I want to clear something up right now. I keep hearing this financial crisis was caused by deadbeats who can't pay their mortgages. Let's be perfectly clear on this: the people didn't leverage the mortgages 30-60 times. The people didn't create new unregulated debt instruments based on these mortgages. The people didn't create casino instruments which bet purely on the risk of the debt instruments.
Let's be perfectly clear on something else: Bush has appointed people from industry who have engineered the greatest theft of taxpayer money in the history of the world.
The taxpayer has always done the heavy lifting for the country. It's time we get paid for all our work. There is a simple way to do this.
The government came to the rescue of Bear Stearns and then emphatically stated the economy was fundamentally sound, because it wasn't time yet. The government publicly stated it would backstop Fonnie and Fraudie but assured us they would never really have to act, because it wasn't time yet. The government took over F&F because of misplaced trust in our fundamentally sound economy. The economy was still sound because it wasn't time yet.
The market value of F&F debt instruments was carefully hidden by the government when if agreed to redeem them them for face value. That deal allowed trillions of dollars of bets to break even simply by having the taxpayer buy the underlying securities. We don't know what the bill will be yet.
The government has thwarted every attempt to allow the market to set a price for all these unregulated securities, including organic methods such as shorting stocks, which discovered the true value of Lehman, for instance. The government had to prevent the price discovery of these toxic assets because it wasn't time yet.
When was it time? One month before the election in a close race would be optimal for extorting the first $700 billion from the public to buy a chunk of these assets nobody else wants. This was timed to avoid scrutiny. They shot for zero accountability and oversight with the package, but settled for minimal accountability and oversight. They knew they could lay economic disaster at the feet of congress to get what they want. It was pure blackmail. If you think I am exaggerating, then you just might be naive.
What does the package do for the economy? In theory, it is supposed to build trust between banks because they will feel more confident the other party will have assets to cover any loans made. That's just an excuse. There are much better ways to do that, but none that will enrich the few banks the government wants standing.
This is an engineered theft, but it is derisively being called socialism, or corporate welfare. Things are going to get very bad, and there will be all manner of pleas to air-drop more cash on Wall Street. We should demand that congress demonstrate the beneficial aspects of socialism if they insist on engaging in nasty aspects of socialism. It is time for them to demand that corporations step up to the plate and get a base hit.
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Here is just one thing congress should do:
The US government should seize all drug patents and trademarks. It should destroy the trademarks, and place the patents in a national Intellectual Property bank.
The government should then regulate the drug industry by placing a Chinese wall between drug research, and drug manufacturing. Never shall the two be linked in any way. Existing drug companies will have to split into two separate companies.
Because the drug industry won the right to keep details of R&D spending hidden from the public, it is hard to know the exact level of government funding of drug R&D (pdf), but a conservative estimate is 48%. The most difficult research is almost exclusively done by the NIH and government grants to universities.
Since we already pay 48% of the costs of drug research, the government should go the additional 52% and fully fund drug R&D. To give you a sense of scale, drug R&D totalled $140 billion for the entire decade starting in 1990. There are routes of recovery for this funding, so please read on.
Here is where the true free market really kicks in:
Companies that only perform R&D could propose new drugs irregardless of the market size for the drug. Money-losing diseases would stand a much better chance of being cured, or at least getting relief because R&D companies would want to create as many drugs as they can. The government could evaluate the proposals and use criteria such as mortality rate, and secondary costs to society that a particular disease may manifest instead of the current criteria which is profit for one company.
The labs would not own the molecules they create. These new drugs would again be placed in the national Intellectual Property bank.
The government would recoup all or part of the R&D expenses by selling annual licenses to manufacture the drug to any certified company. The companies would obviously factor in the cost of the license, but the free market would work its magic on lowering prices through competition because many manufacturers would be making the same drug. They would gain margins the same way other companies do by improving efficiency.
That is not the biggest gain for cost savings. The biggest gain would come from not having to pay for branding. Drug companies currently spend on average 300% more on branding and marketing then on R&D for a drug. No more drugs with excessive X's, Y's, and Z's in their names.
When you consider:
According to PhRMA, U.S. and foreign drug companies spent $139.8 billion on domestic R&D in the 1990's. During that same period, the U.S. Food and Drug Administration approved 857 new drugs for market. Simple division suggests that drug companies spent $163 million on R&D for every new drug approved for market in the U.S. in the 1990's (expressed in year 2000 pre-tax dollars).
This measure is very generous to the industry. It counts total R&D expenditures – which include salaries, equipment, overhead, lab tests (pre-clinical) and clinical trials. And it counts all failed drugs as well as successful drugs. In addition, it uses PhRMA’s own R&D figures, which have not been independently verified and may be inflated with marketing research costs.25 Finally, it uses pre-tax figures; in fact, R&D expenses are tax deductible and every dollar spent on R&D has a net cost of only $0.66.
$140 billion for a decade's worth of new drugs. When you consider that US drug sales were $286 billion in 2007 alone, then it is easy to see where Medicare and insurance costs could be greatly reduced with a true free market approach using public domain drugs.
There is no downside to society. Even the companies whose drug patents were seized could be slowly reimbursed from the license fees for manufacturing those drugs. Something has to be done. The free market has not figured out a way to deliver affordable health care to 49 million people. Something has to be done and we can get it done. Removing the risk in exchange for removing market protectionism is just one way.
It's time for corporations to pony up for a change. This arrangement is a structural reconfiguration for the drug companies; it just removes the protectionism they enjoy. They can still pursue free market capitalism and make profits, but they will not be allowed to own a disease.
There are beneficial aspects to capitalism, and there are harmful aspects to capitalism. The sooner this country stands up and distinguishes between them, the sooner we can get on evolving.
The very banks we are bailing out now are the same banks that prey on us. They dangle no-money-down, no-credit-check loans with teaser introductory rates in front of our faces, and tell us that property values are going up so fast that we would be stupid not to buy a house under their terms. They know they can then leverage that mortgage 50 times over. The government lets them refinance government-assisted home loans to mentally impaired people that are certain to result in an eviction notice. Banks sequence transactions so they will generate $30 penalties a million times a day.
The government has created incentives for companies to ship the very jobs that would normally have allowed us to climb out of the coming recession/depression much easier. They shipped our jobs overseas and told us to stop saving money and instead spend it on cheap products. I bore witness to the government sending out checks for us to spend on the economy. The government has created a consumptive society that is clearly unsustainable.
They are loath to tell us the truth right now about what we are ready to face. They are selling out our children right now to prevent us from having to make the adjustment to a lower standard of living on their watch. It has to happen because the government made it that way. They created the excess through debt, and we indulged because they said to.
We have to absorb the excess, but we have no capacity to do it because we are maxed out. It will be a very long time climbing out of this, and the world is not going to stand still while we do it. Unemployment was still 17% in 1939 - ten years after the start of the depression.
There will be a global pinch, but some countries have savings. They will take this opportunity to invest in their infrastructures and keep economic activity going within their own countries. We are going to flail about for a while and then finally do what nearly all countries do when faced with overwhelming debt: we will monetize our debt, and figure out a new name for the dollar. We will have erased 50 years of progress for expediency.