Health Care Reform: A Victory for the Little Guy?

by Dollars and Sense

David Leonhardt, the New York Times economics reporter, has a cover story in today's paper, In Health Bill, Obama Attacks Wealth Inequality, that depicts the new health care reform law as the first great social legislation in a generation. It is big, and it is social legislation, and it is true that it will be funded partly by raising taxes on higher-income folks. But it is hard to view it as the challenge to inequality that Leonhardt thinks it is--or that Obama & Co. (least of all Larry Summers, whom Leonhardt mentions in a positive light in the article) intended it as such.

As a counterpoint to Leonhardt's argument, here's something from the great, relatively new blog from the good folks at the University of Missouri at Kansas City's econ dept, New Economic Perspectives. This guest post is from Robert Prasch of Middlebury College.

Think The Democrats Just Scored One for the Little Guy? Think Again.

By Robert E. Prasch | Tuesday, March 23, 2010
Professor of Economics
Middlebury College

As a resident of Massachusetts, where the backlash is already well underway, I thought I should add a comment. Let's begin by considering the origins of "Obamacare". It comes from Massachusetts. It was passed early in Gov. Patrick's reign because during the campaign it was already in debate as it was Gov. Mitt Romney's proposal. Now, one might wonder where the conservative, free market, head of Bain Consulting governor might go finding a healthcare plan? Well, he got it from the Heritage Foundation. And why did they have such a plan? Well, they developed its broad outlines during the 1993-4 years as the Republican ANSWER to Hillary's effort. So, that is our new federal plan -- it is a warmed over version of the Heritage Plan. This, I submit, might explain a few things. (1) It was Obama's idea all along to "triangulate" the Republicans on this issue, and (2) why many of them are really very bummed out that their leadership did not take up the chance to show "bi-partisanship" on this issue (see David Frum on this).

Now, I tend to be skeptical of Heritage Foundation health-care plans. For several reasons:

(1) By design, costs are not contained, neither is health care reformed. This means that "affordability" does not come from controlling costs, but by shifting them. Shift to whom? A hallmark of the Heritage/Romney plan is that no change of the distribution of income is to occur with the financing of this plan. NONE. Rather, funding is to be from three sources --- those with supposedly "Cadillac" plans, those who have "opted out' because of the laughably high cost of coverage relative to their own risks, and to the state general fund. (2), In light of state budget shortfalls, it is no surprise that the latter source is declining quickly, and tens of thousands of Mass residents have ALREADY lost their subsidies (this trend will certainly occur on Capitol Hill over the next several years as 'deficit mania" kicks in). So, get this, as your income declines and your house is repossessed, the cost of your health care rises with higher premiums AND lower subsidies. But, make no mistake, even as the subsidies decline, the mandate will stay -- why should the big companies give up this huge windfall of unchecked access to the wages of the low paid?

(3) I also wish to warn against the 'NPR version' of the story that this bill "gives" health care for those without. Nothing is given, it is a MANDATE. Now, while the original 'vision' of the bill had subsidies, these are fading rapidly. So, now we have a dramatically underfunded mandate. Solving the lack of insurance by mandating the poor to buy it is, to be blunt, Dickensian. Obama himself stated it very well during the campaign "It is like solving homelessness with a mandate that those living on the streets buy a house". Those who are poor understand this point, and resent it. True, there are some young people who are in good health and, understanding statistics and rapacious health care insurance firms, "choose" not to get health insurance (as I did for several years in my 20s as the teaching assistantship I got from DU during my years studying for my MA could not cover my living expenses AND health insurance), yet the bulk of non-buyers are people who have found that with little in the way of family funds, other priorities (rent, car repairs, food, school fees, etc.) are a greater priority.

So, now the Democrats have taken it upon themselves to decide the priorities of millions of our poorest citizens. Thus, thanks to the Democrats, non-negotiable required fees from the insurance industry will be several multiples of the current income taxes of the lowest paid. This is sticker shock at its worse. Even Republicans know that the money will go to rapacious, soulless, insurance companies under the careful guidance of the IRS (here in MA, we have several extra highly-complex pages on an already long tax form where we have to prove that we have insurance). Stated simply, the Democrats have decided to go into the business of being the "enforcers" of the big insurance firms. This is NOT a good place to be in an election year. This is ESPECIALLY not a good place to be when you are already presenting yourself to voters, as Obama seems committed to do, as the die-hard supporter of the big banks that foreclosed on people's homes and blew up their economy.

With such a context, along comes someone who calls himself a "regular guy" with a pickup truck (he failed to mention that he has five homes, one in Aruba, but the truck was in all the ads), and he takes Kennedy's seat in Mass. In MASSACHUSETTS! Only one year after Obama wins this state by 20 points! Wow. This, folks, is what a backlash looks like, and it is enormous. Turning the wages of the working classes over to the insurance companies, without recourse or mercy, is not going to win this state, and it will not win in many others. If the Democrats lose any less than 35 house seats this election I will be amazed. And, note my wording, the Republicans did not, and will not, win them. No, the Democrats have decided to lose these seats. Amazing.

Sorry about bringing the bad news. But this bill is a disaster, and it is worse than nothing, as it will destroy the incomes of those it purports to help along with the Democratic Party. It is especially bad since a public option was always an option, I do not believe the D.C. spin on this for even a minute. Just as Obama never wanted to renegotiate NAFTA or leave Iraq, it was clear from the outset that the White House never wanted a public option, which explains why Rahm said so early last summer. Why? Because the big insurance companies did not want it, so Rahm did not want it. End of issue.

Read the original post.

Labels: David Leonhardt, health care, health care reform, Lawrence Summers, Obama administration, UMKC

 

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3/24/2010 02:29:00 PM 3 comments

 

Financial Crisis Inquiry Commission Hearings

by Dollars and Sense

The hearings for the Financial Crisis Inquiry Commission are going on right now. Zachery Kouwe of the New York Times' blog Dealbook is "live-blogging" the hearing right now (how's that for an example of compound-transitive-verbing?!).

Meanwhile, today's NYT op-ed section has a nice survey of questions some experts would like to ask the bankers in the hearings. My favorites are from Simon Johnson of MIT and Yves Smith of Naked Capitalism:

1. Describe in detail the three worst investments your bank made in 2007 and 2008—that is, those transactions on which you lost the most money. How much did the bank lose in each case?

2. What was the total compensation of each manager or executive supervising those three transactions—including yourself—in 2007 and 2008?

3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses?

—SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics

Some of your firms received payouts on credit-default swap contracts with American International Group. Most of those guarantees resulted from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G. or other insurers. This hedging allowed traders to book "profits" that had not yet been earned—profits that would be counted in calculating their bonuses.

However, this insurance was likely to fail, as your risk managers surely knew. It involved so-called wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the housing market collapse) that would lead you to seek payment on the insurance. The insurance was effective only because the government stepped in, theoretically on the taxpayers' behalf, and made payments for A.I.G., an otherwise bankrupt firm. Since employees' bonuses, and ultimately yours, were based on these fraudulent profits, my questions are these:

1. How much profit did your firm record for bonus purposes on these trades that ultimately delivered huge losses? How much of those bogus profits were paid out in bonuses?

2. Have you made any effort to recover the bonuses? If not, why not?

—YVES SMITH, the head of Aurora Advisors, a management consulting firm, and the author of the blog Naked Capitalism and the forthcoming book "Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism"

Read the full list of questions.

Speaking of Yves Smith, she had some interesting things to say today about something that is looming behind today's hearings: the Obama administration's recent talk of levying some kind of tax/fine on the big banks--separate from the tax on transactions that many have been calling for, and from the idea of a special tax on bankers' bonuses. (A NYT editorial today (? or yesterday--I can't tell) came out in favor of the new tax/fine, but called for a tax on bonuses on top of that.) But according to Yves, the O. admin. will come out with a more concrete proposal today:

Obama to Announce $120 Billion TARP Fee

Ah, the machinations that Faustian bargains produce!

The Obama Administration is now caught in its own machinations and is having to backpedal fast and hard from its bankster friendly posture, or at least have the public believe it is executing that maneuver.

While I cannot fathom the logic, Team Obama clearly decided to throw in its hat with the industry from the beginning, supporting a whole raft of tricks to keep banks from recognizing losses (heavens, might expose that some were bankrupt and require that incumbents be given the heave ho!). It also assisted in the “talk up the bank stocks” effort, since goosing prices would allow some banks to sell shares and save the new Administration the unpleasant task of figuring out how to resolve and recapitalize the sickest bank. It never seemed to occur to them that the best time for a President to take unpopular but productive action is at the start of his tenure. Nor did they anticipate that the public was not as dumb and inattentive as they assumed, and has taken notice of how the Administration has hitched its wagon to that of the plutocrats.

Now some readers might argue that, gee, things look better than the did in March, surely this Team Obama program was not such a bad idea. Well, actually, it was and is. The record of serious financial crises shows that regulatory forbearance (which is letting banks soldier on with the hope they will earn their way out of their messes over time) is more costly than forcing them to recognize losses and recapitlize them. Not only are the ultimate bailout costs higher with the "let 'em off easy" approach, but economic recovery is weaker too.

Team Obama is now having the contradictions in its stance exposed. If the banks were really healthier due to their own efforts, the salvos against them would be unwarranted. Here they had gone over the brink, pulled themselves up by their bootstraps. All these complaints about their earnings and bonuses are mere class jealousy. But no one save the banksters themselves believe that tripe. The banks got massive subsidies during and after the crisis; they continue now with the Fed's super low rates and continued intervention in the mortgage markets (theoretically ending in March, but most informed observers expect the central bank to blink).

But Team Obama does not want to play up the extent to which the industry has benefitted from public munificence; that only stokes the deserved and correct public anger, which includes the Administration for cutting such a crappy deal with the industry. So it has the PR conundrum of having it be beneficial for political reasons for them to beat up on the financiers, but now being so deeply aligned with them as to make that impossible, save perhaps on a few narrow issues that it hopes will have sufficient peasant-appeasement value. Any full-bore attack would represent an embarrassing change from the Administration's past fawning posture, and would also require the sacrifice of a senior head or two, presumably starting with Timothy Geithner, to look credible. But Obama seems constitutionally incapable of firing anyone, no matter how much it would serve him to do so.

The sketchy announcement du jour, that Obama will announce a $120 billion TARP fee this week (hhm, conveniently timed to distract attention from the start of the hearings into the crisis and Wall Street bonus announcements) illustrates the bizarre position the Administration is in. Alert readers may recall that Obama was touting the performance of the TARP at his Lehman anniversary speech in September. It repeated that palaver in December.

Read the rest of the post.

We will be on the lookout for the best analyses of and commentaries on the testimony in today's hearings. If you find something particularly cogent, let us know.

Labels: Financial Crisis Inquiry Commission, investment banks, Obama administration, Simon Johnson, TARP program, Yves Smith

 

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1/13/2010 11:08:00 AM 0 comments

 

Life Insurance Securitization

by Dollars and Sense

Is Obama planning to kill grandma? Probably not, unless grandma is Afghani or Pakistani, and the murder weapon is an aerial drone. Or maybe you consider capitulation to private health insurance companies in health care reform an indirect way of killing grandma, given that the true death panels are the ones convened by those companies to deny coverage to, among other people, some grandmas.

But another industry that the Obama industry is busy capitulating to—Wall Street—has figured out another way to profit from grandma's death: securitizing her life insurance. Here's how it works, according to an article in today's New York Times: Investment banks would give policy-holders cash for their policies, which would then be securitized and bundled as "life settlements" (with fees going to the bundlers), sold, traded, resold—just the way subprime mortgages were. And there are similar possibilities for fraud and conflict of interest as with the complex derivatives that played such a big role in the current financial crisis. The most striking aspect of this new scheme, though, is that it bets against grandma: "The earlier the policyholder dies, the bigger the return—though if people live longer than expected, investors could get poor returns or even lose money."

Hat-tip to Mike P., who points out: "The article gets better the farther you read. It's like a description of the mortgage bubble written before it happened. You can picture gangs of insurance salesmen ripping through elderly housing complexes, badgering old deaf people to sell their life policies. On the first page of the link, to the left of the article, is a fascinating graph showing that 'the market for mortgage securities has shrunk to less than a fifth of its peak size'—a picture of a bubble."

Read the full article.

Labels: aerial drones, Afghanistan, health care, health care reform, health insurance, life insurance, life settlements, Obama administration, Pakistan, securitization, Wall Street

 

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9/07/2009 11:57:00 AM 2 comments