No Gold. No Silver. Just Inflation and Hotcakes.

No Gold. No Silver. Just Inflation and Hotcakes.

By The Mogambo Guru

04/07/09 Tampa Bay, Florida Bloomberg.com had a report by Kim-Mai Cutler saying, “Currencies of countries that are using quantitative easing, or printing money to buy government or corporate bonds, are plunging against those of nations sticking to conventional monetary policy” which surprised me because I did not know of any big economies that were “sticking to [the] conventional monetary policy” of not creating excess money and credit, which makes their currencies strong, but I know of plenty of them that are “sticking to [the] conventional monetary policy” of constantly creating too much money and credit because that is the bizarre bastardization of the economic system that has evolved! Hahaha!

In fact, all countries seem to be in a rush to participate in a disgusting orgy of government deficit-spending, which would be a sign of global mental-illness unless they were using this money to buy gold and declare a gold standard for their currencies, which is what I would do to insure a currency so strong that I got cheap imports of goods, services and raw materials, thus keeping inflation low and delivering a higher standard of living for all the citizens, for which they would regularly gather and have “Thank You, Mogambo (TYM)” parties, sort of like midnight at Mardi Gras in New Orleans, except not as reserved in relative behavior as that Louisiana bunch of prudes.

Jim McCormick of Citigroup is not impressed with how the phrase “Show us your boobs!” is mysteriously common to both Mardi Gras and Hail Mogambo! Parties Of Thanks (HM!POT), and says only that “The foreign-exchange market has clearly gotten its arms around the notion that quantitative easing is a negative for currencies.”

Well, this makes you want to ask “Where in the hell has the foreign-exchange market been all this time that they are just now finding out that a country stupid enough to abuse a fiat currency to create excess money and credit, leading to inflationary bubbles of speculative frenzy and resultant excesses in the prices of assets such as stocks, bonds, houses and size of government, and then try to spend its way out of bankruptcy by creating huge NEW multiples of NEW money and credit so that the buying power of the dollar falls to (in the original Latin) ‘squatus stinkum’, is, after all this time, now ‘a negative’ for its currency? Hahaha!”

Not too surprisingly, then, the dollar index sank a staggering and heart-stopping 4.1% last week, taking the index back to 83.8. This is, also surprisingly, still a lot higher, and for no good reason that I can think of except that all the other currencies are even more worthless, than its low of the low 70s in 2008.

I’ll bet that if the foreign exchange markets don’t know that the currency of a nation of fiscal and monetary idiots was “a negative for currencies”, then I guess that they also don’t know that gold and silver, when priced in the currencies of fiscal and monetary idiots, will soar as the currency falls in buying power, which is so elementary that I am shocked that they are that stupid!

Before you start thinking that everyone is stupid, I met a guy named Art Arbutine, of BellaireCoins.com, and I casually asked him “How much gold are you selling these days?” and he surprisingly says “None.”

Well, I used the word “surprisingly” precisely because this was kind of surprising to me, as I had been hearing that gold is selling like hotcakes, which is an expression that you don’t hear much these days, probably not too surprisingly because I never heard of hotcakes being big sellers and thus giving rise to the expression.

Waffles, maybe, but not hotcakes. Crepes, maybe, but not hotcakes, although, now that I think about it, it’s been a long time since I had hotcakes, and maybe I’m being hasty in my rush to judgment!

So there I am, trying not to think about hotcakes and how hungry I am, or how some hotcakes would really hit the spot right now, maybe with a side of bacon, various syrups and toppings with a cup of coffee, when I suddenly remember that he said that he is selling no gold! Huh?

So I suspiciously ask him, “Why not?” and he says that when people come into his shop and want to buy gold, he tells them that he doesn’t have any gold to sell them because there is no gold for him to buy to turn around and sell to them, and that is why he told me that he sells no gold.

I could tell by the slight smirk on his face that he thinks it is “Art 1, Mogambo 0”, but I am going protest the score because more and more you hear those kinds of “no supply” things, what with stories of South African gold mines shutting down, and the U.S. Mint suspending production, and shipment schedules, and silver comes mainly as a by-product of base metal mining which is effectively stopped nowadays and blah blah blah, a blizzard of facts and crucial interconnections, none of which I have straight.

However, it does bring up the question, “Hash browns with hotcakes, yes or no?” which is not even mentioning the puzzling paradox of “With rising demand but zero supply, why is gold not shooting To The Freaking Moon (TTFM) in price, on its way to infinity dollars per ounce, which would be a mathematical imperative of a supply/demand dynamic where the price of gold cannot be determined by the market-clearing point where demand equals supply because supply is always is zero, regardless of the price”! Wow!

This is, indeed, Twilight Zone weird, trapped in some kind of spooky nether-world beyond space and time, between light and shadow, between the depths of despair and the heights of imagination where the Laws of Economics do not apply any longer, but the Laws of Physics still work 24/7, and you still have to work at your same stupid job, and you are married to the same stupid person and you have the same stupid kids as the ones you had in the “other world” where the Laws of Economics still worked, which shows how unfair life is.

My wife and her stupid friends in “this” parallel reality say that I am acting childishly, whining about how life is “unfair” and how I imagine that I am in some parallel universe where immutable “laws” of nature simply disappear, like how a price of something does not rise even though demand is increasing and supply is zero! Amazing!

Of course, this could be easily explained by the Mogambo Gold Conspiracy Theory (MGCT), which, as I recall, I stole directly, line by line, from GATA.org because I am too unimaginative and too stupid to think of it on my own, and too desperate to save my career to be stopped by mere plagiarism when I am, like a diseased, cornered rat in a do-or-die situation, capable of so, so much more.

The Executive Summary is how the Fed and the other central banks around the world have been conspiring among themselves to suppress the price of gold so that the price would not rise, which would alarm a lot of people since a rising gold price means rising consumer prices, who would then start asking a lot of questions, and then everyone would find out “Hey! Inflation in prices is soaring, just like that Idiot Mogambo Lowlife (IML) said it would after such suicidal increases in government deficit-spending and the Federal Reserve increasing the money supply to pay for it, and now we are screwed and need to buy Mogambo Mindless-Mob Brand Riot Gear (MMMBRG) while supplies last in our displays of open rebellion! I hope operators are standing by!”

Well, you can relax on that score, as an operator is standing by in case someone is so stupid as to send me money for some purported Mogambo Brand product that may or may not actually exist; but as for the price of gold rising in the face of inflation, it is no secret that the Fed and the other central bankers have been releasing gold into the market to keep the price down, and they have literally admitted it, as GATA.org has laboriously documented, especially after being counseled to do so by Paul Volcker, famous former chairman of the Federal Reserve, in his book, who said that not controlling the price of gold was the biggest mistake he made in his famous fight against inflation.

The surprising thing is not that he is selling twice as much silver bullion and numismatic coins than he ever sold, but that people are buying silver without even asking him how much it costs! They just want it!

Of course, what can one say in response to this except, “Whee! This investing stuff is easy!”

Obama and Gates Gut the Military

Obama and Gates Gut the Military

The secretary's new budget will leave us weaker to pay for the president's domestic programs.

THOMAS DONNELLY GARY SCHMITT

On Monday, Defense Secretary Robert Gates announced a significant reordering of U.S. defense programs. His recommendations should not go unchallenged.

In the 1990s, defense cuts helped pay for increased domestic spending, and that is true today. Though Mr. Gates said that his decisions were "almost exclusively influenced by factors other than simply finding a way to balance the books," the broad list of program reductions and terminations suggest otherwise. In fact, he tacitly acknowledged as much by saying the budget plan represented "one of those rare chances to match virtue to necessity" -- the "necessity" of course being the administration's decision to reorder the government's spending priorities.

However, warfare is not a human activity that directly awards virtue. Nor is it a perfectly calculable endeavor that permits a delicate "balancing" of risk. More often it rewards those who arrive on the battlefield "the fustest with the mostest," as Civil War Gen. Nathan Bedford Forrest once put it. If Mr. Gates has his way, U.S. forces will find it increasingly hard to meet the Forrest standard. Consider a few of the details of the Gates proposals:

- The termination of the F-22 Raptor program at just 187 aircraft inevitably will call U.S. air supremacy -- the salient feature, since World War II, of the American way of war -- into question.

The need for these sophisticated, stealthy, radar-evading planes is already apparent. During Russia's invasion of Georgia, U.S. commanders wanted to fly unmanned surveillance aircraft over the region, and requested that F-22s sanitize the skies so that the slow-moving drones would be protected from Russian fighters or air defenses. When the F-22s were not made available, likely for fear of provoking Moscow, the reconnaissance flights were cancelled.

As the air-defense and air-combat capabilities of other nations, most notably China, increase, the demand for F-22s would likewise rise. And the Air Force will have to manage this small fleet of Raptors over 30 years. Compare that number with the 660 F-15s flying today, but which are literally falling apart at the seams from age and use. The F-22 is not merely a replacement for the F-15; it also performs the functions of electronic warfare and other support aircraft. Meanwhile, Mr. Gates is further postponing the already decades-long search for a replacement for the existing handful of B-2 bombers.

- The U.S. Navy will continue to shrink below the fleet size of 313 ships it set only a few years ago. Although Mr. Gates has rightly decided to end the massive and expensive DDG-1000 Zumwalt destroyer program, there will be additional reductions to the surface fleet. The number of aircraft carriers will drop eventually to 10. The next generation of cruisers will be delayed, and support-ship projects stretched out. Older Arleigh Burke destroyers will be upgraded and modernized, but at less-than-needed rates.

The good news is that Mr. Gates will not to reduce the purchases of the Littoral Combat Ship, which can be configured for missions from antipiracy to antisubmarine warfare. But neither will he buy more than the 55 planned for by the previous Bush administration. And the size and structure of the submarine fleet was studiously not mentioned. The Navy's plan to begin at last to procure two attack submarines per year -- absolutely vital considering the pace at which China is deploying new, quieter subs -- is uncertain, at best.

- Mr. Gates has promised to "restructure" the Army's Future Combat Systems (FCS) program, arguing that the lessons of Iraq and Afghanistan have called into question the need for new ground combat vehicles. The secretary noted that the Army's modernization plan does not take into account the $25 billion investment in the giant Mine Resistant Ambush-Protected (MRAP) vehicles. But it's hard to think of a more specialized and less versatile vehicle.

The MRAP was ideal for dealing with the proliferation of IEDs (improvised explosive devices) in Iraq. But the FCS vehicle -- with a lightweight yet better-protected chassis, greater fuel efficiency and superior off-road capacity -- is far more flexible and useful for irregular warfare. Further, the ability to form battlefield "networks" will make FCS units more effective than the sum of their individual parts. Delaying modernization means that future generations of soldiers will conduct mounted operations in the M1 tanks and Bradley fighting vehicles designed in the 1970s. Finally, Mr. Gates capped the size of the U.S. ground force, ignoring all evidence that it is too small to handle current and future major contingencies.

- The proposed cuts in space and missile defense programs reflect a retreat in emerging environments that are increasingly critical in modern warfare. The termination of the Airborne Laser and Transformational Satellite programs is especially discouraging.

The Airborne Laser is the most promising form of defense against ballistic missiles in the "boost phase," the moments immediately after launch when the missiles are most vulnerable. This project was also the military's first operational foray into directed energy, which will be as revolutionary in the future as "stealth" technology has been in recent decades. The Transformational Satellite program employs laser technology for communications purposes, providing not only enhanced bandwidth -- essential to fulfill the value of all kinds of information networks -- but increased security.

Mr. Gates justifies these cuts as a matter of "hard choices" and "budget discipline," saying that "[E]very defense dollar spent to over-insure against a remote or diminishing risk . . . is a dollar not available to take care of our people, reset the force, win the wars we are in." But this calculus is true only because the Obama administration has chosen to cut defense, while increasing domestic entitlements and debt so dramatically.

The budget cuts Mr. Gates is recommending are not a temporary measure to get us over a fiscal bump in the road. Rather, they are the opening bid in what, if the Obama administration has its way, will be a future U.S. military that is smaller and packs less wallop. But what is true for the wars we're in -- that numbers matter -- is also true for the wars that we aren't yet in, or that we simply wish to deter.

Mr. Donnelly is a resident fellow and Mr. Schmitt is a resident scholar at the American Enterprise Institute. They are co-editors of "Of Men and Materiel: the Crisis in Military Resources" (AEI, 2007).

The World According to Garzón

The World According to Garzón

The State Department doesn't get it.

Judge Baltasar Garzón, an ambitious Spanish jurist, last month ordered prosecutors to investigate six men who served in the Bush Administration on criminal charges related to "torture." None of the prospective defendants are accused of torturing or ordering the torture of anyone -- only of arguing for legal positions of which Judge Garzón disapproves. He asserts that the principle of "universal jurisdiction" gives him the authority to try U.S. officials for alleged violations of international law.

At a State Department briefing last week, a reporter asked Gordon Duguid, the acting deputy department spokesman, for the Obama Administration's position. His reply: "I'm not aware of any contact with the Spanish Foreign Ministry on this. It's a matter in the Spanish courts, as I'm given to understand. I don't have a comment for you on it at this time. The Obama Administration's position on the matters that are under discussion, I think are quite clear."

This is about as unclear a response as one can imagine. Far from being a mere "matter in the Spanish courts," Judge Garzón's action is an assault on American sovereignty and the integrity of the U.S. legal system. And while some in the Obama Administration may be tempted to cheer him on for partisan reasons, they risk helping to set a precedent that could easily come back to hurt them.

While President Obama has politically repudiated many of his predecessor's antiterror policies, his Justice Department has stood by many Bush legal arguments in national security cases. If former officials can be investigated -- and, at least in theory, indicted, arrested and tried -- on Judge Garzón's say-so, what is to stop him or some other freelancing foreign judge from one day putting current officials in the dock for reaching supposedly faulty legal conclusions?

Even if the principle of national sovereignty leaves Mr. Obama and his appointees cold, the imperative of self-preservation ought to concentrate their minds and make clear that Judge Garzón's meddling in American policy is unacceptable.

Fraidy-Cat Banker, and Proud of It

Fraidy-Cat Banker, and Proud of It

• By HOLMAN W. JENKINS, JR.
  

"Build things slowly." The aphorism comes from a family video of the late Jackson Stephens, co-founder of Little Rock's Stephens Inc., the privately held investment bank that bears his name.

AP

Warren Stephens, chairman and CEO of the investment firm Stephens Inc.

The financial world, until recently, was engaged in a different experiment -- build things fast. Use lots of leverage. Let diversification and hedging extract stable, safe returns from a fast-moving, risky world. We all know how that ended.

Is there a lesson for a Wall Street struggling to rehabilitate itself after the subprime debacle?

Stephens Inc. has been mercifully (in its own view) out of the news since its unhappy involvement in the Clinton scandals of the 1990s. Today the firm is run by son Warren Stephens, who cites another of his father's sayings: "The goal is to be in business the next day." The phrase, he says, once prompted a certain amount of eye-rolling even among family members. Then came the 1980s, the collapse of hundreds of S&Ls, and the meltdown of a Wall Street stalwart like Drexel Burnham. "'Be in business the next day?' Now I get it. That's a legitimate goal," Mr. Stephens says today.

He doesn't join the nostalgics who say Wall Street must return to the partnerships of yore, when bankers had all their wealth tied up in their companies. But he says financial executives treated their stock options like lottery tickets, not like family wealth to be preserved. In the future, bankers need to have more skin in the game.

Of course, Wall Street executives might respond that they had big-time skin in the game and lost most of it. The real problem, they might add, is the diversified fund investors at the end of the line who own most of the shares, and for whom even the loss of a company the size of AIG or Lehman is a small dent. That is, these investors have an appetite for risk that doesn't suit our regulatory system, which presumes some firms too big to fail. And they'd quickly fire any CEO as "risk averse" as Mr. Stephens proudly professes to be.

The solution, one way or another, is likely to be government's heavy hand to suppress risk-taking on Wall Street. That's why Mr. Stephens sees an opportunity for a firm like his. He's opening the kimono a bit, and even thinking about an ad campaign, because he sees talented people being cut loose from Wall Street who might be a "good fit" for the Stephens way of doing investment banking.

So what's the firm telling its clients today? "This is no time to be a hero," he says, no time to try to catch the bottom and bet on a rapid turnaround.

Mr. Stephens describes himself as a "glass half-full kind of guy" who's been forced to become a situational pessimist. A child of the Reagan era who once thought "lower taxes and deregulation were the norm," he now suspects Reagan is "the aberration."

Mr. Stephens bought out his cousins three years ago and now single-handedly runs the 76-year-old "full-service" investment bank that, under his father and uncle, was instrumental in the rise of winning companies like Wal-Mart, Tyson Foods, Alltel and J.B. Hunt. Though still reconciled to losing his best clients to Wall Street when they reach a certain size, he believes the New York firms have so "damaged their franchises" that the playing field may have tilted back his way a bit.

Meantime, Mr. Stephens is adding aphorisms to the family lore. One is: "I can't be giving money to who philosophically I can't defend."

As he tells the story, his family never once supported Bill Clinton in any of his campaigns, until the fateful 1990 gubernatorial race, when his GOP opponent was a bitter foe of the Stephens clan. A year later Mr. Clinton called in his "new best friends" and said he was running for president. They figured he'd be "smoked" by the superlatively popular President Bush, but donated a few bucks to keep the governor happy.

Then came Mr. Clinton's stumble in the early primaries amid the Gennifer Flowers eruption, and Mr. Stephens picked up the paper to learn that Worthen Bank, partly owned by his family, had fronted Mr. Clinton's campaign an emergency loan of $3.5 million. The loan may have been secured by federal matching funds. It may have carried a steep interest rate. But a story line was sealed in the national press that painted the Stephens family as the jerkwater Svengalis behind the Clinton campaign.

The Clinton experience, he says, was bad for Arkansas, and bad for Stephens Inc. "The publicity cost to the firm was awful . . . You'll never know what business you lost because of it."

Mmm. The dangers of mixing politics and business -- another lesson his Wall Street compadres are learning now in an even more smothering way.

* Training School For Protesters

Fujimori Sentenced For Peru Killings

Fujimori Sentenced For Peru Killings

MATT MOFFETT

In a landmark human-rights case, a Peruvian Supreme Court panel sentenced former President Alberto Fujimori to 25 years in prison for his involvement in two military massacres during a conflict with leftist guerrillas in the early 1990s.

Mr. Fujimori's decadelong rule during the 1990s started with economic and military triumphs and unraveled amid corruption scandals.

After a 15-month trial, the three-judge panel ruled that a military death squad known as the Colina Group was operating with the complicity of Mr. Fujimori when it carried out two massacres in the early 1990s.

One case involved the killing of 15 people, including an 8-year-old boy, in 1991. The other involved the kidnapping and disappearance of a university professor and nine students in 1992. Mr. Fujimori was also found guilty of separate abductions of a journalist and a businessman.

Mr. Fujimori, who has been a prisoner in Peru since he was extradited from Chile in September 2007, said he plans to appeal the verdict.

Political and legal analysts hailed the judges' decision as auspicious for Latin America, where courts often are reluctant to convict the powerful out of fear of retribution.

"Overall it's a good thing, because it solidifies institutions and shows that the justice system works for big fish," said Julio Carrion, a political scientist at the University of Delaware.

Mr. Fujimori, a former agronomy professor who won the presidency in 1990, became hugely popular after wielding free-market policies to conquer raging inflation and crushing the Maoist Shining Path guerrillas who had terrorized Peru since 1980.

But the intelligence apparatus he created to counter guerrillas went out of control, and involved itself in rights abuses, corruption schemes and political espionage. Increasingly unpopular due to corruption revelations, Mr. Fujimori abandoned his office in 2000, sending a resignation letter to Lima by fax during a trip to Japan. While visiting Chile in 2005, he was detained and subsequently extradited to Peru on human-rights charges.

In remarks to the court last week, Mr. Fujimori, 70 years old, showed he hadn't lost the swagger he was known for while governing, proclaiming his innocence and asserting that he had saved the country from the Maoists. When he took office, Mr. Fujimori said, Peru "wasn't at the edge of the abyss, but at the bottom of the abyss." He added: "I faced the problem and didn't turn my back on it."

In court Tuesday, Mr. Fujimori maintained a stoic expression as the guilty sentence was read, keeping his head down and writing on a notepad.

Polls indicate that most Peruvians support a guilty verdict. But Mr. Carrion, the political scientist, notes that Mr. Fujimori's legacy is still having a toxic effect on Peru's political culture today. He says that the cynicism about government that took root during the Fujimori years explains why polls show Peruvians still have very little faith in political institutions or democracy, even though the economy has been robust.

Mr. Fujimori's 34-year-old daughter, Keiko, a member of Congress, has emerged as a political force who is carrying on his legacy. She has attracted loyal followers of her father, as well as people who consider her a charismatic figure in her own right.

Dr. Price vs. Obamacare

The State Lawsuit Racket

The State Lawsuit Racket

A case study in the politician-trial lawyer partnership.

State Attorneys General regularly hire private plaintiffs lawyers on a contingency-fee basis to prosecute cases. The trial bar returns the favor with campaign donations to state office holders. And despite the inherent conflicts of interest and questionable ethics of the practice, corporate defendants have rarely challenged such arrangements. Which is why a motion pending before the Pennsylvania Supreme Court is so remarkable -- and deserves more public attention.

Getty Images

Ed Rendell.

Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, is a defendant in a lawsuit filed by the state of Pennsylvania over Janssen's antipsychotic drug Risperdal. The state alleges that Janssen has improperly marketed the drug for off-label uses not approved by the Food and Drug Administration. Janssen denies the accusation, but the merits of the case -- which hasn't gone to trial yet -- are not what's at issue in the motion before the court.

Rather, what's at issue is the fact that the civil action against Janssen is being prosecuted on behalf of the state by Bailey, Perrin & Bailey, a Houston law firm. And it turns out that Pennsylvania Governor Ed Rendell's Office of General Counsel was negotiating this potentially lucrative no-bid contingency fee contract with Bailey Perrin at the same time that the firm's founding partner, F. Kenneth Bailey, was making repeated campaign contributions totaling more than $90,000 to the Democratic Governor's 2006 re-election bid.

Janssen's motion seeks to invalidate the contingency-fee arrangement and lays out a detailed timeline of Mr. Bailey's political contributions and the subsequent actions of the Governor's office. Here it is in part:

- On February 23, 2006, Mr. Bailey contributed airplane travel valued at $9,200 to Governor Rendell's re-election campaign.

- On March 3, 2006, Mr. Bailey contributed $50,000 to the Rendell campaign.

- On May 12, 2006, Mr. Rendell's office submitted a "request of delegation" to the state Attorney General, a Republican, that would allow the Governor's office to handle the case against Janssen.

- On May 24, 2006, the request was granted.

- On June 30, 2006, Mr. Bailey contributed $25,000 to the Democratic Governors Association (which gave Mr. Rendell more than $1 million for his campaign in 2006).

- On August 14, 2006, Mr. Bailey signed a no-bid contingency-fee contract with the state.

- On September 15, 2006, Mr. Bailey contributed airplane travel valued at $6,900 to Mr. Rendell's campaign.

- On October 23, 2006, the Governor's Office of General Counsel mailed the contingency fee contract to Mr. Bailey.

- On October 30, Mr. Bailey contributed another $25,000 to Mr. Rendell's campaign.

- On February 26, 2007, Bailey Perrin filed the initial complaint against Janssen on behalf of the state.

Asked about the timing of Mr. Bailey's political donations, Rendell spokesman Chuck Ardo says Bailey Perrin was selected because of "their experience in these kinds of legal matters." Mr. Ardo says the Governor was aware of the campaign contributions but "had nothing to do with the selection." Asked why the Governor thought the case should be handled by his office rather than by the state AG, Mr. Ardo says, "the suit involves agencies directly under the Governor's control, and the General Counsel's Office believed it could eliminate a lot of unnecessary work by dealing with those agencies directly." Readers can decide if they buy that one.

Under terms of the contingency-fee contract, Bailey Perrin receives up to 15% of any settlement or judgment. Even better for the lawyers, the state is barred from settling for nonmonetary relief "unless the settlement also provides reasonably for the compensation of [Bailey Perrin] by [Janssen] for the services provided by the law firm under this contract."

In court papers, the drug firm argues that the contingency fee contract is invalid because it wasn't approved by the legislature, as the state constitution requires, and because it "violates Janssen's rights to due process under the United States and Pennsylvania Constitutions, which guarantee that attorneys representing the Commonwealth, acting in its capacity as sovereign, not have direct financial interest in the outcome."

The state Supreme Court is expected to decide soon on Janssen's motion, but whatever the outcome, the episode is another example of why more states should reform the process for retaining outside counsel. It's true that private firms are sometimes needed to help states that lack the resources or expertise to bring certain lawsuits. But it's also true that these outside firms could be paid on an hourly basis. And if contingency-fee contracts are used, open bidding would add transparency and ensure that taxpayers are getting the best deal. Mr. Rendell's office insists that "we have nothing to hide in this matter," but details of the contingency-fee arrangement were obtained by Janssen though a freedom of information request.

State prosecutors are supposed to be motivated by a sense of public responsibility for the interests of justice. Law firms have other motivations, and no-bid contingency-fee deals encourage lawyers with a financial stake in a case to try meritless claims or ask for exorbitant awards. That serves neither taxpayers nor justice, though in this case it sure did help Mr. Rendell's re-election campaign.

Why 'Quality' Care Is Dangerous

Why 'Quality' Care Is Dangerous

The growing number of rigid protocols meant to guide doctors have perverse consequences.

JEROME GROOPMAN PAMELA HARTZBAND

The Obama administration is working with Congress to mandate that all Medicare payments be tied to "quality metrics." But an analysis of this drive for better health care reveals a fundamental flaw in how quality is defined and metrics applied. In too many cases, the quality measures have been hastily adopted, only to be proven wrong and even potentially dangerous to patients.

Martin Kozlowski

Health-policy planners define quality as clinical practice that conforms to consensus guidelines written by experts. The guidelines present specific metrics for physicians to meet, thus "quality metrics." Since 2003, the federal government has piloted Medicare projects at more than 260 hospitals to reward physicians and institutions that meet quality metrics. The program is called "pay-for-performance." Many private insurers are following suit with similar incentive programs.

In Massachusetts, there are not only carrots but also sticks; physicians who fail to comply with quality guidelines from certain state-based insurers are publicly discredited and their patients required to pay up to three times as much out of pocket to see them. Unfortunately, many states are considering the Massachusetts model for their local insurance.

How did we get here? Initially, the quality improvement initiatives focused on patient safety and public-health measures. The hospital was seen as a large factory where systems needed to be standardized to prevent avoidable errors. A shocking degree of sloppiness existed with respect to hand washing, for example, and this largely has been remedied with implementation of standardized protocols. Similarly, the risk of infection when inserting an intravenous catheter has fallen sharply since doctors and nurses now abide by guidelines. Buoyed by these successes, governmental and private insurance regulators now have overreached. They've turned clinical guidelines for complex diseases into iron-clad rules, to deleterious effect.

One key quality measure in the ICU became the level of blood sugar in critically ill patients. Expert panels reviewed data on whether ICU patients should have insulin therapy adjusted to tightly control their blood sugar, keeping it within the normal range, or whether a more flexible approach, allowing some elevation of sugar, was permissible. Expert consensus endorsed tight control, and this approach was embedded in guidelines from the American Diabetes Association. The Joint Commission on Accreditation of Healthcare Organizations, which generates report cards on hospitals, and governmental and private insurers that pay for care, adopted as a suggested quality metric this tight control of blood sugar.

A colleague who works in an ICU in a medical center in our state told us how his care of the critically ill is closely monitored. If his patients have blood sugars that rise above the metric, he must attend what he calls "re-education sessions" where he is pointedly lectured on the need to adhere to the rule. If he does not strictly comply, his hospital will be downgraded on its quality rating and risks financial loss. His status on the faculty is also at risk should he be seen as delivering low-quality care.

But this coercive approach was turned on its head last month when the New England Journal of Medicine published a randomized study, by the Australian and New Zealand Intensive Care Society Clinical Trials Group and the Canadian Critical Care Trials Group, of more than 6,000 critically ill patients in the ICU. Half of the patients received insulin to tightly maintain their sugar in the normal range, and the other half were on a more flexible protocol, allowing higher sugar levels. More patients died in the tightly regulated group than those cared for with the flexible protocol.

Similarly, maintaining normal blood sugar in ambulatory diabetics with vascular problems has been a key quality metric in assessing physician performance. Yet largely due to two extensive studies published in the June 2008 issue of the New England Journal of Medicine, this is now in serious doubt. Indeed, in one study of more than 10,000 ambulatory diabetics with cardiovascular diseases conducted by a group of Canadian and American researchers (the "ACCORD" study) so many diabetics died in the group where sugar was tightly regulated that the researchers discontinued the trial 17 months before its scheduled end.

And just last month, another clinical trial contradicted the expert consensus guidelines that patients with kidney failure on dialysis should be given statin drugs to prevent heart attack and stroke.

These and other recent examples show why rigid and punitive rules to broadly standardize care for all patients often break down. Human beings are not uniform in their biology. A disease with many effects on multiple organs, like diabetes, acts differently in different people. Medicine is an imperfect science, and its study is also imperfect. Information evolves and changes. Rather than rigidity, flexibility is appropriate in applying evidence from clinical trials. To that end, a good doctor exercises sound clinical judgment by consulting expert guidelines and assessing ongoing research, but then decides what is quality care for the individual patient. And what is best sometimes deviates from the norms.

Yet too often quality metrics coerce doctors into rigid and ill-advised procedures. Orwell could have written about how the word "quality" became zealously defined by regulators, and then redefined with each change in consensus guidelines. And Kafka could detail the recent experience of a pediatrician featured in Vital Signs, the member publication of the Massachusetts Medical Society. Out of the blue, according to the article, Dr. Ann T. Nutt received a letter in February from the Massachusetts Group Insurance Commission on Clinical Performance Improvement informing her that she was no longer ranked as Tier 1 but had fallen to Tier 3. (Massachusetts and some private insurers use a three-tier ranking system to incentivize high-quality care.) She contacted the regulators and insisted that she be given details to explain her fall in rating.

After much effort, she discovered that in 127 opportunities to comply with quality metrics, she had met the standards 115 times. But the regulators refused to provide the names of patients who allegedly had received low quality care, so she had no way to assess their judgment for herself. The pediatrician fought back and ultimately learned which guidelines she had failed to follow. Despite her cogent rebuttal, the regulator denied the appeal and the doctor is still ranked as Tier 3. She continues to battle the state.

Doubts about the relevance of quality metrics to clinical reality are even emerging from the federal pilot programs launched in 2003. An analysis of Medicare pay-for-performance for hip and knee replacement by orthopedic surgeons at 260 hospitals in 38 states published in the most recent March/April issue of Health Affairs showed that conforming to or deviating from expert quality metrics had no relationship to the actual complications or clinical outcomes of the patients. Similarly, a study led by UCLA researchers of over 5,000 patients at 91 hospitals published in 2007 in the Journal of the American Medical Association found that the application of most federal quality process measures did not change mortality from heart failure.

State pay-for-performance programs also provide disturbing data on the unintended consequences of coercive regulation. Another report in the most recent Health Affairs evaluating some 35,000 physicians caring for 6.2 million patients in California revealed that doctors dropped noncompliant patients, or refused to treat people with complicated illnesses involving many organs, since their outcomes would make their statistics look bad. And research by the Brigham and Women's Hospital published last month in the Journal of the American College of Cardiology indicates that report cards may be pushing Massachusetts cardiologists to deny lifesaving procedures on very sick heart patients out of fear of receiving a low grade if the outcome is poor.

Dr. David Sackett, a pioneer of "evidence-based medicine," where results from clinical trials rather than anecdotes are used to guide physician practice, famously said, "Half of what you'll learn in medical school will be shown to be either dead wrong or out of date within five years of your graduation; the trouble is that nobody can tell you which half -- so the most important thing to learn is how to learn on your own." Science depends upon such a sentiment, and honors the doubter and iconoclast who overturns false paradigms.

Before a surgeon begins an operation, he must stop and call a "time-out" to verify that he has all the correct information and instruments to safely proceed. We need a national time-out in the rush to mandate what policy makers term quality care to prevent doing more harm than good.

Dr. Groopman, a staff writer for the New Yorker, and Dr. Hartzband are on the staff of Beth Israel Deaconess Medical Center in Boston and on the faculty of Harvard Medical School.

The Afpak muddle (part 2): How serious is the threat?

The Afpak muddle (part 2): How serious is the threat?

Does the threat of international terrorism -- specifically al Qaeda -- justify a costly, long-term engagement in Afghanistan and Pakistan? President Obama and his advisors think so, but I'm still not convinced. I certainly understand that we have a terrorism problem; I just don't believe that it is serious enough to warrant the level and type of effort the administration is proposing. And if the results of the recent NATO summit are any indication, our NATO allies seem skeptical, too.

Just how serious is the threat? According to the U.S. National Counterterrorism Center, there were 14,499 terrorist attacks worldwide in 2007 (the most recent year for which it has data). All told, these attacks killed 22,684 people and injured about 44,310. This sounds serious (and it is obviously not something to trivialize), but over half of all terrorist attacks (and two-thirds of all those killed, wounded or kidnapped) occurred in the context of the Iraq and Afghanistan wars, and thus are not a good indicator of al Qaeda's ability to threaten the American homeland or key U.S. allies. To keep these numbers in perspective, bear in mind that over a million people die in traffic accidents worldwide each year, with many more injured. Yet no one is proposing that we allocate additional billions to try to eliminate all highway fatalities.

Even more significant for the issue at hand, the number of private U.S. citizens killed by terrorists in 2007 was nineteen, with zero injured and seventeen kidnapped. All of these deaths or kidnappings occurred either in Afghanistan or Iraq. As John Mueller has argued, if al Qaeda is as dangerous as U.S. officials maintain, why haven't there been more attacks on the United States over the past eight years? In America, the danger of drowning in a bathtub is greater than the risk of dying in a terrorist attack. And that would be true even if the United State were to suffer one 9/11-scale attack every ten years. Given these numbers, does it really make sense to double down in Central Asia?

In short, my concern is that we are allowing an exaggerated fear of al Qaeda to distort our foreign policy priorities. Having underestimated the danger from al Qaeda before 9/11, have we now swung too far the other way? I am not arguing for a Pollyanna-like complacency or suggesting that we simply ignore the threat that groups like al Qaeda still pose. Rather, I'm arguing that the threat is not as great as the administration -- and most Americans, truth be told -- seem to think, and that the actual danger does not warrant escalating U.S. involvement in Central Asia.

I can think of at least three counter-arguments to my position.

First, one could argue that there have been no attacks on the United States since 2001 because we've put al Qaeda on the defensive, and that going after them in Pakistan’s frontier provinces will deny them a "safe haven" and further reduce their ability to stage another 9/11 (or worse). This line of argument sounds persuasive, but it falls apart on closer examination. For starters, it is not clear that al Qaeda requires a safe haven to do damage, especially since the original organization has metastasized into smaller groups of sympathizers (such as the group that bombed the Madrid railway station in 2004).

Equally important, the United States is not going to mount a large scale invasion of Pakistan, which is what would be necessary to completely eliminate al Qaeda from that region. And there is little reason to think that the Pakistani military will do the job for us any time soon. Furthermore, U.S. military strikes in Pakistan -- even limited ones -- tend to undermine the Pakistani government and increase the risk that Pakistan will become a failed state. As James Traub noted in last Sunday’s New York Times Magazine:

Pakistan feels as if its falling apart. . .[and] American policy has arguably made the situation even worse, for the Predator-drone attacks along the border, though effective, drive the Taliban eastward, deeper into Pakistan. And the strategy has been only reinforcing hostility to the United States among ordinary Pakistanis."

Fortunately, there are ways to deny al Qaeda a safe haven (or operational base) that do not require a large U.S. ground presence in Afghanistan and do not require us to conduct extensive military operations in Pakistan. In addition to improved homeland security and more effective counter-terrorist efforts (e.g., cutting off financing, monitoring communications, sharing intelligence, etc.), the United States can launch preemptive attacks against suspected terrorist targets in Afghanistan, using Predators, cruise missiles, or in some cases, Special Forces. If we remain vigilant, al Qaeda will not get the "free pass" that it enjoyed before 9/11. This will not eliminate the threat, but it can reduce its potency.

Second, one could argue that while the risk from conventional terrorism is manageable, the real danger is nuclear or WMD terrorism and that this threat justifies upping the ante in Afghanistan and Pakistan, even if the commitment is costly and open-ended. Nuclear terrorism is a worrisome prospect, but doubling down in Central Asia isn't the best response to that problem. Pakistan is the key here and our primary goal should be making sure that its nuclear arsenal remains under reliable control. The best way to do that is to try to prevent Pakistan from becoming a failed state. As emphasized above, using the U.S. military to go after al Qaeda in Pakistan's tribal areas is likely to destabilize Pakistan, thus increasing the chances that nuclear materials will fall into the hands of terrorists.

Third, one might concede that the actual danger from terrorism is slight, but the political consequences of terrorist attacks are disproportionate to their actual impact. In this view, comparing the risk of terrorism to highway fatalities, or to the danger of being struck by lightning, ignores the psychological and political effects of successful terrorist operations, and rational politicians have to take the latter into account. There is no question that this is the situation we now face in the United States, but it does not have to be that way. Indeed, it is mainly the result of failed political leadership over the past eight years. If our leaders react to every terrorist incident as if it's a monumental disaster, and if they hype the terrorist threat for political advantage -- as George Bush and Dick Cheney did -- the public will surely respond by demanding that we throw more resources at the problem than is prudent. Getting the opponent to react in foolish and self-defeating ways is one of the primary goals of most terror campaigns, of course, because these blunders can help the terrorists win victories that they could not achieve otherwise. We did more damage to ourselves when we invaded Iraq than Osama bin Laden accomplished on 9/11, and an open-ended commitment in Central Asia could easily compound that error.

What we need, in fact, is a political elite (and a responsible media) that will help Americans keep the terrorism problem in perspective. Terrorism is a tactic that various groups have used throughout history, and it will remain with us for the foreseeable future. Dramatic incidents like the recent Mumbai attacks are going to happen again, no matter how hard we try to prevent them, and that includes the possibility of attacks on American soil. But if we can keep suicidal extremists from obtaining nuclear weapons, they will not be able to threaten our way of life in any meaningful way.

None of this is to say that we should ignore al Qaeda or any other terrorist group that is bent on attacking the United States, or that we should not sometimes act assertively to protect Americans at home and abroad. But the threat from al Qaeda does not justify increasing our military presence in Afghanistan, and certainly does not justify major military operations in Pakistan.

Astor Asset Mgmt: ETF Model Portfolio

Federal Takeover

Federal Takeover

Bailouts: Didn't Treasury Secretary Timothy Geithner say that it was not the administration's intent to control private companies? Then why is it reportedly reluctant to accept TARP repayments from some banks?

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If it has indeed declined to accept $340 million in payments from banks in Louisiana, New York, Indiana and California, the administration is tacitly admitting that it wants to control those banks as well as others that will try to pay back the taxpayers' money they took in the Troubled Asset Relief Program.

By refusing repayment, the government can keep the leverage it bought with the bailouts. Banks that still "owe" would not be in position to reject the administration as a "partner."

This reminds us of mobsters making a small "investment" in a family-owned shop, which is not always wanted by the owners, and then using it to justify taking over the business.

Joseph DePaolo, president and CEO of Signature Bank in New York, one of the four banks making TARP repayments last week, said his company wanted to return $120 million it received because, in part, it wasn't comfortable with legislation passed that would limit compensation for salespeople. Those limits, he explained, would make it hard to recruit top professionals.

And then there's the fact that the bank didn't actually need the money. But, as we have learned, need is not relevant in the era of the bailout.

Andrew Napolitano reported last week on Fox News that he had spoken to the head of a $250-billion bank the night before who said Washington forced him to take TARP funds last September.

Napolitano said this bank "has no subprime loans, it has no bad debts, wasn't involved in credit default swaps. It didn't need any money. It didn't ask for the money and didn't want it. . . . officials from both the Federal Deposit Insurance Corporation and the Treasury said if you don't take this money, we will conduct a multi-year public audit of you."

The Fox News analyst said the bank's "board was forced to issue a class of stock just for the federal government. The federal government owns 2% of this huge bank."

That was done under the Bush administration. Enter the Obama White House. Last month, Napolitano said, Treasury told the bank "we own 2%, we're going to tell you how to run the place."

"As a result of that minority ownership, they now want to control salaries. They want to see his books, and they want to tell him who he can do business with," Napolitano reported.

Before his trip to Europe, President Obama, according to Politico, told a group of financial institution CEOs who were unhappy with the federal war on executive salaries and bonuses, "My administration is the only thing between you and the pitchforks." At the time, that sounded like nothing more than exaggeration.

An incident at the same meeting in which Geithner declined to take a fake $25 billion TARP repayment check from JPMorgan Chase CEO Jamie Dimon also seemed to be meaningful.

Later, says Politico, "Dimon also insisted that he'd like to give the government's TARP money back as soon as practical . . . But Obama didn't like that idea — arguing that the system still needs government capital."

Looking back, these are small signs that reveal the administration's desire to seize command of the nation's financial system. The bigger, unmistakable sign is the reluctance — or is it outright refusal? — to take $340 million from four banks trying to be responsible and operate on their own.

This shouldn't be happening in this country. The private sector and the state are not to be mixed. The American financial system is best directed by markets, not politics. Prosperity and liberty suffer when the latter excludes the former.

Benjamin Friedman on the Defense Budget (CNBC)

Peter Schiff on CNBC Checking Market's Pulse

Economic Collapse for Dummies 2009