This can be illustrated by the following: About 25 to 30 years ago the Blue Cross/Blue Shield system dominated the health insurance industry. There was sharp criticism because the hospital portion of medical care was paid on a cost plus basis. Those who did not understand the system assumed that this led to uncontrolled growth in hospital costs. Governments forced the Blues into a different payment system and hospital costs skyrocketed. What the critics failed to understand is that the Blues audited hospital costs and refused to include many costs in the payment base. In fact, hospitals were required to get advance approval for major capital purchases. This means that if one hospital had an underutilized MRI the blues would not reimburse another hospital in the area that acquired an additional MRI. The Blues encouraged the second hospital to contract for MRI services with the first hospital. This led to lower overall costs in the system. The elimination of the Blue Cross single payer cost-plus system led to duplication of services and higher per unit costs due to  underutilization at some institutions and higher over-all costs due to scheduling of unnecessary tests designed to justify the acquisition of the equipment at others. In this case competition led to higher costs rather instead of    economic efficiency.

Now we are hearing health insurers and their congressional apologists screaming that a single payer system would not be economically efficient because we would eliminate competition. In addition, they claim that a single payer system would lead to rationing. What they fail to consider is that we already have rationing. In a world of scarce resources the market based system allocates, i.e. rations, resources on the basis of prices. In the realm of health care, those who can afford to pay the price get the care. Medical care is rationed to those with either high wealth or good insurance. Those without either get poor or no care. In addition, as was explained earlier, market based health care leads to higher costs.

The time has come for Americans to join the rest of the developed world and treat health care as a non-market service. Those who claim that the government cannot operate efficiently just need to look at Medicare as a model. I have many friends, over 65, who rail against government involvement in health care. When I ask them if they're going to give up their Medicare coverage their universal response is that Medicare is great. Why would they give it up? When I point out their contradictory attitudes they just ignore me. They fall into the category of those people who dislike economists    because economics often disproves their preconceived notions and people are reluctant to change cherished beliefs when evidence contradicts them.

More and more, today, we are reading the current economic crisis proves that Market Economics is dead. Looking at the behaviors exhibited in the last twenty years, the detractors tell us, proves that people do not follow the rational economic choices that are espoused by classical economists. They claim that the new wave of economics is behaviorist and behaviorism destroys all classical analysis. In other words: "Adam Smith is no longer relevant."

Although there are strong arguments for this approach, I believe that the classical Supply/Demand Model still works. It only needs a minor modification to remain relevant and reliable predictor of human behavior. Most of us, who only had a cursory course or two in economics, remember that the Supply/Demand approach looks at prices and quantities. There is an assumption that all of our decisions are based upon changes in prices. What we forget is that the price quantity relationships are stipulated as operating ceteris paribus. This means that everything else remains constant. Economists are not stupid. They know that people spend based upon their tastes and preferences, their income, their wealth, their expectations and many other factors. The model, however, holds these items constant and says that people will act rationally in a supply demand situation.

Where our model appears to fall apart is that people seem to be acting irrationally. If this is the case, then maybe economics is irrelevant. Looking at the same behaviors, I have come to a different conclusion. I concentrate on peoples' expectations. I believe that people act with economic rationality based upon their expectations. However, there is nothing in the model that says peoples' expectations have to be rational. So, if you believe that the basics of the economy have changed and there will never be a down real estate market again, you will be willing to take on an in ordinate amount of debt because the rising asset value will give you a growing net worth. Expecting a market with no down side risk is irrational. But, if you are faced with experience that has never seen a down side in real estate you will act as if the lack of a downside is reality. Your actions are rational within the context of your belief and follow standard economic models regarding supply and demand.

This approach also helps us understand why people buy high and sell low in the stock market: If the market has been growing for a long time but you are afraid of market cycles there is a high probability that you stayed out of the market during its early growth phase. As the market keeps growing you begin to experience cognitive dissonance. That is, your behavior is at odds with everything you now appear to know about the market. You finally give in and go into a buy mode. However, you waited too long and the market drops shortly after your purchases. You are now in the "...I knew I never should have done this..." mode. Your real expectations have been reinforced and you decide to "...cut your losses..." Your observed behavior is irrational. But, based upon your expectations you behaved rationally.

We do need to spend more time addressing how expectations are created. We also need to do more in the realm of education that allows expectations to be created based on rationality. The problem we have had is that the experts, who should have known better, were making so much money that they were reluctant to burst the balloon and eventually began to have irrational expectations of their own. They began to believe their own hype.

Up until now I had the attitude that Secretary Geithner needed all the support we could give him. The country needed to have a solid voice that could implement plans without creating a sense of uncertainty. However, I now believe the time has come for him to go. His recent plan to deal with the "toxic assets' is fatally flawed. It is based upon the assumption that the markets have undervalued the assets and government guarantees will get the private sector to buy them. The problem with this approach is that it relies upon the banks being willing to sell the assets at the price the market is willing to pay. The private sector which has already priced the assets at extremely low levels and the Geithner plan expects it to miraculously start buying at inflated prices due to government guarantees. There is not even an assurance that the banks holding the assets will sell them at anything less than face value.

 In addition, if the assets prove to have little worth, the US government, read you and me, will have to pay off the guarantees. It would be a lot cheaper to the taxpayer if we nationalized the illiquid, read that as insolvent, banks, let the assets mature, and pay back the taxpayer to the extent that the maturing assets will allow. We, in aggregate (government), have a much greater capacity to wait out the market than do profit making institutions. In the long run a single "Bad Bank" will have a greater capacity to renegotiate loans, the disruption to the market from bank bankruptcy will be mitigated, and the costs to the tax payer will be lower.

Mr. Geithner appears to be too obsessed with preserving the current insolvent banks rather than solving the problems facing the financial system. I believe that in his role as President of the Federal Reserve Bank of New York he may have gotten too close to the "Movers and Shakers" who caused the problem to begin with. This makes him overly amenable to their approaches that are design to preserve their own positions.  Once again the economics of greed is winning out over Adam Smith's "Enlightened Self Interest"

When I was reading about the AIG bonuses I was as outraged as anyone else. The first thing that came to my mind was "How could Geithner let them get away with this?" Then I stopped and thought about the days when I managed a half-billion dollar portfolio. Number in the thousands didn't seem very significant. The problem arises from the fact that large numbers contain a lot of digits. Most people working with large numbers drop several digits due to what accountants call immateriality. For example: Most company financial statements have (000) written under the title of the individual financial statement and all of the numbers are in thousands of dollars. So, $1,985 is really $1,985,000. We're talking millions of dollars, not thousands and hundreds of dollars get lost in the shuffle.

So, how did Mr. Geithner miss $250 million? It is easy to do when the bailout is in the billions. Simply, most of the numbers crossing Mr. Geithner's desk were probably written in billions. The bailout package to AIG was probably written as $185 instead of $185,000,000,000. This means that the bonuses would have been written as $0.165. This is a number that looks insignificant in the overall scheme of things and could easily be missed. Especially by a person who is dealing with a national debt number in the trillions. Let's face it, if all day long you're seeing number like $9,654.4 which is the national debt, $0.165 looks like peanuts. That fact that the true numbers are $9,654,400,000,000 and $165,000,000 gets become obscured.

What is needed is to have people working with the Treasury Secretary and the Fed Chairman who understand that apparent small percentage numbers have a high impact when read as whole numbers. People in the rarified air of Washington and New York do not realize that the AIG bonuses could eliminate the debt of many smaller cities and pay for the complete budgets of many school districts. I do not blame Mr. Geithner for missing the impact news of the Bonuses would have on the public. I do blame the loud mouthed critics who would have claimed that the Obama administration was destroying the capitalist system if the bonuses had been blocked. Once the bonus contracts were written, it became a loose-loose situation for the Obama team.

About 15 years ago, when I was working in corporate treasury, my company's insurance broker asked me to write a letter to him expressing my experience in dealing with AIG as the carrier of our Liability and Workers Compensation coverage. My response was that the AIG representatives behave in such an arrogant manner that one would think that you were dealing with the Department of Motor Vehicles. The recent announcement that AIG would be paying in excess of $165 million in bonuses convinces me that nothing has changed.

Remember, AIG is a company that has required tens of billions of dollars in bailouts from the government in order to avoid cascading failures to the world economic system. In addition, AIG's losses have been larger than the GDP's of many medium countries.   Yet, the executives of AIG have the arrogance to believe that they are entitled to huge bonuses. Yes, I said entitled. Executives at AIG believe that they entitled to receive a form government transfer payments similar to the welfare system. However, these payments go to those who are well off: Welfare for the rich.  The executives will claim that government money isn't paying the bonuses. If that is the case then AIG doesn't need the $165 million and the government payments should be reduced by value of the bonuses.

I fear for the future of the United States. We have gone from a country where Adam Smith's enlightened self interest has changed into the arrogance of greed.  I cannot think of any behavior which could do more to convince Americans that there is something wrong with the capitalist system. The executives' actions could not do more for advancing socialism than they could if they were on the payroll of the Socialist or Communist parties.

The Republicans tell us that President Obama is attempting to adopt European socialism in the USA. However they are actually trying to establish European separatism as an alternative.  Let's face it; Europe is an amalgam of over 20 separate countries with few mechanisms for coordinated Fiscal Policy. Monetary Policy is centralized through the European Central Bank in the same manner that our Monetary Policy is centralized through the Federal Reserve System. However, Europe does not have a strong central government to design and implement fiscal policy. As a result, even the Europeans have doubts about their ability to recover. Each country is pretty much on its own regarding stimulus issues. That means if Italy tries to increase spending and create jobs the result could be that the new spending ends up creating jobs outside of Italy. This would happen if France decided not to stimulate its economy. As a result wages, and therefore, prices would be lower in France and the Italians who were hired under the stimulus would buy French goods. This would result in sporadic growth in Europe and a prolonged recession.

American governors who refuse the stimulus money would be placing our country in the same boat a Europe. The lack of spending in their own states would lead people to relocate to states where the stimulus money is working. The result would be a continued recession in their own states and a delayed recovery in the country as a whole as unemployed workers cross state lines.  The only reason to seek this type of scenario is to be able to say: "See the stimulus didn't work so vote Republican."  The Republicans are willing to see the country suffer so that they can regain power. It is this selfish approach which can threaten the state of the Union. The Republican Governors are traitors who have stronger loyalties to their party than to the country.

The more I read Warren Buffett's comments regarding business and economics the more I believe that he has more practical sense than all of congress combined. Today on CNBC Mr. Buffet stated that it is time to treat our economic problems as if we were at war. In doing so our congressional political parties have to put their partisan differences aside and treat our president the way we would in a full scale war situation. In an all out war, the people need to believe that we will win and the president must be commander in chief.  Buffett (along with Krugman, Stieglitz and most economists) stated that confidence is necessary for an economic recovery to take place. As long as the congressional Republicans fight everything President Obama tries to accomplish and the Democrats try to add pet projects to every piece of stimulation legislation, the public will have serious doubts about the prospects for recovery.

It is time to end the fighting if we are to preserve the nation. Recovery is a matter of national security and we should all be a part of it. The problems that will arise from the tactics used to stimulate a recovery are far more manageable than the slide that will turn into a plunge if we do not act. Monetary Policy has done well at preventing a full scale plunge. However, monetary policy has reached its limit because we are now in what economists call a liquidity trap. It is time to let Fiscal Policy do its job.

People often ask me why we can't let banks and organizations such as CITI and AIG just fail. The answer is simpler than most of us would expect. First it is important to think of the economic system as an organism comprised of a series of interrelated systems similar to the human body. The banking system is the circulatory system of the economy; Money is the blood of the economy. If an artery, such as a major bank, gets clogged some other major organ may fail or be severely impaired. We can equate the failure of major financial institutions to the clogging of arteries that lead to cascading organ failure. Clogging of the renal artery can lead to kidney failure. We can survive with one missing kidney but a loss of both will kill the organism. A bad kidney can lead to a bad liver which can affect other organs. CITI or AIG going under can lead to a cascading collapse of other banks and financial institutions to the extent that the whole organism we call an economy can die. Therefore it is necessary to prevent the total failure of these organizations.

 However, this does not mean that we must preserve the plaque that got us into trouble to begin with. Just as arteries can be opened using stints and plaque can be reduced with Statins, financial institutions may need a complete change in the clogging agent known as outdated management. In addition, a pacemaker (regulatory agency) and regular check-ups (audits) may need to be added to keep the system healthy.

Whenever I hear the minions of the Republican Party, and the right wing goofballs such as Rush Limbaugh, screaming about the Democratic Party's lack of fiscal responsibility I am dumbfounded by their self deception. The fact is that history shows our worst years of fiscal responsibility have occurred under Republican Administrations. Data on the Federal Debt as a percentage of GDP, generated by the OMB, demonstrates this.

From 1960 through 1980 there was a general decline in Federal Debt as a percentage of GDP from 56% to 33.1%. However, with the beginning of Reaganomics in 1981 we can see a sharp increase in this percentage. It continues to grow sharply throughout the Reagan and Bush senior years. As stated earlier in 1980 the debt was 33.1% of GDP. Republican prolificacy led the percentage to top out at 67.3% in 1996. Throughout the balance of the Clinton years the value dropped. In 2002 it was down to 59.2%. With Bush junior's ascendance to the presidency there was a sharp increase in debt until it is projected to reach 67.5% when the final figure for fiscal 2008 is in.

Somehow the Republicans have managed to deceive the press and the public into believing their myth of Fiscal Responsibility. I guess they have learned well from Joseph Goebbels: If you tell a big enough lie often enough people will begin to believe it. When will the press start doing its job and start challenging the deceptions of the right?

If you read the current press or watch television news you may have heard that Americans have lost confidence in President Obama. The real problem is that the media in their stupidity has given credence to the latest scam of the obstructionists from the right.

The real issue is that the right wing, who believe that government has no role to play, has spent so much time talking about how Obama's plans couldn't work that the economically ignorant press has begun to believe them. If Obama's plans fail it is because the right has been obstructing so much of anything he tries to do that the people have lost confidence not in him but in the who political process. When Rush Limbaugh says he wants Obama to fail and Rick Santorum, a light of the "Right" agrees, we find we are all in trouble. The right has learned that expectations have an awful lot to do with how an economy operates. If they can destroy positive expectations then the failure of the recovery can move the right into power in 2012.

Rush and his ilk are traitors. They are more interested in their regaining power than they are in the health of the country. Their governors' refusal of stimulus funds borders on criminal behavior and implications that they can refuse to follow laws they believe to be unconstitutional is a step toward cession and a new civil war. They would rather see a failure of the republic than allow their opponents any semblance of success.

Recently, my wife and I found out that we could reduce our mortgage and second mortgage interest rates substantially by refinancing and combining the two loans. This process reduced our monthly payments by over $300 and left us with substantially the same outstanding balance. The generation of credit reports for the mortgage triggered automatic reporting to our various credit card companies. One company cut our credit limit in half because we weren't using all of it. Another credit company cut our credit limit for two reasons: one was that we used too much of the credit available on the first card. The other reason was that they didn't like the bank from which we obtained our new mortgage.

The fact is that we substantially reduced our monthly cash outflow. This means that in the event of something going wrong with either my wife's or my income our chances of continuing to pay our bills has been significantly increased. In their infinite wisdom, however, these idiots reduced our credit limits. This has resulted in our eliminating our plans for a winter vacation because we do not want to come closer to our still available credit limits and thereby reduce our future credit worthiness.

On top of all of this, the banks that reduced our limits were on the list of banks which received outrageous amounts of bailout money. This is the money that was intended to increase bank's willingness to lend. Not only did it not increase bank lending, it appears that the banks have reduced their lending despite their gorging themselves at the public trough.

So, because the banks are acting like idiots, people like my wife and I who are willing and able to spend have been forced to cut back. Perhaps the Swedish answer of nationalizing the banks is the only way out of this mess. We should also be looking at the potential for fraud charges against the banking executives who took the money under false pretenses.

Someone once said that we get the government we deserve.  My problem is that I cannot fathom what grievous harm we've done to the world to get the congress we have today. We have both Republicans and Democrats screaming that we have a spending program instead of a recovery program on the table. My guess is that all of them failed their Introductory Economics course or they decided that nothing in the field developed after 1899 has any relevance.  Our illustrious elected leaders seem to forget that spending is economic stimulus. When Republicans complain that the New Deal took too long and we needed WWII to get out of the depression, they are ignoring the fact that it was the stimulus spending for WWII that finally ended the depression. Even FDR had a tough time spending enough to end the disaster. Now Republicans and some conservative democrats are complaining that President Obama is spending too much. These naysayers are going to end up extending the problem through under spending.

I can understand why the Republicans might want to do this. They believe that they can win the mid-term congressional elections if they make sure that a recovery doesn't take place. They are willing to see the country go down the tubes in order to gain an electoral victory in 2011. They bring out the old saw of giving money to business to get the economy moving. They believe in something called "Say's Law" which states that supply creates its own demand. The problem is that nobody in his/her right mind is going to produce goods in the absence of demand. Without an increase in demand, reducing the cost of labor merely increases business profits without increasing employment.

It is time to get tough and call the obstructionists to the carpet. I would use their old saw and state that they are threatening the security of the United States. I would not hesitate to call them traitors who are more interested in lining the pockets of the internationalist multi-national corporations than they are in the security of America. Progressives have, for too long, been too timid in their pursuit of their goals. They have tried to appeal to the mind. It is now time to use the tactics of the conservatives and start appealing to the gut. In 1932 the USA could have gone the way of Germany and Italy or the way of Russia. We found a third way through FDR and the new deal. If the conservative have their way, I'm afraid that our fate will be to resemble Mussolini's Italy.

As we look about the business landscape we find that many older, former blue-chip, firms are on the brink of financial collapse. Given the shrinkage of credit, many are asking if these firms have enough cash to survive a major recession. GM has been forced into seeking Federal Loans and GE has already started marketing commercial paper to the Fed. Why are these firms so cash poor that they have to go to extremes to survive?

I blame the Wall Street analysts and the MBA programs of America. In the last 40 years there has been a growing emphasis on distributing cash to share-holders at the expense of a company's future financial health. About eight years ago I spoke with the management of a firm which had recently moved from listing on the American Stock Exchange to listing on the New York Stock Exchange. Management was flabbergasted when the stock analysts assigned to their firm said that they could not recommend buying the company's stock because they didn't owe enough money. The company's management had always pursued a program of internal financing. They believed that low leverage (borrowing) ratios meant lower costs to share holders and safety in the event of an economic turn-down. The analysts insisted that the company should do more borrowing and hand the excess cash over to the shareholders.

Almost all publicly traded companies are faced with this dilemma: Do they look to the long term financial health of the company or do we put emphasis on maximizing short-term shareholder value? The fact is that that the two may be mutually exclusive. High cash distributions may enhance short-term shareholder value while undermining long term financial heath. It is similar to the kick an addict gets from cocaine. It feels good every time the addict gets a hit. However, the addict's long-term physical health is at risk.

As a product of several of America's business schools I am well aware of the financial analyses that are being taught. I also understand the economic theory underlying the analytic thought processes. The problem lies in the fact that most of the analysts are working from a strictly academic angle. Most have never worked outside of the financial sector and have no notion of how a firm producing real as opposed to financial worth operates. The crux of the problem is that they treat all wealth creation as if it were financial wealth. This leads to a casino mentality where the emphasis is on short-term results. We end up in a world where there are no investors. All we end up with is traders. If you don't believe this, just look at the turn-over ratios of some of our largest pension plans. The ratios often indicate that the portfolios are being completely liquidated and repurchased more than once every year. This is not investing. It is gambling masquerading as an investment strategy.

If we want America's firms to survive, we need to break this gambling mentality. We need to restructure the nature of business education. We need to realize that risk is more than the financial analysts' notion of price variability. They believe that diversification will get rid of the specific risk of bankruptcy. What they fail to recognize is that the emphasis on leverage increases the bankruptcy risk of all firms. If all firms are under increased bankruptcy risk then specific risk becomes market risk and it is impossible to diversify it away.

Now that Obama has submitted a stimulus package I am struck by the fact that the Republican in have returned to their standard of trying to stimulate business through tax breaks and tax credits. They use the excuse that businesses will hire more people if government would only give businesses tax credits for every additional person they hire. The problem is that this is pure bull shit. The demand for labor is derived from the demand for the goods and services businesses sell. When businesses get stimulus credits they are only applying for money based upon people they would have hired anyway. They believe that they are not doing anything wrong because they feel that the money is going for hiring people and since they're hiring, why shouldn't they get the stimulus money. The forms that are completed merely move numbers around to prove that the stimulus got them to do the hiring. It is a shell game on a massive scale.

To understand what I'm talking about you only need to look at the CFO.com article of Sept. 24, 2005 entitled "Tax Breaks Don't Boost Investment." This article looked at the effect of tax credits on business investment and found that the companies with tax breaks cut their investments by 22%. The article concluded that investment was based more on the demand for a company's goods than on the cost of making the investment. In other words, the demand for any production input is based  upon the demand for the goods and service the inputs produce not on an artificially reduced price of the input.