Barney Frank Lecturing On Morality - A sin Itself!

Consumer spending represent 2/3rds of our economic activity. We are a consuming not a producing nation as such.. Consumer net worth largely consists of homes and investments and both are declining in value and we still have a full overhead supply of unsold homes with more coming on the market from foreclosures. Roubini is right. (See 1 below.)

Now its beat up time on auto executives for not driving to D.C. Perhaps they could have descended in their golden parachutes. However, having to find scape goats is a full time job for Congress. There is not one mirror in the Halls of Congress. Pogo was right: The Enemy Is Us!

Milbank is also correct. Corporate executives have become Capitalism's royalty. They have priced themselves beyond the reach of mortals. That said, Congress loves to parade these executives before the nation so as to shift blame and take the spotlight off themselves. Barney Frank lecturing someone on morality is a sin in and of itself! Not because he is gay but because he is sanctimonious!

As for union leaders, they too have lied to their members in order to save their own jobs while those of their members were drifting overseas. Outpriced unions demands and other crippling work rules left no room for economic headwinds, management errors or a recalitrant auto buyers. It did not have to be had economic sanity been allowed to reign but greed and stupidity drove the various labor negotations, management had their back against the wall because of restrictive legislation and they caved and the traghioc aftermath is Congress scapegoating and lecturing. What dunces we are to allow these political idiots to wreck our culture. (See 2 below.)

Kasparov has a novel idea for Obama - look into Putin's record, not his eyes.

Granted GW made the comment, about looking into Putin's eyes and seeing his soul, to show courtesy and to extend an olive branch. However, such phrases can eventually beome devastating tag lines and are used to demonstrate naivety, as was the expressions - "Read My Lips" and "I Knew Jack Kennedy. You are No Jack Kennedy" etc.(See 3 below.)

Henninger points out it is politicially incorrect to say Merry Chirstmas but okay to allow people to own homes who can't afford them. Warped liberal values lead to strange results. Ho, ho, ho.

Also, so often politicians lie to get elected and then they become stuck with those haunting lies when it comes time to govern. We are mature enough to handle truth but apparently not smart enough to demand it. (See 4 below.)

Finally, we have some inkling of what kind of destructive health care system Obama has in mind. You guessed it - more government bureaucracy! It is Obama-Baucus time. Get ready for a sicklier health plan than we already have.(See 5 below.)

Dick

1) Doctor Doom:Twenty Reasons Why We're Not Consuming
By Nouriel Roubini

No savings--and a pile of debt.

This week's news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm that the U.S. has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption, real gross domestic product growth could be a whopping 5% negative or even worse in the fourth quarter of 2008. And this is not a temporary phenomenon: Almost all of the fundamentals driving consumption are heading south on a persistent and structural basis.

Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

1. The U.S. consumer is shopped-out, having spent for the last few years well above his means.

2. The U.S. consumer is savings-less, as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and now has to rise to more sustainable levels.

3. The U.S. consumer is debt-burdened, with the debt-to-disposable-income ratio having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.

4. Not only are debt ratios high and rising, debt-servicing ratios are high and rising, too, having gone from 11% in 2000 to almost 15% now, as the interest rate on mortgages and consumer debt is resetting at higher levels.

5. The value of housing wealth is now falling by over $6 trillion, as home-price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12%-14% rather than the historical 5% to 7%. And with home prices falling over 30%, about 40% of all households with a mortgage (or 21 million out of 50 million who have a mortgage) will be under water (negative equity in their homes) with a huge incentive to walk away from their homes.


6. Mortgage equity withdrawal (MEW) is collapsing from the $700 billion annualized in 2005 to less than $20 billion in the second quarter of this year. Thus, with falling housing wealth and collapsing MEW, U.S. households cannot use their homes anymore as ATM machines.

7. The value of the equity wealth of U.S. households has fallen by almost 50%, another ugly wealth effect on consumption.

8. The credit crunch is becoming more severe as the recent second quarter flow of funds data and the Fed Loan Officers' Survey suggests: It is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

9. Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.

10. Real wage growth and real income growth have been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling, real consumption will fall sharply.

11. The Fed is reaching zero-bound on interest rates as the economy gets close to deflation, given the slack in goods, labor and commodity markets. Deflation means consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of households' nominal debts

12. Employment has been falling for 10 months in a row and the rate of job losses is now accelerating. In the last recession in 2001, which was short and shallow (eight months from March to November 2001, with a cumulative fall in GDP of only 0.4%), job losses continued all the way until August 2003--with a job-loss recovery and a total cumulative loss of jobs of over 5 million from the peak. In this cycle, job losses have, so far, been "only" slightly over a million, while labor market conditions are severely worsening based on all forward-looking indicators such as initial and continuing claims for unemployment benefits. Massive job losses and concerns about job losses will further dampen current and expected income, and further contract consumption.

13. Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the rebate was spent as U.S. consumers are worried about jobs and needed to use funds to pay off their credit cards and mortgages. The tax rebate was supposed to boost consumption all the way through September 2008: In reality, real retail sales and real personal spending rose only in April and May, while starting in June and all the way into July, August, September, October and now the holiday season, real retail spending and real personal spending have been down month after month. Thus, another general tax rebate would be as ineffective as the first one in boosting consumption.

14. The 1990-91 and 2001 recessions were not global; this time around, the IMF is forecasting a global recession for 2009.

15. The recent rise in inflation--that is only now slowing down--reduced real incomes even further for lower-income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion), but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.

16. The trade-weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the U.S. and reduced further real disposable income and the purchasing power of U.S. consumers over foreign goods.

17. With consumption being over 71% of GDP, a sharp and persistent contraction of consumption all the way through at least the fourth quarter of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth. But the worsening balance sheet of U.S. consumers in 1990-91 (debt ratios, debt servicing ratios, employment contraction, wealth effects of housing and stock markets) was much less severe than the current downturn.

18. Monetary easing will not stimulate durable consumption and demand for residential housing, as demand for such capital goods becomes interest-rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession, the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200 bps. In spite of that, capital expenditure in the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today, there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut and monetary policy is becoming ineffective to resolve that glut.

19. While policy rates are sharply falling, the nominal and real rates faced by households are rising rather than falling: rising mortgage rates, rising rates on credit cards, auto loans and student loans, together with less availability of credit are severely dampening the ability of households to borrow and spend.

20. To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall--relative to current GDP levels--by almost a trillion dollars. If all of this adjustment were to occur in 12 months, GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capital expenditure in a severe recession) by 10%, an exemplification of the Keynesian "paradox of thrift." If such an adjustment were to occur over 24 months rather than 12 months, you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10%. (Note that in the worst U.S. recession since WWII, such cumulative fall in GDP was only 3.7% in 1957-58). One can only hope that this adjustment of consumption and savings rates occurs slowly over time--four years, say, rather than two.

Even in that scenario the cumulative fall of GDP could be of the order of 4% to 5%, i.e., the worst U.S. recession since World War II. Note that the cumulative fall in GDP in the 2001 recession was only 0.4%--and in the 1990-91 recession only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two.


2) Auto Execs Fly Corporate Jets to D.C., Tin Cups in Hand
By Dana Milbank

There are 24 daily nonstop flights from Detroit to the Washington area. Richard Wagoner, Alan Mulally and Robert Nardelli probably should have taken one of them.

Instead, the chief executives of the Big Three automakers opted to fly their company jets to the capital for their hearings this week before the Senate and House -- an ill-timed display of corporate excess for a trio of executives begging for an additional $25 billion from the public trough this week.

"There's a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hands," Rep. Gary L. Ackerman (D-N.Y.) advised the pampered executives at a hearing yesterday. "It's almost like seeing a guy show up at the soup kitchen in high-hat and tuxedo. . . . I mean, couldn't you all have downgraded to first class or jet-pooled or something to get here?"

The Big Three said nothing, which prompted Rep. Brad Sherman (D-Calif.) to rub it in. "I'm going to ask the three executives here to raise their hand if they flew here commercial," he said. All still at the witness table. "Second," he continued, "I'm going ask you to raise your hand if you're planning to sell your jet . . . and fly back commercial." More stillness. "Let the record show no hands went up," Sherman grandstanded.

By now, the men were probably wishing they had driven -- and other members of the House Financial Services Committee weren't done riding the CEOs over their jets. "You traveled in a private jet?" Rep. Nydia M. Velázquez (D-N.Y.) contributed. Rep. Patrick T. McHenry (R-N.C.) felt the need to say that "I'm not an opponent of private flights by any means, but the fact that you flew in on your own private jet at tens of thousands itself dollars of cost just for you to make your way to Washington is a bit arrogant before you ask the taxpayers for money."


It was a display of stone-cold tone-deafness by the automaker chiefs. In their telling, they have no responsibility for the auto industry's current mess. Threatening the nation with economic Armageddon if they are not given government aid, they spent much of the session declaring what a fine job they've been doing in Detroit.

"Chrysler really is the quintessential American car company!" Chrysler's Nardelli boasted.

"We have products that are winning car and truck of the year regularly," General Motors' Wagoner proclaimed.

"We are equal to or better than Honda and Toyota," Ford's Mulally added. "Every new vehicle that we make, whether it's small, medium or large, is best in fuel efficiency. The given is safety. And we have more, at Ford, more five-star quality and safety ratings than any other automobile."

Committee Chairman Barney Frank (D-Mass.) cut him off. "Thank you, Mr. --"

"And the best value!" Mulally blurted out.

"Commercials can go later," the chairman proposed.

They would have to go later, because members of the committee wanted to turn the session into a special edition of "Car Talk." Rep. Mike Castle (R-Del.) spoke of his '99 Jeep: "It probably has about 150,000 miles on it, and it's still running doggone well." Rep. Jeb Hensarling (R-Tex.) invoked his '98 Jeep Cherokee: "Small problem with the back hatch staying open; we can talk about that afterwards." Rep. Michele Bachmann (R-Minn.) praised her Chrysler minivan. Rep. Judy Biggert (R-Ill.) had good words for her Jeep but complained that it didn't come in a hybrid version.

"I drive the same '66 Plymouth Valiant that I've always had," Ackerman proffered. He went on to discuss a problem with the GPS system in his Cadillac. "I wanted a loaded car in blue; I had to reach out to five states to find one in blue," he complained.

It seemed everybody had a car story to tell. Rep. John Campbell (R-Calif.) let it be known that he was a car dealer for 25 years. Rep. Stephen Lynch (D-Mass.) disclosed that he had worked at the GM plant in Framingham. Rep. Donald Manzullo (R-Ill.) wanted to see more ads for the car made in his district, while Rep. Michael Capuano (D-Mass.) said the Edsel was once made in his home town. Rep. Walter Jones (R-N.C.) read from Cicero and held up photos of cars. And Rep. David Scott (D-Ga.) had no car stories to tell but delivered the surprising news that the problem with the Titanic was not its collision with an iceberg.

Detroit area lawmakers made passionate arguments that the carmakers had already done what "they possibly can to restructure and become globally competitive," as Rep. Thaddeus McCotter (R-Mich.) put it.

But the executives were not helping their own case. When Rep. Paul Kanjorski (D-Pa.) tried to find out when GM would run out of cash, Wagoner hemmed and hawed until the lawmaker protested that "I don't quite understand what the hell you just told me." When Rep. Ed Perlmutter (D-Colo.) asked about GM's outlook for the quarter, Wagoner informed him that "we don't provide financial guidance in earnings."

So it was hard to feel sorry for the executives when Rep. Peter Roskam (R-Ill.), late in the hearing, reminded them again that "the symbolism of the private jet is difficult," and mischievously asked the witnesses whether, in another symbolic gesture, they would be willing to work for $1 a year, as Nardelli has offered to do.

"I don't have a position on that today," demurred Wagoner (2007 total compensation: $15.7 million).

"I understand the intent, but I think where we are is okay," said Mulally ($21.7 million).

"I'm asking about you," Roskam pressed.

"I think I'm okay where I am," Mulally said.

And don't even think about asking him to fly commercial.

3) Obama Should Look Into Putin's Record, Not His Eyes: The U.S. has the chance for a fresh start on Russia relations.
By GARRY KASPAROV

Even as Barack Obama faces front-page issues like Iraq, Iran and Afghanistan, he will still have to find the time and courage to deal with a certain nuclear-armed autocracy that controls much of the world's oil and gas.


How should Mr. Obama deal with Russia's official president, Dmitry Medvedev, and Russia's real leader, Vladimir Putin? The choice is straightforward: Mr. Obama can treat them like fellow democratic leaders or like the would-be dictators that they are. His decision will tell the world a great deal about how seriously he takes his promises of change.

The Kremlin is very eager to be accepted as an equal. It apparently hopes that Mr. Obama will send the signal that democracy in Russia doesn't matter, that the Kremlin's crushing of the opposition and free speech is irrelevant, and that annexing pieces of neighboring Georgia is a local issue and not an international one.

Last week Mr. Medvedev was in France to meet with the leaders of Europe. French President Nicolas Sarkozy, who is also the current European Union president, tripped over his tongue to ingratiate himself and to present himself as a great peacemaker.

Mr. Sarkozy proudly announced that Russia had "mostly completed" its obligations to resolve the conflict with Georgia. But there is no way to "mostly" accept a dictatorship.

Russia's ruling elite has close allies among the European nations that Mr. Obama is expected to woo. I am far less concerned by Italian Prime Minister Silvio Berlusconi's clownish remarks about Mr. Obama's "suntan" than about the way he so eagerly rushes to defend the commercial and political interests of Mr. Putin's clan.

Leaders like Messrs. Berlusconi and Sarkozy have no allegiance to the nation of Russia. Rather, they are defending Mr. Putin as a means to protect their personal and business relationships. Will Mr. Obama's desire to be the toast of Europe come at the expense of democracy in Russia? Mr. Obama must listen very carefully when European voices defend the Putin regime. Nearly always there is the hiss of gas or the bubbling of oil in the background.

Last weekend Mr. Medvedev was in Washington to continue his new charm offensive. But Mr. Obama must remember that he was selected by over 66 million votes while Mr. Medvedev needed only one -- that of his predecessor, Mr. Putin.

There is little doubt the most recent elections in Russia had even less value than those in Venezuela and Iran. Russia's own "supreme leader" cannot be treated as a true democratic representative if the new U.S. administration wishes to maintain any credibility on matters of human rights and freedom abroad. For a glimpse into Russia's "democracy," just look at its idea of a bailout. While Washington is worried about Main Street, in Russia the government wants to rescue the oligarchs -- at the expense of the Russian taxpayer.

In Mr. Medvedev's Nov. 5 speech in Moscow, he assured the mafia running the country that everything is business-as-usual despite the global financial crisis. He also talked about extending the presidential and parliamentary terms of office, even though the next Russian parliamentary elections aren't until 2011.

The speech sent two signals. First, that the Constitution, praised by Mr. Medvedev as the "cornerstone of law," can be twisted. This helps pave the way for Mr. Putin's return to his old Kremlin office, perhaps even before all the furniture has been moved out. Equally important, it says that Messrs. Medvedev and Putin aren't going anywhere until they are forced to leave.

In a Nov. 7 meeting of senior officials, Mr. Medvedev instructed the interior minister to crush any demonstrators "exploiting the crisis" as extremists and criminals. If the EU has "mostly" ignored bloodshed in Georgia, would they accept it in Russia as well?

The collapsing Russian economy precipitated Mr. Medvedev's new batch of threats. The vast majority of Russians, who haven't shared the trough with Mr. Putin's elites over the past decade, are realizing that they never will. When Mr. Medvedev took office he said that Russia would become a global financial center and that the ruble would become a reserve currency of choice. But with oil nearing $50 a barrel, the charade of a strong and stable Russia is over. The ruble is becoming a reserve currency -- in Russia. With so many aspects of life in Russia deteriorating simultaneously, the regime has to squeeze harder to keep control.



Each day decreases the likelihood of a quiet transition of power later on. As John F. Kennedy said, "Those who make peaceful revolution impossible will make violent revolution inevitable." Such talk about the fall of the Putin regime is not just wishful thinking. Remember all the experts who failed to anticipate the collapse of the Soviet Union.

Do not believe that the damage from a violent fall would be limited to within Russia's borders. Gazprom and its ilk have many allies in the Western companies and administrations that currently serve as the Kremlin's enablers. There is also the issue of Russia's vast nuclear arsenal and large, though impoverished, military.

Mr. Medvedev's posturing about the supposed threat of NATO expansion -- and about deploying missiles near the Polish border in response to the U.S. missile shield -- are part of his plan to get Western leaders to leave him alone so that he can continue his looting. Mr. Obama must quickly make clear that he will not tolerate this. He cannot repeat his predecessor's mistake and look into Mr. Putin's eyes instead of looking at his record.

Mr. Obama's character is already being tested. He will fail unless he labels the Putin dictatorship correctly from the start. If he does, Mr. Obama might even be able to help bring hope and change to an entirely new constituency: 142 million Russians.

4)Mad Max and the Meltdown How we went from Christmas to crisis.By DANIEL HENNINGER
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Notwithstanding the cardboard Santas who seem to have arrived in stores this year near Halloween, the holiday season starts in seven days with Thanksgiving. And so it will come to pass once again that many people will spend four weeks biting on tongues lest they say "Merry Christmas" and perchance, give offense. Christmas, the holiday that dare not speak its name.


Warner Bros./Kobal Collection
Mortgage-backed security survivor.
This year we celebrate the desacralized "holidays" amid what is for many unprecedented economic ruin -- fortunes halved, jobs lost, homes foreclosed. People wonder, What happened? One man's theory: A nation whose people can't say "Merry Christmas" is a nation capable of ruining its own economy.

One had better explain that.

How the financial markets fell so far so fast will occupy economic seers for years. The path to 50% wealth reductions and the death of Wall Street was paved with good intentions, notably the notion that all should own a house, even if that required giving away the house to untutored borrowers with low-to-no-interest loans.

This good intention set off history's largest chain of moral hazard. The great unraveling began sometime between 2005 and 2007, when borrowers, lenders and securitizer shamans all found themselves operating in a zero-gravity environment, aloft on moral hazard.

The technical details have been described with harrowing precision by Robert Stowe England in "Anatomy of a Meltdown" for Mortgage Banker magazine. Briefly: "The underwater earthquake that first rattled the foundations of the mortgage industry came in the form of sharply higher delinquencies and defaults from a book of poorly underwritten subprime loans from the fourth quarter of 2005 through the first quarter of 2007."

His narrative runs through borrowers making misrepresentations on loan applications (fraud), the collapse of Bear Stearns's hedge funds, revised ratings-agency methodologies that led to "unprecedented" mass downgrades, causing a contagion that spread from subprime to prime home-equity loans, and a warning from the president of the IndyMac S&L that "the private secondary market is not functioning." This in turn precipitates a "torrent of deleveraging." Here's the best part: Mr. England's chapter-and-verse article appeared in October -- of 2007, one year before the current mass panic.

A more recent, widely emailed article for Portfolio.com by Michael Lewis of "Liar's Poker" fame describes a skeptical hedge-fund manager and his associates walking through the wild world of mortgage-backed securities like stunned characters in "Mad Max," in effect asking bankers, borrowers and ratings-agency executives one question: Why? Why do you think all of you can get rich, all at the same time, forever?

On Sept. 25, a week after Lehman Brothers declared bankruptcy, Nicolas Sarkozy announced, "Laissez-faire is finished." Then the Washington Post asked on its front page: "Is American Capitalism Finished?"

Little or nothing that has occurred through this crisis discredits the system of free-market capitalism. Across several centuries of rising world incomes and social gains, the system has proved its worth. In this instance, the system has been badly used -- by mere people. Nonetheless, the dimensions of the fall and devastation that originated in subprime mortgages are breathtaking.

Amid all these downward-pushing pressures, occurring in plain sight, hardly anyone or anything stepped up to brake the fall. What happened?

The answer echoing through the marble hallways of Congress and Europe's ministries is: regulation failed. In short, throw plaster at cracked walls. Trusting the public sector to protect us from financial catastrophe is a bad idea. When the Social Security and Medicare meltdowns arrive, as precisely foretold by their trustees, will we ask again: What were they thinking?


Responsibility and restraint are moral sentiments. Remorse is a product of conscience. None of these grow on trees. Each must be learned, taught, passed down. And so we come back to the disappearance of "Merry Christmas."

It has been my view that the steady secularizing and insistent effort at dereligioning America has been dangerous. That danger flashed red in the fall into subprime personal behavior by borrowers and bankers, who after all are just people. Northerners and atheists who vilify Southern evangelicals are throwing out nurturers of useful virtue with the bathwater of obnoxious political opinions.

The point for a healthy society of commerce and politics is not that religion saves, but that it keeps most of the players inside the chalk lines. We are erasing the chalk lines.

Feel free: Banish Merry Christmas. Get ready for Mad Max.

5) The Obama Health Plan Emerges


"Universal" government-run health care proved too ambitious even for FDR, who stripped it out of the Social Security Act of 1935. Lyndon Johnson settled for Medicare and Medicaid. Now liberals think the political moment has finally arrived to achieve what has eluded every other Democratic President from Harry Truman to Bill Clinton.


APOne signal is yesterday's news that Barack Obama has selected Tom Daschle, the very liberal former Senate warhorse, to head the Health and Human Services Department. But a even clearer sign was last week's release by Montana Senator Max Baucus of a policy blueprint that closely resembles the one Mr. Obama campaigned on for 17 months. The plan is significant not only because its author is Chairman of the powerful Finance Committee, which oversees taxes and about half of all government spending. Mr. Baucus is also one of the more moderate, and cautious, senior Democrats.

If the Obama White House decides that reorganizing the 17.1% of the economy that the U.S. is likely to spend on health care in 2010 is a first-year priority, then Mr. Baucus's bill will be the place they start. Americans need to learn what they'd be paying for.

First, Democrats want the government to create a national insurance exchange, or marketplace, in which all comers could buy into a range of heavily regulated private policies at group rates. These private plans would then "compete" with a new public insurance option, i.e., a program managed by the government and modeled after Medicare. Lower-income earners would get subsidies to make coverage "affordable." Businesses that didn't cover their employees would pay a tax on some portion of their payroll.

The last cog is the "individual mandate." This requirement that everyone buy coverage has grabbed most media scrutiny of the Baucus plan, because Mr. Obama opposed it during the campaign. But the many moving parts don't work together unless the young and healthy foot the bill for care of the older and sicker -- one reason Hillary Clinton kept nagging Mr. Obama about the individual mandate during the primaries.

The irony is that the public option -- not the mandate -- is far and away the most radical part of the plan. Green eyeshade objections are obviously out of favor in modern Washington, but the reality is that the Baucus-Obama plan would be extraordinarily expensive as it slowly but relentlessly grew the government's share of health spending. The draft doesn't include an exact cost, though casually notes the ballpark "investment" could run as high as $150 billion a year.

Even those huge outlays are likely conservative, considering that subsidies would go to families earning up to 400% of the federal poverty level. According to the Census Bureau, that would apply to 61.5% of the American population, or about 184 million people -- less those already on Medicare and Medicaid.

Some financing will come from the "pay or play" tax on businesses, but because Mr. Baucus is no more omniscient than anyone else, the tax rate is left undefined. If it is too low, companies will have every incentive to "cash out" their employee liabilities and pay the tax instead. Then workers will flood the public option.

The Baucus plan expects to make up more of the money with nips like better health technology and tucks such as "a national focus on wellness." But those don't come close to adding up to $150 billion -- or the health system would have made them already. As for the claim that centralizing health spending will lead to more "efficiency" . . . well, that is the triumph of hope over evidence.

Over the past 40 years, per capita health spending has grown an average of 2.1 percentage points faster than the economy. The dominant U.S. insurer -- Medicare -- has had no success in mitigating this climb, despite valiant attempts. Since the 1980s, Medicare has actually controlled the prices that physicians and hospitals are paid for thousands of billable services. In 2007, the program spent some $425 billion according to these arbitrary guesses. Because of its huge purchasing power, and because many private plans adopt its reimbursement rates, Medicare significantly shapes all health-care financing and delivery.

Now the Democrats want to double down with the public option, apparently on the theory that the bureaucracies fail only when they're too small. Even without the new program, Medicare and Medicaid costs are rising substantially both as a share of the economy and the federal budget. The nearby chart tracks the historical behavior of government health spending and the Congressional Budget Office's post-2007 fiscal scenario in the absence of reform. Today, health entitlements account for 4% of GDP but will rise to 7% in 2025 and about 15% in 2062.

Not that the current level of benefits will ever be paid. According to the Medicare trustees, the program's excess costs over the next 75 years -- that is, the difference between expected outlays and revenues -- is more than $36 trillion, which even they acknowledge is several trillion too low given current trends. Even if Congress doubled all individual and corporate tax rates, it still wouldn't raise enough revenue to pay for Medicare and Medicaid.

The Obama-Baucus solution to this slow-motion catastrophe is to add tens of millions more people to the federal balance sheet. Because the public option will enjoy taxpayer sponsorship, it will offer generous packages to consumers that no private company could ever afford or justify. And because federal officials will run not only the new plan but also the "market" in which it "competes" with private programs -- like playing both umpire and one of the teams on the field -- they will crowd out private alternatives and gradually assume a health-care monopoly.

Many proponents of plans similar to Mr. Baucus's openly cite this as one of their goals. Eventually, the public option will import Medicare's price controls into the private sector as it tries to manage the inevitable cost overruns. When that doesn't work, Congress will deal with the problem by capping overall spending and rationing care through politics (instead of prices) -- like Canada does today.

Either Senator Baucus and President-elect Obama are making promises that can't possibly be kept. Or they're not being honest about their plans for U.S. health care.