Andy Kessler

WSJ: Bank Pay Controls Aren't the Answer

In his weekly radio address on Saturday, President Barack Obama said that "we cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess." A day earlier, Treasury Secretary Tim Geithner told the New York Times that "you don't want people being paid for taking too much risk."

So now the administration wants to control the pay of employees of banks and Wall Street investment firms.

Kenneth Feinberg, the administration's "pay czar," is being tasked to oversee employee compensation at firms that took bailout money from the government's Troubled Asset Relief Program (TARP). The Federal Reserve will require thousands of bank holding companies and state banks to submit their compensation plans for approval.

The administration has it wrong. It wasn't reckless schemes and excessive risk that sunk banks and Wall Street; it was excessive leverage. And thanks to cheap money and twisty regulations, risk was extremely undervalued. Banks owned huge portfolios of real-estate loans and mortgages specifically because they, and regulators, didn't think they were taking much risk at all.

Outlaw pay and pay will only go to those outside the reach of the law

Populist pay limits are squarely aimed at Wall Street, not local banks, yet for the most part Wall Street doesn't take much risk. Highly profitable investment banking and sales and trading are agency businesses, doing work for customers for a fee. Of course bad trades happen, and there are the rare rogue traders like Barings' Nick Leeson, who hid losses and sunk the firm, or Jérôme Kerviel, the young trader who lost $7 billion for the French bank Société Générale. But Wall Street firms are quite good at managing day-to-day trading risk.

The unwritten deal between public Wall Street firms and their shareholders is that employees get half of revenues as compensation. Yes, half. Shareholders, after expenses of phone calls and computers, get the rest, usually around 20%. In other words, Wall Street is a 70% profit-margin business. And Goldman Sachs, with the help of 0% interest rates, continues to knock the cover off the ball.

As competition and electronic trading ate into the agency businesses and profits in the early 2000s, the firms redirected their capital to invest in mortgage-backed securities, pocketing the 2%-3% difference between mortgage rates and their cost of short-term capital. This was the easy trade, the safe trade—not a "thirst for reckless schemes."

Bear Stearns, Lehman Brothers, Morgan Stanley, Citigroup, Merrill Lynch, Goldman Sachs and others believed the mortgage-backed security was the low-risk investment, and so it couldn't hurt to use leverage—i.e., borrow far more than the capital they had on hand, 20 times or even 30 times as much, to make additional investments in these securities. The firms raised huge sums of money—from other banks, money-market and mutual funds—so they could multiply 2%-3% gains into those large 70% profits and compensation. It wasn't risk but leverage that did in the financial system. Without that leverage, we'd have had an investment-banking profit crisis, not a credit crisis.

Yet if politicians still insist on limiting pay, there are only a few ways to do it:

• Limit risk? Good luck defining it. Great traders know that what looks low risk is often the scariest trade. You can't legislate market smarts.

• Pay Caps? So do you limit executive pay to $250,000? $1 million? $100 million? Who picks, how, and what are the effects? Not all Wall Streeters are equal. If oil trader Andrew Hall can't get paid $100 million after making Citigroup shareholders money, he is going to set up shop across the street and do it himself. Sure, he'll have to scrounge for his own capital, and maybe not borrow as much. But to evade the regulators' pay handcuffs, people will simply not work for a regulated company. Outlaw pay and pay will only go to those outside the reach of the law—whether they move to a hedge fund in Greenwich, Conn., or to an investment banking firm in London.

• Raise the cost of insurance? After overextending themselves with excess leverage while doing supposedly low-risk trades, Wall Street firms and banks got bailed out by a combination of low-cost capital from the Treasury, guaranteed debt by the Fed, and deposit insurance by the FDIC. It is clear in hindsight that Wall Street and banks have been underpaying for the twin pillars of the Fed as lender of last resort and the FDIC to limit bank runs. And so, yes, it is time to find a formula that adequately values that risk and charges Wall Street firms for this bailout insurance. There are market mechanisms today, in the form of derivatives, that price the risk of doing business with specific firms. Transparency is what will let the Fed and the FDIC use the market to protect the market. If done right, the increased costs will eat into the employees 50% take and therefore limit compensation.

But the knee-jerk reaction—to squeeze "greedy Wall Streeters" who nearly sunk the economy—is misguided.

Forbes: Lehman and Meritocracy

 

http://www.forbes.com/2009/09/14/lehman-brothers-goldman-sachs-bankruptcy-anniversary-opinions-contributors-andy-kessler.html

Part of the charm of Wall Street, and what scares most reasonable people away, is that it is as close to a meritocracy as exists on this earth. It's dog eat dog. It's sink or swim. You do a trade and it makes money, then you're a hero (for a moment anyway) and deserve a bonus. You bring in a deal, you get paid. You lasso more clients' assets under your firm's roof, you're a hitter. I once discovered some good news on the stocks I followed before the rest of the Street, and mentioned it to the sales force at a morning meeting and moved markets in New York, Tokyo and London. I had the head of global equities pat my head on the elevator ride up the next morning. Pat my head! I was told he never does that.

The flip side, of course, is what makes Wall Street so dangerous. You lose money for the firm and you're a heel. Do it again and you don't get paid that year. Do it a third time and you're out of a job. Just like that. Gone. I've seen it happen to friends and acquaintances at just about every firm up and down Wall Street. There is no tenure on Wall Street, no job security, no long-term guarantees. Ten- and 20-year careers end in a flash. Happens all the time, and everybody who works in the business knows this.

That's one reason why everyone is paid so well. Think of it as combat pay. But the other reason compensation is many, many multiples of the average wage in this country is that trading stocks, doing IPOs, merging companies, managing money is a very lucrative business. Not everyone can do it. It looks easy, football-field-sized trading rooms jammed with adrenalin-rush maniacs sitting in front of huge LCD screens. It might as well be a call center in Mumbai. But it's hard. Really nasty hard. Wall Street hires in that 99 percentile zone. And then they make your life miserable hoping you'll quit before they break you. Or hoping they break you before you lose money for the firm. It's not WalMart or General Motors or even Pfizer or Intel. It's trial by fire.

You would think that would make the entire workforce afraid to do anything for fear of being tossed out on their can, back into the cruel, cruel averagely paid world. But a meritocracy works in the opposite way. You have wicked smart people trying to prove to each other that they are smarter than everyone else. Unlike acing a chemistry final or even nailing your ACT tests, the score is kept with real money--how much your trading desk makes for the firm--how big a chunk of the bonus pool you command for your do-or-die heroics day in and day out.

Another not-so-secret revealed--it ain't fun, that's what Harry of Hanovers or Ben Benson's are for after 4 p.m. Pour a stiff one and recall sticking the guy at the First Bank of Neenah for a teenie (I'm dating myself talking about 16ths of a dollar) or bagging the OpenTable IPO or whatever the next deal is.

I'm reminded of all this because September 15, is the one-year anniversary of Lehman Brothers heading off to the great trading room in the sky. The debate will rage on for decades whether Paulson and the Treasury or Bernanke and the Federal Reserve should have saved them from failing. There is no good answer. Bear Stearns was bailed out six months earlier. Bank of America with the Merrill Lynch anchor around their neck was bailed out maybe four months later.

But the crude reality is that Lehman Brothers is a classic Wall Street story. Inside and outside, it was a meritocracy. They wanted to one up on Goldman Sachs, generate as good a return on equity and earnings growth so they could win the meritocracy game and get paid in spades. How dare Bear Stearns' CEO make more than ours! Let's lever this sucker up with mortgage-backeds and create a trillion-dollar balance sheet. If not us, who? And by the way, very few people at Lehman really understood how upper management was playing this meritocracy game with the rest of Wall Street with the rank and files' careers.

When that trade went south, and their creditors pulled their short-term financing, (OK, Jamie Dimon at JP Morgan was particularly egregious pulling a $5 billion plug), the ugly side of meritocracy reared its head. You lose money, you're out. Goodbye. It was nice knowing you. Every single person working at Lehman knew this personally, or should have known. That's the giant sword hanging over everyone's head, the stench of fear, that keeps the game going and going. I've got to use my 99 percentile smarts and win. If I don't, I'm toast, so I'll work harder, think harder, and of course play harder with my winnings that everyone else. The outside-meritocracy downside became the inside-meritocracy homicide.

Lehman is gone, sure, but Wall Street and the meritocracy lives on.

WSJ: Why AT&T Killed Google Voice

Earlier this month, Apple rejected an application for the iPhone called Google Voice. The uproar set off a chain of events—Google's CEO Eric Schmidt resigning from Apple's board, and the Federal Communications Commission (FCC) investigating wireless open access and handset exclusivity—that may finally end the 135-year-old Alexander Graham Bell era. It's about time.

With Google Voice, you have one Google phone number that callers use to reach you, and you pick up whichever phone—office, home or cellular—rings. You can screen calls, listen in before answering, record calls, read transcripts of your voicemails, and do free conference calls. Domestic calls and texting are free, and international calls to Europe are two cents a minute. In other words, a unified voice system, something a real phone company should have offered years ago.

 Apple has an exclusive deal with AT&T in the U.S., stirring up rumors that AT&T was the one behind Apple rejecting Google Voice. How could AT&T not object? AT&T clings to the old business of charging for voice calls in minutes. It takes not much more than 10 kilobits per second of data to handle voice. In a world of megabit per-second connections, that's nothing—hence Google's proposal to offer voice calls for no cost and heap on features galore.

What this episode really uncovers is that AT&T is dying. AT&T is dragging down the rest of us by overcharging us for voice calls and stifling innovation in a mobile data market critical to the U.S. economy.

For the latest quarter, AT&T reported local voice revenue down 12%, long distance down 15%. With customers unplugging home phones and using flat-rate Internet services for long-distance calls (again, voice is just data), AT&T's wireline operating income is down 36%. Even in the wireless segment, which grew 10% overall, per-customer voice revenue is down 7%.

Wireless data service is AT&T's only bright spot, up a whopping 26% per customer. How so? As any parent of teenagers knows, text messages are 20 cents each, or $5,000 per megabyte. After the first month and a $320 bill, we all pony up $10 a month for unlimited texting plans. Same for Internet access. With my iPhone, I pay $30 a month for unlimited data service (actually, one gigabyte per month). Is it worth that? The à la carte price for other not-so-smart phones is $5 per megabyte (one-thousandth of a gigabyte) per month. So we buy monthly plans. Margins in AT&T's Wireless segment are an embarrassingly high 25%.

The trick in any communications and media business is to own a pipe between you and your customers so you can charge what you like. Cellphone companies don't have wired pipes, but by owning spectrum they do have a pipe and pricing power.

Aren't there phone competitors to knock down the price? Hardly. Verizon Wireless, T-Mobile and others all joined AT&T in bidding huge amounts for wireless spectrum in FCC auctions, some $70-plus billion since the mid-1990s. That all gets passed along to you and me in the form of higher fees and friendly oligopolies that don't much compete on price. Google Voice is the new competition.

By the way, Apple also has a pipe—call it a virtual pipe—to customers. Its iTunes music service (now up to one-quarter of all music sales, according to NPD Market Research) works exclusively with iPods and iPhones. The new Palm Pre, another exclusive deal, this time by Verizon Wireless Sprint, tricked iTunes into thinking it was an iPod. Apple quickly changed its software to lock the Pre out, and one would expect Apple locking out any Google phone from using iTunes.

It wouldn't be so bad if we were just overpaying for our mobile plans. Americans are used to that—see mail, milk and medicine. But it's inexcusable that new, feature-rich and productive applications like Google Voice are being held back, just to prop up AT&T while we wait for it to transition away from its legacy of voice communications. How many productive apps beyond Google Voice are waiting in the wings?

So now the FCC and its new Chairman Julius Genachowski are getting involved. Usually this means a set of convoluted rules to make up for past errors in allocating scarce resources that—in the name of "fairness"—end up creating a new mess.

Some might say it is time to rethink our national communications policy. But even that's obsolete. I'd start with a simple idea. There is no such thing as voice or text or music or TV shows or video. They are all just data. We need a national data policy, and here are four suggestions:

• End phone exclusivity. Any device should work on any network. Data flows freely.

• Transition away from "owning" airwaves. As we've seen with license-free bandwidth via Wi-Fi networking, we can share the airwaves without interfering with each other. Let new carriers emerge based on quality of service rather than spectrum owned. Cellphone coverage from huge cell towers will naturally migrate seamlessly into offices and even homes via Wi-Fi networking. No more dropped calls in the bathroom.

• End municipal exclusivity deals for cable companies. TV channels are like voice pipes, part of an era that is about to pass. A little competition for cable will help the transition to paying for shows instead of overpaying for little-watched networks. Competition brings de facto network neutrality and open access (if you don't like one service blocking apps, use another), thus one less set of artificial rules to be gamed.

• Encourage faster and faster data connections to our homes and phones. It should more than double every two years. To homes, five megabits today should be 10 megabits in 2011, 25 megabits in 2013 and 100 megabits in 2017. These data-connection speeds are technically doable today, with obsolete voice and video policy holding it back.

Technology doesn't wait around, so it's all going to happen anyway, but it will take longer under today's rules. A weak economy is not the time to stifle change.

Data is toxic to old communications and media pipes. Instead, data gains value as it hops around in the packets that make up the Internet structure. New services like Twitter don't need to file with the FCC.

And new features for apps like Google Voice are only limited by the imagination. Mother-in-law location alerts? Video messaging? Whatever. The FCC better not treat AT&T and Verizon like Citigroup, GM and the Post Office. Cellphone operators aren't too big to fail. Rather, the telecom sector is too important to be allowed to hold back the rest of us.

Forbes.com - Thankfully, That's Not The Way It Was

http://www.forbes.com/2009/07/20/walter-cronkite-obituary-media-opinions-contributors-mediocrity.html

I've always had a problem with Walter Cronkite. He had this mind-meld grip on the brain of everyone, including me, who came of age in the 1960s and 1970s, with his subliminal promotion of mediocrity and complacency that kept an entire generation in the doldrums. And no, I'm not talking about his views on the Vietnam War and LBJ's line "If I've lost Cronkite, I've lost middle America." That was just noise.

Look, the guy could read the news okay. It's not rocket science. "Uncle Walter" had the anchor seat on the CBS Evening News from 1962 to 1981, back when people actually watched the news on television. How quaint. Seven o'clock, right after the local news. Like clockwork, finish dinner, put on Cronkite. And he was good--heck, he was the master. He taught himself to speak slowly, with a half regal, half Midwestern accent, so he could penetrate American minds, and infect them with his mystical powers of persuasion.

Am I talking about liberal media bias? No. C'mon, stay with me here. Every night, right after the news stories and vignettes on acid rain and student protests and Dan Rather in the jungles of Vietnam and crumbling cities and heroin epidemics and exposés on Watergate and fraud and corruption and burning slums, Walter Cronkite would turn to the camera, and with almost undisguised smugness, tell me, right to my face, "... And that's the way it is."

Liberal schmiberal. That was a cover. He was the voice of the establishment, The Man trying to keep us down. And there's nothing we could do about it because that's the way it is. And I believed him. We all did. A conspiracy by advertisers on his show? Who knows, but it took me a long time to break out of his trance.

The 70s were a smog-filled haze. Upward mobility was a pipedream. Stock markets stagnated and all the moon-walking Space Age dreams of the 60s were shattered with layoffs and plant closings and Rust Belts and urban unrest. You were told to do well in school and maybe you could get an entry level job at a big company and wear a white short-sleeved shirt and work your way up over twenty or so years, so you could buy that little house in the suburbs and squeeze out 2.3 kids and afford a station wagon and … well, that's the way it is.

Someone else has all the money and you don't. That's the way it is.

Unknown forces control your life. That's the way it is.

Governments are corrupt. That's the way it is.

Society is divided into classes, and you're stuck in yours. That's the way it is.

The American Dream is dead. Go back to work, you sorry little cretins.

Fortunately for me, for you, for everybody almost everywhere, Walter Cronkite was wrong. "Most trusted man in America"? No way. That wasn't "the way it is." Not even close.

In fact you couldn't rely on anyone else--no school, no company, no institution, no company, no industry, no media, nobody was going to raise you up. The trick was to destroy each and every one of these existing systems. Blow it all up. Invent the future by destroying the past.

Not blow it up literally. Abbie Hoffman was a bozo. The Black Panthers were terrorists. It wasn't civil unrest that created change. That was a sideshow. It wasn't hippies or free love or exotic drugs (too bad, all that was kinda fun). All these things destroyed lives and never built anything new. Same for every beneficent government program and professor's teaching. Worthless.

Instead, what it took was a few little microchips (Ted Hoff at Intel), and a couple of funky pieces of code (Bill Gates at Microsoft) and a few smart people (Steve Jobs at Apple and Larry Ellison at Oracle and thousands of others), who weren't content working for The Man. Each of them dislodged "the way it is" and got a few people asking "why is it this way?" and declaring "think different" and "eat my dust," and bang, the status quo crumbled. You could create your own future. Power shifted out of the hands of conglomerates like Gulf & Western and Engulf and Devour and away from centralized bureaucrats running faceless government operations. Instead, power ended up in your hands, my hands, all of our hands. To do what we wanted.

Computers escaped air-conditioned rooms and ended up on our desks. Banks gave way to mutual funds. The New York Stock Exchange gave way to Nasdaq. Brokers gave way to Web-based trading and on and on.

So what did we want? To change the world, for the better, increase the size of the pie, bring the rest of the world onto our wealth grid. And not by building huts in Costa Rica but by taking down those obstructing progress, those leeching off the rest of us, holding us back, milking the present for their own benefit rather than standing aside and letting wealth-creating innovation increase everyone's living standard. Those "that's the way it is" types needed to move over. But they didn't move on their own, so we either had to wait for them to die or just destroy them. Seek and Destroy. Music companies. Travel agents. Insurance brokers. And we're not done--the hard work has just started.

It took me a long time, well into my life, to get Cronkite's words out of my head and realize that not only is anything possible (thank you Kevin Garnett), but that I was the one that had to make it happen. There were no gifts, no trailblazers to follow. We all have to invent the future by destroying the past.

Sadly, the old mentality is back. Citibank is too big to fail. That's the way it is. The government needs to bail out the automakers. That's the way it is. Taxes are going up. That's the way it is. Carbon dioxide will boil the oceans so we need to live in cities and walk to work. That's the way it is. Elites like Robert Reich and Paul Krugman and Al Gore will tell you what you'll be paid, how much health care you'll get, how much risk you can take, what kind of car you can drive, how much water you can use to flush your toilet, because … That's The Way It Is. He may have passed away last week, but Walter Cronkite will never die.

WSJ: The Bernanke Market

http://online.wsj.com/article/SB124762005061042587.html

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Technology Review: A Pound of Cure

http://www.technologyreview.com/computing/22852

The federal government is about to spend big on health-care IT. Too bad the medical industry has a vested interest in inefficiency.

Technology is once again being touted as a cure-all, this time for what ails the American health-care industry. The Obama administration's $787 billion stimulus plan includes $19 billion for health-care IT spending that provides incentives for doctors and hospitals to adopt electronic health records. Starting in 2011, stimulus funds will provide additional Medicare and Medicaid reimbursements for health-care providers using such systems.

These federal funding programs assume that the critical hurdle to widespread adoption of electronic medical records is cost. Indeed, hospitals surveyed in a study published last year in the Journal of the American Medical Association reported cost as the major barrier. Yet compared with other businesses, the health-care industry has been unmoved by the logic of lowering costs to increase profits. The truth is that these folks could have digitized the whole industry ages ago. The technology has been around for a long time: Wall Street began phasing out physical stock certificates over 35 years ago. Even the cash-strapped airline industry has gone ticketless, removing huge labor and overhead costs. These industries started using electronic records because they believed it would save money. The health-care industry simply has not followed suit.

The reason lies neither with cost nor with inadequate technology. Rather, the health-care industry's reluctance to digitize its records is rooted in a desire to keep medicine's lucrative business model hidden. Dangling $19 billion in front of a $2.4 trillion industry is not nearly enough to get it to reveal the financial secrets that electronic health records are likely to uncover--and upon which its huge profits depend. In those medical records lie the ugly truth about the business of medicine: sickness is profitable. The greater the number of treatments, procedures, and hospital stays, the larger the profit. There is little incentive for doctors and hospitals to identify or reduce wasteful spending in medicine.

The amount of unnecessary spending is huge. In a project that analyzed 4,000 hospitals, the Dartmouth College Institute for Health Policy and Clinical Practice estimated that eliminating 30 percent of Medicare spending would not change either access to health care or the quality of the care itself. The Congressional Budget Office then suggested that $700 billion of the approximately $2.3 trillion spent on health care in 2008 was wasted on treatments that did not improve health outcomes. This excessive spending has kept the entire health-care industry growing faster than the population, and faster than inflation, for decades.

While electronic medical records do have sizable up-front costs, they also have the potential to save big, in part by streamlining administrative costs. According to a 2003 article by Dr. Steffie Woolhandler in the New England Journal of Medicine, administration accounts for 31 percent of expenses in the U.S. health-care industry, or more than $500 billion per year. (To put that in perspective, Google has spent well under 10 percent of that on all its R&D.) Richard Hillestad of the Rand Corporation wrote in Health Affairs, in 2005, that health-care information technology could save physicians' offices and hospitals more than $500 billion over 15 years thanks to improvements in safety and efficiency.

Electronic medical records would make it much easier to conduct the studies needed to track down this wasteful spending. According to one estimate, only about 4 percent of U.S. hospitals use comprehensive electronic record systems; most rely on paper records. As a result, analyzing the effectiveness of specific treatments--for example, spinal-fusion surgery versus physical therapy for back pain caused by a herniated disc--is unnecessarily expensive and time consuming. Physicians must compile data for a significant number of patients undergoing each treatment and correlate that information with each patient's outcome.

Using electronic health records, in combination with data mining and search technology, would make this kind of analysis much easier. Patients who fit specific criteria could be identified and tracked automatically, for example. Researchers would be able to analyze larger numbers of patients and a wider variety of treatments. With easy access to this kind of information, wasteful spending could be identified more readily, allowing payers, whether Medicare or private insurers, to stop reimbursing for expensive but unnecessary tests and procedures.

An even bigger threat to the sickness industry's business model is that by allowing automated tracking of patients over time, electronic health records would set the stage for early detection and preventive medicine. Currently, the entire industry is organized around treating sickness, rather than keeping people healthy in the first place. Three-quarters of health-care spending is devoted to chronic care, but the National Cancer Institute and the Centers for Disease Control and Prevention allot just 12 percent of their budgets to research on early detection. Moreover, the payment system is structured around reimbursement for treatment rather than prevention.

With widespread use of electronic health records, it would be easier to expand preventive medicine, not only by educating patients about lifestyle changes but also by conducting mass screenings. A recent American Cancer Society study concludes that prevention, early detection, and better treatment decreased cancer death rates between 1990 and 2005 by 19 percent for men and 11 percent for women. I would like to see funding for technologies that could ultimately improve early detection. Studies are now being launched on CT scans that can evaluate a patient's heart in less than one heartbeat. They produce finer resolution than existing technologies and return fewer false positives. These tests cost $1,000 now, but within five years, thanks to expected advances in computing power, we should see a $200 CT scan to detect heart disease before a heart attack.

The ability to detect cancer early enough and cheaply enough for effective treatment would prove much more cost effective than the current approach, which involves spending hundreds of thousands of dollars to extend the life of a cancer patient for a few months--generally, with low quality of life.

As valuable as electronic health records are for streamlining costs, their biggest contribution will lie in moving medicine toward early detection. Let's hope that the adoption of this screening technology is not postponed as long as electronic medical records have been, in a misplaced desire to protect the lucrative status quo. Like all good technology, it's probably going to get off the ground on the grassroots level. Expect your local Walgreens to promote these tests sooner than your doctor does.

Forbes.com - The Inevitability Of Internet Pirates

Pirates are all over the news this year. They were off the coast of Somalia … and now they're in Sweden? In April, a Stockholm court handed down a guilty verdict for "accessory and conspiracy to break copyright law" to the four owners of the Web site Pirate Bay, who now each face up to one year in prison.

Their crime? Setting up a site that allows 22 million users--and that number is growing--to search for and find pointers to (mostly) copyrighted material on the Internet. These so-called torrents are easily downloadable, perfect digital copies of music, TV shows, movies and, as it's known on the Web, pr0n. Outraged at their courts, Swedish citizens got the last laugh when the three-year-old Pirate Party received 7.1% of the vote in the early June European Union elections, guaranteeing it a seat in the European Parliament. Argh.

The funny thing is, Pirate Bay doesn't even host any copyrighted material for download, only directions to find it. If I were Google CEO Eric Schmidt, I'd hold off on that trip to Europe this summer. Because type "The Climb lyrics" into Google and you get pages of links to other Web sites with copyrighted lyrics to this Miley Cyrus song. Type in "Hannah Montana the Movie torrent," and you have a choice of download sites for a copy of the movie, all one click away. That's "accessory and conspiracy," if you ask me.

Fortunately, we in the U.S. rarely pay attention to Swedish laws. Did you know it's illegal in Sweden to repaint a house without a license and the government's permission? But along the lines of Supreme Court Justice Ruth Bader Ginsburg's remark--"Why shouldn't we look to the wisdom of a judge from abroad with at least as much ease as we would read a law review article written by a professor?"--I say bring on the Pirate Party!

Copyright law and its interpretations have been a mess for years. I'm always amused by pay-per-use Xerox machines in libraries bearing a warning label not to copy copyrighted material--as if there was any other reason for the copier to be there. In 1998 Congress was happy to pass an extension to existing regulation, practically written by Disney, that extends artist's copyrights well beyond their deaths. Google has inflamed the anger of book authors, a dangerous group who can type faster than most, by claiming it is allowed to put the complete text of books on its site unless individual authors opt out.

Furious that Internet news sites are using Associated Press content without paying fees, the AP announced tougher enforcement of their copyrights. In an attempt to show how twisted this has become, I (illegally?) copied the following from an AP story I found on Google: "'We can no longer stand by and watch others walk off with our work under misguided legal theories,' said Dean Singleton, the AP's chairman and the chief executive of newspaper publisher MediaNews Group Inc. 'We are mad as hell, and we are not going to take it any more.'"

No matter what laws are passed, copyright infringement is going to happen.

For the most part, Google and others hide behind a simple concept, that they are in the "link serving" business. Ingenious, actually. Others may violate copyrights, their argument goes, but we just serve up links to Web sites that are doing supposedly illegal things, like hosting downloads. Google's implicit claim is that they are not the police of the Internet, which would be quite an expensive task to undertake. And if the Web were strictly regulated, search wouldn't be as lucrative a business. But are they in the same business as Pirate Bay? Will they soon fund the Google Party?

And who are the Web's police? In the end, it's courtrooms in places like Sweden. They're not very efficient; they don't fit the Internet model of scalability. So really, it's no one. Like it or not, the Web is and will remain the Wild West.

Hand out as many guilty verdicts as you like, but folks on the Internet will copy away--because, really, who can stop them? Google won't do it, Internet providers like Comcast and AT&T, who can block a lot of this stuff, can't do it without Network Neutrality proponents squawking, "Interference!"

Even authoritarian regimes fail. (The Great Firewall of China is quite leaky.) Plus, it is so easy to create a Web service to download copyrighted material that, like that arcade game Whac-A-Mole, if you take one culprit down with your mallet another five pop up in the next few nanoseconds. Sad but true, there is not much anyone can do.

If you want to understand how impossible it is to shut this stuff down, here's an example. I've noticed that Pirate Bay's servers go down every once in a while, for as long as a day. A note is put up that they have to travel to reset their servers, which are in an undisclosed location. My bet is Estonia. Or maybe Tuvula.

So make all the legal arguments you want. No matter what court decisions are rendered and no matter what laws are passed, copyright infringement is going to happen. So these folks should stop suing their customers and lobbying for more laws and instead come up with new business models that pirates can't follow them into.

Rock groups Aerosmith and Metallica have had most of their library of songs stolen, so they have incorporated them into the videogame "Guitar Hero." In that format, they sell them again to millions of fans who want to do more than listen. High-definition movies are too big to download (for now), so Blu-ray disc sales continue to grow. The fact that iTunes is tightly linked to iPods legitimized digital music sales. The Amazon Kindle is kick-starting a protectable platform for electronic books. And newspapers and magazines need to create more than just a free display tablet to properly Webify their printed words.

New services--in areas from alerts to social networks to finance to interactive sports-fan participation--need to do things paper versions can't do. These organizations aren't in the railroad/media business anymore; they're in the transportation/communications business. The distinction makes a difference. And in the meantime, expect digital pirates to remain a menace to the old way of doing things.

CNBC: Fast Money - Bull Market or BS?

18:00 minute mark...

WSJ: Was It A Sucker's Rally?

The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

Only a fool predicts the stock market, so here I go.

I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:

1) Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.

It doesn't matter if financial institution losses are $2 trillion or the pessimists' $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don't call them toxic anymore), the bears have backed off and the market rallied -- Citi is now $4.

2) Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.

3) Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.

The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.

Can you see why I believe this is a sucker's rally?

The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.

For now, the market appears dependent on a hand cranking out dollars to help fund banks. I'd rather see rising expectations for corporate profits.

Weekly Standard: Putting the Toothpaste Back into the Tube

Federal Reserve chairman Ben Bernanke needs to spell out how he plans to head off hyperinflation.

So how is Fed chairman Ben Bernanke going to get all that toothpaste back into the tube? The Fed has been cranking money out like water over Niagara Falls. The monetary base has increased by a trillion dollars in just the last six months. And he's not done, furiously printing dollars (bank credits, really) and buying Treasuries in an attempt to flood the economy with dollars. When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn't need all that cash sloshing around. Is runaway inflation our next crisis?

Let's go back to fundamentals for a second. Money is a placeholder of value--the price of a cold Heineken or the value of work already done, a hole dug, a piece of software written, whatever. When things work just right, prices seek the right level and we get a match between that cold beer and the sweat from working for it.