Crisis of Credit 2009, a simple technical explaination

A excellent short video explaining the cause of the Credit Crisis of 2009, how it developed, and the downfall.

It's the Friction that's Worn the Gears

We all know that friction is the enemy of any machine, that's why you lube your car, why shoes that are polished regularly scuff far less than those that are not, or the reason why waxing the floors in your home makes them last far longer; in every case, you are defeating friction. When I was growing up, every child knew a properly greased and oiled bike pedaled easier, went faster, and would glide further, we also understood that if the brakes weren't properly set up the results could hurt - a lot. Properly controlling friction in everything around you improves efficiency and can dramatically improve function and dependability.

BUSINESSES ARE NO EXCEPTION! AIG, CITIBANK, GM, Big Media, the Health Insurance Industry and almost all of the other giants are like the man who is so fat he cannot see his toes, much less put on his sox or even prepare his own food. In every case, they have increased their nonproductive internal overheads (friction) to a level where they cannot function as designed and without external support they will die. Perhaps they should - or at least go on a serious program and exercise.

In business friction can be defined as needless layers of bureaucracy, fiefdoms where people create work to justify jobs which are no longer meaningful to the organization, bureaucrats who insist on spending their entire budget in order to support an increase for the next fiscal year, not to mention ridiculous levels of executive compensation.

Friction does absolutely nothing but transform motion into heat while wearing away it's host. Sometimes it is good, like the breaks in your car, and sometimes it is bad like what happens when you forget to put oil in the engine. In the best case, friction is put to use, like starting a fire by rubbing two pieces of wood together, or the experimental automotive brakes which recapture the energy of your moving car through a braking system which generates and stores electricity for later use.

When big banks need to charge interest and fees that far exceed what Credit Unions and smaller banks charge, while still loosing money, it is a clear indicator of excessive friction draining the system.

When the brilliant economic minds who dreamed up the sub-prime loans and derivatives Ponzi scheme which brought down AIG could not predict it's inevitable failure, it is a clear indicator of excessive friction draining the system. Some might call it unbridled greed and outright theft.

When a Health Care system that was the standard of quality and cost effectiveness to world has become unaffordable and dysfunctional while the heads of HMO's have become Billionaires, it is a clear indicator of excessive friction draining the system.

When major newspapers are failing on a daily basis while their parent corporations have earnings in excess of 20%, it is a clear indicator of excessive friction draining the system.

When corporate executives earn more than the company nets, it is a clear indicator of excessive friction draining the system.

When anyone in top management receives total compensation in excess of 10 time that of the average non management employee, it is a clear indicator of excessive friction draining the system.

Placing "shareholder value" ahead of corporate health is just like putting sand in the gears.

Friction is not an entirely bad thing, the brakes in your car offer a great analogy. Well thought out corporate regulation keeps companies from going into corners too fast; preventing disasters rather requiring costly repairs or even corporate deaths.

It is time that we remove the non productive friction and re-create a system where the company president meets each and every employee at the yearly picnic or Christmas party, where unproductive layers of bureaucracy are identified & eliminated, where executives are compensated based upon their actual day to day and long term value to the company, where corporate goals are long term orientated - not manipulating share prices by pandering to stock speculators.

Remove the counter productive friction.

The Ponzi Scheme That Is Health Insurance - a view from the Doctors office

The following was written by Nancy R. Terry and lifted from MEDSCAPE Today, it offers some interesting & enlightening opinions:

"Commercial, for-profit health insurance is one of the greatest Ponzi schemes ever foisted on the public," says a family medicine physician. "The executives are the ones that benefit to the detriment of everyone else. How else does the president of one of the largest insurance companies get to be a billionaire? By being at the top of the pyramid of companies' and individuals' premium payments."

"The single most important factor in the atrociously high cost of healthcare in the United States is the rapacious, money-hungry insurance companies and their fat cat CEOs," comments an Medscape's Physician Connect (MPC) contributor.

"The damage that the insurance companies do is not limited to the salaries of the CEOs," says another contributor. "They waste the time and resources of healthcare workers, institutions, and patients. They are clearly a negative, wasteful element in healthcare today that needs to be heavily regulated, changed, or eliminated."

Physicians point to a number of supposedly routine practices of the health insurance companies that cry out for oversight. One MPC participant remarks that health insurance companies increase their premiums even as they decrease coverage. Another discussant notes that insurers typically burden physicians and patients with filing requirements as part of a strategy to delay or deny legitimate claims. According to one contributor, some companies frequently change their coding schemas to avoid paying legitimate claims. "The insurance companies make billions of dollars in profit each year," says one MPC commentator, "and they do it by limiting care, denying claims, limiting contracts, and limiting reimbursements."

The practice of systematically denying legitimate reimbursement claims by insurance companies has been the focus of an ongoing investigation by New York Attorney General Andrew Cuomo. In January 2009, Cuomo reached an agreement with UnitedHealth Group, Inc. that the insurer would shut down its controversial Ingenix database and pay $50 million to fund a nonprofit, independent database for the purpose of establishing fair compensation rates. The Ingenix database, which was owned by UnitedHealth, served all the major insurers and, according to The Wall Street Journal, skewed downward the "usual and customary" rates of out-of-network insurance reimbursements through "faulty data collection, poor pooling procedures, and lack of audits, thus forcing customers to pay more out of their own pockets for healthcare." In February, WellPoint, Inc., the nation's largest health insurer, agreed to Cuomo's request to pay $10 million to help fund the new database. WellPoint is the sixth insurance company to make such an agreement with Cuomo's office. As quoted by New York Daily News, Cuomo commented on the insurers' use of the Ingenix database, saying, "This is as egregious a situation as I've seen, of a virtual monopoly."

Is health insurance a scam? The 100 MPC postings in response to that question are unanimous in their assertion that the health insurance industry needs reform. Yet, MPC contributors are divided as to the extent and nature of that reform.

"The health insurance system is so profoundly flawed," says one MPC contributor, "that the only solution is a nonprofit, single-payer healthcare system." Other MPC contributors contend that a single-payer system would harbor its own set of problems. Comments a psychiatrist, "I would rather have evil insurance companies than absolute power concentrated in a single agency. If you have a complaint about an insurance company, you can complain to the regulators and drop the insurance. If you have a complaint about the government, you are screwed."

Advocates of a single-payer system singled out Physicians for a National Health Program as a resource outlining the salient features of a single-payer system. Similarly, several advocates for reorganization of the for-profit insurance system directed readers to Real Health Reform, which proposes, among other healthcare reforms, the restructuring of private health insurance into a regulated utility.

Other contributors less concerned about the overall structure of the industry advocate that health insurance coverage should more closely resemble other types of insurance. "When we protect our house and car, the purpose has traditionally been to provide a safety net if the unforeseen happens to us," points out an endocrinologist. "Health insurance is not that way. We have come to expect medical insurance to subsidize ordinary expenses, like our prescriptions and our office visits and any number of interventions that are not in themselves financially devastating, the way an auto collision or a home fire would be." A family medicine physician comments, "Health insurance needs to be made into real insurance that only covers catastrophic events. Then it will be cheaper for everyone."

Evident throughout the postings is a sense of frustration. One participant comments, "The people are not happy with health insurance, the physicians and allied personnel are not happy with health insurance. What is the government waiting for?"

Some MPC contributors refuse to take a wait-and-see attitude. They advocate that physicians who are disgruntled with the health insurance industry should effectively boycott health insurance.

"We need to immediately stop taking all third-party payments," says an MPC contributor.

"Bill patients at the time of service," advises another contributor. "Provide them with the invoice and tell them the truth, the larger truth -- that you, the doctor, are not in the business of bandying about with insurance clerks and petty tyrants whose motivation is nothing but to frustrate payment and cost you valuable time and energy, which is duly relegated to patient care."

"Stop making contracts with HMOs, hospitals, and health insurance," recommends a neurologist. "Return to cash payment. When other doctors see it works for them the way it has for many, guess what? The yoyos who keep your insurance clerk and billing staff on hold for 2 hours asking for notes and records will be collecting pink slips."

But the question remains: will the President's health reform initiative take on the health insurance industry? MPC contributors hope the answer to that question is yes. "Our healthcare system is broken largely due to the insurance companies," comments an MPC contributor. A urologist agrees, "Only through insurance reform can we begin the process of real healthcare reform."

U.S. Senate Antitrust Panel Unveils Agenda

The Senate Judiciary Antitrust Subcommittee announced its agenda for the 111th Congress. Among the list of issues: sharp increases for text messages, rising cable TV rates, consolidation of Internet and advertising, media consolidation, Net Neutrality and access to content.

In the minds of many, including mine, there are few issues that surpass Monopolies and oligopolies on the list of key contributors to America's (and the world's current issues. I certainly applaud the Senators addressing media consolidation, but it is simply too little too late. We need sweeping and universal reform of the Antitrust laws as well is aggressive & meaningful enforcement, and we need it now.

A bit of history may illustrate what I am saying. Prior to 1984, telephone in America was a virtual AT&T monopoly including equipment manufacture, transmission, local and long distance telephone. Service and quality were good, the standard black Western Electric (AT&T owned) phone would outlive its user,I still have one. Bell Labs (AT&T owned) was the premier technological research laboratory, but prices were high and many policies were seen as arbitrary.

In 1974 the U.S, Justice Department brought proceedings to break up AT&T. Although it took ten years, the giant was broken up in 1984. In its infancy, this new and competitive environment showed a lot of promise. Competition quickly brought long distance telephone rates down dramatically at the expense of small increases in local rates. Unfortunately, competition never developed on the local level. The local companies preferred to lobby for the right to expand through mergers and acqusitions rather than competition, Unfortunately, they won and the jewel in Antitrust enforcement was rendered worthless.

LESSONS FROM 1996 TELECOMMUNICATIONS ACT: DEREGULATION BEFORE MEANINGFUL COMPETITION SPELLS CONSUMER DISASTER
This is a long and detained story which is well worth studying, but the long and short of it is the divested companies have reunited into AT&T and Verizon and are stronger and more powerful than ever. The consumer has lost again.

One of the best ways to make your voice heard is to contact your elected officials on a regular basis, once a week would be great - particularly if you can get some friends and relatives to join in. Congress.org is a quick and easy way to send short, pointed, single issue messages to your elected Federal and State officials.

Financial crisis? an idiots guide. - A simple explanation of the financial crisis

Financial crisis? An idiots guide.

Thanks to Garry for forwarding this to me, as well as to the unknown person who wrote it!

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around and as a result increasing numbers of customers flood into Heidi's bar.
Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern because he has the promissory notes of Heidi's customers as collateral.
At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then sold and traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager of the bank, (subsequently fired due his negativity), decided that the time has come to start demanding payment from Heidi for the debts incurred by the drinkers at Heidi's bar.
Unfortunately Heidi's customers cannot pay back any of their debts to Heidi.
Heidi cannot fulfill her loan obligations to the bank and claims bankruptcy.
DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by only 80%.
The suppliers of Heidi's bar, having granted her generous payment terms and also having invested in the securities are faced with a new and desperate situation. Her wine supplier claims bankruptcy and her beer supplier is taken over by a competitor.
The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. They came up with a miraculous rescue plan that saved the bank.
The funds required for this massive rescue are obtained by levying a new tax on all the non-drinkers.
Finally an explanation I understand...
Addendum; This apparently came from a column by Neil Marks

A little company that offers service

Much of what ails our economy revolves around the concept that "the customer is always wrong". Most marketing is a combination of image and either disinformation or non-information. Go into McDonald's and ask for a Big Mac like the one in the picture on their sign - disinformation at its pinnacle. Pick up three different models of items made by the same manufacturer and try to figure out how they differ functionally and which is most suitable for you from the information on the packaging or in their brochures; you will rarely find anything useful. I won't even mention the typical clerk in the store.

A ray of sunshine came in the form of a little Vodafone shop tucked away on a back street in Auckland's Newmarket. They are a First Mobil franchise and its owner Stanley and young Ken, his offsider, clearly know the consumer is king, and project their desire to make sure they are all well served, and they even carry the attitude through to after sales service. (I can't say the same for any of the other Vodafone franchises I have dealt with, and Telecom is far worse.)
Their phone number is: 09 520 6258

These folk are great, give them a try. If you appreciate the difference people like these make in your life, tell your friends, it is a concrete way to improve our lives and what ails our economy. Vote for change every day with your dollars and your voice.

What do we mean by Zero Cost Recovery?

Since this is the core of the blog, a summary has been created as the lead article.

It's simple, much if not all of what ails us economically can be solved without costing one thin dime, that is what we mean by a ZERO COST RECOVERY.

Many of today's ills have come from easily reversible causes. Just watch the Boston Legal reruns and Alan will explain most of them eloquently. Here are a few to start you thinking:
- The Bible condemns usury (there are some loop holes); whether or not you are religious, the core concept make great sense. In years gone by, U.S. banks had to peg their lending rates to a percentage of what they paid their depositors. In other words their "markup" was regulated. Almost all States had usury laws which prohibited charging exorbitant interest rates, the cap was something like 12 -15%. Then back in the '80's Citibank realized South Dakota did not have these laws, moved Mastercard there, and Credit Cards began their rapid climb to 25 or 30%. All we need to do to correct this is:
* Reenact national usury legislation (we had it until just after the depression) and
* Link the interest rates banks can charge to what they pay for their money.
* While we are at it, let's address the 1996 Supreme Court decision which took the cap off of credit card fees. Late fees were $5 - $10 then and have climbed steadily since, if left alone they will be $45 - $50 within a year or so. All it will take to correct this is for Congress to address the issue and legislate reason into bank fees.
An easy way for you to let them know your opinion is to log onto Congress.org and use their user friendly site to find and write your Federal and State politicians, always send a copy to your local newspaper.
If a maximum spread of 4% was mandated and a maximum lending rate of 12% was legislated, they would go a long way toward restoring consumer confidence and would be a major step toward solving the financial crisis.
- The "Free market" is not the cause of this problem, the fact that it has been castrated and prostituted is. Without meaningful competition, a true "Free Market" cannot exist - period.
- Bigger is not better, that is why anti-trust legislation was enacted. Today's crisis was created by the unvarnished greed of the giant banks and financial institutions & the complicity of our governments, it is just that simple. Update and enforce meaningful anti-trust regulations and the root cause will be eliminated. Good competition makes for good businesses!
- Big Banks don't work for America or Americans (or anyone else for that matter). Consolidation was touted as a way to lower costs, provide better service and offer more affordable fees to customers. Can anyone show me an example where these promised economies of scale came to life? In almost every case, it is just the opposite, fees have skyrocketed and service has all but disappeared. The consolidation frenzy only served the top management of the surviving institution, and to a lesser extent those who sold out the smaller ones. It was something like using a "Judas goat" to lead lambs to slaughter.
All you have to do is look at how small Credit Unions and local banks are weathering this financial storm to see living proof of how "Small is Better".
Updates;
* Bailed-Out Banks Raising Credit Card Interest Rates
* Bill would limit loan, credit card rates
- The Stock Market is not synonymous with the economy, it is gambling pure and simple, and in its current form it is one of the economy's greatest ills. A simple truth is wherever there is gambling there are people who will find sophisticated ways to cheat and fleece the unsuspecting. In its noblest form, the concept of selling stock started as a way to fund the research, innovation, and company growth that was vital to the economic development of our nation. With time it morphed into a haven for speculation and manipulation. Rather than funding growth, for the most part shareholders have become solely interested in maximizing short term profits at the expense of the company's long term health and growth. It is speculation rather than investment.
In my opinion, shares should be classed into two broad categories, those held short term (for argument sake, less than two years) and those which following Warren Buffets advise are long term. Voting power should not be bestowed upon the short term, speculative investor. Executive stock options should encourage long term corporate health and growth by not becoming vested for five years after they are exercised.
- Food costs have more than doubled, yet the family farmer is struggling while large corporate farmers are getting huge subsidies. One solution would be enacting Anti-trust legislation that forbids the huge conglomerates which are so dominant in critical industries from operating at more than one level in the manufacturing and distribution chain; pick one, manufacturing (including farming), distribution or retail. It should also limit the market share one company can have in any sector to 10% of the market. Except in small towns, retailers should not be allowed to control more than a specified market share based upon the population of the area they serve. Just watch what this would do to your weekly food bill.
- The price of oil at the well head is dramatically different from the price we see quoted on the TV each night. The difference is created by speculators in the commodities markets (the same holds true for food and other vital commodities). Products which are vital to the national good such as food, oil and the like should be heavily regulated so as to forbid the unconscionable profits which are siphoned off by manipulation of these markets. A short term 90% windfall profits tax should be levied on all profits above a reasonable spread, for argument sake 15%. At the same time a long term per share traded tax of 1.0% should be applied to all stock and commodities transactions (by other than users) which are held short term. The term should be 1 year, with the fee applied at the time of sale.
- Big Pharma spends more on marketing than on R&D, some say the figure is twice as much. How much do you think this adds to what your prescriptions cost?
- Health care costs are skyrocketing yet Physicians pay has decreased dramatically. How much do you think the near monopolies in Health Insurance and HMO's contribute to this? Do you think limiting their size and forcing competition would bring reality back into the cost of health care?
- "A Free and Independent Press is the Cornerstone of Democracy". I don't know who first said it, but they were spot on. Today's media does not hold the powerful accountable. Return to regulations which forbade multiple ownership of media outlets and protected the world's newspapers, radio & TV stations from being swallowed up by massive multinational conglomerates which only provide us with the information they want us to have. Just this week two major metropolitan newspapers have announced closing their operations. Break up these non productive giants. Our news media and objective investigative journalism is all but a thing of the past, and IT IS THE CORNERSTONE OF DEMOCRACY. Media reform is one of the most important strategies for reclaiming our democracy!