<body><script type="text/javascript"> function setAttributeOnload(object, attribute, val) { if(window.addEventListener) { window.addEventListener('load', function(){ object[attribute] = val; }, false); } else { window.attachEvent('onload', function(){ object[attribute] = val; }); } } </script> <div id="navbar-iframe-container"></div> <script type="text/javascript" src="https://apis.google.com/js/plusone.js"></script> <script type="text/javascript"> gapi.load("gapi.iframes:gapi.iframes.style.bubble", function() { if (gapi.iframes && gapi.iframes.getContext) { gapi.iframes.getContext().openChild({ url: 'https://www.blogger.com/navbar.g?targetBlogID\x3d27708445\x26blogName\x3dWatchingTheHerd\x26publishMode\x3dPUBLISH_MODE_BLOGSPOT\x26navbarType\x3dLIGHT\x26layoutType\x3dCLASSIC\x26searchRoot\x3dhttp://watchingtheherd.blogspot.com/search\x26blogLocale\x3den\x26v\x3d2\x26homepageUrl\x3dhttp://watchingtheherd.blogspot.com/\x26vt\x3d8775860279176631146', where: document.getElementById("navbar-iframe-container"), id: "navbar-iframe" }); } }); </script>

Sunday, December 09, 2007

Better Decision Making? CHECK

The December 10, 2007 issue of The New Yorker has an excellent article written by a physician, Atul Guwande, who summarizes an approach for dramatically improving care and cutting healthcare costs -- with one simple change in daily hospital practices. The full article can be read here:


The article starts by recounting the successful treatment (resurrection, really) of a drowning victim and uses that to depict the THOUSANDS of tiny individual steps that all must be performed nearly flawlessly in order to save a life in an ICU environment. Thousands of individual steps which, when analyzed independently, may not be terribly difficult to perform correctly but can snowball into bigger problems if overlooked or performed incorrectly.

Guwande then goes off on a seemingly unrelated tangent by describing the final test flight of a new plane delivered to the United States military by Boeing. The plane, the model 229, surpassed all the Army's criteria and was a shoe-in for a major purchase. The military's top test pilot climbed in, fired up the engines, took off smoothly, climbed to 300 feet, then stalled and crashed. Subsequent investigations found the pilot forgot to release a lock on key controls at take-off. The article continues:

The Boeing model was deemed, as a newspaper put it, “too much airplane for one man to fly.” The Army Air Corps declared Douglas’s smaller design the winner. Boeing nearly went bankrupt.
Still, the Army purchased a few aircraft from Boeing as test planes, and some insiders remained convinced that the aircraft was flyable. So a group of test pilots got together and considered what to do.
They could have required Model 299 pilots to undergo more training. But it was hard to imagine having more experience and expertise than Major Hill, who had been the U.S. Army Air Corps’ chief of flight testing. Instead, they came up with an ingeniously simple approach: they created a pilot’s checklist, with step-by-step checks for takeoff, flight, landing, and taxiing. Its mere existence indicated how far aeronautics had advanced. In the early years of flight, getting an aircraft into the air might have been nerve-racking, but it was hardly complex. Using a checklist for takeoff would no more have occurred to a pilot than to a driver backing a car out of the garage. But this new plane was too complicated to be left to the memory of any pilot, however expert.


The plane was better known as the "flying fortress" and obviously became a key part of our arsenal. Guwande then returns to the problems of modern, high-dollar health care and explains how one doctor devised a simple checklist for nurses and doctors to follow to ensure the proper placement of lines in patents. Like the checklists for pilots involving 1) tanks full, 2) chocks out, 3) instruments lit, 4) radio working, 5) controls unlocked, the items on the checklist for placing lines were all common knowledge items:

On a sheet of plain paper, he plotted out the steps to take in order to avoid infections when putting a line in. Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. Check, check, check, check, check. These steps are no-brainers; they have been known and taught for years. So it seemed silly to make a checklist just for them. Still, Pronovost asked the nurses in his I.C.U. to observe the doctors for a month as they put lines into patients, and record how often they completed each step. In more than a third of patients, they skipped at least one.

Of course, if you miss one of these simple steps, the risk of infection goes way up along with patient costs and patient mortality rates. Hospitals which implemented the checklists, altered personnel policies to ensure nurses had adequate backing when calling doctors on missed steps and ensured the proper supplies were on hand any times lines were placed saw infection rates and complications plummet.

Obviously, one barrier to adopting such a simple fix was overcoming the arrogance on the part of highly trained doctors, interns and nurses who didn't think they needed a reminder of such obvious requirements. As the author points out, the ego of those doing the work isn't the key concern. The goal is to create a process and a mindset in which simple details aren't left to chance.

The point of the story seems not only apropos to problems in healthcare but to problems throughout our society in general. How many financial firms failed to compile and use a checklist for monitoring their involvement in the sub-prime fiasco?

1) who is the borrower?
2) where's the paperwork the borrower completed?
3) do the cash flows really add up here?
4) can someone explain the calculations behind the ratings of these CDOs?
5) if no one can explain the ratings math, how were ratings compiled for millions of loans?
6) are the incentives of the loan originator aligned with the re-sellers?

More generally, how many American citizens watch the news or vote without following a rudimentary checklist to separate all the fact from fiction? Maybe a checklist like the following?

1) can the proponent clearly describe the DIRECT tie of this solution to the problem being solved?
2) does this solution produce multiple benefits that all contribute to solving the problem?
3) does this solution counteract another policy or program that is also needed?
4) can the advocate of this solution even compute the cost of the first five years of this solution?
5) who drafted the legislation?
6) if solution A is so vital, can the proponent explain the tax plan that will pay for it?
7) if solution A is so vital but a tax isn't needed, can the proponent name the program to cut to pay for it?
8) does the proponent actually KNOW what they're talking about?

Our economy and society have become so complex and inter-related that it's easy to lose track of basic criteria that can lead to better solutions if consistently followed. A better checklist of sorts certainly seems in order. We seem to be making far too many easy mistakes on financial, military and political matters to continue free-lancing the country into the ground.

Friday, December 07, 2007

Another Teachable Moment - Squandered

On the same day, both George Bush (#1) and Hillary Clinton (#2) attempted to dash to the head of the parade in the effort to "help" sub-prime borrowers faced with the prospect of defaulting on their mortgages and "losing" their homes. If THESE two players agree that "something must be done," does anyone believe any sound economic principle lies behind this sudden "helpful" instinct? It's pretty easy to argue the negative, just by analyzing the mechanics of a mortgage freeze and its likely impacts.

Some Proposed Fixes

The Bush proposal (actually a joint effort between the Treasury and mortgage industry) calls for freezing mortgage interest rates for a period of five years for a particular category of borrowers who:

* took out a mortgage on a primary (occupied) residence
* between January 2005 and July 2007,
* have not yet defaulted on the loan
* and have not yet been hit with the interest rate adjustment on their loan

The Clinton plan (#3) calls for

* allowing state level bond programs to use funds for re-financing as well as original loan
* providing an extra $2.5 billion to fund those state bond programs (MRB)
* a freeze on sub-prime rates for 5 years or until "affordable" fixed-rate loans can be made
* a 90 day moratorium on foreclosures involving sub-prime loans
* better reporting from the mortgage industry on loans being renegotiated

So is either plan appropriate for the scale of the problem? First some basic statistics:

* nearly $2 trillion in mortgage debt faces rate resets in the next two years (#4)
* the average home price is $211,700 (#5)
* the average monthly home mortgage payment is $1672 (#6)
* estimates for the number of sub-prime mortgages at risk range from 1 to 2 million (#7)
* the current 30-year interest rate is about 6% (#8)

Ignoring for a moment the number of loans originated as interest-only loans or loans with ridiculous 1% rates, let's just assume the average reset increased the interest rate by three percent on a $190,530 loan (a 90% loan to value on an average home). Running the amortization on that loan in Excel shows a monthly payment of $803.28 for the first three years jumping to $1112.13, an increase of $308.85 per month.

Obviously, this implies the average home mortgage amount of current loans (regular and sub-prime) is significantly higher than the overall average home price. A monthly mortgage of $1672 assuming a fixed 30-year mortgage at 6 percent implies a mortgage amount of about $279,000. If a $279,000 loan amount is used in a 3/27 model jumping from 3% to 6%, the monthly payment would jump from $1176.28 to $1628.53 or $452.25. Let's go with that number.

A five year freeze on upward resets aimed at one million borrowers is aimed at deferring 60 months of incremental $452.25 payments the borrowers cannot afford, or a $27.1 billion shortfall. Clinton's proposal to add $2.5 billion in funding to a bond program aimed primarily at original mortgages instead of re-finances would appear woefully inadequate to make even a psychological improvement in the market. Using the above numbers for comparison, a $2.5 billion solution only addresses about 9.2 percent of the at-risk loans, or about 92,250 loans of the low-end one million loans estimated to be at risk.

The plan touted by President Bush involves no direct funding by the government but involves a voluntary agreement by lenders to alter lending terms under specific qualifying criteria. Critics have already raised concerns that the criteria not only narrow the eligible pool to a number far below the million at risk but that they perversely reward those who have the worst credit and closed their loans later in the cycle when presumably the risks should have been better understood. No cost is estimated for the Bush plan but clearly lenders won't voluntarily surrender the right to $27.1 billion in interest payments with all other variables unchanged. The obvious variable under their control is the amount of funds available for other loans. $27.1 billion fewer dollars coming in means $27.1 billion fewer dollars available to lend to ANYONE. The missing $27.1 billion could be used for an additional 160,014 loans for average priced $211,700 homes with an 80 percent LTV. See? This voluntary program would reduce the supply of funds to 160,014 qualified buyers able to produce a 20 percent down payment on an average priced home to allow unqualified sub-prime borrowers to stay in houses they never could afford in the first place for an additional five years. Other than that, it's "free."

It seems pretty evident that any of the current proposals involve dollar amounts or eligibility which are at least one order of magnitude beneath the scale of the dollars or numbers of loans at risk. Regardless of the scale, a quick analysis of the mechanics of any such freeze at the micro-economic (the homeowner) or macro-economic (the financial industry) levels makes the logic behind such proposals even more dubious

The Little Guys

Can a mortgage rate freeze actually protect current homeowners, either sub-prime borrowers or the rest of us? In a word, NO. First consider the borrowers nearing default. If our average borrower looking at a $452 dollar jump defaults the very first month after their mortgage adjusts, that literally means that borrower has no other liquid assets to tap to cover a $452 dollar expense. At any time. How many homeowners ignorant enough to sign a $279,000 loan without the financial cushion to absorb a $452 shock are also ignorant enough that they don't understand they have to make 6 percent on their home just to break even? Even if the borrower managed to sell the home to cover their loan, the borrower without $452 in spare cash also won't have the $16,740 to cover the real estate commission on a $279,000 sale. If a government program did nothing but pay the sales commission as defaulting borrowers sold their homes for the loan amount, it might take $16.7 billion just for that.

From the perspective of equity appreciation protection for other homeowners, the logic behind a mortgage rate freeze has equally fatal flaws. First, any arbitrary freeze period doesn't change the underlying economic reality that the sub-prime borrowers CANNOT AFFORD THEIR HOME. A Bloomberg news story (#9) indicates possibly half of the 450,000 sub-prime borrowers facing rate hikes in the next three months will lose their home. That trend is likely to continue for the next full year, putting 900,000 borrowers in the crosshairs. Are you aware of any looming economic boom in America that will produce average take-home pay increases of $452 dollars per month ($5424 a year) for a million workers? I'm not either. Are you aware of any looming economic boom in America that will produce one million new jobs in the next year to help borrowers avoid losing their home after a job loss? I'm not either.

If your home value shot up thirty percent in the past three years because you had a bunch of new neighbors move in with artificially cheap mortgage money that allowed them to get more home temporarily than they could afford permanently, shifting the pain out one year doesn't change reality. The cruel reality is that your home in fact did NOT go up thirty percent in value, unless you happened to luck out and sell your home before the bubble burst. Arguing it did makes no more sense than arguing Enron was ever worth $90 a share. Homeowners who acted upon that inflated valuation before the bubble burst by borrowing against it via a HELOC or by selling and buying an even bigger home are no smarter than the original sub-prime borrowers.

Freezing rates on existing sub-prime loans also hurts the market by freezing all of the current uncertainty in place as well. Protecting teaser rates on current loans won't ease the tighter (justified) lending standards required for new mortgages. As a result, the pool of potential new buyers who can afford an inflated home price is still smaller. Protecting the teaser rates allows borrowers to stay in their home longer, reducing the supply of homes that would otherwise be on sale. The combination of fewer eligible new borrowers and fewer sellers produces reduced sales volume, which makes it more difficult for the market to gauge new price levels and eliminate the uncertainty. A lack of liquidity paralyzes not only the home market but the job market as well. How many people have the nerves of steel required to accept a job in a new city without knowing if they can sell their current home in nine months and without having confidence home prices in their new community won't be tanking a month after they move in? How many employers will be willing to cover that risk as part of relocation benefits?

The Big Guys

Rate freezes , even if voluntary, will fail to help stabilize the broader financial markets for the same reasons they fail at the micro level for individual borrowers. Deferring the point where those who truly cannot afford their home get tossed out doesn't materially change the underlying problem. It simply shifts the timing of the missed payments and the ripples they cause on valuations of the underlying CDOs and similarly obtuse financial instruments built upon the original bad loans. It does nothing to clarify the actual value of the underlying assets. Until that happens, financial markets will continue to seize up any time two major parties to a transaction suffer a panic attack from trying to set a value on assets they give or get in a deal. The longer that goes on, the greater the volatility will be in stock markets as investors try to gauge the true book value of companies holding this debt.

What Should be Done?

The real fallacy about any proposal to "solve" the sub-prime problem starts with the very definition of the problem as limited to the sub-prime mortgage world. The sub-prime mortgage problem is a microcosm of the failure of American economic policy and American politics in general. People taking out a mortgage because they could afford the first three years of payments and "deserved" a nice house are no different than the American public at large, which has continually returned politicians to office who vote for prescription drug programs or wars with dubious near-term benefits using long-term borrowing. Long term borrowing lowers the near term cost of government spending and artificially increases demand.

The complexities of the sub-prime business and the damage done to the economy by its collapse are so great that the odds of a small group of politicians or industry heads devising an equitable and efficient solution are virtually zero. However, the odds of a small group of politicians and industry heads devising a solution that protects their interests (remaining in power and remaining wealthy despite their mistakes) at the expense of those not in the room are a near certainty.

The sub-prime crisis represents another in a series of "teachable moments" for the American public -- moments where the consequences of a decision become apparent in a way that can be inescapably correlated to the decision that produced them and cement a powerful lesson in the minds of the public about future decisions. The idea of one million families losing a home certainly isn't pleasant. There is a worse scenario, however. What if the government saves one million homeowners from default? What's more likely to happen? One million citizens walking away from the cliff saying "Wew, I'll never do something THAT dumb again." Or FIFTY million citizens saying "Hmmm, that worked out OK for them, I bet I can play even closer to the edge." Every teachable moment is a painful lesson. The problem is that every teachable moment squandered produces a much more painful teachable moment down the road. The American economy is running out of road.

The sad truth is that America has raised a generation of consumers and voters so ignorant about legal and financial matters that millions voluntarily entered into legal agreements involving hundreds of thousands of dollars without a clue about the true reality of their situation. They weren't sitting in a room signing closing papers surrounded by people eager to "help" them get into a home they "deserved," they were sitting in a room signing their own financial death warrant surrounded by real estate agents, builders and lenders who devised the perfect financial tool for separating fools from their money while providing a three-year head start in fleeing the scene of the crime.

The even sadder truth is that the same generation of Americans is also likely so financially and politically ignorant they cannot recognize the true cost and the true beneficiaries of the so-called solutions being proposed by the very players who contributed to the debacle in the first place. Hopefully, Americans will recognize the similarities between that sub-prime borrower closing his ill-fated loan and the larger situation we face as politicians promise to help now. It's up to us to realize the big guys in the room aren't really there to help us. They're looking to help themselves -- with our money.


#1) http://news.yahoo.com/s/ap/20071206/ap_on_bi_ge/mortgage_crisis

#2) http://www.cnbc.com/id/22116919

#3) http://www.hillaryclinton.com/news/release/view/?id=4496

#4) http://online.wsj.com/article/SB114204536747195612.html

#5) http://www.realestateabc.com/outlook/overall.htm

#6) http://wiki.answers.com/Q/How_much_is_the_average_mortgage

#7) http://www.npr.org/templates/story/story.php?storyId=16783072

#8) http://www.msnbc.msn.com/id/7148582/

#9) http://www.bloomberg.com/apps/news?pid=20601103&sid=akOEPec30TR4

Sunday, December 02, 2007

Regimes - Three Different Ones

For those reading the news this weekend, the elections in Russia and Venezuela are likely very puzzling developments. Final returns aren't in yet, but it appears citizens in those countries appear to have voluntary walked into the polling booth and exercised their current rights to strengthen the power of individuals over them who really care about none of their rights.

In the case of Russia, Vladmir Putin established new rules which blocked many independent party candidates from filing for election to parliamentary seats, preventing any coalition of parties from putting a brake on the concentration of power being accumulated by his United Russia party. While Putin has publicly stated he will honor current Russian limits on consecutive terms, speculation is rampant in Russia and elsewhere that only his party's candidate has any chance at winning the next Presidential election and any such winner might very quickly resign and allow the party to reappoint Putin to fill the position. No consecutive term violation, no chance of surrendering power to other parties, GENIUS. (#1)

In the case of Venezuela, current President Hugo Chavez put a referendum on the ballot to grant himself power to retain the Presidency as long as his party maintains control One story, typical of the coverage of the Venezuelan vote, is particularly telling (bold emphasis added): (#2)

Three exit polls showed the anti-American leader won by between six and eight percentage points in a vote where turnout was low, the two sources said. If his victory is confirmed, the referendum vote on a raft of reforms would allow Chavez -- in office since 1999 -- to run for reelection indefinitely, control foreign currency reserves, appoint loyalists over regional elected officials and censor the media if he declares an emergency.

Hmmmmm. A leader appointing cronies throughout the entire local / national government chain and reserving dictatorial rights for "future emergencies" all approved by an apathetic voting public. That sounds familiar.

One word that comes to mind after reading about the tactics of Putin and Chavez is regime, a word Americans usually hear in contexts intended to convey illegitimacy, corruption or brutality upon anti-democratic governments or governments not aligned with what we perceive as our current interests.

Recently, I picked up a copy of Bill of Wrongs - The Executive Branch's Assault on America's Fundamental Rights by Molly Ivins and Lou Dubose. In all honesty, my only real motivation in buying the book was partly a combination of trying to show one last bit of support for one of my favorite political "arthurs" and hoping it would have more of Molly's more typical one-of-a-kind observations on the absurdity of politics.

The book is nothing like anything else in her canon, either written alone or with Dubose. There's no aw shucks prose, no stories of state politicians so stupid they'd have to be watered twice a day if they were any dumber, etc. Instead, the book provides details on eight very specific incidents in the last six years in which special interest groups or the government itself ignored and / or abused the most basic rights of those they opposed or used and abused the powers of government to further their efforts.

The stories range from:

* the challenges of speaking truth to power, or the hypocrisy of "free speech zones" in a democratic country where citizens can be arrested for "trespassing" on public property for holding an anti-Bush sign on a motorcade route

* harassing the press to help harass the citizenry AND the press, or how one reporter was jailed for 199 days by FEDERAL officials for not providing his videotape of an incident in which a tail light of a CITY vehicle paid for by federal dollars was broken by protesters, protestors the federal government had its eye on but who committed no federal crimes

* the Dover, Pennsylvania battle over Intelligent Design, or how the attempt to impose religious-inspired teaching in high school biology classes provided a bunch of conservative Christian zealots in a small town the opportunity to abuse both the Establishment clause and the first amendment by suing for the materials of reporters who accurately reported the conduct of the pro-ID officials in public school board meetings.

* the practice of material witness detentions, or how our government is detaining citizens indefinitely to extract testimony from said citizens AGAINST said citizens for alleged crimes the government is not required to divulge (read that again, several times, slowly)

* national security letters, or how the government can compel testimony from citizens while eliminating their legal right to tell ANYONE, including their own lawyer, of the request and how the FBI pursued a particularly abusive NSL case against librarians, paralyzing their ability to contact even their own Senators and Representatives about the abuse until the FBI dropped the case -- only after Congress renewed the Patriot Act and NSL provisions without seeing confirmation of its abuse

* the abuse of habeas corpus protections, or how our government has illegally kidnapped, detained and tortured citizens of OUR ALLIES as part of our war on terror

Keep in mind, each of these stories is not an analysis of how CONCEPTUALLY the flawed Patriot Act and other similar measures COULD BE used to infringe the rights of Americans. These are concrete examples of actual cases.

In the course of the book, Ivins and Dubose make three almost off-hand points that after reading the entire book, outline the most important points of the book and our current situation. In the discussion of the crackdown on protests in sight of the Presidential bubble, the arguments around the original Alien and Sedition Act are recounted and they quote law professor Leonard Levy, who stated that the concept of seditious speech is alien to American democracy because "it only exists where people are subjects rather than sovereigns and their criticism implies contempt of their master."

In the chapter about the detained videographer, they recount the fact that Dick Cheney, as Ford's chief of staff in 1974, suggested getting a search warrant for the papers of reporter Seymour Hersh, who broke the story of the existence of the Pentagon Papers. Cheney had qualms about the warrant though... Well, one qualm. "Will we get hit with violating the 1st amendment to the constitution?" As Ivins and Dubose note, Cheney was not concerned that such an action WOULD be a violation of the 1st amendment, only that they might suffer flack from pursuing it. This is Cheney's strategic viewpoint expressed within months of the resignation of a President disgraced and nearly impeached for identical actions.

In several of the chapters, the examples detail how federal officials operate through local police and law enforcement agents to accomplish their illegal goals while keeping federal fingerprints off the actual activity, making it difficult for citizens trapped in the web to understand their legal position, their rights or even what the charges are. The phrase "Kafka-esque" comes up often in the text and yet doesn't really do the situations justice.

The clear-cut pattern of behavior and obfuscation of actions taken makes it very clear the actions taken are not the result of amateurs or incompetence, but the result of a very coherent, well-formulated and frighteningly effective plan that clearly has the support of a critical mass of adherents who fear their fellow Americans as much as they do "them." It's easy to argue they fear us MORE than "them" cuz we're here, right in front of them every day.

Regime. It's a word we should be using a lot more right here in America. As Bill of Wrongs makes clear, there are many in our government who reject the idea of the people as sovereign and the government as subject and aim to establish precisely the opposite relationship as the preferred state.


#1) http://news.yahoo.com/s/ap/20071202/ap_on_re_eu/russia_putin_s_future

#2) http://news.yahoo.com/s/nm/20071202/ts_nm/venezuela_referendum_dc