George R. Fisher, III, M.D.

Obituary

George R. Fisher, III, M.D.

Age: 97 of Philadelphia, formerly of Haddonfield Dr George Fisher III

Dr. George Ross Fisher of Philadelphia died on March 9, 2023, surrounded by his loving family.

Born in 1925 in Erie, Pennsylvania, to two teachers, George and Margaret Fisher, he grew up in Pittsburgh, later attending The Lawrenceville School and Yale University (graduating early because of the war). He was very proud of the fact that he was the only person who ever graduated from Yale with a Bachelor of Science in English Literature. He attended Columbia University’s College of Physicians and Surgeons where he met the love of his life, fellow medical student, and future renowned Philadelphia radiologist Mary Stuart Blakely. While dating, they entertained themselves by dressing up in evening attire and crashing fancy Manhattan weddings. They married in 1950 and were each other’s true loves, mutual admirers, and life partners until Mary Stuart passed away in 2006. A Columbia faculty member wrote of him, “This young man’s personality is way off the beaten track, and cannot be evaluated by the customary methods.”

After training at the Pennsylvania Hospital in Philadelphia where he was Chief Resident in Medicine, and spending a year at the NIH, he opened a practice in Endocrinology on Spruce Street where he practiced for sixty years. He also consulted regularly for the employees of Strawbridge and Clothier as well as the Hospital for the Mentally Retarded at Stockley, Delaware. He was beloved by his patients, his guiding philosophy being the adage, “Listen to your patient – he’s telling you his diagnosis.” His patients also told him their stories which gave him an education in all things Philadelphia, the city he passionately loved and which he went on to chronicle in this online blog. Many of these blogs were adapted into a history-oriented tour book, Philadelphia Revelations: Twenty Tours of the Delaware Valley.

He was a true Renaissance Man, interested in everything and everyone, remembering everything he read or heard in complete detail, and endowed with a penetrating intellect which cut to the heart of whatever was being discussed, whether it be medicine, history, literature, economics, investments, politics, science or even lawn care for his home in Haddonfield, NJ where he and his wife raised their four children. He was an “early adopter.” Memories of his children from the 1960s include being taken to visit his colleagues working on the UNIVAC computer at Penn; the air-mail version of the London Economist on the dining room table; and his work on developing a proprietary medical office software using Fortran. His dedication to patients and to his profession extended to his many years representing Pennsylvania to the American Medical Association.

After retiring from his practice in 2003, he started his pioneering “just-in-time” Ross & Perry publishing company, which printed more than 300 new and reprint titles, ranging from Flight Manual for the SR-71 Blackbird Spy Plane (his best seller!) to Terse Verse, a collection of a hundred mostly humorous haikus. He authored four books. In 2013 at age 88, he ran as a Republican for New Jersey Assemblyman for the 6th district (he lost).

A gregarious extrovert, he loved meeting his fellow Philadelphians well into his nineties at the Shakespeare Society, the Global Interdependence Center, the College of Physicians, the Right Angle Club, the Union League, the Haddonfield 65 Club, and the Franklin Inn. He faithfully attended Quaker Meeting in Haddonfield NJ for over 60 years. Later in life he was fortunate to be joined in his life, travels, and adventures by his dear friend Dr. Janice Gordon.

He passed away peacefully, held in the Light and surrounded by his family as they sang to him and read aloud the love letters that he and his wife penned throughout their courtship. In addition to his children – George, Miriam, Margaret, and Stuart – he leaves his three children-in-law, eight grandchildren, three great-grandchildren, and his younger brother, John.

A memorial service, followed by a reception, will be held at the Friends Meeting in Haddonfield New Jersey on April 1 at one in the afternoon. Memorial contributions may be sent to Haddonfield Friends Meeting, 47 Friends Avenue, Haddonfield, NJ 08033.

Securitization

Michael Millken

It is not fanciful to link the credit crunch of 2007 with the savings and loan problems two decades earlier. Both bubbles were related to home mortgage financing, and the first bubble turned destructive by seeking money to keep itself going. If dammed-up surpluses of the Middle East and China could be made available to American mortgage lenders, there seemed to be ample demand for them. Furthermore, while Michael Millken is mostly known for his prison sentence, he had nevertheless made an important observation. Risky mortgages were generally overpriced. That is, the aggregate extra cost of subprime defaults was appreciably less than the aggregate extra interest being charged for them. If some way could be found to make the risk premium more appropriate to the actual risk, home mortgages would get permanently cheaper, and mortgaging profits would likely be gratifying. Mortgages needed a better system for establishing appropriate interest rates, and they needed more of that underemployed wealth of the Orient. Derivatives suggested themselves as a solution for both issues.

Chairman Alan Greenspan

The unaccustomed wealth of Asia and the Persian Gulf was put under heavy pressure to migrate to America by lack of local investment opportunities but was bottled up by rudimentary banking systems in the developing world. As ways were found to get around obstacles for exporting this money, the danger increased of "asset bubbles" inflating whatever they touched, for example, the dot.com stocks in 2001. The pressure indeed needed to be deflated, but carefully. Furthermore, certain accords reached in Basle around 1982 made it even easier for banks to issue loans, while the favored tax treatment of interest from residential real estate loans directed lending to home mortgages. Indeed, the calculated cost comparison between buying a home or renting it had once remained identical for fifty years but began to diverge in 1982. By 2007, it was significantly more expensive to buy than to rent, even though many analyses suggested a housing surplus existed, particularly in California and the Southwest. While the interest-rate premise was correct, the earlier campaign against "redlining" probably did encourage loans to people who could not afford the house, and there was momentum to this idea. But the most obvious stimulus to continued high-priced home purchasing, in the face of a growing over-supply, was the momentum of abundant cheap money. To mop up a growing housing surplus, initially low "teaser" interest rates were offered for ARMs, or adjustable rate mortgages which could abruptly adjust upward after a few years. A growing problem was being set up to go over a cliff. Chairman Alan Greenspan fretted at his seat on the Federal Reserve Board that it was difficult -- a conundrum -- why market interest rates for long term borrowing did not rise enough to put a stop to this. In retrospect, it seems likely the risk premium had long been too high and was now reaching for more appropriate levels. Derivatives were the main instrument for bringing rates down, and they did it with breathtaking speed, perhaps overshooting in the process. As is often the case with innovation, the risk of failure was overemphasized, while the dangers of success received little attention.

Credit derivatives can also be viewed as a form of insurance, protecting the lender if the borrower defaults. That doesn't sound like a bad thing. True, all insurance creates a "moral hazard" that encourages risky behavior by reducing its pain. No one, it is said, washes a rental car. But in a housing surplus, the insurance protection allows banks to take more chances in marginal situations, using up the surplus. Young folk is allowed to get started in life; the poor are allowed to enjoy the American dream. Unfortunately, some will abuse the privilege by buying speculative houses in a rising market, and "flip" them. Many will buy bigger houses than their income can support. Some, who should more wisely rent because their employment prospects are not secure, will be tempted to buy. All of these considerations are wrapped up in the interest rate the lender charges, so eventually, interest rates will rise to a level that anticipates -- discounts -- them. Interest rates did not rise. The old levels of risk "premium" did not reappear.

It seems now that increased demand stimulated by derivatives was not resisted by a shrinking supply of money, with a balance maintained by the adjustment in interest prices. Indeed, a good even brilliant idea was crippled by a series of responses to the puzzling environment. Banks learned to sell pretty much any mortgage as quickly as it was created; after that, the extra risks were none of their concern. It has been suggested that banks be required to retain a portion of any loan they originate but to do so would exhaust the bank's lending capacity during a bonanza of business. Standards for a bank's lending capacity are set by the Federal Reserve, as a multiple of their retained profits or reserves. Those capacity limits had been relaxed by the Basle accords, but only on condition, the banks restricted themselves to AAA-rated loans. This will turn out to be a critical point because it put unwarranted reliance on the opinion of the rating agencies, and in any event, led to "tranches".

Federal Reserve Building

Here's how things roughly went. Investment banks learned to buy up and combine great bunches of these mortgages into a bundle. The bundle was then sliced into tranches of lesser bundles, attempting to sort out the bundles by their credit rating. Elegant mathematical formulas were brought forward which did a fairly good job of sifting the potentially weak loans away from another bundle that was largely risk-free. Those better sub-bundles, thought to warrant a AAA rating, were then sold to institutions who were restricted to them by the Basle accords but paid a lower interest return than the mortgage pool they came from. That was already an uncomfortably low rate by historical standards, now made lower. However, in view of its superior quality with default risk removed, it could be bought with borrowed money, eventually creating an adequate but leveraged return after costs. The debt was thus piled on debt, and the process repeated with exaggeration on the next lower quality tranche, the AA paper. And so on down to the lowest grade, which was thought to contain all or almost all of the default risk in the whole mortgage pool. People who bought the lowest tranche were real risk takers, experts who knew what they were doing, receiving a premium interest return to do it. Because this process was thought to create a sophisticated assessment of the true risk in the bundle, it was thought it would justify lower rates for everybody, squeezing out the unnecessary cushion of comfort. It was a plausible idea, and if it worked, it would be a brilliant one. But it had a big unrecognized flaw. It assumed that essentially all of the defaults would occur at the bottom of the pile, or possibly at the next higher level. There would be no defaults in the AAA level until all of the lower tranches had been wiped out -- an almost inconceivable economic calamity.

Ingenuity was then carried to yet another level. Credit derivatives are a form of insurance against default, but there was a more traditional form already in existence. Several so-called monoline companies offer insurance against default, backed by the enormous strength of pooled resources of a number of the largest strongest financial institutions in the world. The rating agencies assess their strength as AAA, the highest quality. Now, it was reasoned, if a tranche of mortgages rated AA by the agencies were insured by an insurance company, itself rated AAA, then the effective risk to the investor was really only AAA, or negligible. Alchemy. The lead was turned into gold. Unfortunately, when the panic finally hit, monoline insurance stock which was considered rock-solid at $80 a share, was soon selling for $15. The flaw in all this was that the rating of the bond was based on the credit rating of the borrowers. No one had supposed that people who were quite able to pay their debts would walk away from them. When home prices fell only ten or so percent, many of them fell below the cost of the borrowed-up mortgage. Instead of feeling horror at defiling their credit reputation, many of these prosperous borrowers regarded foreclosure as simply a business decision. The protection of monoline default insurance was trivialized when one of the smartest investors in the world, Warren Buffett, announced he proposed to form a company to ensure municipal bonds, and only municipal bonds, against default. Since that might strip away what had become the only profitable portion of the monoline portfolio, the prospect of such crippled companies paying housing claims would be bleak. Pseudo AAA tranches were now clearly back to being AA, and even real AAA tranches were under a cloud. All of this was not anticipated.

There remain two other questionable developments in this colorful adventure: the role of the rating agencies, and off-the-books behavior by the regulated mortgage originators.

Oil Bubble

The cost of gas at the pump has soared, and conspirators are suspected. But, awkwardly, nice respectable pension funds and university endowments may be responsible. {bottom quote}

Although gasoline in the U.S.A. costs only half what it does in France because of their taxes, prices at our friendly local pump have nearly doubled in a year. Scoundrels are suspected. The major oil companies have no trouble showing they are not profiteers but victims of high prices of crude oil, but not everyone believes them. The oil consumption of developing nations is assuredly increasing but not enough to cause prices to jump this much; the oil-producing nations are pumping about all the refining system can absorb; and American gasoline consumption is trending down a little, not up. So who's the speculative villain, here? An offshore trader named Michael Masters pointed out to befuddled congressmen at one of their show-trial hearings that the marketplace for crude oil is mainly divided between actual producers and actual consumers, plus a buffer of middle-men who may buy and sell but neither produce nor consume. Normally, middlemen are involved in about 20% of crude oil transactions. Recently, they constitute almost 80%. Aha!, we are starting to get somewhere.

Lukoil Gas Prices

There will be, however, little political mileage in hounding these speculators, because they indirectly represent mostly retirees and grandmothers whose purchases are not predatory but prudent. Life savings (encouraged by Congressionally created tax shelters) have accumulated in pension funds and custodial accounts of one sort or another, run by professional managers. Since the stock market is down over a thousand points and bonds look risky, these pooled funds have accumulated cash. Moreover, falling interest rates drop the value of the dollar, and real estate is presently a special catastrophe. So essentially only one investment asset class is rising in price -- commodities. Gold is a commodity but has already seen a big price runup, while agricultural products are seasonal. So, essentially, the huge global tidal wave of liquidity has exhausted one safe harbor after another. The current soft spot, where the tire bulges out, is the price of oil.

It has long been difficult to invest in commodities as an asset class, but modern investment theory devoutly believes in combining unrelated asset classes, and continually searches for more of them. So, investment managers have lately created index funds to facilitate investing in commodities as a general class. These funds are more costly and complicated to run than index funds of stocks and bonds, and there is rent to be charged for scarce expertise in a non-traditional field. Consequently, the low-hanging fruit for managers of commodity funds has been to solicit and even limit access to non-profit endowments, pension funds, and sovereign wealth funds. All of them are cash heavy, and almost all of them are touchingly trustful. So, a very large pool of money has switched from cash to commodities without much notice by its ultimate owners, and the main commodity at the moment is oil. These pensioners and rentiers through their surrogates don't want to burn oil, they want to own oil. But the effect is the same; increased demand with constrained supply leads to higher prices.

An illustration makes the point quite simple. An oil tanker filled with many thousands of barrels of oil takes five days to go from Venezuela to Philadelphia, somewhat longer to come from Africa, and considerably longer to go from the Persian Gulf to Japan. But even in the mere five day trip from Venezuela, it is quite common for owners of the cargo to change hands ten or twelve times, each time at a slightly higher price. The ship plows along uneventfully, but ownership of the cargo is held anywhere in the world and transferred over the Internet; the captain of the ship could care less. There's only one buyer in Venezuela and one seller in the Delaware Bay, but five or six other parties have the feeling they owned the cargo. The value of the cargo could well rise by millions of dollars in the interval between sale by the producer of the oil in Venezuela, and purchase by the refiner of the product in Philadelphia. It's hard to say whether aggregate demand has risen, but virtual demand certainly has and is capable of affecting the price. With this picture in mind, the aggregate total produced or the amount refined, or the amount burned in SUVs, are sometimes irrelevant to the price at the pump. And the speculative owners of the money involved can be blissfully unaware, or even vocally critical of what they are doing.

Where this will lead depends on whether the imbalance of true supply and virtual demand is a bubble or merely a sign of inflation. Another way of describing the matter is to ask what the "real" value of crude oil is. Some pretty experienced oil traders believe oil is only worth $45 a barrel, but the larger consensus is that it would sell at $80 rather than $140 if the "speculative" element were removed. Essentially, this analysis suggests that oil has moved from $15 to $80 because of inflation, but the further move from $80 to $140 is a bubble. The distinction is not whether consumption is out of balance with production, but whether the supply of oil and the supply of money are out of balance. If that's approximately accurate, all we need to worry about is the Federal Reserve, the European Central Bank, and the likes of George Soros. Always remembering the destructive potential of wars, hurricanes, and presidential candidates.

One final point needs to be made to the skeptical customer, encouraged by politicians to believe big oil companies headquartered in some other state are ripping him off. Without resorting to statistics and computers, the gut feeling of most motorists is based on quick notice that gasoline prices are asymmetrical. That is, they go up promptly when the price of crude oil does, but slyly are more sluggish in going down after a fall in crude oil. Asymmetry is quite verifiably a fact of the gasoline marketplace. However, it is not true of wholesale gasoline prices, which track the price of oil quite closely, both up and down. The observed delay in adjusting prices downward in response to wholesale gasoline prices is due to your friendly local retailer. When there is a sharp drop in wholesale gasoline prices, the retailer finds himself with gasoline in his underground tanks which tank trucks delivered earlier at a higher price. Until that inventory is exhausted, the retailer is reluctant to lower prices below his cost. That normal reluctance is heightened when prices are jumping up and down frequently, because it becomes possible for him to sell gas, both below the cost of what is in his tanks, and below the cost of new gas that hasn't arrived yet. For the retail gas station, cautious behavior isn't speculation, it's survival. And in case you believe that retail gas pumping wallows in unjustified profits, notice that the big oil companies are now doing their best to sell off the retail stations, after decades of buying them up. That probably accounts for all those new names you recently see on the old gas stations, possibly reflecting penetration of American domestic markets by Russians, Venezuelans and other enemies of democracy. Possibly so, but more likely it just reflects a decision by big oil to let someone else experience the hostility. Call it, if you like, Yankee ingenuity.

Chairman Bernanke of the Federal Reserve refuses to believe present high oil prices will persist. Although motorists mutter about it, the price of oil is excluded from the present calculation of America's inflation rate, which has been renamed "core" inflation. To simplify a little, core inflation reflects wages. In Bernanke's view, we don't have inflation until we have inflation expectation; and he chooses to measure expectations by the degree to which employers raise wages, in response to protests from employees. When wages go up, consumer spending also goes up, which forces up the price of goods. If rising prices of goods provoke another round of wage inflation, things are spiraling out of control. But if the price of goods like oil goes up without provoking a rise in wages, it's something else, maybe stagflation. Or, one can hope, a prediction that the price of oil will soon come back down where it belongs.

Causes of the 2007 Crash: Political and Technological

Dealing with a topic as complicated as the causes of the 2007 financial crisis, it's quite possible for two viewpoints to be entirely in agreement, until abruptly coming to different conclusions. In this paper, we consider the relative merits of blaming government housing subsidies in various forms, relative to blaming the unanticipated effects of the computer revolution. The subsidy argument has just been succinctly and effectively argued by a lawyer, Peter J. Wallison. Agreeing with every word he writes, I nevertheless hold the perspective that the disruptive effects of the computer revolution were equally responsible, if not more so. Politics versus technology, choose your poison.

Federal Reserve

Mr. Wallison served as a lawyer in the financial loins of Washington, and thus has the perspective of a Reaganite who sees government as the main problem; with the significant distinction that his proposals for solution also lie in government corrective action, particularly "covered bonds" and step-wise privatization of the Federal Housing Authority (FHA). While agreeing with both reform proposals, my concern here is about too little general recognition in the analysis of how vulnerable the banking system has become, to revolutions made possible by even primitive computers of the 1960s. Such revolutions soon grew many times magnified by the inexpensive high-speed internet. If that analysis is correct, it predicts mere legislative action for the housing industry will prove inadequate; banking has taken a radical new direction.

Mr. Wallison's argument in the January 3, 2011 edition of the Wall Street Journal is admirably succinct. He points out the New Deal Federal Reserve deliberately suppressed interest rates to the benefit of the housing industry, but made a significant exception for the Savings and Loans. (It was forced to abandon that approach by the innovation of money market funds, in turn, made feasible by the widespread adoption of the IBM 360 computer.) When the collapsed, that segment of the market was awarded to the GSEs (Fannie and Freddy Mac, insured by FHA). In 1992, Congress imposed the goal of promoting "affordable housing" on the GSEs, which is to say the subsidization of "subprime" (i.e. high risk) mortgages. By 2007, half of all mortgages were subprime, and by September 7, 2008, Fan and Fred were insolvent, effectively replaced by the Federal Reserve (i.e. the taxpayers) as the final guarantor against national insolvency. It will take a decade to restore the economy from its present setback, but Mr. Wallison's proposals do indeed have some chance of eventually leading to a viable economy. He proposes the threshold for "jumbo" mortgages be reduced by $50,000 every six months until mortgages are effectively privatized. And he also suggests we create a pool of mortgage assets as security for a bond issue, thus privatizing existing mortgages in the way Europeans describe as a "covered bond" system. Go ahead, do it; it might work, and nothing else is on offer.

IBM 360 Computer

Meanwhile take a look at banks; we seemingly can't get along without them. But other institutions are undermining them, with cheaper products made possible by computers. For two centuries, banks transformed short-term borrowing into long-term loans; no one else could do it. It's a simple idea, and it works, that a constant or even rising pool level can be maintained by a steady inflow of short-term deposits. But it is risky; the risk is that some event will precipitate a sudden rush of withdrawals, a run on the bank. Sooner or later, the law of averages catches up. The risk is real, it happens every few years. A price in the form of interest must be imposed to maintain reserves against occasional bank runs, and collectively the whole nation must maintain a central "bank", charging interest to maintain reserves against simultaneous runs on multiple banks. No device has ever been created for a nation to protect against a universal bank panic, which is as effective as placing the risk in the hands of private bankers who can expect to be stripped and shorn if things get out of control. Robert Morris demonstrated this point in 1779, and the nation seemingly must re-learn it every few decades. The IBM 360 computer made it possible to transform short-term into long-term in greater volume and lower cost by allowing banks to get bigger; but it could also perform the short-long transformation in cheaper ways than depository banks do, and from there the bank-competitive process we know as securitization has gone on to commercial credits, auto loans, credit cards, high-velocity stock trading, and mortgage-backed securities. These approaches are often cheaper and more convenient than the trusty old banking system and Credit Default Swaps show its power isn't exhausted; any legislation to prohibit CDS is sure to to be circumvented. Insurance is also on the edge of being threatened. An industrial revolution of this magnitude takes decades of tweaks to become stabilized, but it will suffice for now, if we can establish reasonable protections against the risk shifted into the securitization or investment banking arena. As risk shifts, remuneration for accepting risk must shift as well. This new system for generating capital must not be starved because depository bankers resist the loss of their share of profitability; politics will have much to answer for if that happens.

Most likely, the main obstacles to getting this system fixed will come from overseas. Fifty years of disillusionment with the United Nations will make nations, the United States chief among them, resist loss of sovereignty in something so vital as finance. But that's for the future. For nearly a century, the past has been disrupted by idle notions of the fairness of coerced redistribution, in ways Mr. Wallison has succinctly described. But meanwhile we almost willfully ignore technological upheavals which everyone welcomed but no one fully anticipated.

Negative Interest Rates?

Switzerland recently started charging its customers interest on their deposits, and it's the only instance of doing this I feel I understand. The Swiss are after all surrounded by countries which might devalue their currency, and in the past have sometimes even expropriated the funds. So, many of these potential victims are tempted to deposit money abroad to keep their own governments from grabbing it, to the point where the ability of Swiss banks to make loans is swamped with too much money. They can't use more money, thank you, and will charge you for the security of hiding money in safety. After all, every bank charges customers for using its deposit boxes purely for safe-keeping.

And the Swedes and Germans are almost in the same position. Having been victims of their own governments once, they want to retain strong currencies, no matter what, and it has proved to be a good stance to take. They have seen too many spendthrift aristocrats get out of a Rolls Royce in order to file bankruptcy proceedings. Money floods in to take advantage of safety, and the Germanic governments can thus pay lower rates to borrow for themselves,(just as long as they don't borrow too much.) Some may remember the episode when John McCain was running for President and rushed home to assure the party bigwigs he had no plans to borrow big amounts. The whole situation reduces itself to governments having a lot of unused credit if they don't borrow, and having high-interest costs if they do. That's also why there was such an uproar when Bush 41 raised taxes in spite of his promises--he was apparently going to weaken the currency, that way. Technically, it reduces itself to finding the "sweet spot" for interest rates, which will vary depending on what your neighbors do. That's how Germanic people see things.

Southern Europe, and for that matter the rest of the world, sees a different reality. To them, you must "spend money to make money", and if your thrifty neighbors will loan it to you, it benefits both, (if the interest rate is right.) You can buy infrastructure, foreign manufacture, and prosperity. With a little luck and acumen, your trade, industry, and standard of living will prosper. Unfortunately, this ultimately leads to overcapacity, which undermines prices and prosperity, raises interest rates, and leads to a crash. At that point, it is thrifty Germanic types who get to buy things cheaply with their strong currency. Back and forth; this is the business cycle, and it has happened many times. The duration of the recession between cycles will depend on the amount of overcapacity which has developed. The duration of a recession might, therefore, be shortened by printing money to assist consumption, but diluting your store of credit is not the same as increasing it. Increasing your credit by increasing your wealth is quite different, but borrowing conceals whether you are truly wealthy or not. A history of repaying your debts is what banks depend on, not the size of your car or apartment.

There can be less obvious, even obscure, causes of negative interest rates. It is supposed the promised ending of low-interest rates by the Federal Reserve will make banks hesitate to loan money, sensing an opportunity to charge higher rates later. Adherents of this theory are urging that rates be raised as soon as possible.

Others blame the Obama administration, who obviously enjoy borrowing large sums at low rates. The Fed is supposedly independent of such pressures, but the incentive is undeniable.

Still, others feel it is unnecessary to look at specific levels. If inflation is approaching, the prospect of higher future rates has the same dampening effect on present loaning incentives, and ultimately the same effect on collapsing the stimulus.

And others (primarily borrowers) seek joy in lower rates at all times, the lower the better. It represents a chilling prospect to lenders, for anyone to talk about negative eight percent, or even ten. But it suggests faster transaction speeds and electronic gadgets to replace paper money. Part of the cause of the collapse of Lehman Brothers was the increased float in world currency occasioned by globalization, breaking single big transactions into many smaller ones. The current estimate is there is American currency in circulation in the world, amounting to $4000 per living American. And how much of that is created by illicit drug trading and other crimes, is anyone's guess. The underworld isn't interested in gadgets which record transactions, such as several variants of bitcoin do.

All in all, it will be intensely interesting to see what happens to negative interest rates, once the Fed does start to raise them. If they are only a passing fad, it doesn't matter.

How to Cope with a Trillion Dollars of your own Money.

"Eighty years ago any one of the 'tycoons,' whether in the U.S, Imperial Germany, Edwardian England or in the France of the Third Republic, could and did by himself supply the entire capital needed by a major industry of its country. Today the wealth of America's one thousand richest people, taken together, would barely cover one week of one country's capital needs. The only true 'capitalists' in developed countries today are the wage earners through their pension funds and mutual funds." (Peter F. Drucker, The Wall Street Journal, September 29, 1987.)

In the passage displayed above, a noted authority on the American economy has concisely captured the new dimensions of capitalism in the Twentieth Century, even though his jump in logic can be disputed. It is too soon for the evolution from Nineteenth-Century tycoons into universal capitalism to have affected common parlance; redefinition took place without anyone's planning or prediction. People who describe themselves as workers and employees are slow to develop attitudes and skills appropriate to their new economic power. It is equally uncongenial for those who think of themselves as entrepreneurs and managers to accept "people's capitalism" as the present and growing future of free-enterprise America. Drucker's partitioning of the country into two classes may well be disputed, but he has an insight of some sort which warrants examination. Obsolete class rhetoric will doubtless persist through several more presidential election campaigns.

Two things fit together here. It takes a ton of money to finance a multi-trillion a year economy. It also takes a ton of money to pay for a whole country to retire from work at age 65 and then go on a twenty-year vacation. The new imperative of capitalism is that we somehow must save enough of our collective working income to supply the capital requirements of the economy, which must, in turn, employ such capital efficiently enough to pay for our old age including its inherently heavy medical costs. If we have wars we will have to pay for them too, but the main dividend of our economy does go into a national retirement nest-egg. That's why we work, and that's all we have when we are done working. Stop worrying about quick-rich stories like Mr. Boesky's concerning conspicuous consumption by overpaid yuppies on Wall Street. Forget about the occasional person who takes a year or two off in mid-career to wander around Nepal. Don't however forget to remember the poor, the disadvantaged and the shiftless, because they get old too, and are part of the molten mass. In my view, the national economy can be roughly summarized as a process in which we collectively attempt to have nearly everyone spend his last cent on the day he dies but not a day sooner, living as well as he can in the meantime. Within the scope of this description we thus all become capitalists as we strive to enjoy twenty years without working income after we retire. The only alternative is that we mustn't live so long.

Because broad-based or near-universal capitalism has evolved recently and is not entirely acknowledged, the present system has some large transitional defects. Health insurance, unfunded health insurance, is one of the main defects we will get to in a few pages. A more immediate structural defect is what is that we have not yet evolved an efficient system of aggregating the savings of a nation of little capitalists who are unsophisticated in the ways of Wall Street and want to stay that way. Not only does it cost excessively to hire investment advice, but the voting power of ownership control gets lost in the process.

In the bad old days, when J.P. Morgan and others would buy common voting stock, they bought the company, and the company certainly knew it had been bought. If all of the officers and managers of the bought company weren't soon changed, that was only because they made desperately clear they were ready to take orders about company policy. By contrast, when T. Boone Pickens today buys a similar share of the voting stock of a corporation, the hired hands appear before a congressional committee, or the legislature of Delaware, to get a law passed outlawing the "unfriendly takeover". In Morgan's day, money didn't just talk, it screamed. Today, well, money is in a fight for its life with one-man-one-vote power in the hands of elected representatives. People's capitalism has become a humbled passive investment process, although not necessarily a cheap one, or invariably profitable.

There may be some exceptions, but the middlemen in peoples capitalism have generally declined to grab the voting power which the small stockholder cannot usefully exercise. The people who run what is known as the "Institutions" are custodians of great gobs of other people money in a mutual fund, pension or insurance trusts, and hence hold enormous voting power in the election of corporate directors, officers, and auditors. For some reason institutional investors seldom vote against the management, generally preferring to sell the stock if they are dissatisfied with the way things are going in a portfolio company. Consequently, the entrenched management of major publicly held corporation can do just about as it pleases even following policy disasters. To say this is a flaw in our system is a massive understatement. Things which run by the law of gravity generally tend to go in only one direction. No one wants to see the Japanese pulverize our major corporate jewels, no one wants to see them repeatedly greenmail. Nobody loves a corporate raider.

And still, it is clear the little stockholder cannot and never will aspire to meaningful voting power in a corporation which has millions of shares and thousands of stockholders. (Footnote; When I get those expensively packages proxy cards for my pitiful holdings, I always vote along with management. My theory is it's a good thing to change watch dogs frequently, and my Quixotic vote might hurt somebody's feelings enough to notice the message it sends). The system of governance of very large corporations needs to be reformed by its insiders before consumer activists using one approach, or elected public officials using another, manage to fill the power vacuum to our national disadvantage. They might, for example, reexamine the New York Stock Exchange rule, prohibiting the listing of companies with more than one class of stock. Someone should be asked to evaluate the experience of companies like Ford which evaded the rule, or of those companies which escaped to other exchanges to avoid it.

The directions such reform might take are not the concern of this book; the present focus is on the difficulties which are created for pre-funded health insurance by the fact that corporate voting power materializes whenever major purchases of common stock are made for purely investment purposes. Unpredictable things happen no matter how the stock is voted. If the voting power in the hands of custodians is never exercised, corporate control automatically concentrates in the hands of those whose ownership is relatively minor, whether insiders or outsiders.

One does not have to be a rabid conservative to recognize that government ownership of voting control of a corporation is a form of is w form of nationalization. The Labor party in England nationalized the steel and airline industries, the Socialists in France and India nationalized the banks, Communist doctrines go to the extreme of requiring government ownership of the total "means of production". If we are imaging success in the effort to pre-fund a trillion dollars of health insurance, we have to contemplate the highly undesirable features of potential government control of the voting stock of IBM, American Telephone and Telegraph, Exxon, and Morgan Guaranty Bank. The aggregate worth of all he stock on the New York Exchange is xx xxx. A trillion dollar worth of all the stock implies voting control of quite a bit of corporate America, no matter how sincerely its managers try to avoid it. a resolutely passive investment stance would just make it cheaper for the Japanese to buy control or for that matter the Russians, if they wanted to do it.

This scary line of thought potentially leads to the conclusion that pre-funded health insurance should avoid the purchase of common stock. But that seems bizarre; the historical difference between a 3% return (bonds) and 8% return (stocks) means this voting control issue could condemn health insurance pre-funding to a pitiful fraction of its potential for reducing the costs of an essential social service. It seems imperative to seek ways to improve the long-term return, even if government-controlled pools have to be rejected. True, massive increases in the proportion of non-voting stock confer unwarranted power to the management of the corporations and their potential greenmailers, no matter who runs the passive investment pool. Go one long jump beyond that; they just cannot be permitted.

As a matter of fact, it is impossible to conceive of a permissible investment vehicle for a government-controlled fund, except government bonds. Unfortunately, when you look at what has happened to the Social Security trust funds which are totally invested in government bonds, you find an appalling thing. Buying government bonds isn't too satisfactory, either.

When sums approaching a trillion dollars are involved, even the finances of the United States Government must reckon with the law of supply and demand. If a lot of people want to buy government bonds, they push the price up as long as the supply is limited. Since government bonds are issued to pay for federal debt, increasing the supply of those bonds means increasing the national debt, so we ordinarily don't want to do that either. That is, we don't want the Treasury to issue more bonds just to provide a safe investment vehicle for funded health insurance. On the other hand, by restricting permissible investment to government bonds in huge amounts we cripple the cost reduction of health insurance, since the inevitable result of clamoring to buy bonds will be lower interest rates. Quite aside from the fact that a captive customer gets shabby treatment, it may not be in the national interest to lower interest rates. Since Government bonds are regarded as the safest possible investment, their rate is the floor under all interest rates in the country or even the world. So, lower interest rates are inflationary, even at times when it may be contrary to national policy to stimulate inflation.

What this focus on government bonds has stumbled onto is the mechanism by which modern government attempt to fine-tune the national economy, a process mostly devised by the British economist Maynard Keynes. Based on the premise that no one controls enough money to affect the market price of government bonds, the government sets the price by buying and selling to itself. This particular conflict of interest operates between the Treasury which issues the bonds, and the Federal reserves which buy them. To a certain extent, the Arabs and the Japanese have been rich enough to influence the price of US Bonds, but the largest "external" bond buyer has been the Social Security trust funds. The quasi-external quality of the trust funds is often minimized or exaggerated as it suits some momentary purpose. If more money flows into the funds from tax payments than flows out for pension checks, the trust funds are described as assisting the national deficit. However, if the future indebtedness of the funds is increased more than current revenues are, this debt is regarded as the trust funds' problem and not a matter of national accounts. All this is a cross-generational difference in point of view. My generation can only see it as one big sticky ball of wax. The Federal Reserve's regards it as a major obstacle to their effective use of Keynesian principles. One has to conclude that it would be very unfortunate to add a great big lump of health insurance funding to a government bond problem which will be convulsive enough without it.

In summary, what can we conclude about investing the proceeds of funded health insurance, if we could ever get around to funding it? We see that the creation of a new source of investment capital would be an enormous asset for the national economy, but reckless dumping of huge amounts of cash in any market at all could be disruptive. The purchase of common stock would be considerably more cost-effective than buying bonds, and in the long run, might even be safer. However, equity markets need to consider how to cope with the continuous concentration of voting control of major corporations by default, as a majority of votes would become further locked into passive custodial accounts by funded health insurance. And finally, control of funded health insurance by government agencies poses the same problem of stock voting power which is left to Wall Street to solve, the next chapter tries to consolidate these issues into a general prescription. Remember, Index fund investing is momentum investing. If everyone does it at once, it will pop the bubble.

Philadelphia Reflections

The musings of a physician who served the community for over six decades

Obituary

George R. Fisher, III, M.D.

Securitization

Oil Bubble

Causes of the 2007 Crash: Political and Technological

Negative Interest Rates?

How to Cope with a Trillion Dollars of your own Money.