September 29, 2012

The 47% Theory On Free Health Care

I thought we were always 100% in this together.
By Melvin J. Howard

Imagine I am running for the highest office in the free world the President of the United States Of America and you overheard me say in a private meeting to a group of wealthy donors something like this almost half the voters in this country 47 percent believe they are "victims" and expect the government to provide free health care, food, and housing. And then I go on to say of these people, "I'll never convince them that they should take personal responsibility and care for their lives." What would you think? First off you would think I just alienated and pissed off half of the population that I hope to govern one day. Secondly you would think this was a dishonest and unfair general characterization of the people of whom I am referring too. Unless you are a hardcore trained financial quant analysts you will not get how our financial and free market system really works. It is technically to complex.      

Follow me down the rabbit hole we call our financial system and I will show you why. Did you know that as little as 4% of the money in the world exists as paper cash and coins. To put it in another way, for every $100 or its equivalent in any other currency, only about $4 exists as printed-paper notes or coins, while the remaining $96 exists as (just numbers written on papers and computer disks)! If you walk into most bank branches in the world and ask for more than $10,000 in cash, from your own account, they will politely let you know that you will need to give them a few days advance notice so they can get the money ready for you. If you don’t believe me try it. Unless you live in New York City or some other high finance center, you will be unable to get that much cash in physical form if you just show up unannounced to withdraw your account. You would think that most banks would have enough cash to pay off a person who walks in to withdraw just $10,000. But most bank branches can't do that in this world. Why? The money, in physical form, does not exist why not? To answer that question, we will first pursue the issue of what money is. So back we go OK, now, when you go to the ATM cash machine and look at your bank balance and it tells you that you have $1,000 left in your account, what is that $1,000? What is it? Yes, what is it? Don’t just say, “It is money”; you need to define it for me what it is? Imagine I was from another planet and asked you this question. What would you tell me your $1,000 on that ATM slip is? That is the question.

Once you have gone over several possibilities in your mind, here is the answer. The $1,000 is simply a recorded number.  Numbers written on a paper or computer disk you have agreed to it, your bank has agreed to it, and you even agree to use it in a cashless way by paying for things using your ATM card. The $1,000 printed on the ATM slip does not represent any sort of wealth that the bank is keeping for you. It does not, for example, represent the value of diamonds the bank is keeping for you in a safe. The only difference between the $1,000 written on that ATM balance slip and $1,000 you would write on a piece of waste paper is that the one on the ATM slip is on record as having been agreed upon by whomever you bank with. If you took that slip, or your ATM card, to a country or civilization (on Earth) where they don’t share your system, they would look at you as if you were crazy as you tried to buy real goods and services with a piece of plastic or a paper with a number written on it. The point of all this is to show you that the money we use in what you might call the Western civilization of today is 96% imaginary numbers written on invoices, slips, and computer disks, while 4% of it is in paper and coins. That 96% does not exists in the sense that you cannot possibly go anywhere on this world and hold it, touch it. It is nowhere! It physically exists nowhere at all on this planet. You cannot see it, feel it, taste it, or touch it. It doesn't exist! The only reason it works is that we the people have agreed on it and we act in predictable ways when certain numbers are written down for us in our name. Now that we know what 96% of it is, let us see what the remaining 4% is.

The 4% that exists as physical real ‘things’ is not made of gold or anything valuable at all. It is made of funny colored pieces of paper, and cheap alloy coins not worth their own weight in money (they are made cheap so that people don’t profit from melting them into iron).  So what is real, people and people believing on what they can accomplish if they put their minds to it that is real.

Let’s begin with debt, because here lays one key to much of the puzzle we find our self and the economy in today

Healthy vs. unhealthy debt

There is nothing wrong with debt, when used healthily as a tool. But when it arises, as it mostly does, from fear, feeling of lack, and negative self-worth beliefs, then it is a control game being played, a painful one at that. Additionally, what most people don’t know is that debt, in our current civilization’s money system, is designed to collapse for a certain number of its holders I bet you didn't know that did you?

The Medici The Kings of the Renaissance

Before cash money was invented in it’s present form, people used to trade by barter. They would exchange goods and services. Finally, one day, a powerful merchant family such as the Medici family of Italy (powerful merchants and later bankers who ruled through influence between the 13th and 18th century i.e. the Renaissance) said, “We have another way we can do this. We can make promissory notes we shall call money. They are more convenient to carry than goods and gold.” The first paper money worked as follows. A trader would go exchange his or her goods for gold. They then take this gold to deposit it with the Medici, and the Medici write up a paper with their signature and family seal, a paper that would represent the gold that was deposited with them. This paper, upon return to the Medici, would be exchanged into its gold equivalent. That concept is where the gold standard came from.

Now let us look at debt. Imagine that the Medici have just opened up their first bank and announced the new scheme to the traders. So one trader, let us call him Melvin, goes to the Medici and deposits $100 worth of gold. The Medici make up a paper saying that they promise to exchange that paper for $100 worth of gold upon its return (less a banking fee, plus an interest, whatever). Now another person comes by the name of Alan then takes this paper and goes home. Alan can use this paper to buy things, but let us assume he does not. So far, he is the only customer at the Medici’s new bank. Now James, another person, wants to start a new business, a hotel. He has the land and building but needs some pots and pans. He does not have any goods to trade in exchange for pots and pans, but he hears that the Medici is giving “loans”. So James goes to the Medici and asks for a $100 loan. The Medici says they can do that, but James has to pledge his land and building as a security, collateral, in case of default. The Medici makes up money (money that did not exist prior) by writing up a new paper, sign and seal it, and give it to James. The condition is that on return, James has to give back $100 plus $10 interest. Now freeze that right there. Imagine that James and Melvin are the Medici’s only two customers at the time. 

This means that the economy only has two paper notes out there, one with Melvin and one with James. And James has to return his plus $10. Where will James get that $10, unless Melvin comes and rents a room at James’ hotel for $10? The Medici did not print the extra $10! So even if James is hyper-careful with his loan, even if he does not spend it at all but returns it after a year, the $100 intact, it is physically impossible for him to pay the $10 interest. This is because he cannot print the extra $10 money and Melvin does not want to spend his money at the hotel, yet Melvin is the only one with the only other note printed! Do you see the error in this system? Even if James now has goods to trade, he cannot trade them for paper money because there is no more out there and the Medici wants cash money or the collateral. James will have to lose his hotel to the Medici simply because of a paper shortage error. He has the original $100 they gave him because he did not spend it, but he cannot possibly get the $10 they want in addition as interest, because he can't print money nor does the only other person with bank notes want to stay at his hotel and pay cash. His hotel may be highly successful, renting rooms in exchange for goods, but he still would not have the printed paper for $10 that he has signed to give back to the Medici as interest. So his hotel would have to be seized by the bank.

This example shows exactly how our modern civilization’s debt system works. But because there are millions of people playing this game, the players don’t realize there is a problem because only 8% of people are caught by this error (about 8% of all debts are un­payable). And those that are caught by this error think there is something wrong with them the so-called 47% of the U.S. population they never imagine that the system itself is flawed are you getting this have we gone down far in the rabbit hole yet? Debt, by its very nature, in our current financial system, is designed to fail for a certain percentage of the population, no matter how much effort or care they put into it. And it is so simply because there is not enough money created (printed) for the interest requested. The only reason this illusion has managed to run this far is that there are millions of players rotating the money and it looks like it works for most people, which makes the few it doesn't work for look like something is wrong with them and not the system.

Every now and then, when the debt bubble bursts like in 2008 that some become aware of this glitch. As you are about to see next, inappropriate use of debt is a function of control and fear. Unhealthy debt is a product of fear, and a deep-seated belief in not having and not being able to have. And fear is a means of control. Now, let us consider the mortgage game that many of us whether we like or not are playing right now. Mortgage what does that word mean? Where does it come from? Split it up and look at its origins. Mort, mortuary, morgue... do you see the root? Gage, engage. Engaged till death. Why would your house loan be called a name that has its word origins from the words that mean death and engagement? Why those two? Of all the millions of words, why those two?

Nevertheless, the unhealthy type of debt is a function of fear and self-worth issues. Remember, we are not judging anything here. We are merely observing basic facts.  There is nothing wrong with debt, when used as a tool. But when it arises, as it mostly does, from fear and negative self-worth beliefs, then it is a control game being played, a painful one at that. A game we created and continue to create.

The Federal Reserve Banking System began when, in 1914 and after trying to do so unsuccessfully several times before due to opposition when 300 people and banks put together just $100 each and formed the Federal Reserve Banking System. The job of the Chairman of the Fed is to keep the economy going in a certain direction, and he manages that consistently for many years and that is why people find him powerful. The point is, he can and does shape the economy. That is his job. Now, in the minds of most people, the economy is some wild crazy thing. But what if it wasn't wild at all? What if it was very tame and always listened to the boss? The point I am trying to make is this: (1) the Board has proven itself  able to direct the economy with a fairly high degree of accuracy and (2) this proves the economy is under the direction of the Board (otherwise the Board would be powerless and we wouldn't even have it).

Now, and this is very important, the economy only looks to be out of control to those who are finding themselves in it but hurting. Did you get that? This is very important if you are jobless, you will think the economy is bad and out of control, because that is your personal experience. But that is looking at it from the bottom end. If you look at it from the top end, there is hardly any ‘out of control’ going on. And this is why: At the top, at the level where bankers see things, they control exactly how much money is in the system the government has nothing to do with it since the 1914 law), they control the interest rates, the regulate cash deposit reserves (which determine how much credit/debt you are ‘allowed’ to have), and so on. So what part of the economy is a mystery to them? To you, the interest rate is a mystery and can move either way to end up hurting or helping you. But to them they can predict it better than you can predict the weather – because it is they that set up the rate. To you, you don’t even know what the money supply situation is or will be – but they do because they have the power to print the money. Much of the national debt is money ‘owed’ to the Fed. People think that the Chairman of the Fed is tackling some unknown thing and maybe soHowever there isn’t much in the economic equation that is unknown to him simply because where he sits he has all the tools necessary to make sure the plan works  almost as planned (the tools in this case being the Fed system, banks, money press, monetary controls, etc). So just because the economy may look out of control for you, personally, or even for a few million people that are in hard economic times, does not mean that, at the top level, it is out of control at all. The point of the Board, to control the economy this perspective is very important. The truth can look very different indeed depending on what perspective you use to observe it on the right side or the left side of the 47% . So if you think the Fed did not have to step in when they did to save the economy I would love to show you some swampland I am selling. You probably also thought that the U.S. health care system was just fine the way it was too. Well if you did how about I throw in the London Bridge with that piece of swampland. So before you go and make that critical vote remember seriously think about what you are really voting for.

"A democracy cannot be both ignorant and free" - Thomas Jefferson

September 23, 2012


Who is Insuring the Insurance and re-Insurance companies guess?

By Melvin J. Howard

The smaller government argument that's the theme some have chosen to hold as their platform motto this year. Let me tell you why that’s hypocritical and not really honest. If it were not for the government’s intervention in this crises America would have never been the same. For that matter the global financial market system would have vanished.  In today’s climate risk transfer is not what is use to be. Citizens pay taxes to ever expanding governments in return for a variety of "safety nets" and state-sponsored insurance schemes. Taxes can, therefore, be safely described as insurance premiums paid by the citizenry. Firms extract from consumers a markup above their costs to compensate them for their business risks.

Profits can be easily cast as the premiums a firm charges for the risks it assumes on behalf of its customers - i.e., risk transfer charges. Depositors charge banks and lenders charge borrowers interest, partly to compensate for the hazards of lending - such as the default risk. Shareholders expect above "normal" - that is, risk-free - returns on their investments in stocks. These are supposed to offset trading liquidity, issuer insolvency, and market volatility risks.

In his book, "When all Else Fails: Government as the Ultimate Risk Manager", David Moss, an associate professor at Harvard Business School, argues that the all-pervasiveness of modern governments is an outcome of their unique ability to reallocate and manage risk. He analyzes hundreds of examples - from bankruptcy law to income security, from flood mitigation to national defence, and from consumer protection to deposit insurance. The limited liability company shifted risk from shareholders to creditors. Product liability laws shifted risk from consumers to producers.

Export and credit insurance schemes - such as the African Trade Insurance Agency or the more veteran American OPIC (Overseas Private Investment Corporation), the British ECGD, and the French COFACE - shift political risk from buyers, project companies, and suppliers to governments. Risk transfer is supposed to be the traditional business of insurers. But now with no other alternative governments are in direct competition not only with insurance companies - but also with the capital markets. Futures, forwards, and options contracts are, in effect, straightforward insurance policies. Companies collaborated with insurance firms - specialize in converting derivative contracts (mainly credit default swaps) into insurance policies. Investors assume risks by buying those contracts. Financial players first promoted the risk-reducing role of derivatives. Banks, for instance, lend more - and more easily - against hedged merchandise. Hedging and insurance used to be disparate activities, which required specialized skills. Derivatives do not provide perfect insurance due to non-eliminable residual risks (e.g., the "basis risk" in futures contracts, or the definition of a default in a credit derivative). But as banks and insurance companies merged so did their hedging and insurance operations the result a big mess as your witnessing today!

You might ask yourself if the powers of government are indeed commensurate with the scope of its risk transfer and reallocation services - why should it encourage its competitions? The greater the variety of insurance a state offers - the more it can tax. Why would it forgo such benefits? Isn't it more rational to stifle the derivatives markets or at the very least regulate it? This would be true only if we assume that the private sector is both able and willing to insure all risks - and thus to fully substitute for the state. With all the recent turmoil in the financial markets we now know that can never happen at least in the foreseeable future.

Insurance companies cover mostly "pure risks" - loss yielding situations and events. The financial markets cover mostly "speculative risks" - transactions that can yield either losses or profits. Both rely on the "law of large numbers" - that in a sufficiently large population, every event has a finite and knowable probability. None of them can or will insure tiny, exceptional populations against unquantifiable risks. Now in is this market failure climate the rise of state involvement is unavoidable. Consider the September 11 terrorist attacks with their mammoth damage to property and unprecedented death toll. According to "The Economist", in the wake of the atrocity, insurance companies slashed their coverage to $50 million per airline per event. EU governments had to step in and provide unlimited insurance for a month. The total damage, now pegged at $70 billion - constitutes one quarter of the capitalization of the entire global reinsurance market. Despite this public display of commitment to the air transport industry, by January that year, no re-insurer agreed to underwrite terror and war risks. The market came to a screeching halt. AIG was the only one to offer to underwrite it maybe we shouldn’t be to harsh on AIG. Then Allianz followed suit in Europe, but on condition that EU governments act as insurers of last resort.

Even Warren Buffet and Kenneth Arrow - called on the Federal government to step in. Some observers noted that the state guarantees full settlement of policyholders' claims on insolvent insurance companies in the various states. Federal programs already insure crop failures and floods. In Israel, South Africa, and Spain, terrorism and war damages are indemnified by the state. Germany also has similar state sponsored coverage.

Insurance companies in the face of stiff competition to dominate or to re-establish themselves. Started insuring hundreds of billions of dollars in pools of credit instruments, loans, corporate debt, and bonds - quality-graded by third party rating agencies. Which now we know were flawed with their rating criteria. Insurance companies became backdoor lenders through specially-spun "monoline" subsidiaries. Collateralized debt obligations - the predominant financial vehicle used to transfer risks from banks to insurance firms - are "synthetic" and represent not real loans but a crosscut of the issuing bank's assets. Here is where the problem started unravel. Insurance companies started refusing to pay up on specific credit derivatives - claiming not to have insured against a particular insurance events.

This excursion of the insurance industry into the financial market was long in the making. Though treated very differently by accountants they see little distinction between an insurance policy and equity capital. Following the 1987 crash on Wall Street - leading insurers and their clients started to "self-insurer" through captives. Blurring the boundaries between insurance and capital is most evident in Alternative Risk Transfer (ART) financing. It is a hybrid between creative financial engineering and ad hoc insurance. It often involves "captives" - insurance or reinsurance firms owned by their insured clients and located in tax friendly climes such as Bermuda, the Cayman Islands, Barbados, Ireland, and in the USA: Vermont, Colorado, and Hawaii.

Risks, by its very nature, are - stochastic and catastrophic. Finite insurance involves long term, fixed premium, contracts between a primary insurer and his re-insurer. The contract also stipulates the maximum claim within the life of the arrangement. Thus, both parties knew what to expect and or anticipated. Yet, as the number of exotic assets increased, as financial services converged, as the number of players the very concept of risk was under attack. Value-at-Risk (VAR) computer models - used mainly by banks and hedge funds in "dynamic hedging" the so called used by geniuses. Merely computed correlations between predicted volatilities of the components of investment portfolios. The witness collapse of Long Term Capital Management (LTCM) hedge fund in 1998 is partly attributable to miscalculations of their computer models. It is impossible to fully account for risk in an ever changing quantum world full of hidden possibilities and probabilities. Governments often act as reluctant lenders of last resort and provide safety nets in the event of a bank collapse.

Ultimately, the state is the mother of all insurers, the supreme underwriter. When markets fail, insurance firm recoil, and financial instruments disappoint - the government is called in to pick up the pieces, restore trust and order and, hopefully, retreat more gracefully than it was forced to enter. But this time around the state would, do well to watch all financial instruments: deposits, derivatives, contracts, loans, mortgages, and all other deeds that are exchanged or traded, whether publicly (in an exchange) or privately. Because the next time we have to ask Uncle Sam to bail us out he may need to ask his cousin and his two ugly step sisters for help!

September 15, 2012

Paging Dr. Bernanke Dr. Ben Bernanke To The Economy Emergency Room STAT!

Daddy where does money come from and how do you make it?

By Melvin J. Howard

The announcement this week of another round of quantitative easing by the U.S. Federal Reserve  got me thinking about the time when my children were very young. One of them ask me dad how do you make money and where does it come from? I said good question that got me to thinking how many grown ups do not know the answer of how money is made and where it comes from either. For many years I had really had no answer they do not teach it in school and the people at the time in my circle did not have clue either. That’s when I set out on a quest for knowledge not just about making money but the philosophy behind it. How do societies start how do they rise and fall why some countries are rich and why some are poor? Science, Philosophy, Metaphysics, Anthropology, Sociology all the stuff I use to avoid like the plague in school I find myself drawn to it now. My mother use to always tell me that I think they switched babies at the hospital on me because I was always asking WHY? Let’s get back to our original question. How is money created, and what role does the Federal Reserve and its member banks play?

Let’s start with some common misconceptions about money, and why they are not true:

Misconception 1: You make money by going to work, or by selling something.

FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry (or really lend) money. The main reason people get a job is to get a transfer of money from people who already have some.

When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank money. However many non bank types of so called "money" raising instruments are increasingly being used by non bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependent on, and rely on the confidence that they can be liquidated for, "bank money". Hence the credit crunch in the sub prime commercial paper and bond markets. We might call this other stuff "near money". Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will just focus on bank money here.

Misconception 2: Money has something to do with gold at Fort Knox.

FALSE: The monetary system use to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the "floating" of most national currencies, which were no longer pegged to a gold conversion standard .This lead to phenomenal growth in speculation against international currencies, which later led to massive economic and social crises in various countries that were speculated against. Examples include the Mexican Peso crisis of 1994-95, the Asian financial crisis of the late 1990s, followed by the Russian ruble crisis. Since the death of the gold standard and the floating of most major currencies we have seen currency speculation increase to an astonishing 98% of all international transactions. This means that "real economic" transactions account for a mere 2% of international transactions. This data on currency speculation is derived from the Bank for International Settlements and summarized in the book "The Future of Money" by Bernard Lietaer.

Money supply and debt have exploded in the absence of gold convertibility. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits that has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. Today's money is not backed by gold. It is now backed by our trust in the monetary system. This is ultimately a trust in those that create and control money the commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes "In God we Trust" is a solid reminder of that trust.

Misconception 3: Money is Created by the Government Printing it.

FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government.

Having gotten some of these misconceptions out of the way lets talk briefly about the actual mechanics of money creation. Money creation happens in two main ways. First the creation of base money, which is mostly physical currency notes, created by the Federal Reserve. The second money creation process involves checking account or deposit money created by the commercial banks, and which makes up most of the money supply.

Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, that’s another story. The Federal Reserve has no budget, quite simply because it doesn’t need one. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve pumped into the system at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes.

The Federal Reserve then creates a spurious "liability" on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of real work. Every time the Federal Reserve creates or extinguishes base money the financial press and other mainstream media reports it as an interest rate announcement. This is not technically correct but it does sound more palatable than saying that the Federal Reserve just printed some money up or just took some money out of circulation.
Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan. So most money is created just by bankers writing some new numbers on a piece of paper, or these days, entering bits and bytes in computers, since money really now exist just on a bunch of computer records. This means that when you go to borrow money to buy a house or car, the money is really being created by the bank, and being credited to the checking account of the seller.

The bank has a distinct advantage in all this just by being a bank. For if you can’t pay the loan through your hard work, they automatically get the house, and all they did was write some numbers into the computer. From the banks perspective however, if you don’t pay off the loan, they would have to write down their asset (i.e. your loan) and this would affect the earnings they report. If lots of people did this the bank could go "belly up".

To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system the regular taxpayer.

September 03, 2012


 Bi-polar disorder of the free market economy  

By Melvin J. Howard


Since the global financial meltdown I have been reading a lot lately that capitalism is dead since then both sides of my brain have been in this serious discussion about capitalism both the pro’s and con’s the following is that discussion. When a plane crashes or luxury cruise ship sinks we don’t say well lets go back to the horse and buggy days because it did not work. Up until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation. Two things changed the first was the rule of law. For most of the world's history, if you did somehow accumulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened. A new class of merchants and manufacturers began to sprout up. Together they were able to withstand the pressure from the local king or Mayor. So for the first time in history, the bullies stopped stealing the merchant and manufacturers wares and goods. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization. The Industrial Revolution was born part of the success of that era was. Conditions were made that people who made fortunes be able to enjoy them in peace. One piece of evidence is what happened to countries that tried to return to the old model, like the Soviet Union, and to a lesser extent Britain under the labor governments of the 1960s and early 1970s.

Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques. The recipe was the same in Florence in 1200 as it is today. Understanding this may help to answer an important question: why Europe grew so powerful back then. Was it something about the geography of Europe? Was it that Europeans are somehow racially superior no, was it their religion no. The answer may be that the Europeans came upon a powerful new idea: allowing those who made a lot of money to keep it! Wow what a concept who would have thought. Once you're allowed to do that, people who want to get rich can do it by generating wealth instead of stealing it. The resulting technological growth translates not only into wealth but into military power.

Take away the incentive of wealth, and technical innovation grinds to a halt. Starting your own company is, economically: a way of saying, I want to work faster, smarter and harder. Instead of accumulating money slowly by being paid a regular wage for fifty years, I want to get it over with as soon as possible. So governments that forbid you to accumulate wealth and tax you toward the heavy side are in effect decreeing that you work slowly. They're willing to let you earn $3 million over fifty years, but they're not willing to let you work so hard that you can do it in two. They are like the corporate boss that you can't go to and say, I want to work ten times as hard, so please pay me ten times a much. Except this is not a boss you can escape by starting your own company. America is one of the leading technological countries in the world. Microsoft, Oracle, Apple well you get the jist. The problem with working slowly is not just that technical innovation happens slowly. It's that it tends not to happen at all. It's only when you're deliberately looking for hard problems, as a way to use speed to the greatest advantage, which you take on this kind of project. Developing new technology is a long drawn out process. It is, as Edison said, one percent inspiration and ninety-nine percent perspiration. Without the incentive of wealth, no one wants to do it.

The theory that led to the stealth plane was developed by a Soviet mathematician. But because the Soviet Union didn't have a computer industry, it remained for them a theory; they didn't have hardware capable of executing the calculations fast enough to design an actual airplane. In that respect the Cold War teaches the same lesson as World War II and, for that matter, most wars in recent history. The same recipe that makes individuals rich makes countries powerful. Let the founders of companies and the nerds that create new technology keep their lunch money, and you rule the world. A company will be maximally profitable when each employee is paid in proportion to the wealth they generate. It is probably no accident that the middle class first appeared in northern Italy and the low countries, where there were no strong central governments. These two regions were the richest of their time and became the twin centers from which the Renaissance civilization shined. If they no longer play that role, it is because other places, like the United States, have been truer to the principles they discovered CAPATILAISM.


Not everything in America has to be judged by profits. It used to be not so long ago that there were some services and institutions that were so important to our nation that they were exempt from market forces. Some things we just didn't do for money. The United States has been defined recently as extreme capitalism on steroids. But this does not have to define us. War profiteering use to be a bad thing now it is corporate warfare literally. War zones are dominated by private contractors as well as Health and Human Servies who work for corporations. There were more private contractors in Iraq than American troops. War is not supposed to turn a profit. Prisons were a non-profit business, but now prisons are big business they are even traded on big stock exchanges. Is this why America has the world’s largest prison population ­ the question has to be asked would rehabilitating people have a negative impact on the bottom line?

Hospitals have become big business; they're run by accountants in big corporate complexes. In the U.S. today, three giant for-profit conglomerates own close to 900 hospitals and other health care facilities. That’s a not hospital that’s Wal-Mart. The more people who get sick and need medicine, the higher the profit margins.
Because medicine is now for-profit you have things like "recision," where insurance companies hire people to figure out ways to deny coverage when you get sick, even though you've been paying into your plan for years. Surprise that’s not covered in your plan DENIED! Universal health care is not socialized medicine!
If Taiwan and Switzerland can do it why not the United States. Both are avidly “free-market,” business-friendly and entrepreneurial countries. The higher costs for service 22/23 medical services (pdf) and the burden for businesses of financing health insurance for employees makes it even more destructive (we are the only country in the world that leaves this to the employer), and determining on a national basis what medical services are appropriately covered by insurance. 

David Rothkopf  in a Time Magazine, article called In Viewpoint, Fixing capitalism means taking power back from business. He argues our biggest companies have financial resources and political reach that rival all but a few dozen states. Outcomes tend to serve the most powerful, because markets neither have a conscience nor do they ensure opportunity these challenges my analytic view of free markets.

Healthcare is the largest category of business in the U.S., representing 18 percent of the Gross Domestic Product (GDP). More of healthcare is moving into for-profit ventures. For-profit healthcare is merging and acquiring, insurers buying hospitals and physician practices and multinational. If the natural course of these events continue in an unfettered free market. There will be only a few multinationals to control a large portion of healthcare?  
Is it the right thing to do? Could theses corporations ultimately provide higher quality, less costly healthcare for all our communities? Or could this cause perhaps wide spread corruption like the Libor scandal. For some of the world’s leading banks to try to manipulate one of the most important interest rates in finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

How do we realize the benefits of market capitalism while restraining the powerful impulses to cut corners, cheat, and commit fraud? This is an ageless question that has polarized this political season. GlaxoSmithKline (GSK), the huge UK pharmaceutical firm, agreed to plead guilty to federal crimes and pay approximately $1 billion in fines because it promoted two prescription drugs for unapproved uses and failed to report safety data to the FDA about a third. In addition, GSK agreed to pay an additional $2 billion to resolve civil claims brought by both federal and state authorities alleging, among other things, that the company paid kickbacks to physicians to prescribe drugs, made false and misleading statements about drug safety, and committed fraud under a Medicaid drug rebate program. The $3 billion total payment "is the largest health care fraud settlement in U.S. history," said Justice Department, "and the largest payment ever by a drug company," eclipsing other settlements on similar charges with Pfizer ($2.3 billion), Eli Lilly ($1.4 billion) and Johnson & Johnson ($1 billion in process of being completed).

Corporations large and small apply relentless internal pressure on their people to hit basic financial goals for net income, cash flow, and stock price. Other commercial targets, too, may be critically important: achieving specific returns on investment, equity or assets; hitting sales or service goals; meeting product development or product launch schedules; and attaining productivity increases. Companies, especially those in the global economy, also face external pressures such as endemic corruption, weak rule of law, pervasive conflicts of interest, and demands from government officials.

Personal incentives are driven, in important part, by "making the numbers." There are ubiquitous temptations and pressures to behave badly. Employees at all levels may feel that their salaries, bonuses, promotions and even their job security depend on falsifying accounts, cutting corners, colluding with rivals, and generally ignoring law and ethics. So how do we as nation fix this problem of the bi-polarization of capitalism without destroying the very people that it is suppose to help? 

Capitalism cannot function without trust. As the Nobel laureate Kenneth Arrow observed, “Virtually every commercial transaction has within itself an element of trust.”