It shows the exponential growth over the past few years but we see a leveling off due mostly we estimate to the increasing unemployment.

Another Squirrel - Major Nathaniel

I just posted the latest Squirrel Chronicle, one Major Nathaniel Squirrel who was the head of a band of scouts for George Washington. Nathaniel meets Washington in early 1777 and follows him on all his battles during the Revolution. Nathaniel befriends Billy Lee who was Washington's servant, slave, and when he attends Washington's inauguration tells Billy Lee that one of his descendants may some day become President as well....Billy Lee laughed at the time...it also tells of Jean Pierre, a red French squirrel, who works with Nathaniel, is a friend of Lafayette, and describes his Americanization.

Listening to Physicians

On May 27, 2009 I gave a talk to a group of physicians in Bayonne, New Jersey. Bayonne is an interesting place since it is a microcosm of many of the issues that health care will face going forward. It was an old manufacturing town, clean and neat but showing its place in history. The presentation was based upon what I have been writing and speaking about for the past six months but it was highly interactive and the group gave me their ideas as to what is important. I thought it would be most useful to memorialize them.

Their suggestions are as follows:

1. Increase taxes on cigarettes, and in turn on carbs to the point where they truly suppress the consumption and change disease patterns.

2. Allow Medicare to negotiate on drugs. They all seem to feel that the previous Administration's plan was the wrong way to go.

3. Tort Reform was an issue which came up again and again. They clearly all practiced defensive medicine. They also were concerned that if a Comparative Clinical Effectiveness plan were started and they were required to follow its dictates that they needed some protection in a revised tort reform package. What if they were reimbursed only for the approved CCE procedures and tests and they patient died and they were sued for not taking extreme actions that generally were not accepted. This was a real issue.

4. Dismantle the VA system and allow patients to be treated in the existing system. Oh yes and many of these physicians served in the military. The VA seems to have a vary bad reputation.

5. The end of life issue is a real problem. It is cultural and legal in nature. Many physicians take extreme measures with patients for fear of being sued by relatives after the patients demise. Uncle Lou has terminal colon cancer and he died three days early, then you get sued for not saving his life! This is more common than thought. Thus the physician spends drastically more money than necessary. They recommend a revision of the Tort system in general. The cultural end of life issue is also a major factor. Many groups want Uncle Lou to last for as long as possible no matter how painful it may be. That becomes an educational issue.

6. The Immigration Problem! Wow, I really did not think this was as big as it was. It is not just the illegal immigrant laborers, it is also people with cancers, flying to New York-Newark, getting off the plane on a tourist visa and then going to a hospital with everything from pancreatic cancer, lung cancer, congestive heart failure and the like. If you cannot get care in your country then get a cheap ticket to the US and get it free! Try this in Russia and you will die quickly in Siberia!

Thus these six issue are interesting and should be included in the debate.

AOL and Time Warner

In the Fall of 1996 I taught a Telecommunications Economics and Policy course at Columbia University Business School where I was a visiting Professor. What I did was to take a company in each of the business sectors, prepare a business plan for the company and address the policy risks and economic opportunities and risks.

For the ISP world at the time I took AOL as the example. I went through the detailed analysis, namely a simple back of the envelope calculation, to show that the company had no sustainable competitive advantage, it was a Potemkin Village of a business. The class generally disagreed, and most went into investment banking. I ran my businesses and the students went and created the mess we are in now. I was right, albeit a few years too early.

Now we see that Time Warner is finally disgorging the distraction which they could never monetize. As the Financial Times states:

"The deal, which valued Time Warner at $164bn, was followed by a series of huge write-downs, including a $100bn charge as quickly as 2002, as it became clear that the synergies it promised were illusory.

Steve Case, the former AOL chief executive and one of the architects of the deal, used the Twitter messaging service on Thursday to say he was glad the separation was happening.

Thomas Edison’s quote that vision without execution is hallucination “pretty much sums up AOL/TW” he said, saying a “failure of leadership (myself included)” scuppered the early hopes for the combination.

The bitterness left behind was summed up by one irate shareholder at Time Warner’s annual meeting on Thursday, who said that January 11, 2001, the day the AOL Time Warner deal completed, “is a date I believe will live in corporate and economic infamy.”"

However I argued this thirteen years ago. It was obvious to anyone who had an envelope, a pencil and a wit of wisdom. They had nothing, just an access front end for a dial up network. By the time Time Warner made the purchase there already was DSL infusion and soon cable modems. The key question was and still is what value did they bring to the table, customers were fungible, there was no barrier to exit and in fact it could be facilitated. The arrangement was consistently weak and the internecine warfare between the parent and AOL was endless. This should be an example to everyone because it was so obvious before the fact!

Facebook and the Russians

Facebook gets $200 million from the Russians, says Bloomberg. Specifically Bloomberg states:

"Facebook Inc., the world’s largest social-networking service, received an investment from Russia’s Digital Sky Technologies that values the company at $10 billion, more than Starbucks Inc. or Safeway Inc.... Digital Sky will buy $200 million in preferred stock, gaining a 1.96 percent stake in the company, Palo Alto, California-based Facebook said today in a statement"

Let me tell a story about my Russian subsidiary and investors. You see I started one of my companies in Russia with "you know who". Frankly they were great people, managed the political scene, made money, worked well with others, and generally made things work well. I knew when things were going astray because when they said "nyet problemi" it meant all hell has broken loose, they were great for understatement.

We wanted to build a fiber to Moscow and one of the routes was through Belarus. One of my bankers. a Brit, was with me at a meeting in which one of our "senior partners" was present, a "retired" Government "security type". When the banker expressed concern about the political stability and resulting safety of the fiber through Belarus the individual in question slammed his fist down and said in no uncertain terms that he would insure "our" network with tanks. Remember Georgia, perhaps Ukraine. When the banker and I left he asked how he would write this up for his due diligence, I deferred comment.

Now to Facebook. It is a fantastic personality profiling device. If one wants to seek out possible compromisable people what better place to do so other than on Facebook, just analyze their inner-most verbiage. It is an intelligence goldmine. Thus why would the US allow such an investment in what may very well be a strategic asset or a potential strategic threat.

Facebook as currently used provides the innermost examination and analysis of any human willing to expose themselves to the world. It also develops linkages. Any smart analyst can take that information and process it to develop profiles of accessible "groups" which many be manipulated for whatever reason. Thus any entity "owning" a considerable share, even in their own minds alone, can possibly exert such influence. You would not even have to recruit any future terrorist, you just have to check your data base, and perhaps inject "moles" to nudge the group. The thought is terrifying!

China and Cap and Trade

As we have been discussing the HR 2454 Cap and Trade Bill, the Markey-Waxman piece de resistance, we read in China Daily the following:

"China's coal output rose 6.8 percent year on year to 827 million tons in the first four months of 2009, an industry association official said in Beijing Friday.

The global economic slowdown has taken a toll on the coal industry, Jiang Zhimin, deputy director of the China Coal Industry Association, said at the 5th China Energy Strategy Summit in Beijing.

"Weak demand has resulted in a clear trend for overcapacity," he said.

The industry faces challenges of eliminating outdated production facilities and the building of more modern and large coal mine groups, Jiang said at the two-day event, which ends Saturday.

Around 70 percent of the 80,000 coal mine producers in China are small. They each have an annual production of 300,000 tons, Jiang announced at the two-day event which ends Saturday.

China has 24 coal mine groups which each have an annual output of more than 10 million tons. In 2008, those groups produced a total of 840 million tons, he said.

The Chinese government has been encouraging mergers and acquisitions to build more large mining groups for efficiency and work safety."

The question one might ask is if the US destroys its coal industry and China continues to grow as they have stated above, what is to become of the US.

Posner and the Carb Tax

I read Richard Posner's blog today regarding the calorie or carb tax. He states:

"I am skeptical, because the author ignores the possibility of substituting untaxed sugar-sweetened foods or beverages. People who crave sugar will find no dearth of substitutes for sugar-sweetened sodas. Moreover, most consumers of these sodas are not and never will be obese. They may well be overweight, but all that that means is that they are heavier than the "ideal" weight calculated by physicians....

There are many obese Americans, in the sense of ones who are grossly overweight (with some being morbidly obese), and we should consider whether society should be concerned with obesity if not with mere overweight. Obesity impairs health, and, in most segments of the population it diminishes social and professional success as well, and so it can be regarded as self-destructive behavior. Some of it is involuntary....

As to whether by increasing obesity the sale of sugar-flavored sodas imposes costs on other people besides the buyers, the evidence is mixed. Obese people have more health problems than the non-obese and hence higher annual medical costs; they also lose more time at work because of illness. Their poorer health increases the medical costs of other people in their insurance pools and reduces the productivity of their employers, assuming realistically that employers cannot selectively reduce the wages or health benefits of their obese employees. Cutting the other way, obese people have a reduced life expectancy, and the shorter a person's life, the less an above-average annual cost of medical care translates into an above-average total (lifetime) cost. But assuming nevertheless that the net social costs of obesity are positive, this would be a ground for arguing for taxing obesity, but such a tax would be unacceptable as well as cruel. ..."

Unfortunately, as much as I admire Judge Posner, he should at least deal with facts, and when he opines on something, he should first at least try to deal with facts. We have shown in various writings about Type 2 Diabetes that:

1. It costs over $275 B today of our total $2.5T health care costs. That is 12% of the total costs.

2. It will grow to 25% by 2020.

3. Type 2 Diabetes in 95% of the cases is due solely to obesity. Keep the BMI at 22.5 or lower and you keep the HbA1c at 5.0 or lower and no Diabetes! That means keep the weight down.

4. Diabetes is a carbohydrate disorder. It is not a fat or protein disorder. Thus we want low carbs, and our old friend Pigou had this tax idea, tax things we do not want people to do, like smoking, and it works! Just look a lung cancer in males. It is down 50% from twenty years ago! High taxes on cigarettes. So tax carbs, not just soda. Education may help, but how many physicians have "educated" their patients to lower BMI, less than 0.1%!

Thus if the good Judge had the slighetest chance to examine the facts he would see that taxing is not only a good plan it is the only one we know works!

Robert Solow of MIT wrote a critique of the most recent Posner book in the New York Review of Books. Solow is a Nobel Prize winner and I have come to know and respect him personally. He states:

"Judge Posner evidently writes the way other men breathe. I have to say that the prose in this book often reads as if it were written, or maybe dictated, in a great hurry. There is some unnecessary repetition, and many paragraphs spend more time than they should on digressions that seem to have occurred to the author in mid-thought. If not exactly chiseled, the prose is nevertheless lively, readable, and plainspoken. The haste may have been justified by the pace of the events he aims to describe and explain. Posner has an extraordinarily sharp mind, and what I take to be a lawyerly skill in argument. But I also have to say that, in some respects, his grasp of economic ideas is precarious. In his book on public intellectuals, Posner blames the decline of the species on the universities and their encouragement of specialization. I may be acting out that conflict. Remember that even hairsplitting is not so bad if what is inside the hair turns out to be important."

As Posner's economics grasp may be precarious to Solow, his grasp of medicine is almost totally lacking to me!

Reintroduce the Poor House!

When I was young, my grandmother, who was a head of the Socialist Party in New York, and ran for US Senate in 1916, a rather strong move for a woman at the time, had me read Dickens in toto as a young child. I confess that I hate Dickens, really hate Dickens. Dickens showed the evil in the Poor Houses in England and the evils in the English class society. But when I read the self sorrow on the New York Times Economics reporter in the paper last week and then his appearance with his second wife on PBS last Friday I thought that it may be wise to reintroduce the Poor House.

You see what the Poor House does is take those who get credit and then cannot repay it and place them in the Poor House, where they are housed and fed and they work for the state until such time as their family repays their debts. No bailout, just work and the creditors get their money back. Simple plan, we the good payers of our debts are charged nothing and the dead beats get to work off their debt with the help of their family. The family learns a valuable lesson, gets shamed, and society has established a good teaching exercise for everyone else. We also get to employs lots of Poor House help thus adding to the employment base.

Now this reporter, for the New York Times, is supposed to report on economics. It is like a avowed atheist being the reporter for the Vatican, but alas it is the New York Times, all the news that is fit to print and such. This may explain why they report the way they do on all other such items of interest. It is like having a CFO of your company having declared personal bankruptcy! I had one of those once, he never told us, just as we were trying to go public. I was a board member and the shock sent us all slightly swinging! Integrity says you cannot not do that. You can say you can swim if you cant's as long as you never go near the water! If you are on a ship and your life and others depend upon that representation then you have a problem, of ethics, to say the least. People have a reliance on your representations. Thus the erstwhile economics reporter, and perhaps many others at the old grey lady may want to recheck their bona fides!

But seriously, the Poor House is a great idea! One could imagine Bernie Madoff going there after prison!

HR 2454, The Bill From Hell!

HR 2454 is what was the Cap and Trade Bill. Except now it is not cap and trade, it is allowances and offsets. We will try and give a simple explanation on how this works. We will try, since it is some 932 pages long and it is one of the most convolved bills ever written. But I believe what it says is really scary.

First it established a decreasing cap on emissions. This is shown below. It takes 2005 as a base year and then starting in 2010 it gets to 17% of 2005 by 2050. The chart shows a slight increase as the program kicks in and then drops linearly.


















Then it also throws into the total mix all other emissions and not just energy. The weights on these are in the following Table. This Table is a real concern since it shows that we will have possibly a significant amount taken from the cap from sources which may be hidden all over the industrial landscape from cement manufacturing to cattle and dairy farmers. Just look at methane, which is weight 25 times that of CO2. Cows generate massive amounts of methane as do garbage dumps.Will they fall within the cap! The Bill seems to state that clearly.


















The process works as we show in the following Table. Let us describe each step.


1. First there are the Limits. The limits are set for each year and each generator of CO2 or other emissions must get an allowance for their CO2 or equivalent production. An allowance is equal to 1 mTn of CO2. If one generate 2000 mTn then one needs 2000 allowances.

2. Then there are allowances which are set out to the original generators and to other entities or beneficiaries. We will explain this in detail shortly. An allowance equals 1 mTn CO2.

3. Then allowances are auctioned off, some are outright given, but the majority are auctioned, with the Government being the holder of these allowances which the Government then chooses how to distribute them to its selected recipients in a set of pools which we shall define shortly. The auction process is described in the Bill in one place as a highest bid auction. In other places it is something else. In this model we have 40% of the cap being "given" to the existing suppliers and they must then nid for the remaining 60%. The bidding is done by some auction process run by the Government with the Government then allocating the proceeds in some manner to the beneficiaries as defined in the bill. As we have stated befoe based upon evidence from FCC auctions, this process may have a great number of problems.

4. One can trade these allowances. It is not clear what trading really means since an allowance is an allowance. The allowances are fungible.

6. Or one can bank them for a latter time,

7. Or one can borrow them from others to be returned at a latter time and some form of interest charged.

8. There are offsets of between 2B mTn and 3.5 mTn which the Government in some manner will allocate if there are problems. This seems to mean if the industry just cannot meet the obligations the Government can use the offsets in some manner, also be auctioned off but now the Government is the beneficiary.

9. The Government controls all of this process. The Government sets the limits, allocates the allowances, controls the offsets, collects the funds via the auctions and then determines who the beneficiaries are. The Government does of this via a new and expansive organization with a new and powerful czar.

Now the pools of allowances are shown below. They each have a percentage of the total for the year in which they are allocated. The primary energy companies, electric, gas and heating oil get about 40% of them and they then need to buy more from the pool which is controlled by the Government which in turn redistributes the money to the beneficiaries of the specific pool from which they were bought.

Note in this collection of allowances that the beneficiary of an allowance pool is as specified. Thus the electric utilities have 30%. However there are state beneficiaries, electric car beneficiaries, R&D beneficiaries, low income beneficiaries. The list goes on. This is a true collection of pork redistribution because it is the Government who decides who these beneficiaries are.

For example there is also an added tax for electricity to do the following:

"Section 114, Carbon Capture and Sequestration Demonstration and Early Deployment Program: Establishes a program for the demonstration and early deployment of carbon capture and sequestration technologies. Authorizes fossil-based electricity distribution utilities to hold a referendum on the establishment of a Carbon Storage Research Corporation. If approved by entities representing two-thirds of the nation’s fossil fuel-based delivered electricity, the Corporation would be established and would be authorized to collect assessments from retail customers of fossil-based electricity. The Corporation would be operated as a division of the Electric Power Research Institute and would assess fees totaling approximately $1 billion annually, to be used by the Corporation to fund the large-scale demonstration of CCS technologies in order to accelerate the commercial availability of the technologies."

That means $1 Billion per year ad infinitum for EPRI to "study" carbon issues! You cannot make this up. EPRI is the same group which brought you the blackouts and the grid we have today! Why choose EPRI? One wonders who is being "paid off" by this selection. This is not a free market process, it is not entrepreneurial, in fact it is about as far from the way things should be done as one would ever think! Remember that the electrical power industry has been the intellectual backwater of electrical engineering for over fifty years!




















The details of the pool allocation and beneficiaries are shown in the Figure below. This is a very key Figure in interpreting the Waxman-Markey plan. Remember it was Markey who brought us the 1996 Telecom Act. Now look at the telecom market! The beneficiaries are Government handouts to who they want to influence. Take the electric car. DoE has been spending billions on electric cars since the 1970s! Do we have anything? No. It is DoE! You cannot make this stuff up!



















It is necessary to reduce this proposal to simple pictures. The words in the Bill are incomprehensible to mere mortals. Having gone through hundreds of these before I have a somewhat better glimpse but there are thousands of little traps in the Bill played there by hundreds of lobbyists. The conflicts will eventually play out in our courts and the result will be dramatic destruction of our economy!

Pooh, Pooh, Pigou

The announcement today by Obama regarding the change in mileage standards for autos in my opinion makes sense. After all I drive a Honda so I have already taken the first step. The Republicans in general seem to support a "market approach" of taxing gasoline and then giving it back in a tax payback in the withholding taxes. The problem with the Republican proposal is minion. They are:

1. Once the Government gets your money you can be certain you will never get it back. There is thus a fundamental flaw in the principle they espouse.

2. What of those not paying taxes such as the poor and the retired. They will get no rebate and in fact they will be taxed disproportionately.

3. There is a class of drivers with substantial discretionary spending who will buy their Hummers and Escalades and drive the gasoline up and out their exhaust. This group, and it is not a small group, will just dominate gas usage. They could care less and besides they will be getting their money back if we believe the Republican acolytes. Small chance.

4. People will buy what is available. Thus if one gets to buy only 35 mpg and greater vehicles then the system works. Clearly Honda, Toyota and the other imports are already on the way there so they care less. However the Detroit trio are the ones with the problems. They need the big muscle cares because their labor costs are so high. They cannot bear the small autos. How this will work is unknown but since Obama runs two of the three there is no longer any complaints.

5. A tax is always regressive. A tax just adds the the burden of taking money from the economy and from entrepreneurs who can create wealth and value. The current administration has taken the position of wealth transfer and perhaps wealth and value destruction by absorbing funds from the economy and adding to the overall deficit and debt burden. However in this case if we can stay away from a tax and only sell what makes sense then this is the better solution.

Just Look at the DOW

The DJIA from a year ago to now is shown in the above Figure. As much as we may be pleased by the significant rise in the Dow we must look at it a year ago, after Bear Stearns had already dies and when Lehman was nearing its end and when the mortgage problems were well know and before the current Administration.

Things have not really gotten that much better in the short term. In fact we are basically where we have been since the collapse. Things are not only not better but they are not getting better. Yet they are not getting worse which may be a small advantage. It is strange to see many people viewing the market as improving. One must look backward and see little if any progress.

The Feds Balance Sheet Again

The figure above is the assets on the Fed's balance sheet. We have discussed this before and we see it beginning to rise again. This as we have argued given the ratio of M2 to assets is dramatically lower than as before bodes poorly for controlled inflation.

However if we look at the second element which is the reserve balances to other Fed banks as shown as follows we see where the growth has occurred. The Fed is buying treasuries at an ever escalating rate as well.

An Observation about Economists

I read a press release from MIT today discussing how the failing economy is providing economists with a wealth of new topics for theses and class discussion. The article states:

"Economists recognize how painful and wrenching the experiences of an economic downturn like the one we are currently experiencing can be for households and firms, but they also find that times like this create a lot of new research questions," says James M. Poterba, the Mitsui Professor of Economics and president of the National Bureau of Economic Research."

The article also states:

"This is intellectually fascinating for many of us," says Ricardo Caballero, head of the Department of Economics and the Ford International Professor of Economics, describing the market shocks and subsequent policy moves of the past six months. "My financial wealth has declined, but my human wealth has increased."

The recession may be prompting more people to seek graduate degrees in economics or MBAs. Applications to Sloan last fall rose 28 percent from the previous year, while the Department of Economics saw a more than 10 percent increase in graduate applications last fall and expects applications to jump again this year."

Could you imaging if all the bridges started to fall or all the computers started to crash and the EECS or CE professors taking glee in the fact that there would be new theses available. The truth of the matter is that they have no clue from the outset! Economics is not at the stage that it is anywhere near a science or engineering discipline, there are no true verifiable facts, and at best we can see students trying to discern what happened with tools and techniques which failed to predict what was to happen in the first place and when applied have also failed to have any deterministic effect.

I guess they just have no shame! But I also guess that there will just be many more produced. It is like investigative journalists...after Watergate everyone wanted to be one.

Electronic Medical Records and its Politics

Russell Roberts in Cafe Hayek wrote today regarding a Washington Post article on how the EMR was politically and interest driven. Roberts states:

"...the Washington Post deserves to be read in its entirety. It explores how implementing electronic records became part of the stimulus bill. Not because it's a great idea but because the people who would profit from it lobbied like crazy. It may be a great idea. Suffice it to say that the evidence is highly biased."

The Post states:

"A Washington Post review found that the trade group, the Healthcare Information and Management Systems Society, had worked closely with technology vendors, researchers and other allies in a sophisticated, decade-long campaign to shape public opinion and win over Washington's political machinery.

With financial backing from the industry, they started advocacy groups, generated research to show the potential for massive savings and met routinely with lawmakers and other government officials. Their proposals made little headway in Congress, in part because of the complexity of the issues and questions about whether the technology and federal subsidies would work as billed.

As the downturn worsened last year, advocates helped persuade Obama's advisers to dust off electronic records legislation that had stalled in Congress -- legislation that the advocates had a hand in writing, the Post review found.

Their sudden success shows how the economic crisis created a remarkable opening for a political and financial windfall: the enactment of a sweeping new policy with no bureaucratic delays and virtually no public debate about an initiative aimed at transforming a sector that accounts for more than a sixth of the American economy"

The post continues:

"Middleton said he provided many of those details.

"I sent them a LOT of stuff, many papers and most of the reports. I probably spoke or communicated with David Blumenthal, David Cutler (the health economist on the team), or Dora Hughes about every other week during the heat of the campaign," Middleton said in an e-mail.

In an e-mail, Blumenthal wrote:

"It would be flatout wrong to say Blackford Middleton was a key campaign adviser or had an official role on the campaign. He was one of many people the campaign reached out to, and I personally had minimal contact with him.""

It should be noted that David Blumenthal is the brother of the Attorney General of the State of Connecticut, not that such a relationship would in any way be used to anyone's advantage.

Finally the Post states:

"Under the stimulus package, Medicaid and Medicare providers will receive incentive payments to offset the cost of electronic health record systems they buy. No one knows for sure how widely the technology will be adopted, and no one knows for sure whether those systems will yield the expected savings, specialists said.

Another open question relates to the development of technical standards that define what equipment qualifies for stimulus payments. Some critics contend those standards could choke off innovation and funnel profit to certain vendors, without necessarily improving care.

To qualify for federal funding, the technology must enable "meaningful use" by doctors and others, according to the legislation -- a standard that policymakers, researchers, vendors and others are struggling to define now.

Joseph Antos, a health-care policy specialist who has examined the legislation, said the risks of the technology plan are high because of the haste with which it is being implemented and the special interests seeking to profit from it.

"This is the real way things get done," said Antos, of the American Enterprise Institute, a Washington think tank. "The stimulus bill looked like a bonanza to an awful lot of people.""

Let us again make a few observations:

1. The EMR is a complex concept, and it must include searchable and secure complex multimedia file elements. I wrote about and developed some of the preliminary systems in the late 1980s and have returned to it frequently. There is no simple web based interface because entry of data is from a plethora of sources, including the physician.

2. The Government plan unfortunately is based upon the input of a few. This is a classic Government project. One need look no further than the FAA and see that we are fundamentally using an air traffic control system designed in the 1950s! Imagine what a Government system will do to the EMR. Again I have argued that an IETF model used in the Internet is the way to go. If all else fails listen to the customer. As much as I greatly respect my former Harvard colleagues, the engineer side of me is always concerned about the details.

3. The goal is laudable and ultimately the system is needed. However the stress to incorporate a system like this as a "stimulus" forced via strong lobbying will lead to a disaster and loss of money and worse generating lack of future acceptance of such a system. I argue that in the short term it will actually add to the costs of a physician's practice, which of course will result in a reduction of a physician's compensation and the driving of truly competent physician's into a practice not accepting of any insurance, especially Medicare. There will be a new set of "medical services" plans for those with money and not using Medicare and especially not using the new proposed Government plan.

Again one must always be aware of the unintended consequences. Washington does strange things to people's egos. As Wall Street generated Masters of the Universe, Washington creates gods! It becomes the Olympus on the Potomac.

The Unemployment Chart

The above chart is the plotting of Christine Romer's projections of unemployment with and without the stimulus plus the real data.

I am reminded of when I ran my own companies, every Monday morning I had directors call me to see how we did last week. One from London was akin to a hemorrhoid in his call from London which was on my phone blinking away along with a half dozen emails. If I failed to meet or exceed the targets then I was justifiably called on the carpet to explain. By the way some of this occurred during the telecom meltdown when we frankly did not know how bad the storm really was.

However it is clear that Romer was way off base! If she were head of sales she would have been sacked by April 15th. You just cannot be that far off. However this is economics, macroeconomics where two things coexist; unfounded opinion and no basis in any facts which are reproducible.


The second chart shows how far they are off in actual percent differences by month. We will follow this data as we progress along this so-called recovery plan.

Verizon: A Great Move or The Greater Fool Theory is Alive and Well

In 2002 we published a paper called the Imminent Collapse of Telecom, after a request from White House Staff. It was looking at several factors; the loss of copper access lines to cable telephony using VOIP, the growth of wireless and the impact of broadband. We were right, and usual we were a few years early and two financial collapses early.

Then in September 2007 we wrote a report on how Verizon would finance their FIOS properties and this was through a sale of central offices. A month ago we remarked how Verizon was lucky to sell of the New England properties.

Today we see Verizon has found a bigger fool to buy the remainder of its junk, namely old un-upgradeable copper! Namely the sale to Fronteir. The release states:

"The operations Frontier will acquire include all of Verizon's local wireline operating territories in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin. In addition, the transaction will include a small number of Verizon's exchanges in California, including those bordering Arizona, Nevada and Oregon."

It continues:

"As of the end of the first quarter, Verizon had approximately 35.2 million wireline access lines in 25 states and the District of Columbia. This includes Verizon's wireline operations in jurisdictions that will not be part of the transaction: Connecticut, Delaware, District of Columbia, Florida, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Texas and Virginia, plus most of California."

This in my opinion is a real greater fool action and an absolutely brilliant move by Seidenberg the absolute genius in deploying a strategy which we proposed seven years ago! It is like that scene from Patton where he wins his battle against Rommel's troops and says "you SOB I read your book..." Did Ivan read my book?

Now what problems remain? Vodaphone and its 45% interest. Analysts have been commenting on Verizon's dividend problem because they now have to pay from dividends out of wireless. Again, and I love to do this, the analysts are just plain idiots! My opinion. Look at what just happened. The declining junk was pushed aside and made someone else's problem and the remaining markets are FIOS triple or even quadruple play markets. So what does Verizon do, it buys Vodaphone in what may be a hostile bid.

Hedge fund guys, watch the dust! At least that is my guess, it is not in any way a recommendation, you take your own risks!

Government Control of Salary: Good or Bad?

There is a significant amount of coverage of the proposed control of salaries and overall compensation in the financial service industry by the Government. The reports from the Wall Street Journal to the New York Times stress the intent to match compensation and responsibility.

The Journal states:

"Administration and regulatory officials are looking at various options, including using the Federal Reserve's supervisory powers, the power of the Securities and Exchange Commission and moral suasion. Officials are also looking at what could be done legislatively.

Among ideas being discussed are Fed rules that would curb banks' ability to pay employees in a way that would threaten the "safety and soundness" of the bank -- such as paying loan officers for the volume of business they do, not the quality. The administration is also discussing issuing "best practices" to guide firms in structuring pay."

The Times remarks:

"Among the ideas under consideration are incorporating compensation as a “safety and soundness” concern on official bank examinations as well as expanding the existing regulatory powers of the Securities and Exchange Commission and Federal Reserve to obtain more information regarding compensation. The policymakers are also expected to publish formal guidelines regarding Wall Street pay."

Let me take a brief look at how compensation works in other industries.

Insurance Sales: The classic plan is that for the old insurance salesperson. They go out and sign up some person for a life insurance plan, say whole life. This is a very lucrative policy for the company but the salesperson gets paid over time if and only if the person who purchased the policy still keeps it and pays their premium. If the customer drops the policy then the salesperson gets nothing.

Telecommunications Services: This is an area in which I have considerable experience having run these businesses for years. The sales person gets a percent of the gross revenue per year for say five years. The customer must stay with the company and there is a motivation for the salesperson to both get a good customer and to keep the customer. The sales person may get 2% per year of the gross revenue for five years. If the customer goes away then the revenue goes away.

Now let us look at investment banking. Let us look at say an IPO. The bank prepares the S1 filing and gets a payment at closing of the public offering but takes no responsibility as to whether the company and the offering make an economic sense. They may very well be selling junk. The perpetrators of this sale upon the public get their money and move on. If compensation in the financial world matched that of the rest of the world then the bankers would be compensated over a period of time if and only if the company were successful.

Now move to mortgage brokers. Why is their compensation not like an insurance sales person? Because the mortgage is fungible, it can be sliced and diced. The sales person gets their money and runs. Making compensation run contemporaneously with the product sold would improve the situation especially since that is what works in most of the rest of the world.

The issue is what role does the Government play in this process. It appears that the current Administration wants to use its heavy hand and added to that is the Congress especially under Congressman Frank, want to use legislation to "punish" Wall Street. Beware the un-intended consequences.

There are many fine examples, models, precedents for a balanced commission and remuneration. They should be followed and fiscal policy should be used, not the heavy hand.

An Interesting Development: Virtual Colonoscopy

The U.S. Centers for Medicare and Medicaid Services toady announced that Medicare would not pay for virtual colonoscopy. Specifically they state:

"The evidence is inadequate to conclude that CT colonography is an appropriate colorectal cancer screening test under §1861(pp)(1) of the Social Security Act. CT colonography for colorectal cancer screening remains noncovered," the May 12 memo states.

The decision comes as a blow to advocates of CTC, who held out hope that the agency would reverse its proposed February 11 decision to deny reimbursement for screening CTC based on the body of evidence presented to it since the analysis of CTC as a screening tool began last year."

The opposition states:

"Dr. James Thrall, chair of the American College of Radiology Board of Chancellors, was even more emphatic.

“Make no mistake: If it stands, this CMS decision not to pay for CT colonography will cost lives. More than 140,000 Americans are diagnosed with colorectal cancer each year. Nearly 50,000 of them die due to late detection. How can CMS ignore the fact that people are dying because they do not want to have the tests that are currently covered?” Thrall said in a statement to the American College of Radiology.

“For CMS to turn its back to a technology that can attract more patents to be screened and save countless lives is deeply concerning," he continued. "CMS should reverse this determination immediately or Congress should step in and vote to mandate coverage of CTC.""

I knew Dr Thrall from Mass General many years ago and he is a highly respected radiologist. This may seem like an inside baseball issue but it does raise many questions as we see Health Care go through many changes.

The New England Journal of Medicine has reported five years ago:

"CT virtual colonoscopy with the use of a three-dimensional approach is an accurate screening method for the detection of colorectal neoplasia in asymptomatic average risk adults and compares favorably with optical colonoscopy in terms of the detection of clinically relevant lesions."

However there is a battle between other specialties and radiologists as to who will "own" the patient. This argument in many ways is centered around that issue. Does this cause the patient any increased risk. Unlikely since the standard procedure with and endoscopist leads to the ability to immediately remove lesions. In addition a competent endoscopist can detect sessile lesions with greater accuracy and it is those lesions that often are missed and also are the most lethal.

Thus is this a decision to control medicine or to improve care. I believe the evidence is the latter. Fear not from the Government, at least on this one.

The New York Fed Has a Similar Concern

The New York Fed published a paper today on Precautionary Reserves and the Interbank Market which looks at the problem of banks hoarding the Federal funds provided them over the pas few months. In the paper they state:

"Our interest lies in studying the precautionary behavior of banks facing liquidity shocks and credit constraints, and how this affects the interbank market equilibrium. To achieve this, we develop a model with payment liquidity shocks, credit constraints and limited interbank market participation. Banks rationally hold large precautionary balances intra- day and overnight, which may be described as hoarding, and which leads to volatility in the interbank market rate. We show that extreme outcomes that occur during a crisis may be in part explained by our general model of interbank market frictions. The model also gives broad theoretical results about the effects of such interbank lending frictions during non-crisis times."

As we have shown in our previous entry the ratio of M2 to Federal Balance Sheet assets is usually 45:1 but the new ones due to hoarding are 15:1. This is bad news for many reasons. First the funds are now going out to the market for financing. Second, and this is more serious, when the banks loosen up, the M2 will explode and given the simple relationship between M2 and inflation we would anticipate a rate of inflation well in excess of 12-15% per annum, well above the 2-3% we see now. Thus the Feds attempt to stave off deflation will result in a strong potential for massive inflation.

Although this paper is quite analytical, it does show that there is concern.

The worst part, however, is the gross perceived incompetence of the Feds oversight as exemplifies in the presentation of their Inspector General to Congress. Chairman Bernake has a duty to provide transparency on this issue which seems to be lacking.

Further what I see is that the many economists seem to be missing this simple causal relationship between monetary policy and the attempts to drive liquidity in the system.

The question is; why are the banks hoarding. In my opinion it seems to be simple, fear of the current Administration taking over a bank which it in its sole opinion is not doing well, at least as they define it in the "stress test" analysis. The unintended consequence of the "stress tests" is the spreading of fear about the banks own balance sheets and the resulting hoarding of cash and in turn the resultant explosive impact of impending inflation!

The data is now clear and unfortunately no one is looking forward!

M2 to FRB Assets: An Interesting Ratio

This chart shows the ratio of M2 to FRB assets. The observations here are quite interesting. The Fed has pumped money into the banks and the money has not come out the other side. The normal ratio, historically speaking, is a 45:1 ratio. We are now seeing an almost 15:1 ratio. This means that banks are hoarding the money put in, as evidenced by the lack of small business credit, and secondly when the money does ever start to flow that there will be the potential for massive inflation. The more we look at this ratio the more we believe that it is a useful metric to anticipate a functioning banking system and the risk of massive inflation. Despite the current Administration's rhetoric regarding what they are doing for small businesses it seems clear that there really is little if anything being accomplished. The flow of the stimulus money from the Federal Government to the states, without any sense of accountability, will result in a great number of tales of waste, fraud, and outright theft.

The $9.7 Trillion Commitment

Bloomberg in February posted a story which stated:

"Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged up to $5.7 trillion more. The Senate is to vote this week on an economic-stimulus measure of at least $780 billion. It would need to be reconciled with an $819 billion plan the House approved last month"

Bloomberg went on to state that they were litigating under FOIA to obtain the details:

"Fed Sue: Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request..The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan)."

The in a Congressional hearing Representative Alan Grayson questioned the Inspector General of the FED, depicted in detail on YouTube, which demonstrated the near absolute incoherence of Federal employees, especially political appointees. We have shown the FED balance sheet a few days ago and how it has grown almost $2 trillion since then end of last year. The question is where are the commitments on the balance sheet, and the answer is they are "off balance sheet" but they are just as firm as if they were on balance sheet.

This clearly raises major concerns regarding inflation, yet M2 is still low.

Real Estate Metrics

The MIT Center for Real Estate has some interesting demand and supply information on real estate. We present a summary here but it covers a broader scope of properties. The chart below is somewhat telling. Note that until the collapse the Demand exceeded the supply. Since the collapse the opposite is the case.

The following are the details for the retail, office and industrial markets.

FRB Balance Sheet

The FRB has published its weekly balance sheet data. We summarize some if it here. The figure below depicts all of the assets of the Fed from early 2007 until the present. Note that the jump up to $2.5 trillion was the Fed "printing" money and raising its assets by $1.5 trillion in just a few months. This is a classic example of central bank intermediation.


The following depicts the Feds liabilities since January 2009.















The Fed liquidity facilities are shown from January 2009 thru the present below.













There seems to be a stabilizing of the Feds balance sheet and this along with the other metrics we have been tracking such as unemployment changes, M2. and the "portfolio" lend one to believe that perhaps the worst is over. Yet we are still concerned about both commercial real estate and the massive amounts of high yield debt.

Antitrust Law: Will it Return?

Mankiw again writes a column critical of the Department of Justice new Antitrust Chief Christine Varney (see NY Times). Let me first begin by stating that Varney was once a Board member in one of my companies and I think quite highly of her. She is a truly competent attorney and experienced in the ways of Washington. Second let me state that I have written extensively on antitrust law as applied to telecommunications and as such have both a legal perspective and hands on experience in its use and misuse. Mankiw is an economist and I need say no more.

Let me address two simple examples. Both relate to tying agreements and antitrust remedies.

Access and Interconnection Fees: This is the old question of, if there are local telephone providers and long distance providers, then the customer should be able to choose their combination and the incumbent should not receive a benefit from an access fee just because they were an incumbent. The local wireline companies receive an access payment from the wireless carriers because the externality presented by the wireline is supposed to be a benefit. Well there are now more wireless phones than wireline and thus should the benefit switch, likely not to. This was based upon the old Baumol Willig theorem, a classic example is sloppy economics. The failure of the Antitrust Division to do anything about this after the 1996 Telecom Act led in my opinion to the collapse of the Telecom market in 2000-2001.

Digital Cable Converters: Companies like Cablevision and others have decided that they will take economic advantage of their customers in two ways. First they have been raising their rates between 6-10% per annum for the past several years. It costs now almost $55 per month for a modest basic cable package and about $50 per month for broadband. The former contains a couple of dozen channels of no import, it excludes all CSPAN for example, and is not digital. They charge an additional $10 per month per television set for a digital converter. The converter costs wholesale about $25-30 in bulk! That means there is at most a 3 month payback and then in my opinion an almost extortionary payment to Cablevision. They keep removing channels from basic forcing the subscriber who has no alternative to pay for this box. It is in my opinion a tying agreement. They should specify the box allow TVs to be digital cable ready for their system or allow third party manufacturers to sell the product. This is a great antitrust case. Mankiw would disagree.

Now to Microsoft. The bundling of Windows and Internet Explorer is a tying arrangement and moreover the nexus between the browser and the operating system was the portal through which all Internet cyber terrorists enter. Firefox has a firewall, the Microsoft product has monthly updates. I believe that Mankiw's rant is without merit and that the Antitrust Division under Varney has a chance again to allow equity across markets.