Monthly Archives: September 2009

Healthcare Diversions, Part 1: The Elephant in the Room

By L. Randall Wray

I have tried to stay clear of the current healthcare debate because all sides appear to be so far from any sensible policy that I remain indifferent to the outcome. However a recent three-hour layover in a major airport in the “new South” brought into sharp focus—at least for me—the elephant in the room that no one wants to discuss.

I won’t belabor the obvious point that Americans are, to put it delicately, a bit on the hefty side. But what really struck me is that many have evolved to the point that they are barely bipedal. As passengers attempted to perambulate their way from one gate to the next, it appeared that most had forgotten how to walk. I saw the most ungainly gaits—peregrination with great effort but little forward progress, the zigzag, the toe-heel-toe, the Quasimodo, the sideways roll, the zombie, the stop-start-stop again, all whilst occasionally careening off walls and other passengers. Of course, in some cases the attire dictated the method. A few of the boys had their pants waist bands down around their knees, forcing a duck-like waddle, made even more difficult by the need to use one hand to hold onto the belt lest gravity complete its work and bring the pants down to the ankles. A lot of the girls wore PJs and flip-flops, making it impossible to do much more than shuffle along. Some forty-somethings had eight inch stilettos in which only flamingos could parade about with grace. Still, the vast majority of passengers wore shoes marketed as sporting equipment, designed presumably for activities involving two legs and an upright posture rather than for those of the aquatic or slithering or knuckle-dragging variety.

And here is an interesting factoid: the average American walks just the length of three football fields daily. (Sierra Magazine, Jan/Feb 2007, p. 25) It shows. Since that is the average, it is no doubt boosted by the still considerable number of aging yuppies who manage 3k runs before breakfast, as well as by children the soccer moms idolized by Sarah Palin drive to practice. I presume that most of the airport patrons typically manage little more than a few schlepps from couch to fridge each day, taking a momentary break from their average 1600 hours in front of the TV each year. (Uncle John’s Bathroom Reader, 2006 p. 115)

Like many other airlines, ours had provided a welcoming speech as the plane pulled up to the gate, helpfully reminding passengers that the most dangerous part of their journey would soon begin. I had always thought that they were alluding to the fact that we would shortly be behind the wheel of our autos, taking our lives into our own unprofessional hands as we attempted to pilot 2 tons of steel on a 65 mph freeway through an obstacle course of text-messaging drivers (which studies show are twice as impaired as a drunk driver). Actually, they were referring to our more immediate mission—to walk without major mishap to the baggage claim area before returning to the relative safety of a seated or prone position in a vehicle, like the humans in the Wall-E movie. A few centuries ago, our ancestors here in America were able to run down buffalo, or even mastodons, and kill them with spears. Today, most Americans can, with some effort, spear a French fry—providing it is not moving too quickly and that they are seated to steady the aim.

Don’t get me wrong. I am not one of the contrarians who reject the argument that lack of access to healthcare by the uninsured contributes to the US’s relatively poor ranking in terms of health outcome. Surely that explains some of our problem. But too little exercise, too much smoking, too much food, and especially too much bad food have got to be a huge factor. As Michael Pollan argues (In Defense of Food, 2008), unless we address the problem with American Food, Inc., we will not significantly improve our health no matter what we do with health care. According to Pollan, the cost to society of the American addiction to “fast food” (which is neither all that fast nor is it food) is already $250 billion per year in diet-related health care costs. One-third of Americans born in 2000 will develop diabetes in her lifetime; on average, diabetes subtracts 12 years from life expectancy, and raises annual medical costs from $2500 for a person without diabetes to $13,000. While it is true that life expectancy today is higher than it was in 1900, almost all of this is due to reduction of death rates of infants and young children—mostly not due to the high tech healthcare that we celebrate as the contribution of our innovative, profit seeking system, but rather to lower tech inoculations, sewage treatment, mosquito abatement, and cleaner water. The life expectancy of a 65 year old in 1900 was only about 6 years less than it is for a 65 year old today—and rates of chronic diseases like cancer and type 2 diabetes are much higher. (Pollan, p. 93)

Smoking causes 400,000 deaths yearly. Simply banning smoking from public places throughout our country could reduce deaths by 156,000 annually. (NPR 22 Sept) We incarcerate a far higher percentage of our population than any developed society on earth—and health care costs in prisons are exploding for the obvious reason that prisons are not healthy environments. Our relatively high poverty rates, and high percentage of the population left outside the labor market (especially young adult males without a high school degree) all contribute to very poor health outcomes. In a very important sense that I will explore thoroughly in the next blog, more health insurance coverage would no more resolve our health care problems than would provision of car insurance to chronic drunk drivers solve our DUI problem.

So, before ramping up health care insurance, how about an education program to teach people the mechanics of walking. It is not as simple as it sounds. I speak from experience because some years ago I tore a calf muscle and after a long and painful healing process, I developed a gait that was all kinds of ugly. A physical therapist helped me to redevelop a human stride. While we are at it, we can reintroduce Americans to food. I don’t mean the corporate offal that Pollan calls “food-like substances”—products derived from plants and animals, but generated by breaking the original foods into their most basic molecules and then reconstituting them in a manner that can be more profitably marketed. What I mean is real food, produced by farmers and consumed after as little processing as possible. Preferably it will be local, cooked at home, eaten at a table, and will consist mostly of vegetables, grains, and fruits. And let us provide decent jobs to anyone ready to work, as an alternative to locking them up in prison. Ban smoking from all public places and regulate tobacco like the highly addictive and dangerous drug that it is. Together these policies will do far more to improve American health and to reduce health care costs than anything that “reformers” are proposing.

To conclude this part of the analysis: the benefits of extending health insurance coverage are almost certainly overstated and are not likely to make a major dent in our two comparative gaps: we spend far more than any other nation but do not obtain better outcomes and in important areas actually get worse results. Nations that adopt diets closer to ours begin to suffer similar afflictions: obesity, diabetes, heart disease, hypertension, diverticulitis, malformed dental arches and tooth decay, varicose veins, ulcers, hemorrhoids, and cancer. (Pollan p. 91) Even universal health insurance is not going to lower the costs of such chronic afflictions that are largely due to the fact that we eat too much of the wrong kinds of food and get too little exercise. It makes more sense to attack the problem directly by increasing exercise, reducing caloric intake, and minimizing consumption of corporate food-like substances that make us sick, than to provide insurance so that those who suffer the consequences of our lifestyle can afford costly care.

Let me be as clear as possible: it is neither rational nor humane to deny health care to any US resident. Further, I accept the arguments contending that early treatment through primary care is far more cost effective than waiting for emergency care—and it is obviously more humane. However in the next blog I will explain why I believe that extending health insurance is the wrong way to go if the goal is to extend health care coverage.

What the Fed has to Say About This?

An interesting article by Ryan Grym on Fed control of research. “Priceless: How The Federal Reserve Bought The Economics Profession

According to the article,

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate.
Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: “I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results,” Friedman wrote.

It is time for a new start.

Selling Death: Wall Street’s Newest Bubble

When Wall Street’s commodities bubble crashed last year, I asked whether the next bubble might be in securitized body parts. Wall Street would search the world for transplantable organs, holding them in cold storage as collateral against securities sold to managed money such as pension funds. Of course, it was meant to be an apocryphal story about unregulated banksters gone wild. But as the NYT reports, Wall Street really is moving forward to market bets on death. The banksters would purchase life insurance policies, pool and tranch them, and sell securities that allow money managers to bet that the underlying “collateral” (human beings) will die an untimely death. You can’t make this stuff up.

This is just the latest Wall Street scheme to profit on death, of course. It has been marketing credit default swaps that allow one to bet on the death of firms, cities, and even nations. And the commodities futures speculation pushed by Goldman caused starvation and death around the globe when the prices of agricultural products exploded (along with the price of gasoline) between 2004 and 2008. But now Goldman will directly cash-in on death.

Here is how it works. Goldman will package a bunch of life insurance policies of individuals with an alphabet soup of diseases: AIDS, leukemia, lung cancer, heart disease, breast cancer, diabetes, and Alzheimer’s. The idea is to diversify across diseases to protect “investors” from the horror that a cure might be found for one or more afflictions–prolonging life and reducing profits. These policies are the collateral behind securities graded by those same ratings agencies that thought subprime mortgages should be as safe as US Treasuries. Investors purchase the securities, paying fees to Wall Street originators. The underlying collateralized humans receive a single pay-out. Securities holders pay the life insurance premiums until the “collateral” dies, at which point they receive the death benefits. Naturally, managed money hopes death comes sooner rather than later.

Moral hazards abound. There is a fundamental reason why you are not permitted to take out fire insurance on your neighbor’s house: you would have a strong interest in seeing that house burn. If you held a life insurance policy on him, you probably would not warn him about the loose lug nuts on his Volvo. Heck, if you lost your job and you were sufficiently ethically challenged, you might even loosen them yourself.

Imagine the hit to portfolios of securitized death if universal health care were to make it through Congress. Or the efforts by Wall Street to keep new miracle drugs off the market if they were capable of extending life of human collateral. Who knows, perhaps the bankster’s next investment product will be gansters in the business of guaranteeing lifespans do not exceed actuarially-based estimates.

If you think all of this is far-fetched, you have not been paying attention. From Charles Keating’s admonition to his sales staff that the weak, meek and ignorant elderly widows always make good targets, to recent internal emails boasting about giving high risk ratings to toxic securities, we know that Wall Street’s contempt for the rest of us knows no bounds. Those hedge funds holding CDS “insurance” fought to force the US auto industry into bankruptcy for the simple reason that they would make more from its death than from its resurrection. And the reason that most troubled mortgages cannot obtain relief is because the firms that service the mortgages gain more from foreclosure. It is not a big step for Wall Street and global money managers with big gambling stakes at risk to slow efforts to improve health. Indeed, it is easy to see some very nice and profitable synergies developing between Wall Street sellers of death and health insurers opposed to universal, single-payer health care. As AFL-CIO Secretary Treasurer Trumka recently remarked on NPR, we already have committees deciding when to cut-off care—the private health insurers decide when to deny coverage. It would not be in the interest of securities holders or health insurers to provide expensive care that would prolong the life of human collateral—a natural synergy that someone will notice.

It should be amply evident that Wall Street intends to recreate the conditions that existed in 2005. Virtually every element that created the real estate, commodities, and CDS bubbles will be replicated in the securitization of life insurance policies. If Wall Street succeeds in this scheme, it will probably bankrupt the life insurance companies (premiums are set on the assumption that many policyholders will cancel long before death—but once securitized, the premiums will be paid so that benefits can be collected). But it is likely that the bubble will be popped long before that happens, at which point Wall Street will look for the next opportunity. Securitized pharmaceuticals? Body parts?

Here’s the problem. There is still—even after massive losses in this crisis—far too much managed money chasing far too few returns. And there are far too many “rocket scientists” looking for the next newest and bestest financial product. Each new product brings a rush of funds that narrows returns; this then spurs rising leverage ratios using borrowed funds to make up for low spreads by increasing volume; this causes risk to rise far too high to be covered by the returns. Eventually, lenders and managed money try to get out, but de-levering creates a liquidity crisis as asset prices plunge. Resulting losses are socialized as government bails-out the banksters. Repeat as often as necessary.

Reform of the US financial sector is neither possible nor would it ever be sufficient. As any student of horror films knows, you cannot reform vampires or zombies. They must be killed (stakes through the hearts of Wall Street’s vampires, bullets to the heads of zombie banks). In other words, the financial system must be downsized.

Fed Profits From The Bailout? Don’t Count Those Chickens Before They Hatch

A flurry of reports appears to indicate simultaneously that the government’s bailout of Wall Street is working to bring banks back to life, and that the Fed is making profits on the deal: See for instance here, here and here. According to these reports, the Fed received $19 billion in interest on its emergency loans to troubled institutions, which was about $14 billion more than it would have received if it had instead bought Treasuries. In addition, it was reported that the Fed made $4 billion of profits from the eight largest banks that have repaid TARP funds. This is seen as good news in Congress: “The taxpayers want their money back and they want the government out of our banking system,” said Representative Jeb Hensarling.

There are three fundamental problems with these stories. The first is that it raises a question about the function of the Fed: should a branch of government seek profits at the expense of the private sector? As we all know, the Fed is normally profitable and returns earnings above 6% on equity back to the Treasury. When the Fed profits on its holdings of government debt, that is essentially the government paying itself and thus of no consequence. Profiting at the expense of private institutions—even if they are the hated “banksters” of Wall Street—doesn’t seem to be something to celebrate. Especially when we are in a deep recession or depression, with a long way to go before the financial system recovers. All else equal, I’d rather see the private sector accumulate some profits so that it can recover.

Don’t get me wrong. I want retribution, too. We need a “bank holiday”, to begin next Friday: close suspect banks including all of the biggest that were subjected to the wimpy “stress test”. Spend the weekend going through the books and then on Monday begin to resolve the insolvent, to prosecute the banksters for fraud, and to retrieve from them their outsized bonuses financed by the public purse. It is payback time. My only objection is to the notion that we should be celebrating because the Fed appears to have made a profit on (a small part of) the bailout.

Second, there is every reason to suspect that the banks that have repaid TARP money and those making payments on loans from the Fed are still massively insolvent at any true valuation of the toxic waste still on their balance sheets. Recent reported profit in the financial sector is window-dressing, designed to fuel the irrationally exuberant stock market bubble. This will allow traders and other employees to cash in their stock options to recover some of the losses they incurred last year, even as bonuses are boosted for this year. Indeed, the main reason for returning the borrowed funds is to escape controls on executive salaries and bonuses. And, finally, it provides some important PR to counteract the growing anger over the financial bailouts. Only the foolish or those with some dog in the hunt will believe that the banksters have really managed to restore health to the financial sector as they continue to do what they did to cause the crisis.

Last but not least, the Fed’s “profits” are based on an infinitesimally small fraction of its ramped-up operations—its liquidity facilities (that also include discount window loans and currency swaps with other central banks, purchases of commercial paper and financing for investors in asset-backed securities). It has also spent $1.75 trillion buying bad assets, with any losses on those excluded from the profits numbers. The government’s profits also exclude current and expected spending on the rest of its reported $23.7 trillion dollar commitment to the financial bailout and fiscal stimulus package. The failure of just one medium-sized bank could easily wipe out the entire $14 billion of profits that has attracted so much notice. (See also Dean Baker on the government’s “profits”)

It is ironic that Euroland’s regulators are calling for much more radical steps than Washington is willing to take. German Chancellor Angela Merkel and French President Nicolas Sarkozy are calling for more regulation and for limits on executive compensation even as the Obama administration continues to argue that such limits would constrain the financial sector’s ability to retain the “best and the brightest”. If the bozos that created this crisis are the best that Wall Street can find, it would be better to shut down the US financial system than to keep them in charge. It is doubly ironic that Nigeria (a country that normally would not come immediately to mind as a role model) has actually charged the leadership of five of its major banks with crimes. Each of these banks had received government money in a bailout, and the CEOs stand accused of “fraud, giving loans to fake companies, lending to businesses they had a personal interest in and conspiring with stockbrokers to drive up share prices.”

Isn’t that normal business practice for Wall Street banks favored by Ben Bernanke and Timothy Geithner? It is time to get the NY Fed out of Goldman’s back pocket, and to permanently downsize the role played by Wall Street and the Fed in our economic system.