Engine Failure: When Financial Markets Fail

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." – Winston Churchill

There is a saying on Wall Street that goes, "The market can stay irrational longer than you can stay solvent."

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Scared and confused, consumers stared Monday at computer screens showing a jaw-dropping 777-point, one-day drop of the Dow Jones Industrials in response to the House of Representatives rejection of the proposed $700 billion dollar bailout plan.

They wondered what could be so awful that our government tells us that we need to provide the financial markets a $700B fix NOW, when until recently many of our leaders said the economy was doing just fine, and if anything, we were envious of the superstars of finance, the investment bank CEOs, private equity types and hedge funders, who seemingly could turn lead into gold. 

Moreover, we’ve been taught since the Reagan era about the efficiencies of Mr. Market, that “greed is good” because it motivates wealth creation, and that this wealth trickles down to one and all.  What has changed, we wondered?

A Primer on What is Happening on Wall Street
First, a quickie primer on what is going on.  Deregulation lead to a financial market where credit was cheap and easy to get.  This drove up the consumption of that credit to unsustainable and ultimately, unsupportable levels. 

On Main Street, the best example of this is the person who couldn’t qualify to get a loan to buy a $20,000 car (because auto loan underwriting standards are fairly stringent), yet nonetheless could get a loan to buy a $700,000 home.  Intuitively, that doesn’t make sense, right?

Part of what makes the great engine of the financial marketplace work is a process whereby all of the different types of outstanding loans are chopped up and re-packaged into securities 'baskets' based on the loan type and underlying credit-worthiness of the borrowers associated with a particular basket. 

These securities are then sold in secondary markets as a faceless class of investment (versus a direct stake in Joe or Mary's home mortgage), with the buyers being other banks, mutual funds and the like. 

Independent credit rating agencies are the entities that bless these securities by assigning risk levels associated with a given security class, which drives the risk premium investors expect as an incentive to buy these securities.

What supercharged this long-standing part of the way the financial marketplace works, and ultimately set the stage for a full collapse is two things: 

1. As Wall Street's bread-and-butter business of investment banking and trading stocks became less profitable (when electronic trading took hold), i-bankers started to re-direct their massive pools of capital into complex derivative financial instruments such as yield-enhanced, sub-prime mortgage loans (e.g., collateralized debt obligations – CDOs), often at an eye-popping 30-to-1 leverage.
2. Buyers of theses securities thought that these investments were "made safe" by a type of insurance product known as a credit default swap, a credit derivative from companies, such as AIG.

Unfortunately, the same credit ratings agencies that have (relatively) safely weighted the risk of default on less exotic financial instruments, like bonds and mortgage-backed securities, were now attaching their stamp of predictability to infinitely more complex types of derivative instruments. 

And as history now shows, they were seismically wrong, turning what might have been a disruptive tremor into a massive financial earthquake. 

(The fact the agencies themselves were 'polluted,' operating in financial self-interest in using their trusted seal to extol the predictiveness of these incredibly complex, volatile financial instruments is for another post.)

The bottom line is that when housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.  Then, as Andy Kessler notes, in an excellent post:

“The piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legitimate.”

Legitimate maybe, but parasitic on our economy, just the same.  Not only did this take down banks and brokerage houses, but given the fundamental misread of risk, it took down the insurance companies like AIG, which were underwriting the credit default swaps, and suddenly hit with unfathomed levels of defaults.

When risk assumptions go out the window, strong and weak look alike, and because borrowers and lenders have commingled, non-transparent interlocking interests, everyone knows that today’s predator may be tomorrow’s lunch.  This gives rise to a liquidity crisis. 

Why?  Simply put, no one trusts anyone else.  Banks certainly don’t trust one another, given all of the downside surprises and each side’s vested interest in selective disclosure.  Thus, experience suggests that in times like these, the smart money should sit on the sidelines until the massacre has played out. 

A scarcity of ready capital in financial markets is, by definition, what a liquidity crisis is.

Why Main Street Should Care
While it is trite to think that those greedy bastards created this mess, let them choke on their own blood, the unfortunate truth is that once lenders stopped lending to one another, all forms of borrowing become either completely unavailable or incredibly expensive.

This means that businesses can’t borrow, which forces them to adjust their operating expenses to the levels that cash flow can support. Since most business rely on variants of business loans, credit lines and the like, they need to cut back spending dramatically, which means cutting personnel, cutting capital investments and the like.

Now, Wall Street’s problem is your problem because you are unemployed and/or unable to borrow, or if you are a small business, suddenly you are faced with businesses/consumers that have stopped buying. 

It is easy to see how this becomes a vicious cycle, and that it what has everyone freaked out, since it is a lot harder to re-start a seized engine than to keep it from failing in the first place.

Enter the Bailout
Let me assert that some form of rescue, bailout or whatever is the most palatable term you prefer, is critical and needed fast (i.e., formally COMMITTED within days, not weeks), since every day that passes is a form of financial Russian roulette. 

The problem, however, in getting a consensus on what the right form of bailout is four-fold:

1. Complex Message: It is too complex for the layman to grok why a bailout is necessary.  The interplay between collateralized debt obligations, credit default swaps, massive leverage and the dynamics/dynamite of short selling hedge funds is akin to E=MC2 for most folk (myself included).  In fact, it took me about 700 words to explain this, and I was trying to be concise!
2. Pattern Recognition: The message of bailout is incongruent with our pattern recognition about market efficiency and the government having no place to be a player is such an environment.  We read about billionaires and their hedge funds, superstar CEOs, etc. and are told that their reward in commensurate with their results (as risk takers), but now in crash times, we are told about the consumer needing to bail out the system.  Does not compute, and being intellectually honest, there is no one right formula for how such a bailout should work so the pre-disposition to do nothing is very strong.
3. Bush's Bucket List: There is such tremendous distrust of a Bush administration that has played the Ready, Fire, Aim game more than once that people hear "Fire" and they tune out.  From Iraq and Enron to Katrina and now this, in the annals of ineptitude, history will show that GWB was a master...of disaster.
4. Common Good v. Self-Preservation: With Bush as a lame-duck president, and the presidential election just 60 days away, not only is the concept of a bailout heavily politicized (read: McCain’s cynical, deeply dangerous, ‘suspension’ of his campaign and polluted messages/actions that followed), but Congress, especially the Republicans, are faced with the unenviable task of deciding between what is right and what will get them re-elected.  Self-preservation versus selflessness.  Unsurprisingly, the members of the House of Representatives in the mostly tightly contested races were the ones mostly likely to vote against the plan.

Where Do We Go From Here
What is needed is a front man that is trust-worthy like Treasury Secretary Henry Paulson (perhaps surrounded by Obama, McCain and a couple of finance luminaries - like Warren Buffett - no one trusts economists) who can explain in a Town Hall format the WHAT, WHY and WHY NOW of the bailout

This should spell out the fact that this is not just a bailout, but if done right, a future nest egg for our economy, with an explicit message that the government is working on behalf of the consumer, not the financial institutions, and a clear articulation of goals and how it will be transparent -- i.e., the antithesis of what everyone has come to associate with the Bush administration. 

You sell this one once you feel that the House/Senate is lined up (behind closed doors without cameras) so Congress gets the halo of having gotten something done, and this is kept as apolitical as possible.

Beyond the downside that this post focuses on, the upside is that, because the US Government is truly the buyer in an extreme ‘buyer's market,’ if structured properly, Paulson could pull off the mother of all trades, and net a trillion dollars for the American people over the next 5-7 years.  That would be penicillin for the budget deficit. (Here is a link to an interview with Warren Buffett on the upside scenario.)

Regardless, maybe the sight of blood on the streets will sharpen this deal a bit further on the one side, and give the naysayers a little less bravado on the other, as the alternative of doing nothing seems pretty ugly and irresponsible.

UPDATE 1: Save the Fat Cats (NYT Op-Ed Piece by Nicholas Kristof on lessons learned from Japan, which had a similar crisis in the 90s but opted against a bailout).  Here is an excerpt:

Japan’s failure to respond urgently and decisively to its banking mess caused the country to endure a “lost decade” of economic stagnation. If America wants to avoid Japan’s decline, the House should follow the Senate’s lead and approve the bailout — immediately…For those of you accustomed to bull markets, who think we’re sure to come out of this quickly, remember this: Japan’s main stock index is still less than one-third of its level of 19 years ago.

UPDATE 2: 'S.E.C. No Evil' (Conde Nast Portfolio article on how, under chairman Christopher Cox, the commission has neutered its enforcement staff, yet another legacy of the ‘just do it’ Bush administration.  Here is an excerpt:

The departing chairman, Donaldson, was a Bush family friend who had been appointed by the White House with the expectation that he would temper the S.E.C.’s activism. Instead, he embraced the agency’s role as cop. The business community felt “that Donaldson was too tough on corporate America and Wall Street,” says a former enforcement official. “Cox was brought in to chill it out.”..Besides pulling back on enforcement, Cox also cut back on the S.E.C.’s new risk-assessment office, created under Donaldson to help the agency do a better job of anticipating financial upheavals.

Related Posts:

1. Black Swans and Bank Runs: on why this crisis was predictable.
2. Financial Tsunamis: connecting the dots in the sub-prime mess.
3. Oil, Vinegar and Volatility: on the history of volatility in the market, and missed opportunities to move away from foreign oil dependence.
4. How Speculative Markets Crush Amateur Investors: why amateur investors fail to grasp that what goes up inevitability comes (crashing) down.

Comments

[John "Z-Bo" Zabroski]

RE: Nicholas Kristof's article

I highly recommend reading Ben Powell's economic essay, "Japan". It isn't surface deep like Kristof. The Austrian school of economic theory, represented by the Von Mises' Institute Blog, was, of course, quick to cite Powell's now well-recognized essay.

Also, even more palatable to a non-economist: John Steele Gordon's op in the WSJ: "A Short Banking History of the United States". He also was a guest blogger on the NY Times Freakonomics' blog: "Greed, Stupidity, Delusion — and Some More Greed"

As a separate issue, some people did see this issue coming and even wrote books about what stocks to short (useless considering the market crisis ban).

But what all these people are simply trying to say is that what makes the US so much more powerful than other countries is that we have a swift legal system (compared to developing nations). In particular, laws governing formal property. These laws allow assets to be exchanged without physically looking at the assets. It also allows leveraging of these assets. This system WORKS... BUT only if assets can be 'fixed', allowing the assets to be used as collateral for a loan. Warren Buffet actually has a good story about this in the book Snowball, around page 23. Except, he was talking about interest rates, and assumed asset sheets were easy to evaluate (roughly).

Deregulation of lending was actually a "liberal mistake" (made by Bill Clinton, Barney Frank, and others). Counting welfare towards income for credit worthiness of a home loan is just ridiculous. This is a scenario that demonstrates how dumb it is to attach stigmas to Republicans and Democrats, alike.

Blaming CEOs can only be done to a point. They are humans just like us, and when pushed by gov't to do stupid, irrational things like destroy our economy, they will.

[Mark Sigal]

Thanks for the comments, John. I am so far beyond the Republican v. Democrat dichotomy. It's like The Daily Show bit where Congress gives themselves pats on the back for doing something non-partisan ONCE when that should be their governing principle ALL or most of the time.

As to CEOs, greed and the like, I am a bigger believer in greed than altruism, but I also recognize that greed is rarely satisfied.

The simpleton knows that as long as lenders are willing to lend, borrowers will borrow. Add in extreme leverage, volatility and disparate rewards (relative to true personal risk) and cataclysms will occur.

That suggests a need for clear, transparent financial instruments, sensical underwriting/leverage requirements, and governance/ accountability/oversight mechanisms that are non-polluted and have teeth.

[John "Z-Bo" Zabroski]

I am a big believer that greed and altruism are poor talking points.

The greed school of CEOs are guided by the Peter Druckers and Michael Porters of the world, who peddle 1940s American managerial style (management by objective and 'the value chain'). History has proven that financial analysts given Visible Numbers Only will not see a company is being destroyed from the inside. At one point, CEO Geenan of ITT was considered the smartest CEO in the world -- until their reputation for poor quality killed them.

Altruism doesn't mean anything.

Quality is the only game in town worth talking about.

Also, gov't oversight really isn't needed. We need to simply do away with this post-modern concept of subprime lending to poor people (which in turn allows the middle class to be over-qualified in terms of capital for a home). In addition, credit default swaps should be labeled as insurance, minimizing their use as it would require being able to pay out every last dollar. Overall, its about controlling the money supply to prevent it from growing too fast, especially the money supply going into these second-hand securities.

People simply don't understand that it isn't modern financial instruments that are to blame. Object-oriented financial analysis is a young but sound field. But it is not immune to bad loans. The idea behind object-oriented portfolios is that you can purchase a basket containing a degree of risk and a degree of reward suitable to your capital needs. The problem is when the heavy risk (<10%) all goes bad at once, and the assets associated with those risks lose their value in the market due to mass liquidation.

We saw a similar mass liquidation problem post-Enron, on an industry scale: fiberoptics. JDS Uniphase got KILLED when Enron flooded the market with fiberoptics. But they were still a pretty good company with a good reputation, and high market capitalization. So, in HS, I told my classmates to have their parents buy them $10k in JDSU as a graduation present, and to sit on it for up to 3 years. Had they done this, it would've more than paid for college.

The funny thing about Clinton/Frank's bill is that it came during a decade of unprecedented minority home ownership growth, and arguably was unneeded.

Also, Richard Baker proposed 8 bills asking to reform FM/FM when he was in congress, and couldn't even get a cosponsor.

[Mark Sigal]

While I think that you have solid points, I also think that you sidestep a real part of the problem.

When I was in real estate, developers didn't self-regulate, and lenders were motivated by yield to keep throwing coin at developers until things reached a cratering point. Both sides chased the cheese until consumption killed them.

This reached its zenith because the S&L industry became unregulated, and because you had entities that looked like banks but were practicing much higher risk activities, which most depositors hadn't the first clue about. They weren't lending to credit risks ala sub-prime mess, but the outcome was the S&L Crisis.

If anything, we have more complexity in terms of the instruments involved, more murkiness in terms of what the financial entity's business really is, who is conflicted in making what assessment of risk, etc., what dominos might fall if this vehicle craters, and the leverage associated with many of these investments is just staggering.

Read When Genius Failed if you haven't as it frames a mini example of how we bit the bullet fairly recently on what's going on right now when Long Term Capital Management Collapsed.

Don't get me wrong, I don't think regulation/reform is a silver bullet, and I certainly don't paint with a binary dem/republican brush, but four major crises in <20 years - S&L Crisis, collapse of LTCM, Tech Bubble, Housing/Financial bubble is emblematic of systemic failures that require more than status quo thinking.

I am an entrepreneur so I inherently trust the market first and foremost but I am also heavily pragmatic and trust my eyes, as I have seen this story one too many times, and for better or worse, put a lot of weight on the Buffett's of the world who both flagged the risk of derivative markets and hedge funds run amok and the need for the government to step in this go around to avoid a complete meltdown.

[John "Z-Bo" Zabroski]

I half-trust my eyes. I also half-trust von Mises and von Hayek. Together, I have a fuller picture than my eyes alone.

As I've said before, when "regulations" encourage people to do stupid things, they will.

Moreover, fiat central banking will cause boom/bust cycles. Under-regulation, de-regulation, and over-regulation are merely pawns in this game.

If you think a president will increase stability in the economy, then you're wrong. Economic history, and basic understanding of the circulation of the money supply, shows congressional policy "lags" and often interferes with the Federal Reserve; IF ANYTHING, synergy occurs, as congressional action and fed action combine to over-stimulate the economy.

What a president can do is reform government to eliminate the burden an individual has to file paperwork with the government. Barack has mentioned doing away with paperwork, particularly in healthcare, but he hasn't said how. That will streamline admissions to some extent, but not necessarily increase revenue for hospitals providing more care faster.

Also, IT IS UNCLEAR WHY THE GOV'T CAN DO BETTER, when the private sector hasn't yet stepped in to address these problems for hospitals, satellite clinics, and affiliated client clinics.

The answer is: Health care contains the most toxic data in any large scale enterprise you'll ever see. It's also got the most complex business requirements. If I were building a nuclear submarine, then I could consult 10 world famous experts on nuclear sub engineering. In a hospital, the system is broken and the staff doesn't contain experts. The rules are too complicated for humans to figure out, and there are no super-human experts with extraordinary understanding of all this complexity.

Not to put too fine a point on it, but Barack's universal healthcare plan shouldn't even pass until he figures out how to streamline this paperwork. However, that's a software project, and history has shown that the gov't fails MISERABLY at large scale software, and arrogantly so: Look no further than the gov't's most recent initiative: "VERY LARGE SCALE SOFTWARE", sponsored by universities who think "software process" is the answer (Carnegie Melon's SEI). Look at what the gov't says on software: it needs to be BIGGER (and more incomprehensible).

It's times like these where I feel like my sole purpose in life as an engineer is to fight off complexity. Simply telling a client, "No." is often the best feature implementation I can give them and will help their business the most. Unfortunately, gov't doesn't think this way.

[John "Z-Bo" Zabroski]

Also, I'll read When Genius Failed, but in turn, you could read The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto. It won't be surprising to somebody who is well-acquainted with von Mises and von Hayek.

As an aside, I've mentioned von Mises several times before without properly explaining his fame: he was the first person to point out capitalism *has* planning. (In the words of James Galbraith in his book Predator State. "Lines form, under capitalism, every day.") von Mises was the first person intellectually smart enough to explain why social was dead from the inside-out, and was not a fear for the rest of the world, because socialism would slowly die off.

You may forget that for a long time, Christians had a tough time reconciling capitalism with their social ethos. It wasn't until a decade after von Mises death that people like Michael Novak became spokespeople for capitalism; Novak himself was an American socialist until the '70s.

Only for the past 40 years have we had a strong belief in capitalism, and the climax of the past 40 years was the Reagan administration.

I am a republican, but I'm a moderate. More than anything else, I'm a "capitalistic pig" who wants fair playing fields to compete.

[Mark Sigal]

Hi John,

I have added The Mystery of Capital to my amazon wish list. This appears to speak to the tactical side of what Thomas Friedman calls the golden straightjacket; namely that once a country plugs into the global marketplace (he calls it the electronic herd), it is held to certain standards of accounting, transparency, etc.

Needless to say, the current crisis raises serious questions about how real/effective that straightjacket is.

Check out my post on Capitalism 2.0 that explains some of the mechanics at work in this rescue plan: http://thenetworkgarden.com/weblog/2008/10/capitalism-20-t.html

Btw, count me in the fiscal conservative, social moderate bucket, albeit not bucket-able as being either a faithful Dem or Repub. I vote by policy and by leader, not party.

p.s., to your comments on the state of health insure re-work, I can't disagree with anything that you are saying, while at the same time believing that this may be the time that we have the actual will combined with a pragmatic leader to carve out achievable change in this area -- grand reinvention will take longer, IMHO, and shouldn't be the goal in short run for the reasons you assert.

[John "Z-Bo" Zabroski]

I wonder, what does Friedman's wishlist look like?

There are key questions I want the answers to on health insurance. People cite WHO Fact Book for figures about our cost per capita, but disease rates tend to prominently show obesity-related (diabetes, heart problems) and smoking-related diseases (longs). I wonder how much of this is just

a) us being fat pumpkins
b) us getting early access to new procedures, equipment, medicine

All I know is supporters of UHC say not to look at the Canadian system, since they call it broken.

[Mark Sigal]

Not sure on Friedman. The specific book that I am referring to is Lexus and Olive Tree, which is probably about 10 years old but did a really good job of articulating how globalization works from a finance, governance and markets perspective while capturing the subtle differences between manufacturing and farming/production in this model.

Re your comments on the health front. One part of what you are saying deals with the basic goodness of holistic, process oriented approach to medical care, which is complicated heavily by medical establishment's heavy bias of "we know the answer" versus "if we frame the question differently" we may get an entirely different answer. An example here is that I am a bikram yoga devotee (105 degree room, 90 minute class). No doctor would recommend injured people to go into a class like this. In fact they would all say stay away until you are healed, but in 10+ years I have seen people with broken bones, MS, arthritis, cancer, weight issues, pregnancy leverage this as part of health protocol. Our model is much more oriented towards curing/medication protocol than prevention, maintenance and west/east health hybrids.

The second issue, which is more vexing for me personally, is fact that insurance system is convoluted, expensive, biased in who gets coverage and able to discriminate on "pre-existing" issues. This has been masked for decades as most people got coverage through employer and different rules for employer policies than individual policies. As more of the burden shifts to the individual, that is wear a lot of sad, scary stories. That aspect of access, coverage, governance and pricing needs to change, as access to health feels every bit as essential as access to education.

[John "Z-Bo" Zabroski]

Hmm...

A lot has changed since Obama's mother died of cancer, Mark. Medical underwriting basically isn't possible. Also, the United States has the lowest 5 year survival rate for cancer patients in the world. It might not have saved Obama's mom, but it has saved many mothers.

There is a lot wrong with the health care system, but, as Jay Severin points out, "Do you really want the speed of the US Postal Service combined with the compassion of the IRS?" Government should have limited involvement in healthcare if it's position is that it should be a marketable good.

Likewise, it isn't the sad, scary stories that indicate we have a broken system. What's broken is subscriber/payer, and limited choice in the market place. That's why you need clinics and why you need to streamline administration as well as payment.

My health care package is about $6,000-8,000 a year (covered by my employer and contributions from me), but most states fund per person around $12,000. I have some pretty amazing health care. Even my doctor's wish they had my doctors.

Right now, my preference would be to vote Republican, but McCain's campaign has been so awful, his advisors either so mystifyingly bad or maybe his reluctance to follow their advice. By contrast, Obama has surrounded himself with smart people. McCain is also the author of arguably the worst piece of legislation in a 100 years (McCain-Feingold), which protects incumbents and is now having the interesting effect of making it hard for the people to elect new community leaders.

People contrast an Obama presidency with FDR, but that is silly, because FDR was the one who taxed the poor after taxing the rich too much. Although it is certainly foreseeable that 60/40 Democrat-run Senate could do a lot of damage -- especially Barney Frank and Henry Waxman, who refuse to accept responsibility for some of this mess. I am way more terrified of those two than I will ever be of the media's slant that Obama has the most "liberal voting record in the Senate".

[Mark Sigal]

John, I think that some of your arguments fall prey to the tyranny of the ALL or NONE.

It's not so simple as to say the problem isn't underwriting standards, it's falling five-year cancer survival rates.

The truth is more paradoxical. Both are real issues and you can't fully solve one without the other but you also can't have the inherent complexity of the problem be an excuse for inaction.

TODAY, young, healthy individuals can get punted on by an insurance firm on basis of pre-existing condition, past history of taking certain meds, etc.

In unfettered free market logic, so be it but of course the net effect is that more and more of these folks fall into more expensive cracks such as emergency room care and medicare, or worse.

A century ago, we did not see it as necessary to have working condition standards - underage kids, lethally dangerous, etc. was a market issue. We came to a more enlightened view and everyone's standard of living seems to be better for it.

This added cost did not remove incentive, lead to socialism or kill business.

This is not the same as saying that we should want gov't providing these services, embrace spread the wealth nonsense or whatever.

It is just pure recognition that 21st century fairly early in this millennium we are faced with a conundrum of where should government play, where should it get out of the way, what is a right (education, health care), what is a luxury.

[John "Z-Bo" Zabroski]

@It's not so simple as to say the problem isn't underwriting standards, it's falling five-year cancer survival rates.

Sorry, I meant to say we have the best cancer survival rate. I accidentally said lowest. At the time, it made sense. I was thinking lowest death rate, but said survival.

I'm not all or none. I tend to think I have a balanced view, and apologize if that doesn't sound humble.

Balance is extremely important. For instance, one major criticism I have of Barack's energy policy is that he wants a windfall profit tax to subsidize the gas pump. What many Democrats often overlook is that they merely need to regulate u.s. energy futures. Unfortunately, republican majority has seen this gone un-regulated, driving up oil prices due to excess speculation. It's also not sensible to give a rebate to taxpayers using a windfall profits tax. It should be used to fund alternative energy, if anything. All a rebate does is take money away from planning. This rebate is really just a bribe for votes. If anything, taxes on gas should be raised as soon as possible to further fund alternative energy while driving down demand and speculation (along with regulating u.s. energy futures).

In health care, we face similar issues. Poor cost structure of health care needs to be solved by creating new markets.

I understand and respect your position: you believe health care is not a marketable good. I believe it is, but you'd need sneak it past an HMO to get it done. Do you really think I could snap my fingers and clinics would be set-up? Like most legislation that helps a group of people out, it has to be snuck in. Except, the special interest group we need to serve is the American public. This flips the game. Usually, the lobbyists sneak in past the public.

With regard to rights... I wish I was forced to earn some of my rights growing up. I always had far superior intellect to everyone else, but never, ever did homework or projects, and thought studying was pointless. I took home A's on tests, but when it came time to apply to college, my GPA was a 1.98 on a 5.0 scale. On the day I took my SATs, I was out partying the entire night, and took them while sobering up. My friend Mike sat behind me and kept pricking me in the back with his pen to keep me awake.

In college, I had to pay for my education, and accountability made me disciplined.

The U.S. education system is a paradox. We have the best universities in the world, but we're awful in k-12. Why? Competition. Unfortunately, government policies are eroding the competitive base in universities... we graduate MBAs who can't do a break-even analysis and don't know who Dr. Deming is.

[Mark Sigal]

I would challenge one statement you make, as I think that it is reflective of the ALL or NONE mindset that I am referring to.

You say:

I understand and respect your position: you believe health care is not a marketable good. I believe it is, but you'd need sneak it past an HMO to get it done.

I say:

Health care, like finance and education need a market component to push the bar up versus down to a LCD. That said, saying healthcare is a marketable good is not incongruent with saying these are the rules of this particular market, these are the oversight mechanisms, these are the penalties for non-compliance and this is the process for governance.

Otherwise, this topic is relegated to the EITHER/OR of best med-tech on the planet vs. HMO-hell.

I think that part of our challenge societally moving forward is to embrace and reconcile paradoxes versus forcing absolutes.

[John "Z-Bo" Zabroski]

My mouth does not always communicate what my brain thinks. I don't point out certain things, because they are so fundamental to me it'd be like stating I need air to breath.

My comment is a half-truth, similar to how "left" and "right" is a half-truth.

Let's illustrate this with examples.

Democrats tend to state Americans are uninsured, not that they don't have healthcare.

Republicans renamed the Inheritance Tax the Death Tax, because it softens the public image of the government's role in redistributing wealth when a particular key exchange event occurs.

Christian fundamentalists used to have severe cognitive dissonance over socialism, which appeared to align with their Ethic, but they also despised how Godless communism countries are. The underlying concept they supported is planning.

Reagan/Bush/Clinton greatly reduced welfare programs, and people wondered what would happen to all these people on healthcare, but what ended up happening is people just got jobs for a change. The effects were most widely seen during the Clinton administration, who continued Reagan's and Bush's policies of reducing welfare entitlements. For a long time, economists believed unemployment naturally gravitated toward 7%, but we've been below that for years.

Your requirements are nice {{"saying these are the rules of this particular market, these are the oversight mechanisms, these are the penalties for non-compliance and this is the process for governance"}}, but in my book there is only one group of Americans who are consistently given the short end of the stick: mentally impaired, usually mentally deranged. Mental health facilities either get slashed from state budgets or are under-employed or staffed with people who are basically inmates running the asylum. How do you propose your requirements will fix that? Give me something that isn't unactionable.

[Mark Sigal]

I think that you are up-leveling and obfuscating by treating terminologies like welfare as catch all buckets and applying party centricity to global issues. The truth is messier and more complex.

The increasing cost of insurance borne by individuals or the lack of coverage provided by companies for individuals or the increasing trend of insurance companies to carve out pre-existing ailments is probably just in your periphery because I am guessing that you are young and single (and healthy), and for young, single healthy, no problem.

By contrast, I have seen the angst of parents, co-workers and relatives who face scary circumstances and have materially diminished life options choosing between any job that will get them coverage and truly being hosed.

It's easy to bucket, especially when we don't directly have the pain of a policy of lack thereof, but perhaps when you are older and have a family and perhaps a child with an ailment that isn't covered and your choice feels more limited, you might see it differently.

I put these things in the bucket of infrastructure (health, education, roads, financial markets), and while I generally agree that less is more, I also think that the answer is more involved than you present.

As to mentally impaired, etc., this is in the bucket of safety nets, and the paradox here is does someone with diminished capacities get more rights and protections than the homeless elderly woman who I see every day in my neighborhood who's big mistake was outliving her means and not having a familial support system.

It's the same thing you see in schools where there are resource set asides for students with special needs in the same school that is dropping class electives, growing class sizes and can't replace basketball and volleyball nets.

To be clear, I agree with your macro viewpoint on balance between throwing money at the problem and fiscal conservatism, but I also believe that you have internalized your own set of absolutes that are reflective of the US/THEM/ALL/NONE bucketing that I think that we as a society need to grow beyond.

In Covey-speak, we need to start beginning with the end in mind, and figure out holistically how our system can get better at building infrastructure services in a world of limited dollars, regular election cycles and the conflicting objectives of special interest groups.

I just don't think that it's a simple as saying "throw more market/vouchers at the problem" or "throw more entitlements/socialize it."

I suspect that if tomorrow goes the way it seems like it will go, we might get some glipses of a different way of governance, although now magic potions, to be sure.

[John "Z-Bo" Zabroski]

I'm in pain every day, but there is no cure for what I've got other than fast treatment by doctors and the body's healing mechanisms. I managed to avoid surgery 5 years ago, but had a massive relapse this summer.

Any help for me is beyond the production possibilities frontier for manipulating the body's healing process. Some research has been done to treat similar problems to mine, but the fundamental problem is our bodies aren't designed to repair themselves for the kind of failure my body had.

I'm getting better, but very slowly. However, I had surgery 4 days after my doctor said it was necessary. Doubt I can get that speed under a universal system. Without it so quickly, I probably would've lost my job.

[Mark Sigal]

John, much empathy to your health issues. Needless to say the universal coverage conundrum is just that, a conundrum.