Monthly Archives: August 2009

Banking Crisis In Perspective

In “Banking Crisis Dwarfs Depression”, John Lounsbury suggests: “The S&L crisis was about five times bigger than the banking crisis of the Great Depression. The current crisis is about 25 times larger than the Great Depression. Both are per capita, adjusted for inflation.”  The chart he created says it all.

And the banking crisis is not yet over. As Lounsbury notes, in both the S & L Crisis of the 1980s and the Depression of the 1930’s it took ten years to unwind the banking mess. Unfortunately we have only begun this time around.

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Economic Morality

What is the moral foundation of your economic beliefs? Bill Frezza asks some great questions we should all be exploring.

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Health Care – Exploring The Real Problems

In a comprehensive Atlantic article, “How American Health Care Killed My Father”,  businessman David Goldhill analyzes what is really wrong with heath care that none of the reformers are talking about. And he proposes  real solutions – exactly the opposite of what is being discussed in Congress.

The story starts with his father walking into the hospital after work with a mild case of pneumonia, and dying in the hospital five weeks later from infections contracted in the hospital itself. It concludes questioning the $636,687.75  that the hospital billed medicare and his mother for such bad quality service. Along the way, Goldhill explores how medical care has come to be paid for so completely differently than every other service our modern society provides. He makes a strong case that the morel hazard embedded in the third party payment system is the fundamental cause of the skyrocketing costs of questionable quality of the system.

He includes some shocking facts: roughly “one hundred thousand deaths [are caused or influenced by infections picked up in hospitals]: more than double the number of people killed in car crashes, five times the number killed in homicides, 20 times the total number of our armed forces killed in Iraq and Afghanistan.” And more shocking, most hospitals don’t have strict rules requiring basic sanitation. He points out that many doctors and hospitals reject the policy of implementing of a “simple checklist of ICU protocols governing physician hand-washing and other basic sterilization procedures”, which has been shown to  reduce  “hospital-infection rates by two-thirds within the first three months of its adoption.” Goldhill goes on to point out that “blood clots following surgery or illness, the leading cause of preventable hospital deaths in the U.S., may kill nearly 200,000 patients per year.” He asks the critical question: “How did Americans learn to accept hundreds of thousands of deaths from minor medical mistakes as an inevitability?”

Goldhill explains that providing more third party payment in the health care system is not the solution, but rather the fundamental cause of all the problems people decry. As a businessman he explores how “America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.”

He clarifies that: “I’m a Democrat, and have long been concerned about America’s lack of a health safety net. But based on my own work experience, I also believe that unless we fix the problems at the foundation of our health system—largely problems of incentives—our reforms won’t do much good, and may do harm. To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance; focus the government’s role exclusively on things that only government can do (protect the poor, cover us against true catastrophe, enforce safety standards, and ensure provider competition); overcome our addiction to Ponzi-scheme financing, hidden subsidies, manipulated prices, and undisclosed results; and rely more on ourselves, the consumers, as the ultimate guarantors of good service, reasonable prices, and sensible trade-offs between health-care spending and spending on all the other good things money can buy.”

Including both private systems and public systems like medicare, Goldhill suggests “insurance is probably the most complex, costly, and distortional method of financing any activity; that’s why it is otherwise used to fund only rare, unexpected, and large costs. Imagine sending your weekly grocery bill to an insurance clerk for review, and having the grocer reimbursed by the insurer to whom you’ve paid your share. An expensive and wasteful absurdity, no?”

He decries the “moral hazard” build into our system of third party payments for health care, “the tendency we all have to change our behavior, becoming spendthrifts and otherwise taking less care with our decisions, when someone else is covering the costs.”  “Moral hazard has fostered an accidental collusion between providers benefiting from higher costs and patients who don’t fully bear them”

He points out: “Certainly, Medicare wasn’t paying for the quality of service during my dad’s hospital stay. And it wasn’t really paying for the quality of his care, either; indeed, because my dad got sepsis in the hospital, and had to spend weeks there before his death, the hospital was able to charge a lot more for his care than if it had successfully treated his pneumonia and sent him home in days.”

The quibbling in Congress is about whether to add somewhere between $900 billion and $1.5 trillion we don’t have to spending on health care, while “already, the federal government spends eight times as much on health care as it does on education, 12 times what it spends on food aid to children and families, 30 times what it spends on law enforcement, 78 times what it spends on land management and conservation, 87 times the spending on water supply, and 830 times the spending on energy conservation.”

Goldhill suggests that all the current proposals for  “comprehensive reform will not address the underlying issues, any more than previous efforts did. Instead it will put yet more patches on the walls of an edifice that is fundamentally unsound—and then build that edifice higher.” And he suggests that the “most important single step we can take toward truly reforming our system is to move away from comprehensive health insurance as the single model for financing care. And a guiding principle of any reform should be to put the consumer, not the insurer or the government, at the center of the system.”

Goldman exposes the hugely expensive scheme that makes health care seem and feel low cost or even free to consumers while inefficiently stealing vast amounts that would otherwise go to their personal income and transferring it into the medical system. He calculates that if health care costs were restrained to raise only at the rate of general inflation, employees of a 22 year old person entering the work force would total  $1.77 million throughout his career and over $4 million if health care continues to rise the way it has over the last decade. ” He describes the very real quality and cost reduction benefits of shifting the entire medical payment system, putting the cost and responsibility for health care directly on the consumers by putting those dollars back in salaries and wages while making individuals responsible for wise purchasing in the routine aspects of their health care, with insurance reserved for catastrophic costs.

The general direction that Goldhill prescribes matches the recommendations from John Mackey, many of which he has tested in his own business, Whole Foods Markets, and which is described in his recent Wall Street Journal op-ed.

As Goldhill points out, unfortunately “these ideas stand well outside the emerging political consensus about reform.”

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Exploring The Polarized Health Care Debate

In “When Planners Decide Life”, Michael Gerson calmly outlines the real issues that politicians have avoided discussing in the health care debate. These issues need to be resolved if  health care reform is hoped to be anything other than divisive and polarizing.

The inevitability of health care rationing in any plan that makes free or extremely low cost health insurance coverage universally available has to be addressed honestly. So far, while vilifying insurance companies, proponents of the administration’s favored solutions are pretending that government bureaucrats rooting out waste will create vast new resources enabling essentially unlimited coverage for all.

Virtually everyone  agrees escalating health care costs  need to be dealt with and we do need to address the challenge of access to care for the uninsured. But there is good reason most people are skeptical of government taking over a health care system that is generally providing good service for the majority of Americans.

Supposition of  well planned super efficient government management of vast swaths of the economy is simply not credible to anyone who has ever watched the costs escalate on a highway project like Boston’s Big Dig or who watched the government make two major revisions in a matter of weeks to the  recent “Cash for Clunkers” fiasco, throwing three times as much money as planned into the program at the same time  they scaled back the time schedule for eligibility by more than half. Government economic planning just doesn’t have a credible track record.

Giving away vast amounts of free money, whether for cars or for health care is going to balloon out of control. Anyone suggesting such generous largess can be done without rationing, especially with government deficits already in the trillions, is either very cynical or very naive.

Failing to address the inevitability of rationing honestly, especially as regards to emotional end of life issues, just builds on the natural and rational skepticism of those opposed to government management of the economy.

Polarizing the political debate makes workable solutions to the fundamental challenges of health care harder to reach, eroding  hope for respectful and productive policy dialog.

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Mark to Fantasy Accounting And Other Crimes

William Black, a top regulator unwinding the Savings and Loan Crisis of the 1980’s offers a surprisingly blunt assessment of where things stand in our current financial crisis in a presentation at UCLA’s Hammer Forum. The author of “The Best Way to Rob a Bank Is to Own One” does not parse words, describing Timothy Geithner and Alan Greenspan as serial incompetent failures, declaring all the major banks as insolvent, condemning as essentially fraudulent the recent changes in accounting rules for banks that eliminated mark to market accounting and describing both the Bush and Obama administrations irresponsible in meeting their regulatory obligations. He describes the collusion of big banks, captive regulators, credit rating agencies nothing short of criminal.

This isn’t some radical right wing nut out to attack the Obama agenda. He is clearly  in favor of more government controls of the financial system and he has the credibility of having been the top regulator cleaning up the last big financial mess in the country who put a lot of the responsible people in jail.

Its a long video, but well worth watching.

Its interesting to note that in her latest report on the “Continuing Risk of Troubles Assets”, Eizabeth Warren, Chair of the Congressional Oversight Panel, which Congress established  to “review the current state of financial markets and the regulatory system” describes recent changes in Mark to Market Accounting in essentially the same way, though being actively empolyed by the government, her language is a bit more constrained.

In his latest report, “The FDIC IS Broke – Now What?”, Chris Martenson describes the impacts of “Mark to Fantasy” accounting and other continuing efforts to paper over the severity of the financial mess still facing the country with senseless happy talk.

It is hard to be hopeful about “green shoots” if one actually pays attention to the numbers. It’s alarming that President Obama has chosen to surround himself with people like Timothy Geithner, Lawrence Summers and Sheila Bair.

One wonders how many indictments there would be this time around if William Black were cleaning up the mess. And one has to wonder what federal response to the financial crisis would have looked like if Elizabeth Warren were Chair of the Federal Reserve or Treasury Secretary.

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Social Security Reality Getting Coverage

Allan Sloan’s article in Fortune “The Next Great Bailout” is as clear and blunt as one can get about what’s going on with social security. He quote’s David Walker, ex-Comptroller General of the United States saying the social security “trust fund has no financial significance. If you did [bookkeeping like] that in the private sector, you’d go to jail”.

Bottom line – the trust fund is just an IOU from one branch of the government to another. For decades the government has spent more than it takes in with other taxes by “borrowing” from the trust fund. That’s over. Sloan predicts Social Security will go cash flow negative this year, meaning that on top of all the other debt we have piled on our kids, now taxes and deficits will rise to cover the shortfall in social security that we have been pretending was safely locked in a “trust fund” but which is really just a pile of worthless pretend IOUs that the federal government wrote to itself. Nice accounting trick. Unfortunately, now we have to start paying for it.

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Real Health Care Reform

John Mackey nails it in “The Whole Foods Alternative to ObamaCare”

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