Public versus private health insurance

A key element of Barack Obamas health proposal is the option for a public insurance organisation which would compete with the private offerings. Private insurance companies typically work with an administrative overhead of 25 % whereas the public insurance works with much lower admin overhead of < 5 %.  The CEO of the largest public insurance company in Germany with 7 Million customers gets a salary of < 400 k $. (Just check out the salary of the CEO of your insurance company.)

In contrast to the situation in US the German government forced the private insurance companies to offer private insurance at the same level of services as the public insurance. Surprise – their offering is typically 100% more expensive than the  public option although they have more good risks. The price of public health insurance  in Germany is about 15 % of the income up to a maximum of 68 k $ income. The insurance is really a family insurance and covers children as well as non working spouses without additional charge. The employer pays 50% of the health insurance for its employees. The private insurance companies collect the maximum of 10 k$ from every customer. Although they don’t serve the high risk group of customers with low income.

The private insurance companies really don’t want (yes we can’t) to serve the lower end of the health market with low profit margins. I guess this is also true for US insurance companies. It’s really strange that people in US do not compare  the cost/performance of their health insurance with other countries. They even seem to be happy to pay premium prices for average health care. Three cheers to the health industry lobby.

Borrow Swine-flu Vaccine from your friends

The Swine Flu Disease is a nice learning environment for the president’s engagement in the health arena. Producers have managed to get commitments from governments in the whole world to buy large quantities of vaccine even before the vaccine was develeoped and before the threat to the population was quantified.  However, the vaccine manufacturers did not want to build “one time” manufacturing facilities to really meet the demand. GlaxoSmithKline e.g. plans to sell a vaccine containing an unlicensed additive which allows them to produce four times more flu shots than with the pure vaccine. The only problem – the product was not tested according to established rules. This caused a big uproar in Germany when it became known that members of the government and the army should receive the “real stuff” – a traditional vaccine without the additive.

In contrast to US, Germany has enough vaccine with additive because government was guaranteeing the order and paid about 3 times more than e.g. US government. Guess why GlaxoSmithKline is not shipping enough vaccine to US?  However, there is a rather simple way out. Germany has contracts for more vaccine than actually needed because a large part of the population thinks that the vaccination is more dangerous than the flu itself. The vaccine must be used immediately and cannot be stored. President Obama should give the chancellor of Germany (just reelected Angela Merkel)a call  and ask for a couple of millions of swine flu shots. Certainly he will get a good “second hand” price because Germany really can’t use what they payed for the vaccine.  Thus president Obama’s strategy not to overreact to the flu threat may pay pay off.

It is not only a banking crisis but also a technology crisis

“In our time it is not only the market which has its own life and rules over man, but also the development of science and technique.”
Erich Fromm, The Sane Society, Greenwich, 1955

The last decades of prosperity were mostly due to advances in information technology. When microprocessor controlled machines  became widely available in the 1980’s much less  skilled workers were required in the factories. Highly sophisticated manufacturing work could be transferred easily to other countries, the skill was in the machine!  Productivity was increasing with minor or even negative investments. Typically microprocessor controlled machines were even less expensive than traditional man operated machines and could produce goods faster and with better quality. Communication with eMail was used only within large companies and was restricted to text documents displayed on green screens. I remember that sending a fax with an engineering drawing from development to a manufacturing site early 1980  required the same type and brand of fax machine on both sites. Even fax machines were not compatible at that time!  The low speed and limited quality of communication made complicated value chains with many subcontractors expensive and not very reliable. Thus production e.g. at the car manufacturers was done mainly in house. When Personal Computers were introduced to the market even small companies and their employees could apply computing technology to all kinds of processes from design to manufacturing at at much lower cost than the large companies, which were relying mostly on large mainframes and highly inefficient internal processes.The Internet added almost unlimited communcation capabilities between arbitrary business partners world wide enabling sophisticated and fragmented value chains and management schemes. The IT expansion was driven by dramatic increases in computing and communication power at the same or even lower prize.  In old days such a major improvement in overall productivity would have required huge reinvestments of the profits to apply advanced technology.  However, this was not the case for the past prosperity cycle industry because IT technology became always cheaper. Thus profits were not invested in goods and infrastructure. Most large companies could increase their revenue by streamlining their processes and optimization of their management and value chain without need of new capital from shareholders. Most successfull companies e.g. like IBM were even buying back their own shares because they could not identify profitable business opportunities. The work force did not get a large part from the additional income from the advanced IT infrastructure  (why should you pay people more money if you know you will not need them in the future)- the money mostly was used to drive new virtual business in the banking system with  “banking products” .

The communication capabilities over IT networks allowed banks to reduce the transaction delay especially in the inter bank trading. In old days there was always a time of increased risk between the start of a transaction and the confirmation of the partner bank.  This was limiting the amount of risk taken but also the number of active transactions in the banking system. With online trading transactions could be “confirmed” within seconds creating an illusion of safety in the banks. By the end of the trading day all deals were “balanced” in the electronic booking systems – why should anybody be concerned?  These games could be played as long as the real economy was running well but came to a screaming halt, when people realized that the real economy was not capable to expand further because the refinement of current businesses does not provide much additional growth. The “banking technology”  resulted only in virtual business creating negative value for the society.

Recession is a typical companion of mature technology and organisational infrastructure.  A new widely accepted growth opportunity and vision is required to escape from recession. What are the technology candidates for the “new deal” in the post IT area?  The vision “save the earth climate” could easily absorb large amounts of investment and provide jobs but has limited immediate returns to the people. Reducing the energy consumption with more efficient cars and insulated houses and replacement of oil with solar and wind energy is more like a cost reduction program and not really a new business. “Developing the third world” could be another vision. However, the plan to make money from “colonies” never worked for England, UK or France and others in history. China has even reversed the initial idea of a colony – it has more investments in the USA than western companies have investments in China! There is also no new major emerging technology in the labs of universities or companies.  There is no other choice:  THINK.

Value Add Tax needed for Banking Products

All illegal businesses have one thing in common – they don’t pay tax when they sell their products. The only way to bring the Mafia bosses to jail was to accuse them of tax fraud, because they had no good explanation where all their money was coming from. Obviously the banksters have learned from this experience. Togehter with their fellow lawyers and lobbyists they have created all kinds of legal paths to illegal wealth and can play lots of tricks to avoid income tax. Income tax is probably the easiest tax to cheat government and the honest citizens. It is much more complicated to play around with Value Add Tax (VAT) because its based on transaction value and not on profit.  Assume banks had to pay a modest VAT of 1% on all products they sell  and foreign banks had to pay 1 % VAT on all banking products they ship into the country – such a tax was already proposed by John Maynard Keynesto prevent marginal baning transactions. The processing of the tax would immediately create a record of all financial transactions (why should banks treated different than WalMart or MacDonald’s?). Most phony transactions would no longer be valid, because VAT would be due immediately. The VAT on banking products would be also a simple way to recover the money the governments (the citizens – you and me) are throwing at the financial markets. Certainly some banks would outsource their risky business to VAT free countries. However no customer nor any other bank should assume that the US government will cover any of that risk associated with this illegal business.  Certainly a VAT on banking products would make thes products more expensive (so does the VAT on Whoppers for MacDonald’s) but the cost would be taken by the people using banking products and not by the public.

A key problem of General Motors – going metric too late and not full speed

A subtle but important cause of the high manufacturing cost of U.S. car manufacturers is the late and limited use of of the metric system, the standard measuring system for automotive parts in the rest of the world. Thus U.S.  car manufacturers use of global, low cost, standardized parts was limited. In contrast Japan adopted the metric system and DIN  standards mainly defined by the German machinery industry before serving the world market. Other parts of the U.S. industry made the transition to the metric system much earlier (e.g. IBM in the 80’s ) and were able to reduce their manufacturing cost of mechanical parts by typically 50%.  Even when a U.S. manufacturer officially introduced the metric system, engineers were still designing in “inches”. This attitude still complicates cooperation of U.S. car manufacturers like G.M. with European and Japanese manufcaturers. Whereas Ford has adapted the metric system much earlier.

The power of standardization is seen in the software industry where U.S. companies set the standards and dominate the markets.

The retirement trap – are people saving too much?

In his article “Revenge of the Glut”, Paul Bernanke points out that WW people are saving lots of money which they try to secure in “safe” countries like US or the big European countries. Thus these countries especially the USA are flooded with cheap money creating a huge trade deficit.  A good example of “saving countries” are Japan, China or Germany, where people are traditionally saving a large part of their earnings to be prepared for hard times. In good old days this money was used by farmers, entrepreneurs and large companies to finance profitable investments. Today even large excellent companies like IBM don’t have lots of ideas how they could create profitable new business. Most of the IBM profits was spent in 2007 on share repurchase ($ 18.8b share repurchase versus $6.2b for R&D) . As a result IBM much like other big businesses did not grow as analysts expected in the 1990s.  Developing countries could absorb huge investments. However, they do not have to infrastructure to invest and maintain the assets providing reliable return to the investors. USA is still one of the most interesting targets when people want to secure money for the future although US was consuming much of the incoming capital flow in the past.  However, people do not believe anymore that they will get their money back when they need it e.g. for their retirement. In addition the amount of money people need for retirement is growing fast because people live longer, healthcare cost are exploding and companies do not provide pension plans (financed out of cash flow) for their employees anymore.  This is one major reason why people gave their money to banksters promising high revenue.

Now even middle class people must realize that they will not be able to make enough secure investments to maintain their lifestyle during 25 + years of retirement. The only viable solution is probably to scale back much like our grandfathers and grandmothers did.  You must not be a member of a expensive golf club, you don’t need an expensive house in an affluent area, youd don’t need expensive vacations etc.  I even think that our ancestors were happier with their modest style of living growing their vegetables in the backyard than today’s retiree’s. Unfortunately this attitude will decrease the GNP because consumer spending in an aging population will decline. Is there any reason why a wealthy country should not be able to manage such a change?   The answer is probably – yes. we can.

The tax deduction trap – cross border leasing

Very often private investors are trapped by promises of tax deductions. Unreasonable risks are accepted when there is a chance to play tricks on the IRS.  A nice example for best intentions being abused by banksters is cross border leasing. Initially tax deductions were granted for US citizens investing in US air planes to be  leased by airlines in foreign countries. This should help the US aircraft industry to sell more planes abroad and create jobs in the US (and prevent aircraft industry growth in other countries). In the beginning this seemed to work rather well. The IRS lost some taxes thru cross border leasing but was compensated by additional taxes from the aircraft industry.  In the 90’s banksters figured out how they could get enormous tax deductions without investment in US products. CBL fonds started buying already existing infrastructure abroad (sewer systems, water supply, railroads, etc) and leased it back to the original owners. The original owners were offered an initial reward of immediate cash (typically 1 – 2 %  of the asset value)  for taking lots of risk whereas the banksters could make as much as 10 % profit on the deal immediately. In addition they could sell the tax deductions to US taxpayers. Typically cross border leasing to cities, public utilities and states was promoted by former politicians becoming lobbyists for US banks and became a multi billion “virtual” cross border industry in US and Europe. Lease takers are now struggling to manage their long term financing from banks which can no longer be trusted.

Why should US government be interested to grant tax deductions on such deals which do not create jobs in the US and reduce US tax income? This is a good example how laws and rules outside the finance industry must be corrected to prevent banksters from inventing new criminal schemes.

Are mortgage bonds safe?

Traditionall mortgage bonds have been considered a very conservative and safe investment because mortgage bonds are backed by real estate or physical equipment you can see and touch. Mortgage bonds have been a used to secure long term investments in pension funds and life insurance. However with the current turmoil in the housing and real estate market and all kinds of tricks played with loans on physical equipment, people realize that the mortgage bonds are not as secure any more as private investors have assumed. Bankers now discover e.g. in Germany that the safety net provided by mortgage bonds was never tried. Would you trust a safety net which never was tested? The German Hypo Real Estate bank recieved more the 110 billion $ in capital and government guarantees  but is not capable of securing their mortgages > 900 billion $.  A break down of Hypo Real Estate (HRE) would have a major impact on life insurance and government loans.

The HRE crisis is another example how important trust in banking products is. As soon somebody starts to investigate and to test the basic scheme the system breaks. The recommended solution of the banksters to private investors: all your investments are secure but please do not ask and do not investigate!

How to kill the virtual money?

Surprise! Pumping billions of $ in the banking system does not cure the system. The banksters have created a huge amount of virtual money by increasing the hypothetical value of real goods (housing) and virtual “banking products”. The only way out is really to kill the virtual money and hit the financial speculators and not the public. In good old days  during the Great Crash 1873 private banks really printed their money. This had the advantage that the owner of the money and the issuer could be identified easily. Today the banksters have created asocial networks where nobody can be blamed for wrongdoing. The idea that a “bad bank” should buy all the virtual money with real taxpayer money is not really a good idea. It would reward the banksters and the financial speculators which have made fortunes in the past by creating the current financial crisis. A study in Germany showed that during the time period between 2002 and 2008 90% of the population have experienced reduced real income and lost money on their savings and assets. However, the richest 10% of the population have significantly increased their income and their assets.  The situation in the US may be even worse.  A good solution could be a “Intelligent Bank” which buys virtual assets for e.g. 10% of its nominal value for a limited time e.g. 1 year.Thus banks would be forced to reevaluate their virtual assets and sort out the “banking products” which have real value. Huge amounts of public money would be needed to kill the “virtual assets”. However, the amount would be much lower than what would be needed to maintain the current system in the future.

Rebuilding the country by reallocation of intellect

The high salaries and boni of the financial industry have attracted many bright people in all countries, resulting in an intellectual drain in engineering, government or education. Tthe “leading” countries in the financial crisis USA und UK   have also taken the hardest hit. Unlike in the dot.com boom in the 90″s (which has also attracted the bright young people) which created at least some new business models and corporations like Amazon, eBay or Google there is no hope that the large amount of skilled people in the financial sector will create new assets for the society. There is even a danger that these people making their living on fraud and illegal business models will apply their “skills” to other industries! The intellectual skills of the nations must be redirected to support the real businesses and the creation of new values in the real industry. In a first step government must reduce the influence of consultants from the banking industry and the associated lawyers. President-eElect Obama seems to take the first steps in this direction.