Tuesday, October 07, 2008

Fed to Compound Credit Problem

The Federal Reserve today announced that it would purchase US Commercial Paper in an attempt to ease the credit crunch impacting corporations throughout the US. (Bloomberg: Fed to Purchase U.S. Commercial Paper to Ease Crunch.) According to Bloomberg, "The Fed's new unit will buy three-month dollar-denominated commercial paper at a spread over the three-month overnight- indexed swap rate." In addition, the nation's central bank will double its cash auctions to banks, raising the amount auctioned to as much as $900 Billion.

Does this remind anyone of a famous quote from Thomas Jefferson? "The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

There is little doubt that we are facing perhaps the worst economic crisis since the Great Depression. For the moment, one might argue that the post-Watergate crisis that saw double-digit inflation and double-digit unemployment was worse than what we face today, and if today's crisis were in its final hours I would agree. Unfortunately, we face the dawn of this crisis, not its sunset. If improperly handled, this crisis will yield another Great Depression.

The current spotlight is on sub-prime mortgages, and financial institutions lending significant sums to people that can ill-afford those loans, all on the prospect of being able to sell this bad paper for profit or at worst being able to foreclose on property increasing in value. Truth be told, though, the sub-prime issue is only the tip of the iceberg. The collapse of the housing market did result in the sub-prime issue starting a financial avalanche, but this issue was stacked way atop many other more subtle problems that may well drive us into another Depression.

First and foremost, we are seeing a steady decline in the US job market. The alarm was first raised in 2004 when the AFL/CIO warned that the number of jobs sent overseas had doubled in the past year. In January of this year, the Peterson Institute for International Economics warned that as many as 20 million US jobs out of a 140 million job pool were at risk of off-shoring. That's over 14% of the jobs in the US that are at risk. While our unemployment numbers rise (6.1% as of September 2008), the Consumer Confidence Index continues to barely tread water. Over 25% of the people believe the job market will worsen in the next quarter. That means that 25% of the people are concerned about job security, and based on the Peterson numbers, rightfully so.

Next in line we have rising inflation. The increased cost of food and fuel is crippling most low to middle income homes. Lest we forget, that accounts for close to 95% of the American public. Why is the mortgage foreclosure rate so high? Quite simply, it's because the average American family has had their net income squeezed through rising fuel, home heating or cooling costs, and skyrocketing food costs. That money had to come from someplace, and in too many cases it came from the mortgage bill. This economic crisis will not end as long as the average family cannot afford to pay their basic bills.

This leads us to the topic of debt. The average American credit card-holder is in debt to the tune of $8000, so that's $16,000 per family on average. Tack onto that a mortgage and an auto loan, and it's not hard to see where most of America's income is going. As inflation rose, the number of bills being paid by credit card also grew. Now this credit-card crisis has yet to materialize in the banking industry, but rest assured this crisis will hit home over the next 4-6 months. Credit cards are unsecured loans. As consumers begin to default on those cards, banks will be forced to take write-downs. Who will come to the rescue? You guessed it - the American taxpayer. We've already done it twice, first with the $700 Billion white elephant that just cleared Congress and now by the Federal Reserve's unilateral (and most likely unconstitutional) decision to purchase corporate debt.

If you read that Bloomberg article linked at the top of this post, I'd recommend paying close attention to this one sentence: "Fed officials in a conference call with reporters didn't say how much commercial paper, which hundreds of companies use to finance payrolls and meet other cash needs, it plans to purchase."

Let's ignore the fact that the Fed has no clue how much commercial paper they will purchase. That fact alone bothers me since it's pretty much a blank check being written by the Fed. What bothers me more, though, is that "hundreds of companies use (commercial paper) to finance payrolls and meet other cash needs..." Clearly, the concept of out-of-control debt is not limited to the individual or the family. Companies need to borrow money just to meet their payroll requirements. This issue of debt is rampant throughout our economy. So rampant, that the Fed now feels obliged to offer a unilateral bailout to corporations by purchasing their debt.

So what has the government done to date about this crisis? They've increased debt and they've attempted to make it easier to obtain more debt. In case you've missed it, there's increased talk of yet another interest rate cut to stimulate borrowing. If debt is at the heart of the economic crisis, how are we supposed to believe that increasing debt is going to cure it? Has it not occurred to anyone that the solution is to decrease debt, not increase it?

What was that Jefferson said? "If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

Amazing foresight, wouldn't you say?


Sunday, September 28, 2008

Election 2008 - Health Care Issue - Obama Version

The second article in our series of 2008 campaign issues focuses on the Health Care plan proposed by Senator Barack Obama. Details of his plan may be read on the official Barack Obama campaign website.
The Barack Obama Plan

Senator Obama's health care plan emphasizes from the start two points that are at the center of concern for anyone studying a more comprehensive health care solution. Taken directly from his campaign website, the Senator states:

"Under the plan, if you like your current health insurance, nothing changes, except your costs will go down by as much as $2,500 per year.

If you don’t like your health insurance, or you don’t have health insurance, you will have a choice of new, affordable health insurance options."

On the surface that sounds excellent. All of us with insurance would love to see a reduction in costs, while those without insurance are very much in need of some form of affordable coverage. Now, the word "affordable" is very much up for debate since many of those without insurance today can't afford their present bills, let alone anything added on for health care. But for the moment, let's take the statement as written and at face value.

Since the Senator took the time to itemize each of the key points in his plan, I will repeat them hear and comment on each of them. The points I'm listing are directly off his website.

Require insurance companies to cover pre-existing conditions so all Americans regardless of their health status or history can get comprehensive benefits at fair and stable premiums.

Most company sponsored health care plans do have a pre-existing waiver built in during the annual open enrollment period. As we age, this becomes a necessity, and it's good to see some recognition of this requirement built into a health plan. Mandating it, however, will result in an increase in insurance premiums. Once insurance companies are forced to accept pre-existing conditions by default, the natural response will be to raise the cost for everyone.

Create a new Small Business Health Tax Credit to help small businesses provide affordable health insurance to their employees.

This point is necessary if we're going to require small businesses to provide health insurance benefits, assuming they are sharing in the cost of that insurance. Small businesses are at the heart of local economies, but all too often they exist on a shoe-string budget, surviving from month to month. A mandate from the government that forces a significant increase in their expenses must come with some government protection in the form of tax credits. I fully support this point in the Obama plan.

Lower costs for businesses by covering a portion of the catastrophic health costs they pay in return for lower premiums for employees.

The biggest challenge to our current health care system lies in the inability to provide long-term catastrophic insurance. A single major illness can easily wipe out an entire family's savings and destroy their economic future, and that is for a family that has good health care coverage. It does not take long for coverage to be exhausted in the event of serious long-term illnesses that require extensive care. So I agree in principle with the basis for this point in the Obama plan. Where I find myself skeptical is in the cost. Moving a portion of this burden from the corporation (and individual) to the government does make sense on the surface, but before I fully jump on board I want to see more details around the cost. This one could come with a huge price tag.

Prevent insurers from overcharging doctors for their malpractice insurance and invest in proven strategies to reduce preventable medical errors.

No argument here, although caps on malpractice lawsuits have stumbled in Congress anytime they are proposed. There is no doubt that doctors must be protected from the frivolous lawsuit. What is a misconception, however, is the idea that malpractice insurance accounts for a significant portion of our health care costs. It doesn't. In any case, I support the concept behind this point, regardless of its ability to reduce health care costs.

Make employer contributions more fair by requiring large employers that do not offer coverage or make a meaningful contribution to the cost of quality health coverage for their employees to contribute a percentage of payroll toward the costs of their employees health care.

Some states do have laws requiring any employer with 10 or more employees to offer some form of heath insurance. Enforcing this type of requirement is certainly the right approach. The best solution to the health care issue is not socializing the health care system. Rather, the best solution lies in ensuring that anyone that wants a job can find a job, and requiring those employers to provide health care options to their employees.

Establish a National Health Insurance Exchange with a range of private insurance options as well as a new public plan based on benefits available to members of Congress that will allow individuals and small businesses to buy affordable health coverage.

Read this one carefully. I believe the gut reaction of most conservatives will be to scream "socialism" when this point is raised, however if you read it carefully it's nothing of the sort. What Obama is proposing sounds more like a national pooled plan that allows individuals and small businesses to take advantage of the bulk purchasing power already available to large corporations. This concept actually makes a lot of sense, and may be the best solution offered to reduced the cost to individuals or small businesses. It's that loss of bulk buying power that cripples the ability of the individual to obtain affordable health care on their own.

Ensure everyone who needs it will receive a tax credit for their premiums.

As they say, the devil is in the details and this talking point lacks any at all. It's hard to comment on the viability of an option that does not define need, does not define the amount of a tax credit, and fails to account for the funding of that tax credit. This talking point is political campaign fluff, pure and simple.

Lower drug costs by allowing the importation of safe medicines from other developed countries, increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicines from the market

While I'm grateful to see the adjective "developed" used in this context, I oppose the importation of drugs from other countries. The reason, though, may surprise you. A great deal of drug research is done in the United States. We Americans pay a very high premium for that research. Drugs that are imported from other countries are the result of that research, but the cost is not being shared across the board. Rather than allow the importation of cheap drugs - many created as the result of American research - we should require the cost of that research to be passed on to the drugs we export. Our own pharmaceutical companies are not passing that burden on to overseas buyers, so we end up paying an artificially high cost. That's the part that must be corrected, and importing drugs is not the answer.

Require hospitals to collect and report health care cost and quality data.

This is just sound business practice. If hospitals aren't doing that today, then the first question should be "why aren't they?"

Reduce the costs of catastrophic illnesses for employers and their employees.

This sounds great, but without details it's just political campaign fluff. Cost reduction is not something you can mandate, so let's see some details on how it will happen.

Reform the insurance market to increase competition by taking on anti-competitive activity that drives up prices without improving quality of care.

This is another point that sounds very good, but is sorely lacking in details. Before signing up for this one, I'd like to see how the Senator plans to reform the insurance market. Without those details, this one also falls into the campaign fluff category

So now comes the multi-billion dollar question. How will the Obama plan pay for itself? Straight off the website he says:

"Barack Obama will pay for his $50 - $65 billion health care reform effort by rolling back the Bush tax cuts for Americans earning more than $250,000 per year and retaining the estate tax at its 2009 level."

What will pay for it is a tax increase for those making more that $250,000 per year. Now, the question you have to ask yourself is this. What impact will be felt by the lower and middle classes if we increase the tax burden on the wealthiest Americans? In my view, a tax increase at the high end will result in more American jobs being shipped to India and China, lower wage increases (that already trail inflation by 50%), more layoffs, and higher prices for goods and services. Increasing taxes on corporations and the folks that run them is not the solution.

In summary, there are some very solid points in the Barack Obama plan. Overall, I think the plan is a good starting point for discussion. I do not like the method of paying for it, preferring instead that we reduce other areas of the budget to compensate for this increase. On the whole, however, in comparing this plan with the one offered by Senator McCain, I believe the Obama plan will increase the number of people currently insured. I don't believe it will reduce cost - in fact, I believe it will increase cost - but in the long run some form of insurance will reach more Americans.

Saturday, September 27, 2008

Election 2008 - Health Care Issue - McCain Version

Over the course of the next week, we'll attempt to examine each of the major issues facing the two Presidential Candidates. Major topics will include Health Care, Foreign Policy, Taxes, and Energy Policy. The first topic we'll examine is Health Care.

Not unexpectedly, both Senator McCain and Senator Obama offer strikingly different options for health care as part of their 2008 campaign platforms. While nobody on either side of the aisle would dispute that something must be done about the health care situation in the US, finding a viable solution that does not compound the existing problems appears quite elusive. In this first of two articles, I'll review the John McCain Plan and will follow with the Barak Obama plan in a second article.

The John McCain Plan

Details of this plan are found on the official John McCain Campaign website.

Currently, most people employed full time by companies with 10 or more employees enjoy some form of health care as part of their employment benefits. Most of those plans include a pre-tax contribution by the employee and a contribution (on average up to 5 times what the employee pays) by the company. That contribution is not considered income and is therefore not a tax burden imparted to the employee.

The heart of the John McCain plan would change that. Under his proposal, the employee contribution would be made after taxes are deducted, and the employer's portion would be taxable income assigned to the employee. On average, the cost of health care in the US is approximately $12,000 for a family of 4 or $4,400 for an individual. (National Coalition on Health Care.) So under the McCain plan, employees choosing a family plan would see their gross income increase by $12,000 or an individual would see gross income increase by $4,400.

To offset this, what McCain proposes is a $2500 direct refundable tax credit for individuals and $5000 for married couples. He envisions a plan whereby the individual would be able to choose their own health provider, either using the one sponsored by the company or choosing one on their own, with the tax credit being paid directly to the provider. Any surplus in the credit would be deposited into a Health Savings Account.

What this portion of the plan fails to consider is that the only viable option for the employee is the plan offered by the employer. An individual simply cannot obtain the same level of coverage at the same price by purchasing a plan on their own. The corporation has the advantage of purchasing a large pooled plan and invariably receives a better rate than any individual could obtain on their own. To purchase a non-corporate sponsored plan, an individual is going to end up paying $4,400 or more minus the $2500 credit, or at least $1900 out of pocket. That is compared to a national average today of about $880.

It's even worse for the family of four. As stated above, the average cost is $12,000 of which the individual typically pays 20%. So today, the individual has a pre-tax expense of about $2400. Under the McCain plan, that individual (purchasing a plan on their own) would end up paying $7000 and would lose the pre-tax benefits of the current system. That doesn't sound like much of a bargain to me.

Sticking with the employer sponsored plans, the employee may come out slightly ahead based on their tax bracket. For instance, for a family of four in the 15% tax bracket, there would be a potential savings of about $800. The individual may see a savings of about $900. Keep in mind, however, that the surplus goes into a Health Savings Plan, so you only really get to use that surplus if you have a major medical issue in that calendar year. It's a "use it or lose it" savings plan, so it does not add to the discretionary income of the individual or family.

What the McCain plan assumes is that there will be greater competition between the health care providers, thus lowering the costs of health care in general. Unfortunately, the assumption is fundamentally flawed. The deck is already stacked in favor of the corporate sponsored plan, so the individually purchased plans will be minimal at best. What is driving the cost right now is the overall cost of prescription drugs, routine tests, and hospital visits. Competition - or lack of competition - on the part of the providers is not a factor, so attempting to increase that competition will have no positive impact.

In point of fact, the competition between providers already exists today at the corporate level. Each year, corporations review their health care options and attempt to negotiate the lowest cost from a variety of providers. Despite that, we still see significant yearly increases in the cost of health care. This year alone, the rising cost was approximately double the current rate of inflation. So clearly, the driving force is something other than competition between providers.

The second portion of the McCain plan is to attempt to cover, at the state level, those individuals that are unable to obtain insurance. This portion of the plan calls for the federal government to work with states to establish "Guaranteed Access Plans" with "reasonable limits on premiums" and "assistance for Americans below a certain income level."

Not surprisingly, this portion of the plan is a bit vague on the details. The vast majority of people that fall into the the category that would warrant a GAP plan are those with extremely low income levels. Well, at that income level, there is absolutely no discretionary income left after paying just the most basic of bills. All too often, these individuals are floating month to month with at least one bill overdue. For these individuals, no premium is at a "reasonable limit". Given the choice of paying the rent or paying for health care, health care will lose.

It must also be noted that the GAP plans being proposed by Senator McCain are at the state level, not national. This sounds very much like another program mandated by Washington but without any federal funding to back it up. Placing that burden on the states all but insures higher state or local taxes, especially in states with depressed economies or low income levels.

What it all boils down to is my belief that the plan as proposed is neither viable nor beneficial to the average American. I believe this plan will do nothing to reduce the cost of health care, will increase the tax burden on the individual at the state level, and will result in even less people covered by some form of health insurance. I can't support this plan as written.

Sunday, September 21, 2008

Financial Bailout Legislation

Perhaps it is time to be reminded of the lyrics of a popular Buffalo Springfield song. "It's time we stop, hey what's that sound, everybody look what's goin down." As to what's "goin down", I'm not referring to the stock market.

Here is a link to the legislation being reviewed in Congress for a $700 Billion bailout in the current credit crisis: (Wall Street Journal: Financial Bailout Package.)

I first want to draw your attention to Section 8 which reads, "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

So the Secretary of the Treasury is not accountable either to the courts or to any other administrative agency in the handling of $700 Billion. Am I the only one that has a problem with this? So, what limits do we place on him in the legislation, then? Clearly, Congress must have some protection built in for the taxpayer, right?

Well, then, let's take a look at Section 7: "For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."

Wait a second, what was that last sentence again? "Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure."

Am I just too cynical in my old age, or does that pretty much grant the Secretary Carte Blanche in using the proceeds from the sale of any of these securities for such administrative expenses as oh, say, salaries or any other perk you can imagine without court or other agency review? I'd say the Treasury Department just struck the mother lode on this one.

For the record, I totally oppose any bailout package that does not contain the following:
  • Clear, well-defined oversight by one or more agencies external to the Treasury Department.
  • Clear, well-defined criteria regarding the situations in which any federal funds may be used.
  • Provisions stating that the sales of any securities purchased by these funds must be used to off-set the establishment of the fund. In other words, the funds must be used to pay back the tax payer.
  • A clear set of restrictions placed on the Banking, Brokerage, and Insurance industries designed to prevent a future financial melt-down of this magnitude.
That last point is the key. While I've heard endless talk about bailing out corporations on the verge of failure, I've heard no talk at all about preventing this from ever happening again. We must be mindful that those safeguards were in place prior to the mid-1990s, and they must be reinstated. Those safeguards must include:
  • Prohibitions on the combined ownership of banks, insurance companies, and brokerages by the same corporations or holding companies. Each industry must be insulated from the other.
  • Federal requirements regarding the ability of a borrower to pay back a loan. Clearly, leaving it up to the banks as we've been doing for just over a decade is not working. The elimination of federal requirements resulted in a surge in the price of housing as well as a surge in foreclosures and other credit defaults. The requirements must be tightened again, they must be imposed at the federal level, and they must be strict.
  • Restrictions against interstate ownership of banks and holding companies. We must return to the pre-1990s restrictions against banks operating across state or regional lines. This means that a break-up of the largest banks in the nation is an absolute requirement. It was the elimination of this restriction that allowed this current crisis to be global in nature as opposed to being restricted to small pockets of the nation. Just as the government required the break-up of Standard Oil and AT&T, so too must we require the breakup of the large interstate financial institutions.
It is not enough that we simply bailout the companies that are currently drowning. Tossing them a lifeline is one thing. Before reeling in that lifeline, though, we must first implement the measures that will prevent them from ever getting out of control again. In the meantime, scrutinize very closely what is being proposed and what is being done on the federal level to bail these corporations out.

"It's time we stop, hey what's that sound, everybody look what's goin down."