Gretchen Morgenson on the way things don't appear to change in the public-private mortgage industry. Privatize profit, while socializing costs.
That the commission recommends a taxpayer-backed solution isn't surprising, given its makeup. Six of its 22 members and consultants either hail from Fannie or Freddie or work at institutions that received major financing from the companies before they collapsed.
Asked about that composition, a commission spokeswoman said that the diverse group of experts "were not selected solely on the basis of past affiliations."
The larger issue is: what do we mean by insurance? The classical economic definition is succinct: shared risk. For-profit insurers, however, don't operate that way. They always seek to segment the market, charging the maximum to each discrete segment. Mo money dat way. What Morgenson neglects to mention is that the gold rush into housing wasn't led by Fannie and Freddie, but the private insurers. Only when they sensed that they were losing market share, did the pair start down the lemmings' road to disaster with the private insurers. So, she does ask:
Neither Fannie nor Freddie has been adept at setting an appropriate price for their guarantees -- that's why they're choking on more than $100 billion in losses. Why would a new public guarantor do the job any better?
Which begs the real question: what evidence is there that the private insurers were any better at it? They weren't.
Next, we have the Cyprus mess. Regular reader knows of my fascination with Bermuda, our local version of tax evasion nation. Andrew Higgins lays out the Russian connection. What should be obvious by now, is that an economy based on financial fiddling is fragile by definition.
Andreas Marangos, a Porsche-driving lawyer here, had just woken up when he heard the news that threatened to destroy his and Cyprus's most lucrative business: setting up shell companies and providing financial services for wealthy Russians.
This reminds me of the scene from one of the Bourne films where the Russian Secret Police agent jumps into his BMW, chasing Bourne. Don't trust those Russians. And don't base your economy on stealing from other, productive, countries.
"This is all a dirty game to create a banking collapse," fumed Yuri Pianykh of the Russian business association -- aimed, he contends, at luring Russian money out of Cyprus to other European countries. He insisted the country had better safeguards to combat money laundering than many other European states and had been the victim of a German smear campaign.
Ah, Russia fighting Germany. It was, after all, the Eastern Front (read: Russia) that doomed the Third Reich. I suspect the fear and distrust hasn't abated much. The Cuban missile crisis was motivated, little known to Americans until well after the fact, by Russian response to American missiles aimed at Russia in Turkey; just about as close as Cuba is to the US mainland.
David Officer, a sociologist at the University of Nicosia, said Cyprus had indeed enacted tough legislation to fight dirty money, "but the problem is implementation." He said that "a culture of secrecy" allows billions of dollars from abroad to slosh through the financial services and real estate industries with little supervision.
Sound kind of familiar? Yet another bevy of toothless laws and regulations.
Next up: Roger Lowenstein tells the tale of FDIC. As with Fannie and Freddie discussed above, the issue boils down to defining what we mean by "insurance". If we really mean shared risk, then the private, for-profit, corporation ought not to be the vehicle. Private insurers only make real money when they concoct contracts which never pay out. Or, at least rarely and for substantially less than actual loss. In the case of financial services, encompassing more than just store front banks, we need to consider what function they should play in the economy. Fundamentally, their only distinct value is marrying savers with borrowers. The cost of doing this is virtually zero, and so profit in financial services by this definition and with a truly free market, will be just a notch above nada.
Yet, Western (read: "post industrial") economies forged toward financial services rather than production over the post WWII period. Extracting extraordinary profit from arbitrating between savers and borrowers depends on trickery of law and lax enforcement of what laws and regulations do exist. The rat in the woodpile is that economies based on non-productive uses of both labour and capital have to enforce draconian monetary policies on their entire economies (read: all those other folks who don't work in financial services) in order to maintain "the value of the currency". This is, stated or overt, the reason such post-industrial economic decision makers get so batshit over the least whiff of inflation.
In a producing, domestic economy, inflation (modulo true hyper-inflation, which isn't in the US's cards) is a spur to production, since hoarding of currency is discouraged. Consumer demand stays robust as the stock of money is spent on *widgets which are produced in situ*. Such was the state of the USofA from the end of WWII into the early 1970s. The proximate cause of distress was the Arab/OPEC oil embargo, but the seeds of our current state of affairs had already been planted. Now that we have a much diminished producing economy, and more like Bermuda and Cyprus, we depend on imports to satisfy consumer demand for widgets. In such a situation, the economy's commodity is its currency. Since currency is the blood of the commonweal's body, all parts of the body are impacted when the bloodflow is managed to support just the left foot. This also means that both fiscal and monetary policy levers are much less powerful; an economy, in the very short term, can rise out of recession only be re-employing those made redundant by the recession. In the case of the USofA, that's housing and finance, the quicksands that sucked us down in the first place. It took decades to dismantle production across the economy, and that course won't be reversed in two presidential terms (even if Obambi understood the real issue, and sought to fix it).
Forman's insight was that banks were vulnerable to chain-reaction panics. As he put it -- in a line unearthed by the Harvard Business School historian David Moss -- "banks constitute a system, being peculiarly sensitive to one another's operations, and not a mere aggregate of free agents."
He opens his article thus:
FOR all the criticism of bailouts since the financial crisis struck, virtually no one has suggested that depositors in banks be made to suffer along with their investors, employees and customers. Until this week, when the euro zone proposed that, in return for a bailout of the failing banking system in Cyprus, depositors pay a "tax" of 6.75 percent of their deposits -- 9.9 percent for deposits above 100,000 euros.
He fails to mention that, by all we can see, the reason for this is the EU's foment to punish Russia. See above. But the demand from the EU raises, once again, the definition of both insurance and a United Europe. Just as the Red states suck off the teats of the Blue states, southern, dark, swarthy Europeans will do the same to the Aryan nations. If there is to be a United Europe. Interesting factoid: 50% of Germany's GDP is from exports. Germany is taking a meat cleaver to its nose; and doesn't even have a clue it's doing so.
Oddly, what I didn't recall, FDR was opposed to insuring deposits:
When bank failures reached epidemic proportions in the Great Depression, the idea was revived. Again, the industry opposed it -- as did Franklin D. Roosevelt, who said insurance "would lead to laxity in bank management and carelessness on the part of both banker and depositor." Insurance was to be financed by premiums from banks. Still, because it was guaranteed by the government, Roosevelt feared that it could bankrupt the Treasury.
And, as always, the issue comes down to equity and responsibility. For industries which aren't analogous to blood, failure by stupidity harms only the shareholders and employees. If the economy consists of millions of ten or twenty person firms (no corporations), along the presumed ideal of the real Adam Smith, then it's a bubbling pot of stew, which re-blends itself as needed. But that's not the real world, and wasn't in 1776 when Smith's book was published.
To critics, the S.& L. fiasco proved that insurance was a flawed concept. The problem wasn't insurance per se, but that premiums weren't high enough -- nor were they adjusted according to the risk presented by individual banks. (By the same principle, any rational auto insurer will charge a higher premium for an 18-year-old with a D.U.I.)
He repeats, almost verbatim, what Morgenson had to say about premium setting by Fannie, Freddie, and their possible replacement. Who copied from whom? Just kidding. It's an obvious conclusion. Which brings the nasty bit:
After recovery from the S.& L. crisis, Congress, lulled by an improving climate, succumbed to bankers who called the F.D.I.C. overfinanced. Premiums were cut to zero for banks judged to be well capitalized.
I bet you didn't know that? Nor do I recall it. Wouldn't it be useful to know which, if any, of the bailed out banksters were on the zero premium plan? Lowenstein doesn't say.
Next up: Robert Frank takes on soda. Bloomberg's attempt to end the 32 ounce variety. While he doesn't mention it, there was recent reporting from the medical community that diabetes isn't a result of weight, per se, but rather sugar itself. Juvenile and adolescent sugar consumption is the trigger, not adult weight. Bloomberg is on solid scientific grounds, even if he didn't (and from the reporting I've seen, he didn't) know the exact connection at the time.
Frank makes the analogy between sugary drinks and tobacco. Who should pay the external costs of either? And given that such costs exist, and with sugar apparently the higher of the two, should we not, as a society and economy discourage behaviour which damages most of us indirectly? Do we really want a pure Darwinian country? Only those with stronger endocrine systems, able to withstand the onslaught of juvenile sucrose, be allowed to live? Makes for more palatable kiddies; rather Swiftian, what?
Imagine a society like the United States before 1964, where unregulated individual choices produced high percentages of smokers in the population -- more than 50 percent among adult men. Not even the staunchest libertarians should deny that their children would be more likely to become smokers in such an environment.
Smokers harm not only themselves and those who inhale secondhand smoke but also those who simply want their children to grow up to be nonsmokers. People can urge their children to ignore peer influences, of course, but that's often a losing battle.
...
Just as few smokers are glad that they smoke, few people go to their graves wishing that they and their loved ones had drunk more sugary soft drinks. Evidence suggests that the current high volume of soft-drink consumption has generated enormous social costs. So to those who have lobbied successfully against a soda tax, I pose a simple question: How do the benefits of your right to drink tax-free sodas outweigh the substantial costs of defending it?
Next up: cancer. C-SPAN2/BookTV has been running a talk by Ben Goldacre, where he blurbs his new book. I've not been able to see it straight through, but he's got it in for Big Pharma.
Along similar lines Ezekiel Emanuel takes on Pharma in the context of oncology. If you've been following the healthcare sector of the stock market over the last few years, you've seen the transformation from developing widely useful compounds to those which aid the few. The proximate cause, as I see it, was the Orphan Drug Act of 1983 (and the later, 2002, Rare Diseases Act), which allows drug companies to spend all they want and charge what they want for drugs aimed at small populations. And they've done so with gusto. Not only that, their "efforts" (if one wishes to be kind) tilt toward Medicare folks. You know, that terrible waste of money. Oh wait!! It's Pharma's bread and butter.
This year, more than 1.6 million Americans -- 0.5 percent of the population -- will receive a diagnosis of cancer. Their treatment will consume at least 5 percent of the country's health care spending, at a cost that is growing faster than all other areas of medicine.
And it ain't cheap:
Of the 13 anticancer drugs the Food and Drug Administration approved in 2012, only one may extend life by more than a median of six months. Two extended life for only four to six weeks. All cost more than $5,900 per month of treatment.
What's even more stupid, is that robots were sold as the way to be more efficient and more effective.
For instance, while more than 800,000 robotic surgeries, mostly for cancer, have been performed in the last two years, there is no reliable evidence that the robots either improve survival or reduce side effects -- despite the fact that they cost more than traditional surgery. Once interventions are paid for, the incentive for research disappears.
Post-approval research was a major part of the segments of Goldacre's talk that I've seen. Simply put: clinical trials involve, with rare exceptions, at most a few hundred individuals. From a statistical point of view, if what you're studying is well enough understood with regard to how its distribution looks, a few hundred is a lot. But that's true only if the real difference between the New Way is sufficiently better than the Old Way. When the difference is small, then it's harder to prove. And if the difference is small, what's the point of wasting society's resources?
Today, 60 percent of cancer diagnoses are made in patients who are eligible for medicare. By 2030, that number will rise to over 70 percent.
To put it bluntly: what's the point of spending $1 billion (rough estimate from Pharma) to create a drug which gives an 85 year old cancer patient an extra month of living in a hospice? Does that make much sense? Since Nixon (remember him) initiated the War on Cancer, the standard response is along the lines of, "we're making progress, albeit slowly with each new drug, to finding The Cure for cancer". Proponents of the status quo are making the implicit promise that the billions of dollars spent annually on development and treatments, which provide minuscule benefit to patients (but enormous profits to Pharma), are the beneficial side effects of this quest. Never mind that we've only discovered that there's really no Cancer, in a monolithic sense of a single disease like tuberculosis. And there's no chance that there'll be a Cure.
Shared risk? A few patients get a few more weeks of sentience, while widely deadly or debilitating (or both) diseases get little to no research. We're all paying for Granny's extra week. If it's my Granny, or if I'm Granny, I probably think that's a good deal. But it's not.
Finally, Maggie Koerth-Baker takes on we're living longer meme. Alas, this is in the Magazine, and the Times, in its rapacious ways, won't link to the entire piece, just an abstract. Go to the library during the week. In sum: humans aren't really living all that much longer, once adulthood is passed. Currently, expectancy at 25 in the US is 79, and has been for a long time. However, where we were 9th in the world in 1950, we're now 51st. For all that we spend on orphan drugs and elective surgery, public health skids to the gutter.
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