Some counterparties are more equal than others

President Obama gave GM and Chrysler another monetary lifeline today coupled with another ultimatum about coming up with a workable plan for the future. Who knows, maybe this time really will be the last time. The NY Times quoted his announcement (emphasis added):

“And so today, I am announcing that my administration will offer G.M. and Chrysler a limited period of time to work with creditors, unions and other stakeholders to fundamentally restructure in a way that would justify an investment of additional tax dollars...”

That is to say, GM will no longer be able to meet all of its current obligations to workers and to creditors. It is clear these parties will be expected to accept less than they are owed. This is the dreaded "haircut," that one often hears about in the press.

So, to be clear, AIG has a bailout history that looks like a version of the movie Groundhog Day, except that Bill Murray gets a new $1 billion dollar check every time he wakes up. Even after this long and winding and very expensive road, the folks sitting on the other side of the table from AIG are certainly getting different treatment than those across from GM.

Counterparties to AIG contracts, which include some of the biggest financial institutions in the world, get paid in full using taxpayer money. Folks that lent money to GM, or sold them parts on credit, no such luck. Get ready for the haircut.

AIG employees, some of whom helped bring the company down, get bonuses to which they were contractually entitled. Workers on GM assembly lines - haircut!

I'm not a GM worker, but even I can't help wondering where Larry Summers is. When it was AIG bonuses it was, we are a nation of laws and contracts must be honored, but today, nothing.

In both cases, I don't think we are talking about a little off the sides. These two groups may not even be recognizable after Uncle Sam the barber gets done with them.

What problem is the Geithner plan addressing?

It seems clear to me that the goal of the evolving financial rescue plan is to increase lending in order to facilitate economic recovery. From the details of the plan that Secretary Geithner unveiled last week it is also clear that he believes the way to do this is by getting those toxic (now legacy) assets off of the balance sheets of financial institutions.

The obvious question then, is will this work. It depends. The answer though, doesn't depend on whether or not Geithner has proposed the correct solution, but whether or not he has correctly diagnosed the problem.

Implicit in Geithner's plan (and explicit in the document describing the plan) is the fact that he believes what we face is a liquidity problem. This means that the assets that are being held by financial institutions are actually worth more than people are currently willing to pay for them. So the asset they are holding has value, but it is frozen, stuck in its current form. Being unable to turn these assets into cash cripples lending.

There could be a lot of reasons for this. Investors that would normally be willing to buy these assets may be reluctant to buy fearing more bad economic news. They may be reluctant to buy due to the complexity of these assets and the difficulty in accurately valuing them. Or they may be able to value them and are willing to buy, but they are unable to get financing to actually make the purchase.

The public/private partnerships in the Geithner plan are set up explicitly to address these problems. With the partnerships, assets get purchased, balance sheets improve, and institutions are willing and able to increase their lending.

There is another possibility, however. It is possible that the price people are currently willing to pay for these assets really is what they are worth. If this is the case, we have a problem of capitalization, not liquidity.

If banks and other institutions made loans and bought securities that are now worth a lot less than they paid for them, then they have lost money. If the losses are big enough, these institutions could be bankrupt.

The Geithner plan does not address this possibility. The question of whether or not banks had adequate capital was supposed to be answered by the 'stress tests' - remember those? No one hears to much about them now, certainly not in the context of the asset purchase programs.

Not only does the Geithner plan not address the capitalization question, but if the problem is in fact one of capital and not liquidity, the Geithner plan would be among the worst possible solutions from the taxpayer's perspective.

Treasury will use taxpayer money from the TARP and taxpayer guaranteed loans to entice private buyers to bid up the purchase price for these assets. If these assets really do turn out to be worthless, or close to worthless, taxpayers will be left holding the bag. A very big empty bag which we will have to fill with money.

It is true that in these cases the private entities will lose all of their money, but this represents a very small percentage of the purchase price. The vast majority of the funding is a government guaranteed loan that we will have to pay.

Given these two scenarios, I hope you can see just how important it is that our government has correctly identified the problem with the banks. If they have, then the Geithner plan may well work. If they have not, things are going to get much worse before they get any better.
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Click here for the RWC Blog primer on the public private partnerships in the Geithner plan.

Congressional Democrats Go (G. W.) Bush League

Over at One Wisconsin Now, Scott has a post up excoriating Rep. Paul Ryan. The proximate reason for Ryan's thrashing is the Republican response to the Obama budget. A response which didn't actually contain any numbers, as Scott points out.

Congressional Democrats have come out with a budget response of their own and, curiously, it also is missing some numbers. $250 billion to be precise. Here is Reuter's on the missing digits:

Obama has requested in his budget $250 billion to add to the $700 billion widely-criticized financial bailout fund. But the chairmen of both the House of Representatives and Senate Budget Committees refused to include it in their budget plans. [snip]

Both congressional budget committees quickly jettisoned it, giving them an easy way to cut massive red ink from their budget plans for the few years.

The Bush administration preferred to treat the cost for the war in Iraq in much the same way, outside of the budget.

Spending which is reasonably predictable and can be estimated, even roughly, should not be omitted from the budget.

Maybe the Democrats know something we don't. Namely, that the worst is behind us and no more bailouts will be necessary; Or perhaps they have decided to take a stand and flatly refuse the next time some failed corporation comes to the Hill looking for a handout.

I doubt either of these are the case and this missing $250 billion will come up again before too long. It is more likely that Reuter's has it right that this seemed like an easy way for Democrats to massage the budget numbers and pat themselves on the back for fiscal responsibility.

This omission is really too bad. Congressional Democrats have followed Obama in so many other ways, including many on the budget, drawing the line at this seems a bit absurd.

Congressional Democrats would do well to remember that if you follow someone over a cliff, you can't stop ten feet before you hit the ground. You follow them the all the way down.

Going to Plan G: The Geithner Plan

Treasury Secretary Geithner has now released the much awaited details of his plan to alleviate the banking crisis and return lending to normal levels in the hopes of fostering an economic recovery. As we know, the reactions of the market were generally positive. The reaction of Paul Krugman, not so much. Oh well, you can't please everybody.

I have been reading and thinking about this plan for much of the week and there is a lot to digest, so my blogging approach is going to be more shotgun blast rather than laser beam.

Geithner believes that at the heart of the credit freeze is the fact that banks have assets on their books that they can't sell, at least not at prices they are willing to accept. These assets are of two types: actual loans and securities which are backed by loans. Getting these assets off the books should increase lending, at least that's what Geithner thinks. The method that he proposes to get these assets off the books is the Public Private Investment Program (PPIP).

There are two types of PPIP, one type will buy pools of loans, the other will buy mortgage backed securities. These are the 'toxic assets' we have been hearing so much about. In an attempt to class it up a little, the word toxic has been replaced by legacy, which in this case should be means, "we're not sure what they're worth." The batch of loans or securities that gets purchased from a bank is the "investment" part of the PPIP. So how does the PPIP pay for the investment?

Both types of PPIP involve money raised by private companies. This private capital is then matched by the Treasury, dollar for dollar, using money from the TARP. These two piles of money together form the equity portion of the investment. But this makes up a very small percentage of the purchase price for the investment.

The bulk of the money for the investment comes in the form of a loan guaranteed by the government (that is, the taxpayers) to the private entity of the PPIP. When you hear coverage of the plan that is talking about a subsidy or wealth transfer or some other even harsher term, like boondoggle, this is what they are talking about. When the PPIP's purchase actual mortgage loans from banks, the government guarantee will come from the FDIC. When they purchase securities, the guarantee will come from the Fed.

So the private money, the TARP money, and the borrowed money, all added together, are what pay for the bundle of loans or securities that the PPIP buys from the bank.

The details of the plan indicate that Treasury hopes to purchase anywhere from $500 billion to $1 trillion of these legacy assets. But the money that congress explicitly authorized for the financial rescue, you know, the TARP money, was only $700 billion, and much of that has already been spent, so how do we get to $1 trillion. Here is the NY Times from March 20th:

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

This description omits the crucial detail that the leverage doesn't just mean private money, it also means those government guarantees which make up the bulk of the purchase funds. So a small slice of the money that was actually authorized for a financial rescue is being used to foist an obligation onto the taxpayer that is somewhere just south of $1 trillion. It's the paradox of leverage. While we are all trying to de-leverage our private lives, the Treasury is busy ramping up the leverage in our public ones. This begs several questions:

1. Did the original TARP legislation permit the leveraging of those funds into a much bigger obligation for taxpayers?

2. If it didn't explicitly allow the use of funds in this manner, is the Geithner plan illegal, or does it at least violate the spirit of the legislation?

3. Perhaps, since the loan guarantees will come from the Fed (or FDIC), it doesn't matter whether the original TARP legislation permitted the use of funds in this manner or not.

4. If the Fed is indeed allowed to take on huge burdens in the name of the taxpayers without an explicit authorization from congress, does that make it a thoroughly undemocratic institution?

5. Does the fact that I posed question #4 indicate that there is a Ron Paul rally in my future?

I'll leave it at that for now. This quick and dirty version of plan G was meant only as an introduction, a way to get my mind around just exactly what it is our government is doing in our name. More to come in the days ahead since there are many other angles to explore.
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Check out the Treasury's fact sheet on the plan here.
For some reactions to the plan click here, here, here, or here.

No seriously, go read the Treasury's fact sheet. It's short. If you can't be bothered, please go back to watching un-reality TV and absolutely do not ever vote again. Ever!

AIG, Goldman, Spitzer, and Me

Over the weekend I saw a google news headline that caught my attention since it was trumpeting news of a Goldman Sachs claim that they wouldn't have been negatively impacted if AIG had been allowed to fail.

Here is how the New York Times reported it on March 20th:

Hoping to reduce a swirl of speculation over its role in the bailout of the American International Group, Goldman Sachs reiterated Friday that its direct losses would have been minimal if A.I.G. had failed.

Funny, here was one of those much talked about AIG counterparties indicating that they wouldn't have collapsed along with a dissolving AIG. I thought the danger of just such an occurrence was the entire basis for the bailout from the very beginning.

In fact, I seem to recall that last fall we were forced to accept the bailout of financial firms like AIG or face the prospect of total global financial collapse due to a complex web of interrelationships. I am pretty sure that the threat also indicated an AIG collapse would cause clocks to run backwards, epidemic male-pattern baldness, previously obedient canines to refuse to roll over, and that gangs of wayward youth would overrun our streets, jaywalking and stealing candy from babies at will.

Sure enough, here is then-Secretary Paulson discussing the bailout last September:

“It would have been, in my judgment, unthinkable for AIG to declare bankruptcy,” he said, outlining “catastrophic” impacts on financial markets, money market funds and the savings of individuals and families.

So that was Saturday. I then spent two days snatching spare moments to think about how I would blog that the bailout was unnecessary and sold to the American people on false information (sound familiar?). It was going to be this great Gotcha! moment. And then today I read Eliot Spitzer in Slate:

What risk—systemic or otherwise—was being covered? If Goldman wasn't going to suffer severe losses, why are taxpayers paying them off at 100 cents on the dollar? As I wrote earlier in the week, the real AIG scandal is that the company's trading partners are getting fully paid rather than taking a haircut.

Scooped by Slate! No doubt thousands of other blogs probably covered this same topic, but I didn't read them, so I still felt like I was adding to the discussion, not just the noise. But once I read Spitzer's piece I thought well, what do I have to add.

Getting scooped is one thing, but getting scooped by the former governor of New York who resigned after it was revealed he engaged the services of call girls*, well, that's hard to top. Unless Bill Clinton starts a blog.

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*The news coverage on Spitzer often seemed to include the fact that the governor wasn't just trolling darkened alleys for your average street-walker. But let's face it, a call girl is just a high priced hooker. Econ majors that are too clever for their own good like to tell people that prostitution is good where high prices are used to signal quality. When you get right down to it, though, you can jack up the sticker price and call it a Lexus, but underneath it's really just a Toyota.

First Branch or Worst Branch?

If you haven't seen it already, Megan McArdle at The Atlantic has a post up entitled Maxine Waters brings the crazy.

It is a clip of Congresswoman Waters' questioning of Treasury Secretary Geithner, which is rambling and, at times, bewildering.

Perhaps Ms. Waters is a nice lady. Perhaps she brings government money to her district like no one else and the people there are greatly appreciative of her efforts. On the other hand, the rest of the country has to endure her service in the congress.

I submit that the United States would, on the whole, be better off if we sent a check to her district in exchange for the promise to keep her home and off Capitol Hill. They could keep electing her and as long as they didn't let her leave the district, we would keep sending the checks.

McArdle says, "she seems to get all of her questions off of the fringier conspiracy sites." I don't know if this is true, but I am sure we would be better off if she would just yield her time and start a blog to promulgate her theories about the "linkages" and the "connections". Who knows, she might be happier too.

Spending Will Continue Until Morale Approves!

..........and maybe even after that time.

Blinded with AIG-rage it seems much of America missed the Congressional Budget Office's new analysis of the economic outlook including consideration of President Obama's 'New Era' budget outline.

From the CBO Director's blog:

Largely as a result of the enactment of recent legislation and the continuing turmoil in financial markets, CBO’s baseline projections of the deficit have risen by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter...CBO now estimates that the deficit will total almost $1.7 trillion (12 percent of GDP) this year and $1.1 trillion (8 percent of GDP) next year—the largest deficits as a share of GDP since 1945.

Then a little bit of hopeful news. The CBO reports that assuming current laws and policies remain in place:

Deficits would shrink to about 2 percent of GDP by 2012 and remain in that vicinity through 2019.

And:

Outlays are projected to decline from 27.4 percent of GDP in 2009 to about 22 percent in 2012.

Of course, Obama was not elected to keep current laws and policies in place. His mandate was for change. The CBO analysis of the Obama budget proposal is an avalanche of negative economic news:

As estimated by CBO and the Joint Committee on Taxation, the President’s proposals would add $4.8 trillion to the baseline deficits over the 2010–2019 period. CBO projects that if those proposals were enacted, the deficit would total $1.8 trillion (13 percent of GDP) in 2009 and $1.4 trillion (10 percent of GDP) in 2010.

I would love to give Obama the benefit of the doubt, but the problem is that I doubt the benefits of his budget plan.

These numbers are not from Rush Limbaugh or some other right wing bogey man. These are from the Congressional Budget Office, and under every measure cited, we appear to be worse off under the Obama budget.

Deficits under current law, about 2% of GDP for the years 2012-2019. Under Obama, 4-6%.

Cumulative deficit for 2010-2019 under current law, $4.4 trillion. Under Obama, $9.3 trillion.

Debt held by the public in 2019 under current law, 56% of GDP. Under Obama, 82%.

Note carefully! These are figures for 2010 and beyond. This is not the short-term deficit spending that may be necessary to address the current crisis. These figures are the result of new, higher levels of permanent government spending.

The Obama budget promised to signal a new era and on that note it certainly has delivered. The only responsible thing to do, however, is oppose it.

The Bush-Obama Plan

During the election, the Obama campaign made a strenuous effort to connect John McCain and President George W. Bush in the minds of voters. This was smart politics - Bush was, and remains, tremendously unpopular.

I wouldn't be surprised if a large number of voters in the last election voted for Barack Obama because they believed that McCain represented a continuation of Bush policies and Obama represented a break with those policies.

Well, if these same people examine the Obama plan to handle the so-called toxic assets on bank balance sheets, they have to be asking themselves whether they didn't accidentally confuse exactly which candidate it was that represented a continuation of Bush policies.

When it comes to adressing the banking cirisis the Obama approach is identical to the Bush approach. Here is the New York times from March 20th on the plan:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

But the details have been treacherously difficult, politically and financially, and some of the big decisions are the same as those that bedeviled the Treasury Department under President George W. Bush last year.

Sound familiar? This was the approach taken last fall by then-Secretary Paulson. I guess since Geithner was closely involved in the plan from his position at the New York Fed, no one should really be surprised at the nearly seamless transition. Someone might want to let Obama know that the plan was too difficult for Bush and Paulson to implement and nothing came of it other than the catatonic nature of the economy over the last six months.

I have yet to see anything from Obama and Geithner that would lead me to believe that they would be any better at making this plan work.

It is quite possible that Obama defense policies, carried out by Bush-appointed Robert Gates, differ more from the previous administration than does the Obama response to the financial crisis, which is crafted and implemented entirely by Obama appointees.

Liberal advocay group Move On has a website called the Bush-McCain challenge which was intended to demonstrate and reinforce the similarities of those two men, in order to prevent McCain from being elected.

If they haven't already, some smart Republican activist should start their own version of this game, the BushBama Banking Bailout.

Get Your Sticky Wages Off My Health Care.

When you have six kids encountering something sticky is a daily occurrence. But in economics the phenomenon of sticky wages (and prices) has very different implications.

Basically, when things are sticky, they can't adjust as quickly as the surrounding conditions. This results in periods of time when the real world doesn't quite match the charts that the graduate students spent all that time on. I would call this a time when things are out of whack. Professional economists call it a disequilibrium.

The confluence of sticky wages, health care costs, and the competitiveness (or lack thereof) of the US auto industry reared its head recently on the blog of Harvard professor Greg Mankiw.

Mankiw quotes representatives (and personal friends) from two different agencies from the federal alphabet soup as follows (the red text is Mankiw's):

NEC: Our ability to produce competitively in the United States will be enhanced if we contain healthcare costs

CBO: when firms provide health insurance, wages and other forms of compensation are lower (by a corresponding amount) than they otherwise would be. As a result, the costs of providing health insurance to their workers are not a competitive disadvantage for U.S.-based firms.

This debate is more than academic, especially in Michigan. Do health care costs put GM at a disadvantage? Mankiw answers no:

Ultimately, what matters to firms is the compensation they pay workers. The composition of compensation between cash wages and fringe benefits like healthcare does not matter for the firms' costs of production. In short run when cash wages are sticky, the cost of healthcare may affect competitiveness: Lower costs of fringe benefits would reduce compensation and thus reduce firms' cost of production. But in the long run, compensation is set by supply and demand in labor markets. If more compensation is paid in the form of fringe benefits like healthcare, less is paid in the form of cash. And if less is paid in fringes, more is paid in wages.

OK, I'll agree that total compensation is the critical factor, not the cost of a single component of compensation.

But Mankiw specifically mentions workers. Does the calculus change when thinking about retirees? I suppose pensions can be adjusted through negotiation, no different than cash wages. But what about the fact that these people are no longer producing anything.

As Americans live longer, GM pensioners live longer, so every Chevy now has to cover the cost of the men and women that are currently producing the cars, and the health care and pensions of the men and women that produced Chevy's that have long since found their way to the scrap heap.

What about the fact that, during their working years, the productivity of current retirees was limited to the technology that was then available; but the health care they consume today is limited by today's standards. That is to say they worked at 1965 productivity levels, but GM has to pay for health care at 2005 levels. (This is not to say GM doesn't owe this to the workers, I am just wondering if this is more of a problem than Mankiw's brief analysis allows.)

Admittedly, both of these items have to do with legacy costs, but there may be some problems that are driven by the here and now as well.

Mankiw notes that in the long run cash and fringes will vary in order to stabilize total compensation. But certainly there must be some bottom limit beyond which cash wages cannot fall or people won't work - even though the cost of the fringe benefits to the company represent a level of compensation at which people would otherwise choose to work. (I mean would people have to be hospitalized so that they could eat a meal which would then be covered by their employer provided health insurance?)

Finally, what if a firm faces a rapid and steep increase in the cost of compensation coupled with a rapid and steep decline in demand for the products it makes? This seems to be what we have now. In this case, maybe there is no long run during which wages and fringe benefits can recalibrate to keep the firm competitive. Basically a firm could go under for want of a long run, or for want of a loan to make it through the short run. (Anyone still think functioning credit markets aren't important?)

Anyway, no doubt someone of Mankiw's caliber could put all my questions to rest with a few professorial pronouncements. (If only it were that easy!).

His post, for me at least, raised more questions than it answered. As far as I can tell he doesn't have an email or comments on his blog, so I am posting this reaction here.

I suppose I could send him a letter, care of the ivory tower of course! (Now why did I do that, I just marred an otherwise thoughtful post with a silly populist jab. Shame on me. )

Bonus Coverage

Andrew Ross Sorkin of the NY Times recently made an attempt to follow The Other McCain's Rule 4, but only on the flimsiest of pretexts, so I really don't think that it counts.

Mr. Sorkin argues that we should, in his words, swallow hard and pay the AIG bonuses that have caused so much outrage over the last two days in order to maintain the "sanctity of contracts."

Meanwhile, preeminent econoblogger Tyler Cowen over at Marginal Revolution takes time to blog about the fact that he is not blogging about the AIG bonuses.

Memo to these agents provocateurs of media old and new: Bucking conventional wisdom in such conventional ways does not make you Christopher Hitchens. It won't even get you points toward your contrarian merit badge.

Did we really need Sorkin to extoll the virtues of maintaining contracts when we already have Ed Liddy and Larry Summers doing the same.

As for Cowen, if blogging about blogging is 'meta', what is blogging about not blogging?

Try again guys. Next time just don't try so hard.

Health Care Costs - Additional Info.

As a quick follow up to my earlier post on health care costs, here are some links to additional information.

Here is a Reuter's article from August of 2008 notes the following:

Americans who go without health insurance for any part of 2008 will spend $30 billion out of pocket for health care and they will get $56 billion worth of free care, according to a report released on Monday. Government programs pay for about three-quarters, or roughly $43 billion, of the bills for these uninsured people

And:

"The uninsured receive a lot less care than the insured, and they pay a greater percentage of it out of pocket. Contrary to popular myth, they are not all free riders," Hadley [of George Mason University] said.

The idea of the uninsured subsidizing the insured is one that is also discussed in the book Sick: The Untold Story of America's Health Care Crisis---and the People Who Pay the Price by Jonathan Cohn. This book contains a brief but informative discussion of the current state of health care in the United States as well as some background information about how we got here (such as the beginning of group medical and the system of employer provided health insurance that still exists today).

Finally, I will admit it is difficult to exactly pinpoint what is driving cost increases in health care, though I do not believe that unpaid expenses from the uninsured represent a major factor in cost increases. Here is a link to a National Coalition on Health Care factsheet which includes this:

Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families.

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AIG: Pharaoh should let it's people go. Now.

News has come down that AIG will pay out $165 million in bonuses.

No doubt much ink and many pixels will be spilled venting outrage at these antics. For myself, I can only add, somewhat dejected, I am not entirely surprised that this type of thing is going on since the government has made it clear that AIG is not going away.

Bill Kristol on Fox News Sunday summed it up nicely:

AIG sold these credit default swaps to very sophisticated investors, mostly to other banks and other major financial institutions, many of them in Europe, they bought these thinking hey easy profit, no risk....[these were] insurance policies against stocks that they didn't own. They thought they were just making money. AIG thought they were making money and the counterparty thought they were making money. And the way the bailout has worked, as I understand it, is that the counterparties have been relieved of any risk, not only any risk, any loss...If you're a sophisticated bank who bought a credit default swap from AIG you've been made whole. No haircut even, not even 80 percent or 90 percent, 90 cents on the dollar.

I was just going to leave it at that, but reading that news story linked above I can't resist these.

"But where there are contracts, binding contracts that were entered into long before the government put any money into AIG -- we're not a country where contracts just get abrogated willy-nilly," he [White House National Economic Council director Larry Summers] added.

Well, when you run your company in to the ground and you know, bankrupt it, then it cannot pay its contracts. My question is why should taxpayers have to do so?

Then, there was this item (emphasis added):

In a letter to Geithner Saturday, Liddy [the government-appointed AIG boss] said the bonuses could not be cancelled due to the threat of lawsuits for breach of employment contracts, and that AIG risked an exodus of senior employees if it does not pay them out.

Finally some good news! The "senior employees" of AIG are threatening to leave. Why are these people even still on the premises? Is there any reason we would want to keep senior leadership that runs a company the way that AIG has been run?

AIG has got to be the best argument of an "exodus of senior employees" at least since Enron. Here's hoping that exodus or not, we don't end up wandering in an economic desert for forty years.

Doyle through the looking glass on health care cost

Governor Doyle occupied one of the featured blog post spots over at huffingtonpost yesterday in which he extolled the virtues of BadgerCare Plus and FamilyCare. I leave it to others to judge whether or not these programs are successful enough to serve as national role models, but this line was a real eye-catcher (emphasis mine):

More than 46 million Americans lack access to basic medical insurance, clogging our emergency rooms and driving up costs for those lucky enough to have coverage.

Doyle has this exactly backwards. Our system is one in which the uninsured subsidize the insured.

Insurance companies negotiate discount prices with health care providers (including prices for emergency room visits) which is a perfectly rational strategy for maintaining a profitable business.

Providers, knowing that they will have to negotiate their prices with insurance companies, have an incentive to set their initial prices high so that they have room to maneuver and still cover their costs (and make a profit if they are a for-profit entity).

This drives up the initial price for all health care that is ever paid for by insurance, but insured patients do not pay the initial price. If, however, you happen to be one of the unlucky 46 million without insurance, guess which price you pay. That's right, the higher initial price-without a discount. That is not to say one couldn't try to negotiate their own discount, but this is a hit and miss prospect at best.

Through this system of distorted prices then, it is those without insurance that pay the highest prices, subsidizing those that have insurance coverage.

Regardless of where you fall on the spectrum of ideas about what our health care system ought to look like. Whether you are an advocate of single-payer universal coverage or you think that we should just give everybody a leech, a band-aid, and wish them luck, confronting the distorted prices that are a major characteristic of the way we pay for healthcare will be absolutely necessary if we ever hope improve the system.
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There is also a price distortion which results from Medicare and Medicaid reimbursement rates being less than provider costs. Providers then work to shift these costs on to those with private insurance and those that pay for medical care themselves (that is, the uninsured). This represents a hidden additional cost of Medicare and Medicaid. A cost that is above and beyond the payroll taxes which are collected to pay for these programs. See health care economist Uwe Reinhardt's comments on this episode of NPR's Fresh Air.

Omnibus 2009 & Congress: Lost in the Reids

First let me commend Wisconsin Senator Russ Feingold for his vote against the omnibus spending bill. Feingold has spoken out against the earmark process and it is nice to see him stick to his position when it really counts. I am certainly willing to be critical of Feingold when the situation merits, so I should also be willing to praise him in cases such as this.

I have no such sympathy, however, for Senate Majority Leader Harry Reid.

I am not surprised he would vote for this bill, it is not that hard to understand, but his comments on the bill leave me bewildered. NPR's Morning Edition had a story on the bill that included this from Reid:

"Agencies of our government have been so underfunded and under-resourced during the Bush years that these agencies need this money so that they can function properly."

Does Reid actually think that Bush cut funding to government programs? Surely there are examples of specific programs that Bush cut, but federal spending rose during his years in office. Bush may have cut taxes, but he had no such compunction when it came to spending.

Bush went from spending 1.8 trillion in 2001 to 2.7 trillion in 2007. This is 18.6 and 19.5% of GDP respectively. (See this link for the data tables.)

To say our government was underfunded during this time is beyond belief.

Perhaps one could argue that the money that was spent under Bush was misallocated. Fine. The Democrats won the election, they get to set the priorities. Democrats should revise spending to be more in line with their wishes, but this bill increases spending as well. The case for spending increases was made, and became law, as part of the stimulus bill. The increases in this bill set a new high water mark from which spending may never recede.

So Reid is either woefully misinformed or simply making things up to justify the passage of this bill by the Senate. I am not sure which is worse.

My dismay was amplified when I came across an item on the OpenCongress Blog that notes the approval of Congress has jumped to 39%, the highest it has been since February of 2005. Are people more approving because they believe they will receive some direct benefit from the current spending spree? Are they more approving because we are clearly in dire circumstances and the Congress seems to be doing something, anything?

If they listen to Mr. Reid's words, I am not sure how one can be more approving of the job the Congress is doing, even if you believe in the measures that have been adopted thus far.

Within the poll, there is this additional piece of information:

Since January, approval of Congress among self-identified Democrats has risen from 17 percent to 57 percent.

Democrats have had much the same Congressional team since 2006, with the notable exception that one rising superstar has now relocated to Pennsylvania Avenue, so why the sudden jump? Some of it must be reflected glory from the highly popular president. But could some of this spike be the result of too many people being largely ignorant of the basic facts about our government and taking Reid, and others, at their word?

So in Senator Reid we have another example of the disconnect between rhetoric and reality that is a marked feature of our political landscape. And in the poll numbers we see a possible symptom of this disconnect.

Discerning the reality of our situation is critical for our national well being. Unfortunately, discernment is not something that can be legislated into existence.

Omnibus 2009 & Obama

With little fanfare, President Obama recently signed the omnibus spending bill for fiscal year 2009. This is the bill that has become infamous of late for containing about 9000 earmarks. These are those specific spending measures inserted into bills by members of Congress which are considered 'vital spending' by their recipients and 'pork' by everybody else.

Thus, a president that pledged to go through the budget line by line during the campaign has now made these earmarked projects the law of the land. At least spokesman Robert Gibbs admitted that Obama had not read the entire bill when asked if that was the case.

Many of the administration's surrogates had been making the rounds last week offering the excuse that this bill represented 'old business' as the reason why the president was going to sign it. This excuse is utterly uncompelling coming from a president that ran with 'change' as the explicit theme of his campaign.

After all, weren't Guantanomo Bay and Bush's stem cell funding ban 'old business'? The president didn't seem to think there was any reason to maintain these two items from the previous administration, so why keep this spending bill?

With his budget, health care and energy reform, and other legislative priorities of his own coming up, I can understand why Obama would choose to avoid a fight with Congress over a bill that he could at least partially blame on his predecessor (only partially, though, he did sign it into law).

The fact of the matter is that members of Congress wanted this bill to become law, including all of the earmarks. In some sense that makes this spending bill nothing more than a payoff to the Congress. And now that Obama has delivered on this, he will no doubt expect the Congress to return the favor in the near future.

I am not so naive to think that this state of affairs isn't how things normally work in Washington, but it would be nice if we could drop the pretense and see this bill for what it is. The sooner we in the United States close the rhetoric vs. reality gap, the better.

A Tale of Two Critiques

Two recent columns critiquing President Obama strike remarkably similar themes despite the fact that one addresses foreign policy and the other domestic policy.

The first comes via a post over at Lakeshore Laments which comments on a column by Robert Kagan that appeared in the Washington Post. Kagan makes the point that much of the Obama foreign policy so far is really just a continuation of policies that began under Bush, but they are being touted as part of the change that Obama promised to bring to government.

Kagan goes on to argue that the administration is able to make the case that their actions thus far represent change only because the press corps accepts these claims uncritically. As Kevin over at Lakeshore points out however, Kagan's critique is somewhat diminished by his reputation as an advocate of the war in Iraq. No such problem exists as far as I know for the author of the second critique, economics writer Robert Samuelson.

Samuelson's column that appeared at Real Clear Politics on Monday is entitled "Obama is a Great Pretender," and focuses on Obama's domestic policy initiatives, particularly his budget and the stimulus. I wouldn't say that Samuelson is known as a partisan, but as the title suggests, his criticism is absolutely withering. It begins:

To those who believe that Barack Obama is a different kind of politician -- more honest, more courageous -- please don't examine his administration's budget. If you do, you may sadly conclude that he resembles presidents stretching back to John Kennedy in one crucial respect. He won't tax voters for all the government services they want. That's the main reason we've run budget deficits in 43 of the past 48 years.

Obama is a great pretender. He repeatedly says he's doing things that he isn't, trusting his powerful rhetoric to obscure the difference. He has made "responsibility" a personal theme; the budget's cover line is "A New Era of Responsibility." He says the budget begins "making the tough choices necessary to restore fiscal discipline." It doesn't.

Samuelson goes on from there to describe how a truly responsible budget might treat issues such as taxation, entitlements, defense spending and farm subsidies. He also takes Obama to task for the lack of bipartisan support his proposals have found thus far. Stating that Obama has pursued positions that invite rather than avoid opposition.

As he closes, Samuelson strikes some of the same themes that Kagan did - the lack of real change and a complicit media:

Obama thinks he can ignore these blatant inconsistencies. Like many smart people, he believes he can talk his way around problems. Maybe. He's helped by much of the media, who seem so enthralled with him that they don't see glaring contradictions. During the campaign, Obama said he would change Washington's petty partisanship; he also advocated a highly partisan agenda. Both claims could not be true. The media barely noticed; the same obliviousness persists. But Obama still runs a risk: that his overworked rhetoric loses its power and boomerangs on him.

I'll save the fashion report on the emperor here, but suffice it to say that both commentators note a striking disconnect rhetoric and reality. A condition that is at the very least ignored, and at the worst actually aided, by the nation's media.

Maybe it is too much to ask of one man to change an entire nation's politics, but is it too much to ask him to stop telling us that he is doing just that? Probably. After all, the President is a politician. But it is definitely not too much to ask our nation's reporters and editors to approach a president, even one they have great personal affection for, with a more skeptical eye.

Dow Soars!

On news that during the first two months of the year Citigroup found two nickels to rub together.

No word on if they also found a nickel to lend to any credit-worthy, job creating business anywhere within the borders of the United States.

Reporters at a press conference asked Citigroup CEO Vikram Pandit which taxpayer the two nickels belonged to. He replied*,"these weren't taxpayer nickels. We found them in the couch in the breakroom at a Citi branch in Chevy Chase, Maryland. All of the taxpayer money we have received so far has passed right through our hands and into the accounts of the guys we made all those bets with."

A Citi spokesman later backed away from Mr. Pandit's description of where the tax dollars went by noting that the CEO meant to say, "counterparties to our transactions," rather than, "guys we made bets with."

______________________________
*I completely made up these quotes. If you couldn't figure that out, please call Tim Geithner, he has some mortgage backed securities he would like to sell you, cheap.

Economic Meltdown Works Weekends

It seems that both blog production and blog reading go down dramatically on the weekends. This feels counterintuitive to me, since I work on what could be called a traditional M-F schedule and I have more time for blogging and blog reading on the weekends. Maybe I am just out of step with most of the rest of the world. It wouldn't be the first time.

Regardless, here are two items that I read over the weekend that are worth taking a look at:

First, here is a Bloomberg article which discusses former Fed Chairman Paul Volcker's idea for a two-tier system as the future of banking:

Commercial banks would provide customers with depository services and access to credit and would be highly regulated, while securities firms would have the freedom to take on more risk and practice trading, “relatively free of regulation,” Volcker said.

I realize we are nowhere near out of the woods yet, but it is never too soon to start thinking about how to avoid a similar catastrophe in the future. It is possible that identifying a system that could prevent the problems we have now from recurring might also provide some insight into just how to get out of the current situation.

In explaining economic matters of late, it seems that writers often resort to medical metaphors. Particularly those of patients on tables with acute coronary symptoms. Of course, when you're in the middle of a heart attack you want to talk to the intern with the defibrillator, not the dietitian with the tray of low-fat food from the cafeteria. But let's face it, our economy is not a sick patient so maybe the long term fix has some bearing on the short term one. Frankly, I blame E.R. for the rampant use of medical metaphors (For all the talk of zombie banks, that E.R. is a zombie television show. How many times has that show recycled its plots and characters? Wow. That was uncalled for.)

But Volcker's idea is definitely worth considering. It may be a way to provide meaningful regulation that can make our financial system stronger (not brittle) while not destroying the entrepreneurial spirit, which accounts for so much of our economic success.

Also, any future scheme (and any plan to fix the current mess) must protect depositors and must not protect shareholders. It has to have both elements. These days our government seems unable or unwilling to distinguish between people that deposited their money in institutions with an explicit guarantee of safety and those that put their money at risk by buying stocks and, to a lesser degree, bonds.

Speaking of protecting shareholders, Yves Smith at naked capitalism had a great post discussing the nationalization question. It is in the form of a call-and-response smackdown that she gives to a piece by Alan Blinder in the NY Times.

It's a long post, but worth the read if you want to be armed to tackle the question of nationalization. She puts a fine point on it right from the beginning:

...opponents to nationalization often raise the image of enterprises being expropriated by the state, in other words, healthy (or at least viable) businesses being stolen.

We have the reverse here. Instead a transfer of wealth from the private sector to the state, we have the state (as in the taxpayer) propping up businesses and keeping management demonstrated to be incompetent, perhaps corrupt...

I would try to create a sense of urgency for checking these out, but since neither involves massive spending on long sought after Democratic agenda items, I doubt the government will tackle either any time soon.

Tundra Tea Party

I know there is at least one regular reader of this blog that was very interested in the Green Bay Tea Party that was scheduled for yesterday.

I didn't go, but Berry Laker did. Click the link and check out the pics. It looks like they had a very good turnout.

Luckily, the weather was nice yesterday. Looking out the window today, I'm not sure if this is even Green Bay or if I have unwittingly been transported to the Ice Planet Hoth.

Senior Discount - Only In Reverse

Via the Open Congress Blog below are the top 10 Senate earmark recipients in the 2009 Omnibus Appropriations Bill. In RED next to each I added the Senator's rank in terms of Senate seniority.

1. Sen. Robert Byrd [D, WV] – $122,804,900 First
2. Sen. Richard Shelby [R, AL] – $114,484,250 Nineteenth
3. Sen. Christopher Bond [R, MO] – $85,691,491 Twenty-second
4. Sen. Dianne Feinstein [D, CA] $76,899,425 Twenty-seventh
5. Sen. Thad Cochran [R, MS] – $75,908,475 Eighth
6. Sen. Lisa Murkowski [R, AK] – $74,000,750 Sixtieth
7. Sen. Thomas Harkin [D, IA] – $66,860,000 Fifteenth
8. Sen. James Inhofe [R, OK] – $53,133,500 Thirty-fifth
9. Sen. Mitch McConnell [R, KY] – $51,186,000 Sixteenth
10. Sen. Daniel Inouye [D, HI] – $46,380,205 Third

I actually thought that seniority and earmarks would have been even more highly correlated, but you can see that 6 out of the 10 are within the top 20 in terms of seniority.

6 of the 10 are also Republicans.

How about that Muskowski muscling her way all the way from 60th on the seniority list to secure the 6 spot at the trough! Way to go! (OK, I was trying to be serious, but that was just snarky.)

Anyway. Just some food for thought. Very expensive food (and too little thought).

My New Favorite Expression

The other day, I heard a coworker describe Madison as, "65 square miles surrounded by reality."

I realize this is probably an old joke, and originally had a different target, but I had never heard it before and found it tremendously funny.

Now the only time I have visited Madison we toured the Capitol building and ate lunch at Ella's Deli and had a great time. So I will pass on disparaging the, shall we say, more 'out-there', city to my south.

But really, the '65 square miles surrounded by reality' structure has a lot of possibility for variation.

Does anyone know how many square feet are in AIG headquarters?

Feingold and Ryan Walk the Line (Item)

Senator Feingold and Representative Ryan published an Op-Ed arguing for a line item veto as a means of curbing government spending. Aside from the potential constitutional issues this type of provision may entail, this initially seemed like a good idea to me. But then there's this:

If the president could remove egregious earmarks, we could save billions in taxpayer money.

If the spending is so egregious, then Congress should stop it. Even if it doesn't rise to the level of egregiousness, but is merely wasteful or simply not useful Congress should still stop it.

For Congress to rely on the president, any president, to save it from its own bad habits is ridiculous and an abdication of its responsibility under our system of government.

A Republican, especially, should be wary of reliance on such a scheme. If the federal government is not a cure-all for personal irresponsibility, why would it be such for Congressional irresponsibility.

I respectfully suggest that Feingold and Ryan re-examine their position on this issue and then advocate for sensible government spending without calling on the executive to bail them out.

It's high time the first branch of government started living up to its billing.

Sam's Club Revolution: 35% Larger

If no one has yet developed an economic indicator based on how long you have to stand in line to check out at Sam's Club, they ought to. While the size of the crowds at Sam's aren't quite infamous, I would say they at least approach the notorious level.

But on my recent trip, however, the crowds were largely absent. Now I wouldn't say you could have shot a cannon in there, but there was certainly more room than normal to maneuver. In fact, I managed to execute what I consider to be the Pentathlon of Sam's shopping: Downloading 300+ digital photos; Darting across the front of the store to retrieve diapers; Navigating three aisles of frozen foods to pluck a bag of dinosaur shaped chicken nuggets from a cooler like Indiana Jones snatching a jade idol from a quickly descending stone gate; Guiding the cart over to the T.P. which is sold only by the acre thus requiring that it be precariously perched on top of the diapers reducing visibility and increasing drag as I steer the cart toward the check out; Finally, the purchase and consumption of one giant hot dog (with free single serving kraut). All to be done on the lunch hour, of course.

Now normally it's touch and go if I am going to make it back to work within the hour time limit, but this time it was a breeze. In fact, if I was so inclined, I could have stopped to enjoy a paper cup full of Cajun salmon or yogurt smoothie being hawked by retired ladies in matching black aprons and hair nets. You've seen these ladies, they're usually surrounded by a crowd like Britney Spears with a shaved head after a fender bender. It's normally a feeding frenzy in there and these ladies are the chum-dealers, only with coupons.

There were two curious incidents during my trip, though.

First, at the snack bar another patron complained that the Coke from the fountain had a strange taste. She proceeded to try the rest of the beverages, indicating each was somehow fouled, until at last she settled on the lemonade. I had the Cherry Coke but couldn't detect the offensive taste, so I just gutted it out and seem no worse for the wear. No word yet on if the picky patron's porridge was too cold or too hot.

Secondly, as I was checking out, an elderly couple came up and got in line behind me. Among their purchases was a set of bathroom towels. As the woman laid the towels on the conveyor belt, she noticed a thread hanging off the edge of one of them. She half turned toward me and said, "someone should tell those people in India to cut off these threads." I didn't have the heart to tell her that India probably forgot to cut the thread because they were too busy answering the technical support calls for large US corporations, so I just smiled and gave her a non-committal, "yeah."

Then she said to me, "maybe after this revolution we will start making some products in this country again. That would be nice." By this point I am done paying and I'm already thinking about that single size packet of kraut, so I am only half listening, but when an unassuming grandmotherly type starts talking insurrection between the prune juice and bridge mix, it gives one pause.

Now I'm not saying this woman was advocating armed resistance. She may have just meant 'crisis' or 'upheaval', and said 'revolution' by mistake. It's not entirely out of the realm of possibility that a shift in global trading patterns could result from the current economic conditions. Maybe she was just thinking back to a time not that long ago when the United States made the stuff that it (and much of the world) used, as opposed to now where we just borrow money so we can use more stuff. The former seems like self-reliance, the latter like addiction.

Then again, this is the Wisconsin 8th. Our geography lends itself to a nice mix of post-industrial aspiring elite and post-apocalyptic armed survivalist. This is one place that Obama could have given his clinging to 'guns and God' speech and quite literally been talking about the neighbors. Maybe this frail looking woman guts and skins her deer using only a knitting needle. Who knows?

Maybe, like so many of us, she feels unsettled by the events swirling around her. Maybe she looks at the 25 gallon drums of mayonnaise filling the shelves at Sam's but then thinks about how conditions in the country seem to be getting worse, not better, and decides to pass. I mean, who knows what could happen in the time it will take to use up that much mayonnaise?

Americans Idle

The Nielsen Company has issued a report stating that television viewing is at an "all time high" with Americans averaging 151 hours of viewing per month. This is about 5 hours per day. Looking at the television listings, I can't imagine what it is that people are watching during that time.

Until some reclusive billionaire, who just happens to be a cross between Stephen J. Cannell and a bond villain, starts a pirate TV station originating from his tropical island lair with programming that consists almost entirely of The A-Team, Murder She Wrote, Buck Rogers, Family Ties, and Match Game 78, I am in no danger of joining the 5-hour club.

Of course, I can't stand to miss the Sunday morning political talk shows. The appeal of which is completely lost on my wife. (I tried to tell her about the verbal sparring between Karl Rove and Katrina vanden Heuvel on This Week, but to no avail.)

As I have noted before, though, I haven't seen the Soprano's even once. Maybe I am missing something great on TV, but I doubt it.

AIG (All Income from Government)

I wish Obama had spent some time in his speech outlining exactly why it is we need to keep pouring money down the AIG rabbit hole?

I see we may be giving them another $30 billion. Oh, and converting those dividend paying preferred shares into non-dividend paying shares.

It seems AIG will join Citi in the pantheon of corporations with too much government money to fail. Ever.