Bill Clinton’s Secretary of Labor and current Obama economic advisor Robert Reich wrote a June 12th Op-Ed on Salon.com (here) defending a “public option” in the upcoming health reform bill.
I trust that Mr. Reich is an intelligent man, but that only makes his argument more bewildering.
His core proposition is that the solution to the financial train wreck of federal health entitlements, is to create a larger federal health entitlement.
“A public option large enough to have bargaining leverage …[is] the only way to prevent Medicare and Medicaid from eating up future federal budgets.”
In 2009, Medicare and Medicaid will spend $775 billion, over one third of total national health spending and 5.5% percent of GDP. If that massive “leverage” has been unable to control costs, what logic is there in asserting that an additional $150 billion per year will be able to?
He admits that “Medicare and Medicaid [will eat] up future federal budgets”, but then praises LBJ for “successfully take[ing] on the giant health care lobbies” to create those very programs.
Then he hopefully asks “The question now is how much LBJ is in Barack Obama.”
How can an intelligent man admit that LBJ’s health programs are a financial disaster, then hope our new President will replicate them?
There are only two possibilities. Either 1.) My assessment of Mr. Reich is wrong, and he is not smart enough to see the contradiction, or 2.) He does see the contradiction, but wants to expand government health care so badly that he is willing to ignore it, even at the cost of national bankruptcy.
LBJ’s legacy is a Medicare unfunded liability of $34 Trillion, or two and a half times the annual output of the entire U.S. economy. Mr. Reich thinks that’s a triumph and wants the program expanded.
I’m confidant that Mr. Reich does understand the economic cost of this policy, but not the full cost.
The hidden cost is having our grandchildren curse us for stealing their future.
Saturday, June 13, 2009
Tuesday, April 28, 2009
Why David Frum is wrong about Arlen Specter
On Tuesday, David Frum wrote a column at NewMajority criticizing Pat Toomey and the Club for Growth for pushing Sen. Arlen Specter out of the Republican party. This was my response.
Mr. Frum,
With respect, I think you’re wrong.
You are operating on the assumption that positioning on the ideological spectrum is the dominant factor in electoral sucess. If that were true then nominating a moderate conservative against a more extreme liberal would be an easy win for the GOP.
Yet Barack Obama is President.
Certainly, there are political extremes that are unacceptable to the vast majority of the electorate. Thankfully, neither David Duke nor William Ayres is electable. However, between those extremes I believe there is more ideological flexibility among voters than you realize.
Yes, there are hard core ideologues in both parties, but that does not describe the bulk of the electorate. For most voters ideology matters, but only to a limited degree. Voters also value a candidate (and a party) that rejects corruption, can competently govern, follows in office what was promised in campaigns, knows the principles it stands for and does not tolerate hypocrisy.
To demonstrate the relative importance of non-ideological factors in electoral success, as a thought experiment consider the following alternate history:
August 2003 - President Bush recognizes that his Iraq strategy is failing, fires Secretary Rumsfeld and embraces Gen. Patraeus’ counter insurgency strategy.
January 2004 - Congressional Republicans appoint a panel of retired Federal Judges to investigate allegations of corruption within the GOP and mercilessly reject any found guilty.
September 2004 - Republicans adopt a unilateral ban on earmarks.
January 2005 - Congressional Republicans are unified and use reconciliation to pass a voluntary alternative flat tax and free market health care reform.
September 2006 - Republicans cut wasteful spending and set the country on a path to a balanced budget.
If this, however unlikely, had been the history of the last 8 years, would the GOP be in total collapse today? I think the only fair answer is no. Yet none of these actions would have been ideological shifts.
Within a broad ideological range, voters will support candidates, and a party, that are seen as standing for honesty, integrity, competence and vision. Primary challenges may move the party to the right, but on a deeper level they are an attempt to force the party to be true to its core beliefs.
A left wing President and Congress were elected not because of their ideology, but because they were trusted. If Republicans ever hope to regain that trust, putting principles above politics is a necessary first step.
Mr. Frum,
With respect, I think you’re wrong.
You are operating on the assumption that positioning on the ideological spectrum is the dominant factor in electoral sucess. If that were true then nominating a moderate conservative against a more extreme liberal would be an easy win for the GOP.
Yet Barack Obama is President.
Certainly, there are political extremes that are unacceptable to the vast majority of the electorate. Thankfully, neither David Duke nor William Ayres is electable. However, between those extremes I believe there is more ideological flexibility among voters than you realize.
Yes, there are hard core ideologues in both parties, but that does not describe the bulk of the electorate. For most voters ideology matters, but only to a limited degree. Voters also value a candidate (and a party) that rejects corruption, can competently govern, follows in office what was promised in campaigns, knows the principles it stands for and does not tolerate hypocrisy.
To demonstrate the relative importance of non-ideological factors in electoral success, as a thought experiment consider the following alternate history:
August 2003 - President Bush recognizes that his Iraq strategy is failing, fires Secretary Rumsfeld and embraces Gen. Patraeus’ counter insurgency strategy.
January 2004 - Congressional Republicans appoint a panel of retired Federal Judges to investigate allegations of corruption within the GOP and mercilessly reject any found guilty.
September 2004 - Republicans adopt a unilateral ban on earmarks.
January 2005 - Congressional Republicans are unified and use reconciliation to pass a voluntary alternative flat tax and free market health care reform.
September 2006 - Republicans cut wasteful spending and set the country on a path to a balanced budget.
If this, however unlikely, had been the history of the last 8 years, would the GOP be in total collapse today? I think the only fair answer is no. Yet none of these actions would have been ideological shifts.
Within a broad ideological range, voters will support candidates, and a party, that are seen as standing for honesty, integrity, competence and vision. Primary challenges may move the party to the right, but on a deeper level they are an attempt to force the party to be true to its core beliefs.
A left wing President and Congress were elected not because of their ideology, but because they were trusted. If Republicans ever hope to regain that trust, putting principles above politics is a necessary first step.
Saturday, March 28, 2009
Geithner’s Smoke and Mirrors
I’m not an economist. I don’t even play one on TV, but I have some serious problems with Treasury Secretary Geithner’s new public/private toxic asset purchase plan. So I thought I’d throw them out there and see if I’m the only one.
My first problem with his plan is that there is no guarantee that banks will offer to sell.
There has been a lot of talk about mark to market. My understanding is that most (although not all) of the loans and asset backed securities (ABS) held on banks books have to be carried at the market price. That means they are worth (in accounting terms) only what they can be sold for.
It is common wisdom to say that mark to market isn’t working because the markets are “frozen”. But it is not true that the market for these securities is not functional. Banks can sell 100% of their ABS at any time they want to. The obvious truth of this can be demonstrated as follows:
I hereby offer to buy all of Citigroup ABS for $1. Anyone from Citi who is interested, just give me a call.
Why do I think my phone isn’t going to be ringing off the hook? Obviously, because Citi doesn’t want to sell them at that price. The same is true of a wide variety of investors who would be willing to purchase the securities, but the sellers want more than buyers are willing to pay.
Assuming that large banks and large institutional investors have roughly equivalent market knowledge, I can only assume that the banks have not fully marked down their assets to market price. If they had, then an asset they hold on their books at $100 could be converted into $100 cash and they would have no disincentive to sell.
Secretary Geithner said that his plan will use the market to induce “price discovery”. But the market already has discovered a price, the banks just don’t like it.
If sellers want more than buyers will pay, to make a transaction happen you need to either make a) the seller take less or b) the buyer pay more. If you choose a) then a bank holding an asset on its books at $100 sells at a lower price, say $60, and the bank would be replacing a $100 asset (securities) with a $60 asset (cash). Add eight or nine zeros to that transaction and the FDIC will send you a lovely card that says “Surprise! You’re insolvent” and the bank is taken into receivership.
So, for obvious reasons, Mr. Geithner chose option b. Treasury, the Fed and the FDIC will offer loans and a profit sharing arrangement to try and entice the buyers into paying more.
But what happens if the generous purchase terms are insufficient to produce a price higher than the banks book value of the assets? The banks either still won’t sell, in which case, the plan will have no effect, or they will sell but have to take additional write downs pushing them farther towards insolvency. This would make banks even more desperate to build up capital reserves and make the problem worse because banks would have even less money to lend.
And what happens if it does produce a price above book value? This is my second problem with the plan.
Boiled down, my understanding is that the plan works like this: An investment company puts up $1 then the government will loan them $6 more to buy bank assets. If there is a profit, the investor splits it 50/50 with the government. But if there is a loss, the loans are non-recourse. That means that the investor only looses his $1. He doesn’t have to pay back the other $6.
The investor gets 1/2 of the profits but only takes 1/7 of the losses. Put another way, the taxpayer gets 1/2 of any profits, but pays 6/7 of the losses.
That’s one hell of an incentive for investors, and may work. But this produces a contradiction. The more effective the incentives, the more investors will pay for the assets above what they believe they are really worth. But the more the investors pay above market price, the greater the chance that the securities really are worth less than was paid for them.
Stripping away the complexity, it seems to me that this plan is designed to bribe investors to pay the banks far more than anyone thinks these assets are worth so the banks will have more money to lend.
Maybe a miracle will happen and 5 years from now these assets will turn out to be worth even more than the inflated price paid for them. But if Mr. Geithner believed that, then why not cut out the middleman and have treasury buy the assets directly? We’re going to be on the hook for the vast majority of the losses either way. Why not get all the potential profits? Tim Geithner is not a stupid man, so why would he structure it that way?
I’m afraid the answer is politics.
If he went to the Congress and said “Please give me a trillion dollars so I can buy toxic assets that the market thinks are worth $600 billion”, or even more honestly “let’s just give the banks $400 billion so they can start lending again”, Congress would say No. Not to mention the taxpayers with pitchforks and torches waiting for him at the door.
But by structuring it as a public/private partnership with loan guarantees, he doesn’t have to ask Congress for a dime. Plus, the “private” part makes it sound like it’s not another government bailout.
Unfortunately, it is.
It’s a backhanded way to funnel extra cash into the banks by overpaying for their bad assets. And when it turns out that yes, we did pay more than they were worth, and there are losses (as is more likely than not given that we start from the assumption that we are paying more than the markets think they are worth), the FDIC will be drained dry to cover them. At that point, Congress will have no choice but to pay the costs, and bailing out the FDIC a few years from now won’t create the public backlash that bailing out the banks now would.
I would have been much happier if Mr. Geithner had been honest and said “Look, these assets are probably undervalued because the markets are scared. Banks can only sell them right now for $600 billion, but the hold to maturity value is probably around $1 trillion, so let’s buy them for $900 billion and take the gamble that we might loose some money. The banks will have more cash to lend, and who knows, we might even turn a profit.”
But I’m just an unemployed bookkeeper. I might be wrong.
My first problem with his plan is that there is no guarantee that banks will offer to sell.
There has been a lot of talk about mark to market. My understanding is that most (although not all) of the loans and asset backed securities (ABS) held on banks books have to be carried at the market price. That means they are worth (in accounting terms) only what they can be sold for.
It is common wisdom to say that mark to market isn’t working because the markets are “frozen”. But it is not true that the market for these securities is not functional. Banks can sell 100% of their ABS at any time they want to. The obvious truth of this can be demonstrated as follows:
I hereby offer to buy all of Citigroup ABS for $1. Anyone from Citi who is interested, just give me a call.
Why do I think my phone isn’t going to be ringing off the hook? Obviously, because Citi doesn’t want to sell them at that price. The same is true of a wide variety of investors who would be willing to purchase the securities, but the sellers want more than buyers are willing to pay.
Assuming that large banks and large institutional investors have roughly equivalent market knowledge, I can only assume that the banks have not fully marked down their assets to market price. If they had, then an asset they hold on their books at $100 could be converted into $100 cash and they would have no disincentive to sell.
Secretary Geithner said that his plan will use the market to induce “price discovery”. But the market already has discovered a price, the banks just don’t like it.
If sellers want more than buyers will pay, to make a transaction happen you need to either make a) the seller take less or b) the buyer pay more. If you choose a) then a bank holding an asset on its books at $100 sells at a lower price, say $60, and the bank would be replacing a $100 asset (securities) with a $60 asset (cash). Add eight or nine zeros to that transaction and the FDIC will send you a lovely card that says “Surprise! You’re insolvent” and the bank is taken into receivership.
So, for obvious reasons, Mr. Geithner chose option b. Treasury, the Fed and the FDIC will offer loans and a profit sharing arrangement to try and entice the buyers into paying more.
But what happens if the generous purchase terms are insufficient to produce a price higher than the banks book value of the assets? The banks either still won’t sell, in which case, the plan will have no effect, or they will sell but have to take additional write downs pushing them farther towards insolvency. This would make banks even more desperate to build up capital reserves and make the problem worse because banks would have even less money to lend.
And what happens if it does produce a price above book value? This is my second problem with the plan.
Boiled down, my understanding is that the plan works like this: An investment company puts up $1 then the government will loan them $6 more to buy bank assets. If there is a profit, the investor splits it 50/50 with the government. But if there is a loss, the loans are non-recourse. That means that the investor only looses his $1. He doesn’t have to pay back the other $6.
The investor gets 1/2 of the profits but only takes 1/7 of the losses. Put another way, the taxpayer gets 1/2 of any profits, but pays 6/7 of the losses.
That’s one hell of an incentive for investors, and may work. But this produces a contradiction. The more effective the incentives, the more investors will pay for the assets above what they believe they are really worth. But the more the investors pay above market price, the greater the chance that the securities really are worth less than was paid for them.
Stripping away the complexity, it seems to me that this plan is designed to bribe investors to pay the banks far more than anyone thinks these assets are worth so the banks will have more money to lend.
Maybe a miracle will happen and 5 years from now these assets will turn out to be worth even more than the inflated price paid for them. But if Mr. Geithner believed that, then why not cut out the middleman and have treasury buy the assets directly? We’re going to be on the hook for the vast majority of the losses either way. Why not get all the potential profits? Tim Geithner is not a stupid man, so why would he structure it that way?
I’m afraid the answer is politics.
If he went to the Congress and said “Please give me a trillion dollars so I can buy toxic assets that the market thinks are worth $600 billion”, or even more honestly “let’s just give the banks $400 billion so they can start lending again”, Congress would say No. Not to mention the taxpayers with pitchforks and torches waiting for him at the door.
But by structuring it as a public/private partnership with loan guarantees, he doesn’t have to ask Congress for a dime. Plus, the “private” part makes it sound like it’s not another government bailout.
Unfortunately, it is.
It’s a backhanded way to funnel extra cash into the banks by overpaying for their bad assets. And when it turns out that yes, we did pay more than they were worth, and there are losses (as is more likely than not given that we start from the assumption that we are paying more than the markets think they are worth), the FDIC will be drained dry to cover them. At that point, Congress will have no choice but to pay the costs, and bailing out the FDIC a few years from now won’t create the public backlash that bailing out the banks now would.
I would have been much happier if Mr. Geithner had been honest and said “Look, these assets are probably undervalued because the markets are scared. Banks can only sell them right now for $600 billion, but the hold to maturity value is probably around $1 trillion, so let’s buy them for $900 billion and take the gamble that we might loose some money. The banks will have more cash to lend, and who knows, we might even turn a profit.”
But I’m just an unemployed bookkeeper. I might be wrong.
Tuesday, January 20, 2009
Something Is Wrong
There's something odd happening in the national psyche. As we celebrate the inauguration of our 44th President, the mood of the country has taken on a bizarre schizophrenia.
On the one hand, pessimism about the state of the nation is everywhere. You can't turn on the TV, listen to the radio or read a newspaper without being assaulted with doom and gloom. But it goes beyond just the media. There is a sense in the American people that I can't describe as anything other than fear.
There is a cloud of fear, no... more than that, of dread. There is a vague sense of foreboding in the air. Part of that is understandable. The economy took quite a frightening shock with the collapse of the financial markets. Unemployment is going up, as are home foreclosures. It's appropriate that people would be concerned.
But what I'm sensing goes beyond that. It's as if something terrible has happened in our lives while we are just beginning to wake from a pleasant dream. At that moment of semi-consciousness where you can't quite tell which reality is real and which is the dream, you hope and cling to the dream because it is the more pleasant. Yet, as you move towards consciousness and begin to realize that the happy dream is false, for a moment you cling to it even more desperately.
Perhaps it's a fear that all our prosperity and success as Americans is not as secure as we once believed. Perhaps everything can be snatched away from us in an instant. Perhaps it's the suspicion that the strong foundation of our country is nothing more than sand.
To be fair, we have been under unusual psychological stress for the past few years. 9/11 destroyed our innocence that we were immune from harm. We tried to go on with our lives as usual, but somewhere beneath the surface, as hard as we tried not to think about it, we knew.
The sudden and dramatic crisis in our economy, showing that our prosperity is also fragile may have just been the triggering event to bring a more general level of anxiety to the surface.
Regardless of the source of our insecurity, contrast it with the growing glorification of Barack Obama. Obama is a charming and skilled politician. Placing a modest degree of “hope” in the new President is normal. What is not normal is the growing level of worship, approaching idolatry. There is a feverish quality to the praise being heaped upon him. His emulation of the trappings of Lincoln seems even humble by comparison to the image of him as messiah.
What has he done to warrant this frenzied exaltation, other than to simply exist? He has a relatively brief history of public service, of no extraordinary note. He has proposed no revolutionary new policies, it's all fairly standard Democratic boilerplate. He was a leftist in the primaries, then a centrist in the general election, and throughout he studiously refused to take positions on most controversial issues at all. Do we even know him?
I think that may be the point. We don't know him. Obama is an enigma. Onto his blank canvas we are projecting our desperate need for... something. Perhaps a savior to banish all our fears and make that pleasant dream we cling to our reality.
As Americans, we used to believe in our country and in ourselves. Now we are placing our faith in a man. Not even a man, but the image of a man that we have created, but does not exist.
What this bodes for our nation and our future, I do not know. But it frightens me, because something is wrong.
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