Archive for March, 2010

Love thy Neighbor…or else..

“Mike!  Mike! ….Its on!  its on!”, called the seven year old big brother.  

A five year old Michael Bechara sprinted from the kitchen, turned the corner into the living room, and did a baseball slide on the carpet to position himself perfectly in front of the TV.  

A TV that was like a piece of furniture, I might add, encased in solemn walnut veneers.  

As the opening theme played on the screen, the two boys watched slack jawed in complete concentration. 

As the astronaut’s rocket crashed, the announcer’s voice said, “Steve Austin, a man barely alive.” 

The scene then moved into the hospital’s operating room.  The announcer continued, “Gentlemen, we can rebuild him.  We have the technology.  He will be better, stronger, faster.” 

So went the opening theme for one of the best TV shows of all time.  The Six Million Dollar Man starring Lee Majors. 

As I look around these days, my instincts tell me many government officials may have shared my fondness for the TV show. 

Recently the US healthcare system was wheeled into the operating room and the bureaucrats may be repeating the familiar refrain from The Six Million Dollar Man, “We can rebuild it, we have the technology, it will be better, stronger and faster.” 

Whew..if only this delusion was limited to six million dollars! 

In the new drama called the “14 Trillion Dollar Economy” bureaucrats who were incapable of running the Post Office are now in charge of major sectors of the economy, healthcare being the most recent addition to the central planning portfolio. 

Of course no one doubts that our current healthcare system is broken, as it basically consists of a cartel system or a managed monopoly of insurance companies.  

The issue with the “new” ideas coming out of Washington is that they ignore the problem and focuses on a symptom of the problem.  The new healthcare law focuses mainly on insurance.  Forcing people to buy it, trying to make it less expensive, and trying to get everyone covered by insurance in one form or another.  

This approach will solve nothing.  For the disease in our healthcare system is not insurance but rather costs.  

Why does a single pill of ibuprofen cost about $10 in a hospital when you can buy 500 pills at that price at your local pharmacy.  Why does a bandage cost about $50 in a medical environment when its $5.99 at the supermarket?  Finally, why does a CT Scan in China cost a fraction of what it costs in the US, when the CT Scanner in both places is made by the same US Company?  

Almost everyone I know has a good hospital story.  Reading medical bills has become a sub genre of science fiction. 

The point is that everyone is so dependent on medical insurance because of the artificially high costs.  Ah…yes.. I think I hear the peanut gallery screaming: 

“So Mike, why are costs so artificially high!” 

Well, here is a partial list:

  • Lawsuits.  In America we have the mistaken idea that any “bad outcome” means someone did something negligent.  Doctors are not gods and sometimes even the most talented among them cannot save the patient. 
  • Excessive regulation.  Of every healthcare dollar spent, 60% goes towards administration and 40% goes toward medicine.  This is a gross inversion of reality that cannot continue in perpetuity. 
  • Too many unnecessary medical procedures.  This is due to fear of lawsuits and direct advertising of drugs and medical products to the population.  I am constantly entertained by stories from family in the medical field who describe people with high cholesterol demanding MRIs.   

So in a nutshell, unless the issue of cost is resolved, insurance premiums will inexorably continue to rise.  

Beyond the technical side of things, there is another issue lurking in the background.  It’s rarely expressed openly, but it shadows many of the discussions on this topic.  

Many people I know (and respect) say that we have to help people, there are people that have been taken advantage of, and there are those that “know not what they do.” 

I agree.  They should be helped.  But by whom? 

My friends, charity comes from family, friends, charitable and religious organizations.  In other words, those who voluntarily choose to help.  

Charity does not come at the point of a gun.  Taking money from one man by force and giving it to another is not a moral act.  It is the act of a brigand. 

In our economy, an even more apt analogy would be taking money from one man and then forcing him to borrow more money and then giving the entire sum to another man.  

Lest you think we exaggerate, take a look at the following chart.  We can see that nearly 50% of Americans pay zero federal taxes

 

 So the half that don’t pay taxes vote to raise taxes on those that do.  Simply unbelievable. 

Are we now a nation of Robin Hoods?  Prowling around looking for someone who in a bureaucrat’s subjective opinion “has too much” in order to confiscate it and give it to someone else.  

Is it constitutional or even moral to force someone to buy a product (insurance) from a government approved vendor?

Many are confused by the nature of charity.  They do not know its meaning.  Charity is not taking from one person by force and giving to another.  Love and charity are voluntarily giving from oneself..one’s own time, one’s own money and one’s own property.  In other words, “Love thy neighbor” ….. 

So we’ll wait and see what happens and hope for the best.  We close this week with memories of simpler times.  Enjoy the opening theme to The Six Million Dollar Man

http://www.youtube.com/watch?v=HofoK_QQxGc 

Have a great week, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

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History Not Worth Repeating

The definition of insanity is doing the same thing over and over again and expecting different results – Albert Einstein  

History is rarely studied and poorly understood by most.  Economic history is even more obscure, studied only by the most arcane academics and….Managing Directors of consulting firms.  

The study of economics over the last few decades has been pathetically conformist.  In one way or another, the vast majority of economists have subscribed to the idea that the economy can be manipulated to obtain a desired result.  

This idea comes in two flavors.  Let’s call them Keynesian and Monetarist.  Don’t be fooled by the fact we are discussing two approaches with two different names, for the goal of both is the same, i.e. the planning of the economy. 

The Keynesian approach, beloved of the political left, uses fiscal policy to attempt to stimulate demand.  In short the government spends stupendous amounts of money in order to attempt to “prime the pump” of consumer demand to get the economy moving again.  This approach usually causes a speculative bubble in whatever the government is spending money on, say ethanol.  

The Monetarist approach, beloved of the political right, uses monetary policy to attempt to stimulate demand.  In short, the central bank holds interest rates artificially low in order to entice consumers and businesses to borrow and spend.  This approach usually causes a speculative bubble in certain asset classes, say real estate.  

Essentially what both approaches try to do is to get people to act against their own self interest.  They try to convince consumers to spend when they should be saving and businesses to invest when they should be cutting capacity.  Of course, all parties are encouraged to take on more and more debt.  

In a refreshing departure from the usual economic dogma, Harvard University Professor Kenneth Rogoff and University of Maryland Professor Carmen Reinhardt have taken a look at economic history to see if these ideas ever work.  

Their book is called, This Time Is Different: Eight Centuries of Financial Folly.  In the book, Reinhart and Rogoff detail approximately 250 financial crises in 66 countries over 800 years and then analyze them for differences and similarities.  

There are many great lessons in the book on how financial crises start and especially about how they end.  We present below excerpts from the conclusion of the book which effectively summarizes the authors’ thesis.  We have added the emphasis. 

“The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.

“Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis.

“As for financial markets, we have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.

“This time may seem different, but all too often a deeper look shows it is not. Encouragingly, history does point to warning signs that policy makers can look at to assess risk – if only they do not become too drunk with their credit bubble – fueled success and say, as their predecessors have for centuries, “This time is different.”

There must be something about the human experience that makes people say, “Not me.”  Kids that smoke cigarettes believe they will never get hooked, alcoholics believe they don’t have a problem and mothers are sure that they are never overprotective. 

Our leaders are no different.  We continually hear from our them that everything is going to be fine, move along folks, nothing to see here, and yes, the banking system is just fine, etc.  

So the question begs, if these ideas never work then why do humans continually try them?  We don’t know for sure.  Perhaps it’s because humans are never good at facing up to their shortcomings or perhaps, as the authors suggest, people really do believe that “this time it will work.” 

Keynesian stimulus, Monetarist easy credit, séances, incantations, people will come up with anything to avoid the consequences of their decisions.  

So what should be done then?  How do we get out of this economic mess?  Well, take heart my friends there is a third way.  It is a path not taken by many, for the path of righteousness is narrow indeed.  

We need to cleanse the system of bloat by allowing those who cannot afford the debt they incurred to default and those who lent the money to write it off.  That’s right; there are only two ways to make debt disappear.  Either pay it off or default on it.  Anything else just shifts the burden to others; usually the innocent.  

Why should those that bought a house at the top of the market, using a mortgage they could never afford, feel entitled to have others shoulder the burden of their mistakes through Keynesian stimulus programs? 

Why should those that lent them the money, be allowed to borrow from the Fed at 0% through Monetarist easy credit, to cover the fact that they will not be paid back? 

We hope that someone is reading the Rogoff and Reinhardt book, for we left the most interesting point for last.  

One of their more interesting findings was the relationship between debt, GDP and exports.   The Professors show that when external debt passes 73% of GDP or 239% of exports, the result is national default, hyperinflation, or both.

Where is the US today? 

External debt at 96% of GDP and 748% of exports.  

Geez, economic history is soooo boring!

Until next time, 

Michael Bechara, CPA

Managing Director 

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

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