If the problem was too little regulation, then why are the unregulated institutions being used to bail out the regulated ones?
I wish that someone had asked the president that question last night. And here’s another missed opportunity — if the solution to our problem is nationalizing health care, why is Europe, where they did that years ago, having the same problems we are?
[Update a couple minutes later]
Here are some more questions that should have been asked last night:
Mr. President, a staple of Democratic party rhetoric over the years is that the GOP is the party of big business and the Democratic party is the party of the working man. Yet it would appear to the casual observer that Wall Street banks have hijacked your administration and are moving heaven and earth to socialize their staggering losses. Do you find it worrisome that Republicans are now increasingly inclined to argue that what’s good for Citigroup is not necessarily good for America, reversing the long-established rhetorical order of the political universe? And how comfortable are you with your progressive allies who are now wondering aloud about an administration that argues that bankruptcy is only an option for “the little people”?
We may not have the best government that money can buy, but we definitely have one that money can buy.
[Update a few minutes later]
Here’s an excerpt from the Barone piece that I’ve been thinking about for a while:
Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.
My American Enterprise colleague Peter Wallison has argued powerfully that this is a bad idea. Neither the Federal Reserve or other regulators identified the systemic risk which caused this crisis. Neither did most financial institutions or investors. Systemic risk is hard to identify for the very reason that it is systemic: It results from just about everyone doing what turns out to be the wrong thing. (Housing prices will always go up, therefore there is no risk in buying mortgage-backed securities, etc.) Identifying some firms as posing systemic risk is saying that they are too big to fail, in which case they’ll take undue risks and end up having to be bailed out by the government. These strike me as very strong arguments.
I would have a lot more confidence going forward if the people running things now weren’t the same people who didn’t see this coming (and in the case of Barney Frank and Chris Dodd, and Charles Schumer, partially responsible for it). Why not put Peter Schiff in charge? He’s one of the few who actually called it far ahead of time. Of course, the last thing that this administration wants is someone who actually understands economics.
I’d nominate Nasim Nicholas Taleb, not that he’d ever accept, more’s the pity. Perhaps we should have a cabinet-level Department of Black Swans …
Krugman called the housing bubble too, and has a claim to understanding economics, but I’m guessing you wouldn’t want him in charge.
A stab at answering the questions that weren’t asked:
Why are we having unregulated institutions bail out regulated institutions?
First of all, the PPIP plan doesn’t ask hedge funds to bail anyone out — it’s giving them a chance to make lots of money, in return for their help setting prices for currently hard-to-price assets. The fact that these assets are held by regulated institutions does not say very much about the pros or cons of regulation — there weren’t regulations against the accumulation of these risky assets. And while not the focus of the PPIP program, there are other unregulated institutions (e.g. AIG-FP) at the center of the crisis, and we have had past experience with unregulated institutions (e.g. Long Term Capital) melting down in ways that endangered the entire market.
If the solution to our problem is nationalizing health care, why is Europe, where they did that years ago, having the same problems we are?
Health care reform is a key to long term fiscal solvency, but it is not a vaccine against asset bubbles or financial crises. That said, Europe would be in much worse shape today if they were spending what we spend on health care, and if we had a more efficient health care sector we would be in a better position to absorb the costs of this crisis.
Do you find it worrisome that Republicans are now increasingly inclined to argue that what’s good for Citigroup is not necessarily good for America, reversing the long-established rhetorical order of the political universe?
It is disconcerting, but not for any deep substantive reason. There was a similar feeling when Clinton put the interests of the bond market above those of some of his liberal supporters, because fixing the economy was his top priority. In this case the top priority has to be restoring the financial system, not seeking emotionally satisfying but self-destructive retribution for economic injustices. Going forward the administration’s plans — in health care, taxation, education, and labor policy — will focus on the needs and aspirations of the median American rather than the top 1 percentile. Whatever their rhetoric about Wall Street bonuses, the GOP’s policy prescriptions remain focused on that top 1 percent.
How do we identify systemic risk?
Beats me, but it certainly seems worth trying to find a way.
“If the problem was too little regulation, then why are the unregulated institutions being used to bail out the regulated ones?”
Good question. Here’s another: why is the solution to the mortgage debt problem to transfer that debt from the banks to so-called “private investors?” Who are these white knights and what reason do we have to think the country will be better off with all these mortgage-based securities in their greedy hands instead of the banks? (‘Cause after all, they’re ALL greedy, right?)
Notwithstanding the Obama administration’s smear du jour (the demonization of the banks and all things capitalistic) who if not the banks are the true experts in the management of long-term debt instruments? What will these “private investors” be able to do better than the banks themselves?
I don’t see how any of this makes sense, except within the insanity of applying a mark-to-market standard to institutions that deal, not in present value, but future value. But given that the government is stuck on stupid with regard to this issue, it would seem the only way out is for them to create a market for these (now “legacy”, formerly “toxic”) assets. After all, mark-to-market rulz! Problem is, of course, a lack of buyers.
So, how does the Geithner plan create a market when there are no buyers? As I understand it, (someone please correct me if I’m wrong) the basic idea is that the buyers get to buy at a low price, the sellers (the banks) get to sell at a high price, and the government makes up the difference, or rather guarantees the difference. This is the current administration’s idea of a market: everyone gets to set their own price and the government provides the cash to cover any differences. No wonder they have such a hard time with those mean capitalists!
I’m not sure of the exact details of how the difference in price is to be made up, whether the government is throwing in cash right away, or if the buyers need to put up the cash initially but get a guarantee that the government will cover their losses, should they take any. Either way, the Geithner plan essentially recognizes two different valuations of these assets. One is what the market will currently pay, let’s call that the “mark-to-market” value, and the other is one that is based on somebody’s expectations of what the assets are likely to be worth in the future, let’s call that the “mark-to-future” value, which under the Geithner plan is essentially what the banks think they’re worth, and more importantly, what they will apparently be able to sell them for in this crazy government version of a market.
Hmmm… Here’s an idea, rather than requiring this massive transfer of assets, why not just let the banks value the assets on their balance sheets at this mark-to-future value, they way they used to do before the November 2007 accounting rule change, that same value that under the Geithner plan the government is going to underwrite, and presto-change-o they’re solvent again! Why not just do that and drop this whole fake market exercise?
I can think of at least two reasons why not:
1) Because the same economic theory that lead to the change to mark-to-market based accounting for banks in November of 2007 is still being followed, and under that flawed system this makes sense.
2) Because without this massive government-directed transfer of assets, the people in the Obama administration wouldn’t have such a wonderful opportunity to reward their friends and cronies with billions and billions of dollars of government-backed, loss-proof investments.
The problem with “mark to future” is that the holders of the asset can pick any value they want. In “mark to future” the bank would, rather then sell an asset at a 30-40% loss, they’ll sit on it and mark it at 100%.
I’m not sure I agree with the legacy asset sale plan either, but I suspect the thought is that if somebody’s holding the asset at some discount of face, they have the ability to renegotiate the underlying mortgages. Buying an asset at 70% and getting 80% of face is better then holding at 100% and loosing 20%.
Regarding systemic risk, like Jim says, you can’t regulate it away. But, if you have an orderly way to disolve a failed institution, then systemic risks become less of a problem. One of the issues with AIG is that we can’t legally repudiate contracts. In a bank failure, the FDIC can and does repudiate contracts. This makes bank failures nearly seamless to the depositor.
Geez, Jim, you prove Orwell right in every respect. By artful redefinition of language you can prove any insanity.
Here, for example, you assert “the PPIP plan doesn’t ask hedge funds to bail anyone out — it’s giving them a chance to make lots of money, in return for their help setting prices for currently hard-to-price assets.” An amazing display of self-contradiction.
If the reason certain institutions are in trouble is precisely and only because they have “hard to price” assets, then “bailing them out” consists entirely and solely of helping them price those assets, right? Because if you did that, they’d be OK, right? And they can’t do it themselves, right?
So if you ask someone to “help price those assets” — to help the troubled institutions do exactly what they need to do to get out of trouble — then only in Newspeak is it possible to say you’re not “bailing them out.”
I see you take lessons from Obama himself, who believes in user-defined reality. He can propose budgets with massive, unprecedented deficits, and them calmly assert that he is following a road of fiscal discipline quite unlike his predecessor. See, we need to spend wildly beyond our means IN ORDER to put our financial house in order. Freedom is slavery, et cetera. Apparently the both of you feel no particular embarassment in asserting things flatly contradicted by reality. An interesting, if bizarre, point of view.
Here’s another one:
Health care reform is a key to long term fiscal solvency, but it is not a vaccine against asset bubbles or financial crises.
RIght, Jim. And here one might have thought that the very definition of “long term fiscal solvency” is the absence of asset bubbles and financial crises. I mean, WTF? What the hell good is your mythical “long term financial solvency” if it doesn’t include any protection against financial crises? What do you get? Prosperity in times of…uh…prosperity?
You’re like a life insurance salesman selling life insurance with a clause on page 666 that says the policy won’t pay off in the unlikely chance that the polcy-holder dies prematurely. One might be forgiven for wondering if you’ve lost your mind (or integrity).
Then we descend into fantasy speculation:
Europe would be in much worse shape today if they were spending what we spend on health care,
Is that right? So then how come we’re not in much worse shape then Europe, since, duh, we are spending what we spend on health care?
and if we had a more efficient health care sector we would be in a better position to absorb the costs of this crisis.
A banal truism. Here, let me play: if we spent nothing whatsoever on health care, we’d be in a better position to absorb the costs of this crisis. Look! Easy! All I need to do is say “if we [did X that by definition saves money] then we’d have more money. I don’t even need to ask the question of whether X even exists, because I just assert that it does. Let’s try another: if we had a more efficient criminal justice system, so we spent nearly nothing on prisons and also nearly nothing, as a society, on illegal drugs, we’d be in a better position to absorb the costs of this crisis. Wow, this is great!
Of course, the unexamined — and wholly unjustified — assumption in your assertion is that there is “inefficiency” in the health care system. Like, there’s pots of money just lying around waiting to be spent on something — bailing out Wall Street, for example. Here’s a news flash, Jim. No such thing exists. If you want to spend less on health care, and more on making whole those bankers who speculated on subprime mortgages and lost their shirt, then it won’t come out of sacks on money lying around in someone’s basement. It will mean health care workers (doctors, nurses, RTs, insurance adjusters, secretaries in HMOs, shareholders in HMOs, et cetera) will get less money, or do more work for the same money.
Does anyone think there should be more nurses per patient in the local ICU in order to pay off Mr. Subprime Mortgage Broker’s bad bets? What about cutting the pay of your surgeon? Or asking him to do without an assistant during your lung surgery? Maybe we should ask folks needing knee replacement to wait a year or so, like they do in “advanced” Europe and Britain? That would save plenty of money — some of them may even die while waiting, saving even more! And then we can give it to Geithner’s friends and Obama’s and Dodd’s donors on Wall Street. Sweet!
One of the issues with AIG is that we can’t legally repudiate contracts
Never heard of bankruptcy, huh Chris?
But I think you have, actually, and you know very well that bankruptcy judges can and routinely do force renegotiation of — or even just cancel outright — contracts a company has made.
It’s just an inconvenient truth (to coin a phrase) for your proposition that the Federal Executive Branch needs more power, much more power, over private affairs. The intellectual dishonesty here is impressive.
Carl Pham – yes, a judge can repudiate contracts in bankruptcy. The problem is keeping the firm alive long enough to get to the court.
When the FDIC takes over an institution, which is a form of bankruptcy, they make the cut damn near instantly. When you do the same in a conventional proceding, it could take weeks or months.
This inconvenient fact is why we did not take AIG through bankruptcy. Well, besides the other inconvenient fact is that in bankruptcy, all the creditors, including Joe Homeowner and his insurance policy, would be SOL because the company was in the negative by a couple hundred billion dollars.
What Treasury is asking for is what the FDIC has had for banks since the 1930s. Having seen the process in action, it works.
Carl: The problem isn’t that the bank’s can’t price the assets (they are pricing them now, but no one believes the prices). The problem is that they can’t sell them. PPIP is a carrot for potential buyers of these assets: they can buy with enormous government-guaranteed leverage. It’s like telling a plumber to unclog a drain, and offering to pay for 95% of the equipment that might get damaged, along with half of the salvageable gold jewelry that the previous owners flushed down the toilet. It’s an ugly job, and there is some risk, but it isn’t a bailout on the part of the plumber.
And here one might have thought that the very definition of “long term fiscal solvency” is the absence of asset bubbles and financial crises.
Look up “fiscal” in a dictionary. It refers to government budgets (taxation and spending); it has nothing to do with asset bubbles and financial crises.
Of course, the unexamined — and wholly unjustified — assumption in your assertion is that there is “inefficiency” in the health care system.
Of course there is, otherwise other countries would not be able to match our health care outcomes with much lower per-person health spending. Even in the U.S. there are cities and states that spend much more than others, without delivering better results — they are less efficient.
Once upon a time over 80% of the U.S. labor force worked in agriculture. Today it’s less than 5%, and we have more food than ever, because agriculture is more efficient. The idea that health care in the U.S. today is as efficient as possible, or that it would be a bad idea to make it more efficient (and free up people and resources for other pursuits) is the sort of thinking that would keep all of us on the farm.
As I see it, this is one of those classic examples where you need to read between the lines. What the Obama administration wants is for people to pay more for the toxic assets than the assets are worth. So they are trying to dress up the assets both to con the buyers and to save face in front of the voters.
As we remarked on, there are two prices for the assets. The “mark-to-market” price which is the price that the smart money will buy the assets for. Contrary to some assertions here, the market did the home work and the current price is most likely a good guess what the future return on these assets is. And the “mark-to-future” price which is the fantasy price that the Obama administration would really like to sell the asset for in order to keep the bank out of bankruptcy.
But here’s the problem. The only way that the smart money will buy these assets at the inflated price is for government to make up the difference, one way or another.
Jim says: The idea that health care in the U.S. today is as efficient as possible, or that it would be a bad idea to make it more efficient (and free up people and resources for other pursuits) is the sort of thinking that would keep all of us on the farm.
Nobody ever said the US health system couldn’t be more efficient. We’re saying that the European and Canadian systems are not more efficient than ours. We can improve our system efficiency in other ways. Other cpaitalist ways, other FREE COUNTRY AND CITIZENS ways.
Jim, one point that you might have made is about of one of the sources of inefficiency in the US health care system. What I refer to is the widespread practice of ordering all manner of almost certainly unnecessary tests in the course of a clinical investigation. There are two reasons for this; one is the equally widespread practice of test providers giving kickbacks to the doctors who order them. The other is that the tests are often done to protect the doctor against the possibility of a malpractice suit, in the event that the patient gets worse rather than better; and the reason why this is necessary is the immense number of ambulance-chasing lawyers infesting the USA, often working on a no win no fee basis.
The last of these practices is creeping over to the UK as well, to our detriment. A few years ago (I think about 15) a Government minister, a lawyer himself, decided to overturn an existing ban on such agreements. The entirely predictable result of this was many more damages suits, and spiralling insurance costs for everyone in Britain.
Shakespeare got it right. “First kill all the lawyers.” I would add accountants, and for essentially the same reasons.
Carl Pham – yes, a judge can repudiate contracts in bankruptcy. The problem is keeping the firm alive long enough to get to the court.
When the FDIC takes over an institution, which is a form of bankruptcy, they make the cut damn near instantly. When you do the same in a conventional proceding, it could take weeks or months.
This inconvenient fact is why we did not take AIG through bankruptcy. Well, besides the other inconvenient fact is that in bankruptcy, all the creditors, including Joe Homeowner and his insurance policy, would be SOL because the company was in the negative by a couple hundred billion dollars.
Little of this comment makes sense. First, AIG was not FDIC insured.
Second, The problem is keeping the firm alive long enough to get to the court. What’s the point of this statement? Once in bankruptcy, the concern isn’t the firm but the assets held by the estate. The firm no longer has to exist, and assets will likely not equal the debt owed, which is definition of insolvency (a typical reason for bankruptcy). If the firm isn’t insolvent, then it will likely stay afloat under bankruptcy, precisely because bankruptcy gives them the leverage to renegotiation or repudiate contracts.
Third, bankruptcy often take weeks, months, even years to settle, so no news there. In the interim, creditors are often screwed, so no news there either.
Finally, instead of AIG creditors being in the hole a couple of billion dollars, every taxpayer is now in the hole with them. Is that a better plan? Weren’t you the one arguing against rewarding failure? Don’t you think you should also not punish the innocent?
Mac: Carl asserted that there is no inefficiency in the U.S. health care system. You say that we’re as efficient as European systems. How can you tell? How would you measure that?
Fletcher Christian: Malpractice is a factor in health costs, but there is a lot of disagreement about how big a factor. There are big differences in health care efficiency from city to city in the U.S., and that does not appear to be a result of malpractice considerations. More standardization of care could protect doctors, who would be able to defend themselves by showing that they had followed the published best practices.
Whopper sighted …
“Going forward the administration’s plans — in health care, taxation, education, and labor policy — will focus on the needs and aspirations of the median American rather than the top 1 percentile.”
Unfortunately for us all, the relevant bias involves not the supposed scheming top-1-percentile perennially screwing the rest of us, but the politically more powerful vs those less so, or perhaps tax consumers vs producers. Guess which side this Administration will be on? That would be the side that wants $3.6 trillion of our money next year …
“There are two reasons for this; one is the equally widespread practice of test providers giving kickbacks to the doctors who order them.”
You can prove his how? The litigation cost added to medical bills is demonstrable by the increase in malpractice insurance premiums, the other looks like it came from an orifice not olfactory.
“…but there is a lot of disagreement about how big a factor.”
The only people who disagree are trial lawyers.
“You say that we’re as efficient as European systems. How can you tell? How would you measure that?”
Well Jim, look at how many others come here for care versus how many of us go to other countries. Look at the wait times for common procedures. It’s very easy to compare.
“More standardization of care could protect doctors, who would be able to defend themselves by showing that they had followed the published best practices.”
This is tripe. The Breck girl was able to “channel” a dead baby to win a multimillion dollar award. The doctor’s competence had nothing to do with it. He played the emotions of a dumb jury which is half the problem.
The problem isn’t that the bank’s can’t price the assets (they are pricing them now, but no one believes the prices). The problem is that they can’t sell them.
Wow. I can not believe this statement. There is only one point at which a thing is priced… when it is sold. Anything else is not pricing, it’s an estimation of value.
They can’t sell them? Why is that? Do they have value or not? If they have value they can be sold at or below that value. If they have no value, why the hell are taxpayers being forced to buy them.
Too many damn smart guys in the room outsmarting themselves.
Who bought these assets to begin with? Isn’t the buyer responsible for the risk? Isn’t failure how we prevent bad buying from going on and on and on???
Either the assets have value or not. Auction them and find out. Live with the reality.
I never thought I’d be more angry than on the morning of 9-11. Today, with this governments determination to destroy this country from within, I am.
Bill: The number of people crossing borders for medical care is a poor measure of efficiency, as are average wait times (not that you’ve actually provided data on either one). Medical tourism is a drop in the bucket of total medical costs, and a short wait time for a harmful or medically unnecessary procedure is not a sign of efficiency. Please try again.
Carl Pham – Little of this comment makes sense. First, AIG was not FDIC insured. No shit?!?!
The lack of regulatory authority is exactly my point, Carl. If AIG was FDIC insured, we wouldn’t be having this conversation. It’s that level of authority that the Treasury is asking for.
Once in bankruptcy, the concern isn’t the firm but the assets held by the estate. Really?!?!
Your grasp of the obvious is impressive. Treasury’s concern was not AIG, but the rest of the financial system. Again to use the FDIC analogy, the regulators don’t give a damn about the company – they are trying to prevent a collapse of the financial system. That’s why conventional bankruptcy is a lousy option for AIG. If AIG had gone bankrupt, we’d all be really screwed.
AIG PUT US AT RISK. ELIMINATING AIG ELIMINATES THAT RISK. W… T… F…
(my head is about to explode.)
Lending money has been a profitable venture for thousands of years. Guess what would happen if there were NO regulations. Everybody would be able to borrow at the lowest rate and liquidity is not a problem… did I mention that lending is a profitable endeavor and needs no motivation (or stimulus) beyond that to occur… that’s the mysterious liquidity the government is so worried about.
The only thing limiting liquidity IS REGULATION.
“Medical tourism is a drop in the bucket of total medical costs, and a short wait time for a harmful or medically unnecessary procedure is not a sign of efficiency.”
I’ll try again. I’ll try again to improve your reading comprehension. I didn’t write any of this crap. Joint replacements, neonatal care,
and cancer treatments are not harmful or medically unnecessary procedures. So Jim, YOU try again and don’t put YOUR words in MY comments
Bill: My point was that a system that provided short wait times but poor health outcomes should not be considered more efficient than one that provides long wait times and good health outcomes. So looking just at wait times is a poor way to measure efficiency — no one likes to wait, but the real question is whether the waiting matters. I had to wait for back surgery, and while I waited my back got better — an outcome that was better for me (no risk of surgical complications) and much cheaper.
You said that we have a more efficient health care system than peer nations. My question, again, is how can you tell? What data do you look at before forming this conclusion?
I’ll add my two cents on medical tourism. There was an article in this weekend’s Chicago Tribune about Americans going to Mexico for dental care. The main reason cited was Americans didn’t have dental insurance, so it was cheaper to go south.
Last year, the Trib ran an article about Americans going to India for surgery.
If having to go to another country is proof a medical system is broken, then the US system is Exhibit 1.
> The lack of regulatory authority is exactly my point, Carl. If AIG was FDIC insured, we wouldn’t be having this conversation. It’s that level of authority that the Treasury is asking for.
Umm, “FDIC insured” is wrt bank deposits.
AIG was regulated as both a bank and an insurance company. No significant part of its biz was not regulated. Most parts were under the “supervision” of multiple regulatory agencies, both in the US and in other countries.
Yes, I realize that “helicopter Ben” doesn’t know that, but I’ve posted the link here before.
> all the creditors, including Joe Homeowner and his insurance policy, would be SOL because the company was in the negative by a couple hundred billion dollars.
Actually, Joe Homeowner doesn’t much care if AIG goes away because he can buy insurance from another provider. At most, he loses the premiums that he paid for time between AIG going away and when his policy would have come up for renewal.
The same is true of Josie car-driver and Fred the term-life insurance guy.
Folks who bought “investment” products do have a problem, but we get to point to the insurance regulators who failed to protect them by approving bogus assets.
Wanna bet how many of those Indian doctors earned their education in the U.S.?
Josh Reiter – not sure how it’s relevant where the doctors got their degrees.