Despite several leaks of "final decisions" regarding troop levels in Afghanistan, people all over the political spectrum seem frustrated by the delays in the communication of a new strategy by the Obama administration. Those on the left worry about delays in stemming the loss of troops in a war with few (if any) tangible, quantifiable milestones for success. Those on the right worry of communicating doubt or uncertainty to "the enemy" that will improve their ability to tailor their end-game for our departure.
We have no way of knowing if it will be the final answer but the next answer is due from President Obama by the end of November 2009. We know quite a bit about some of the opinions being presented for consideration but not much about the framework Obama is using to make his decision. When you remove all the cynical realpolitik mumbo jumbo and poll-tested catch phrases meant for domestic consumption by die-hards on the extremes, the problems the United States faces in selecting a strategy for Afghanistan really arise from our failure to truthfully answer these two questions about our foreign policy initiatives:
Why are we getting in?
How are we getting out?
Getting In
Several books published in the past five years such as COBRA II and Fiasco provide details on the clarity of thought (or lack thereof) that went into the United States' decision to launch the war in Iraq, the planning of the actual invasion and the problems in the war directly arising from those deeply flawed, incoherent plans. It might be easier to accept the situation and propose an new direction if one could conclude the current situation is solely due to catastrophic mistakes made by one Presidential administration after a shocking terrorist attack and the failure of the American voters to recognize the damage within three years to vote a change of direction in 2004 when the failure of the Bush approach was already becoming apparent.
It might be easier, but it wouldn't be the truth. Reporter and writer Mark Danner's recent book Stripping Bare the Body makes a convincing argument that the problem we face in choosing a direction for Afghanistan and Iraq is a sign of a much deeper problem in our policymaking framework for the past fifty years. The book itself is a collection of Danner's writing and reporting from 1986 to the present on events ranging from the elections in Haiti after the flight of "Baby Doc" Duvalier to genocides in the territories of the former Yugoslavia to American involvement in Afghanistan and Iraq. The book title comes from a comment made by Leslie Manigat, who managed to serve as President of Haiti for a whopping four months in 1987 who stated:
---------------------------
Political violence strips bare the social body, the better to place the stethoscope and track the life beneath the skin.
---------------------------
That comment stuck with Danner for the next twenty years and, in Danner's mind, came to symbolize the disconnect between our public perceptions of crucial foreign policy issues and America's official stated interests in engaging in those situations and the reality on the ground, the latter having very little to do with the former. Per Danner, the quote reflects how America has repeatedly been distracted by the faces of the public villians associated with violence seen around the world. Fixating on the violence and the villain without understanding the history and organization of the society that produced both the violence and the villain virtually assures us of entering into situations we have little chance of improving, much less solving.
As a literary work, the content and organization of Stripping Bare the Body do not exactly make it an enjoyable read. The content itself is quite detailed and frankly grim as Danner writes first hand about mass murders, ethnic cleansing and International Red Cross findings regarding American use of torture. As chapters progress from events in Haiti to events seemingly unrelated in Yugoslavia to events in Afghanistan and Iraq, the lack of a larger obvious "plot line" is a bit tiring. However, Danner includes a few crucial points of analysis amid the chapters that DO make clear a larger pattern to American policymaking that continues to produce these no-win situations.
Boiled down to a nutshell, Danner makes the point that for the past fifty years, America has had no earthly clue about the local history in which it has immersed itself as it goes about intervening in the world in the name of fighting tyranny and threats to our ideals, whether those threats come in the form of communism or now terrorism. Our adversaries seem to understand much more about us, however:
---------------------------
The United States gazes out upon the world with a self-satisfied confidence in the superfluity of its power, the mistakes flowing from its ignorance it can and does survive, for the costs are borne by the objects of its gaze. They, for their part, look back at us clear-eyed, with calculation and cunning; they know us much better than we know them. They have no choice. (page xix in the introduction).
---------------------------
Examples abound in the book:
* The looting and destruction of public infrastructure after the toppling of Saddam was not mere "untidiness" as characterized by Donald Rumsfeld, but the result of a key strategy communicated by Saddam well before the beginning of the war, planned with the knowledge that the resulting chaos would destroy the political authority of any government arising from the ashes. Saddam was thinking two years ahead of his neo-con adversaries even before the war began.
* Besides killing thousands and embarrassing the United States by the attacks on September 11, 2001, Osama bin Laden's true goal behind the attacks was to entice America into an invasion of Afghanistan where it could suffer the same slow, expensive loss by attrition suffered by the Soviet Union twenty years before. Bin Laden was thorough in his planning. Knowing the Americans would soon be on their way, he further destabilized the country by eliminating the head of the Afghan Northern Alliance via two suicide bombers posing as reporters two days prior to 9/11.
* Slobodan Milosevic correctly interpreted four years of side channel communications from both the Bush and Clinton administrations as political paralysis both within the American government and within the NATO alliance that would allow Milosevic to preserve territory captured via years of ethnic cleansing while distracting the West with the details of the Dayton "peace accord" as he planned the final onslaught on Kosovo. To hear the United States describe it, we "won" the war in Kosovo. We dropped over 23,000 bombs and didn't lose a single soldier. Yet Milosevic created over 85,000 refugees and used the turmoil to essentially complete the ethnic cleansing of ethnic Serbs from Kosovo.
Late in the book, Danner concisely summarizes the larger problem in the context of our failed attempt and understanding our position in Iraq as follows:
---------------------------
Increasingly during the past year the newspaper reader and especially the television viewer has been looking at the great complicated tableau of occupied Iraq through a highly constricted lens, as if trying to examine an enormous history painting by squinting through a straw. (page 424).
---------------------------
Whose Doctrine Dominates?
Doctrine. What a great word. It sounds so... substantial. A "doctrine." A clear statement to guide decisions about present and future issues based upon a set of well-analyzed, coherent principles. For most of the past two decades, political debate in the United States has frequently revolved around the so-called Powell Doctrine, which basically states the US should avoid any conflict unless a series of questions can be answered in the affirmative, among them being:
* is a clear security interest at stake?
* have all non-military means to solving the problem been exhausted?
* does the initiative have the support of the American people?
* have objective criteria for defining success and "the end" been identified?
* does the action provide for a clear exit strategy upon success or upon failure of achieving success criteria?
In his book, Danner uses the events leading up to the waves of violence in the former Yugoslavia to effectively illustrate the logical and moral straightjacket that incorporation of the Powell Doctrine has imposed upon American policymaking. Danner coins his own term for the result -- "self-deterrence" -- while explaining its role in the violence that took place in the former Yugoslavia as the world watched on TV and did very little to stop it -- for years.
---------------------------
Since in the case of any given forceful action, one cannot be sure the Serbs will be deterred, and since, if one takes an action and they are not deterred, one must take another action to see that they are (for not to do so would destroy America's credibility) -- any given action, if one can't be absolutely certain of its success, holds within it the clear risk of unlimited and uncontrolled involvement. It is as if, having taken a single small step, the United States will inevitably lose all control of its policy. (page 140)
---------------------------
Danner then quotes another author, Wayne Bert, who summarized it even more concisely:
---------------------------
Eagleburger seemingly had no misgivings about the value of American credibility unless some overt threat was made for which there was no follow-through. Complete inaction, in his view, did not compromise U.S. credibility. (page 140)
---------------------------
In other words, instead of creating a coherent foreign policy based upon support of a small but critical set of principles regarding justice, freedom, peace and prosperity, American foreign policy has been abandoned to a feckless, futile effort at "saving face" and preserving American prestige which can only be lost by acting with less than 100% involvement. Doing NOTHING is OK, cuz if we don't get involved, we can't lose prestige.
It might be tempting to blame this feckless, futile strategy for fashioning foreign policy solely upon the current generation of politicians. Danner stepped back and reviewed American strategy over a longer arc and found much of the problem rooted in a much older "doctrine" -- the Truman Doctrine. The key line of the Truman Doctrine, taken from his speech to a joint session of Congress in 1947 was this:
I believe it must be the policy of the United States to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures.
But that's not how the line originally read. The content of the doctrine came from a brief prepared for Truman by Clarke Clifford in response to Winston Churchill's famous "Iron Curtain" speech the prior year. The Clifford brief stated the Soviets were "on a course of aggrandizement designed to lead to eventual world domination by the U.S.S.R" and that the United States "should support and assist all democratic countries which are in any way menaced and endangered by the U.S.S.R." In modern parlance, the "victim list" was broadened from democratic countries to free peoples and the "enemies list" was broadened from the Soviets to "outside pressures."
Mission creep, anyone?
What led to the change in language? The new national security apparatus being assembled felt the American public wouldn't support such a sweeping policy couched solely in negative terms as thwarting a single enemy but would support those goals if included as part of a positive campaign to support American ideals -- making the world safe for democracy. Apparently, they were correct. We fell for it hook, line and sinker.
Getting Out
So can reviewing fifty years of flawed rationals for action (and inaction) do anything to inform a decision on what to do to next in Iraq and Afghanistan? For starters, it might provide a broader perspective about whose goals -- ours or those of our enemies -- are served by continuing current strategies. One theme that seems to appear frequently in news reports filed from Iraq and Afghanistan involves the measure of success used by those doing the fighting. Inevitably, the first measure of success cited is simply "bring everyone back to base in one piece." I certainly can't fault those doing the fighting for listing that as Job #1 but
1) get in a big HUMVEE
2) drive around all day
3) avoid getting shot or bombed by IEDs
4) get back to base
as a strategy does nothing to create any stability, create any confidence in the local government or kill any bad guys. In short, it does nothing to create an environment that would allow us to leave under conditions that look like a win.
That's the core problem facing President Obama right now. Sadly, it's very familiar territory for the United States. We faced nearly the same situation in 1965 as President Johnson reviewed the advice of his staff regarding the trajectory of the Vietnam War. The November 20, 2009 edition of Bill Moyers Journal on PBS included extended excerpts from numerous conversations between LBJ and various advisors about the calculus of adding troops to the conflict. In a June 8, 1965 conversation with Senate Majority leader Mike Mansfield, Mansfield posed the question: As you said earlier, it's 75,000, then it's 150,000, then it's 300,000. Where do you stop? Johnson's reply: You don't. To me, it's shaping up like this, Mike -- you either get out or you get in… We've tried all the neutral things. And we think they are winning. Now if we think they're winning, you can imagine what they think.
Despite public pronouncements at the time to the contrary, many key advisors had stated blunt concerns about the wisdom of escalating or continuing any involvement and the President himself intellectually knew the war could not be won. Yet the President never left the trap of circular logic resulting from a misguided attempt to "save face" and "prevent more dominos from falling" to review the logic behind the original "getting in" decision to realize 'getting out" was the only viable strategy. As of June 1965, approximately 2200 American lives had been lost. More than 56,000 more Americans would die over the next ten years and the end result was a lost war, a Communist Vietnam and a nearly complete loss of trust in the American government by its citizens.
As was the case with Johnson in Vietnam in 1965, there are no easy answers for American's involvement in Afghanistan and Iraq. There are no good answers. But when you cannot define a mission and you cannot directly associate your strategy with specific goals and finite timeframes, there ARE right answers.
Sunday, November 22, 2009
Sunday, November 08, 2009
Terrorists and Hackers? Or Amateurs?
The November 8 edition of 60 Minutes included a sensational story on the state of cybercrime and cyberterrorism in the world and our preparedness for it.
http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml
The story had some examples of a theoretical test in which a generator at an electrical facility had its control systems altered in ways which destabilized and burned up the generator and an actual attack that caused a complete power outage for two days in Brazil.
More disconcerting were the examples of ATM network hacking and financial network hacking. In one case, hackers working from three different locations (China? Russia? The Americas?) worked together over two days to steal --- are you sitting down? -- ten million dollars.
Yawn.
Wow. Ten million dollars.
Ten million dollars is a rounding error on the amounts stolen from world financial institutions by CEOs, executives and board directors entering and leaving the facility by the front door in luxury SUVs and limousines. Bernie Maddoff destroyed $65 billion with a single AS-400 computer that probably didn't even have an Ethernet card in it.
Who do you think is more likely to wipe out your bank account or retirement savings? A teenaged Boris Badanov toiling away somewhere in his mom's basement in a suburb of Kiev? Or a bank executive in Charlotte, NC or Treasury Secretary / regulator in Washington DC? It's no contest. The bank executive and Treasury Secretary have already destroyed TRILLIONS. Or, stated more accurately, they fostered a climate that created TRILLIONS in phantom wealth then subsidized the big boys as they cashed out then stuck everyone else with the worthless debt.
If our country melts down, it won't be because of cyberterrorists and cybercriminals working from unseen basements in remote countries. Our country will melt down because of decades of short term thinking fostered by distorted compensation schemes and corrupt regulators that allowed trillions of phantom profits to generate hundreds of billions in bonuses for those at the top while starving key industries and infrastructure of investment dollars needed to protect the keys to the kingdom.
WTH
http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml
The story had some examples of a theoretical test in which a generator at an electrical facility had its control systems altered in ways which destabilized and burned up the generator and an actual attack that caused a complete power outage for two days in Brazil.
More disconcerting were the examples of ATM network hacking and financial network hacking. In one case, hackers working from three different locations (China? Russia? The Americas?) worked together over two days to steal --- are you sitting down? -- ten million dollars.
Yawn.
Wow. Ten million dollars.
Ten million dollars is a rounding error on the amounts stolen from world financial institutions by CEOs, executives and board directors entering and leaving the facility by the front door in luxury SUVs and limousines. Bernie Maddoff destroyed $65 billion with a single AS-400 computer that probably didn't even have an Ethernet card in it.
Who do you think is more likely to wipe out your bank account or retirement savings? A teenaged Boris Badanov toiling away somewhere in his mom's basement in a suburb of Kiev? Or a bank executive in Charlotte, NC or Treasury Secretary / regulator in Washington DC? It's no contest. The bank executive and Treasury Secretary have already destroyed TRILLIONS. Or, stated more accurately, they fostered a climate that created TRILLIONS in phantom wealth then subsidized the big boys as they cashed out then stuck everyone else with the worthless debt.
If our country melts down, it won't be because of cyberterrorists and cybercriminals working from unseen basements in remote countries. Our country will melt down because of decades of short term thinking fostered by distorted compensation schemes and corrupt regulators that allowed trillions of phantom profits to generate hundreds of billions in bonuses for those at the top while starving key industries and infrastructure of investment dollars needed to protect the keys to the kingdom.
WTH
Wednesday, October 07, 2009
Lost in the Debate on Afghanistan
The October 6, 2009 edition of Charlie Rose featured an interview with CBS reporter Lara Logan discussing the inputs to the strategic decisions facing the US regarding Afghanistan and Pakistan.
While talking about the ongoing Washington parlor game about what number Obama, Congress and the Pentagon will eventually land on for any change in troop deployments, Logan made a very crucial point about a truth being totally lost in the current debate. Paraphrasing here, the point was essentially this:
-----------------------
The counter-insurgency approach being used to support the addition of more troops states those troops will be used in conjunction with forces pulled from combat outposts back to more populated areas to ensure we protect civilians to win hearts and minds and improve economic stability.
Oooooookay. That's the key foundation of counter-insurgency tactics. The strategy that "worked so well in Iraq." Let's take that as truth. When you reduce or eliminate troops from the remote command outposts, ignoring all the rationalizations and mental and political justifications, what are you doing? You are surrendering territory. Now maybe that's what you do when fighting a counter-insurgency. But that's NOT what you do when fighting any traditional war. (Parenthetically, the argument being made here is not that we care about territory per se, but you CERTAINLY cannot cede territory to an enemy whose primary ingredients for mayhem are space and time in which to operate.)
Okay. So assume we focus on populated areas and reduce or eliminate troop deployments in desolate areas. Assume the populated areas turn around and provide economic stability. Let's even fantasize and assume we get an honest government as a partner (eventually) elected in a clean election.
Have we "won"?
We've just reverted to the situation in Afghanistan that existed in the late 1990s and early 2000s that allowed Al Qaeda to set up training camps in remote, uncontrolled areas and eventually launch terrorist attacks on targets around the world.
-----------------------
The goals set out by the Bush Administration for the war in Afghanistan and any variation of goals stated since then by Bush or Obama have focused on eliminating any capability by terrorists to operate with impunity from remote, uncontrolled regions of places like Afghanistan.
The status quo strategy and troop levels have allowed vast areas of Afghanistan to return to Taliban control while destabilizing tribal areas of Pakistan as well. Pulling out completely will obviously create a vacuum that will likely lead to a complete meltdown in Afghanistan and possibly Pakistan (which already has nukes). Ramping up troops requires a human and financial commitment the US possibly cannot afford. Reverting to a stronger counter-insurgency based strategy might stabilize cities but surrender most of the country to the fundamentalist terrorists that initiated the entire struggle nearly a decade ago.
Does anyone have any other ideas? It appears we may be close to exhausting all possible remaining mistakes regarding this war.
While talking about the ongoing Washington parlor game about what number Obama, Congress and the Pentagon will eventually land on for any change in troop deployments, Logan made a very crucial point about a truth being totally lost in the current debate. Paraphrasing here, the point was essentially this:
-----------------------
The counter-insurgency approach being used to support the addition of more troops states those troops will be used in conjunction with forces pulled from combat outposts back to more populated areas to ensure we protect civilians to win hearts and minds and improve economic stability.
Oooooookay. That's the key foundation of counter-insurgency tactics. The strategy that "worked so well in Iraq." Let's take that as truth. When you reduce or eliminate troops from the remote command outposts, ignoring all the rationalizations and mental and political justifications, what are you doing? You are surrendering territory. Now maybe that's what you do when fighting a counter-insurgency. But that's NOT what you do when fighting any traditional war. (Parenthetically, the argument being made here is not that we care about territory per se, but you CERTAINLY cannot cede territory to an enemy whose primary ingredients for mayhem are space and time in which to operate.)
Okay. So assume we focus on populated areas and reduce or eliminate troop deployments in desolate areas. Assume the populated areas turn around and provide economic stability. Let's even fantasize and assume we get an honest government as a partner (eventually) elected in a clean election.
Have we "won"?
We've just reverted to the situation in Afghanistan that existed in the late 1990s and early 2000s that allowed Al Qaeda to set up training camps in remote, uncontrolled areas and eventually launch terrorist attacks on targets around the world.
-----------------------
The goals set out by the Bush Administration for the war in Afghanistan and any variation of goals stated since then by Bush or Obama have focused on eliminating any capability by terrorists to operate with impunity from remote, uncontrolled regions of places like Afghanistan.
The status quo strategy and troop levels have allowed vast areas of Afghanistan to return to Taliban control while destabilizing tribal areas of Pakistan as well. Pulling out completely will obviously create a vacuum that will likely lead to a complete meltdown in Afghanistan and possibly Pakistan (which already has nukes). Ramping up troops requires a human and financial commitment the US possibly cannot afford. Reverting to a stronger counter-insurgency based strategy might stabilize cities but surrender most of the country to the fundamentalist terrorists that initiated the entire struggle nearly a decade ago.
Does anyone have any other ideas? It appears we may be close to exhausting all possible remaining mistakes regarding this war.
Sunday, September 13, 2009
Wake-Up Call or Snooze Button?
Perhaps the most maddening aspect of watching government at work is recognizing the enormous disparity between the number of things obviously screwed up in the country and the number of those things actually addressed by anything the government does, even when vast amounts of time, energy and money are spent supposedly focused on them. The week of September 6, 2009 is a case study of the phenomenon in the realm of healthcare. Unfortunately, the healthcare debate is not the only consequential example of the problem. It's not even the most important example.
All in One or One at a Time?
Virtually all political coverage in the week of September 6, 2009 was devoted to whether President Obama would formally and publicly support a "public option" in any healthcare legislation then, when his September 9 address to Congress obliquely referenced a public option, more time was spent analyzing if he really meant it and what exactly he meant. Voters and politicians with centrist views watched the fixation from the same vantage point: why, with so many things wrong with healthcare that most agree upon, does Congress insist on giant omnibus bills too large for anyone to understand that include deal-breakers for extremists on the far left or far right? Why can't the Federal government break the problem down into manageable pieces and vote on issues individually?
The reality of our current political dilemma is that NEITHER an all-in-one approach aimed at producing compromise in the interest of progress or a one-at-a-time approach to the legislation aimed at electoral accountability has much of a chance of achieving reforms that truly improve the situation. Why?
The all-in-one approach that uses a single massive piece of legislation to try to fix as much as possible poses the deal-breaking dilemma for extremists. The bigger the bill, the greater the chance it will include SOMETHING that offends SOMEONE on "principle" and will give them cover for rejecting the entire bill. That's really not the most dangerous outcome, though. The real danger of an all-in-one bill is that NO ONE VOTING FOR IT WILL READ IT in its entirety and certainly NO ONE WILL BE CAPABLE OF UNDERSTANDING all the special interest language inserted into the bill and understand the origins of those terms to understand whether they should remain or be axed.
What that really means is that the all-in-one approach poses a substantial risk of containing one or two or dozens of clauses which replace some fatal flaw of the current system with new fatal flaws that could prove equally inefficient or corrupt. One could argue the all-in-one approach DOES help fight special interests by forcing them to attack on multiple fronts at once which may dilute their message and focus and lessen the chance of blocking the debate with demagoguery. However, past history with giant omnibus legislation seems to confirm the risk of really dumb / bad language that defeats any value in a bill remaining in a large bill outweighs the benefit of that bill passing.
The one-at-a-time approach would seem to provide a few benefits but again, recent history proves otherwise. In theory, use of small bills to address issues should increase the probability that members of Congress actually READ the entire bill and UNDERSTAND its mechanics, claimed benefits and claimed costs precisely. In theory, use of small bills to address issues should also then provide voters a better ability to understand exactly what their elected official voted for or against to hold them accountable at the polls with "no excuses".
In reality, the one-at-a-time approach is virtually NEVER used for anything in Congress for exactly this reason. It provides no "cover" for officials to say they only voted for a study to determine why college kids like beer because it was in a bill that funded up-armored humvees for our troops in Iraq. This allows special interests to focus on one issue at a time and pick off opponents via any means necessary. It also eliminates the ability to use counterbalancing pork projects to forge coalitions large enough to pass bills. Any junior high school student of American history recognizes the process -- logrolling. In essence, that type of waste represents the tax imposed by an inefficient, corrupt political process because the only way to get anything through the gauntlet of corrupt politicians and lobbyists is to grease the skids with pork projects.
Political Paralysis Doesn't Stop Change
On any issue, there are always some who aren't comfortable with current proposed solutions and seem to almost take comfort in what appears to be our political paralysis. Their operating philosophy seems to be "I don't like the current ideas, let's just do nothing, keep the status quo and wait for a better idea." Unfortunately, an unchanging status quo only exists in our government. The real world continues to change in ways which are shifting investment capital out of America, shifting jobs out of America, concentrating more power with a smaller number of international corporations and widening the disparity in income and wealth throughout the world.
Normally in a republic, the voters should step in and use the ballot box to demand change and "throw the bastards out." That assumes the voters are paying attention and understand the mechanics of the issues well enough to discern fact from fiction. In the case of America, that also assumes our primary political parties actually present distinct choices and solutions. If the parties are failing to provide meaningful alternatives, use of the ballot box to make a change presumes that it is possible for a new party to be formed and gain enough power to make a difference. In reality, procedural rules at the federal and state government levels virtually assure any vote for a non-traditional party is wasted due to seniority rules for committee membership, leadership positions and election funding.
Wakeup Calls and the Snooze Button
The sad reality is that our political process is being strangled by corruption and special interests and has brought the country to the point where the only force capable of producing material change is massive failure and collapse. How massive? Just consider these examples.
The collapse of the Internet bubble in April 2000 didn't lead to any material change in obviously corrupt practices for IPO stock offerings and bogus mark to mark accounting that fed much of the bubble. It took the near simultaneous collapses of both WorldCom and Enron nearly 18 months later for Congress to make any attempt to improve regulations on accounting fraud and even those changes were toothless due to a lack of funding for enforcement.
The terrorist attacks of September 11, 2001 didn't produce any effort to re-orient America's energy policies to lessen our dependence on oil and reduce the volume of American dollars flowing into the coffers of states promoting militant Islamic terrorism. Indeed, the aftermath of the attacks led us to attack one nation that NEVER HAD nuclear weapons while starving a war in another country for resources that allowed that war to destabilize another country that DOES have nuclear weapons and has repeatedly engaged in proliferation of the weapons and the technology to make them to numerous other countries.
One year ago on September 15, 2008, the bankruptcy of Lehman Brothers triggered a month of near-constant financial failures which nearly triggered the collapse of our entire financial system and led to TRILLIONS of dollars being given away with zero accountability for the recipients. Yet twelve months after that wakeup call that made the market crashes of October 19, 1987 and October 29, 1929 look relatively benign in comparison , NOT A SINGLE CHANGE has been made to the regulation of the institutions that brought our entire economy to the brink. Indeed, we instead are seeing stories about executives of banks receiving TARP money using foreclosed properties of their institutions as personal vacation resorts.
In other words, NONE of these events -- arguably among the biggest "black swan" events to impact the United States in its entire 233 year history and all within the last decade -- have altered the behavior of our government or the behavior of We The People in the slightest.
Stop and think for a moment how shocking those events were to your retirement savings, your livelihood and your loved ones. If none of THOSE events could wake up Americans and force a change, how shocking do you think the event that CAN force a change will be? Believe it or not, healthcare is NOT an existential problem for the United States. Failure to address it will not lead to the collapse of the country, just a sudden, painful collapse of a few related industries and a shifting of spending between employment sectors within the country. Healthcare is a mere warm-up issue to practice our problem solving skills in preparation for vastly more important issues --- energy and finance -- which ARE existential to the future of America as we know it. Both have the ability to cripple the core of our economy and both are currently acting to cement Americans in a role as debtors to the world rather than its leaders.
Wake up, America. The snooze button won't work forever.
All in One or One at a Time?
Virtually all political coverage in the week of September 6, 2009 was devoted to whether President Obama would formally and publicly support a "public option" in any healthcare legislation then, when his September 9 address to Congress obliquely referenced a public option, more time was spent analyzing if he really meant it and what exactly he meant. Voters and politicians with centrist views watched the fixation from the same vantage point: why, with so many things wrong with healthcare that most agree upon, does Congress insist on giant omnibus bills too large for anyone to understand that include deal-breakers for extremists on the far left or far right? Why can't the Federal government break the problem down into manageable pieces and vote on issues individually?
The reality of our current political dilemma is that NEITHER an all-in-one approach aimed at producing compromise in the interest of progress or a one-at-a-time approach to the legislation aimed at electoral accountability has much of a chance of achieving reforms that truly improve the situation. Why?
The all-in-one approach that uses a single massive piece of legislation to try to fix as much as possible poses the deal-breaking dilemma for extremists. The bigger the bill, the greater the chance it will include SOMETHING that offends SOMEONE on "principle" and will give them cover for rejecting the entire bill. That's really not the most dangerous outcome, though. The real danger of an all-in-one bill is that NO ONE VOTING FOR IT WILL READ IT in its entirety and certainly NO ONE WILL BE CAPABLE OF UNDERSTANDING all the special interest language inserted into the bill and understand the origins of those terms to understand whether they should remain or be axed.
What that really means is that the all-in-one approach poses a substantial risk of containing one or two or dozens of clauses which replace some fatal flaw of the current system with new fatal flaws that could prove equally inefficient or corrupt. One could argue the all-in-one approach DOES help fight special interests by forcing them to attack on multiple fronts at once which may dilute their message and focus and lessen the chance of blocking the debate with demagoguery. However, past history with giant omnibus legislation seems to confirm the risk of really dumb / bad language that defeats any value in a bill remaining in a large bill outweighs the benefit of that bill passing.
The one-at-a-time approach would seem to provide a few benefits but again, recent history proves otherwise. In theory, use of small bills to address issues should increase the probability that members of Congress actually READ the entire bill and UNDERSTAND its mechanics, claimed benefits and claimed costs precisely. In theory, use of small bills to address issues should also then provide voters a better ability to understand exactly what their elected official voted for or against to hold them accountable at the polls with "no excuses".
In reality, the one-at-a-time approach is virtually NEVER used for anything in Congress for exactly this reason. It provides no "cover" for officials to say they only voted for a study to determine why college kids like beer because it was in a bill that funded up-armored humvees for our troops in Iraq. This allows special interests to focus on one issue at a time and pick off opponents via any means necessary. It also eliminates the ability to use counterbalancing pork projects to forge coalitions large enough to pass bills. Any junior high school student of American history recognizes the process -- logrolling. In essence, that type of waste represents the tax imposed by an inefficient, corrupt political process because the only way to get anything through the gauntlet of corrupt politicians and lobbyists is to grease the skids with pork projects.
Political Paralysis Doesn't Stop Change
On any issue, there are always some who aren't comfortable with current proposed solutions and seem to almost take comfort in what appears to be our political paralysis. Their operating philosophy seems to be "I don't like the current ideas, let's just do nothing, keep the status quo and wait for a better idea." Unfortunately, an unchanging status quo only exists in our government. The real world continues to change in ways which are shifting investment capital out of America, shifting jobs out of America, concentrating more power with a smaller number of international corporations and widening the disparity in income and wealth throughout the world.
Normally in a republic, the voters should step in and use the ballot box to demand change and "throw the bastards out." That assumes the voters are paying attention and understand the mechanics of the issues well enough to discern fact from fiction. In the case of America, that also assumes our primary political parties actually present distinct choices and solutions. If the parties are failing to provide meaningful alternatives, use of the ballot box to make a change presumes that it is possible for a new party to be formed and gain enough power to make a difference. In reality, procedural rules at the federal and state government levels virtually assure any vote for a non-traditional party is wasted due to seniority rules for committee membership, leadership positions and election funding.
Wakeup Calls and the Snooze Button
The sad reality is that our political process is being strangled by corruption and special interests and has brought the country to the point where the only force capable of producing material change is massive failure and collapse. How massive? Just consider these examples.
The collapse of the Internet bubble in April 2000 didn't lead to any material change in obviously corrupt practices for IPO stock offerings and bogus mark to mark accounting that fed much of the bubble. It took the near simultaneous collapses of both WorldCom and Enron nearly 18 months later for Congress to make any attempt to improve regulations on accounting fraud and even those changes were toothless due to a lack of funding for enforcement.
The terrorist attacks of September 11, 2001 didn't produce any effort to re-orient America's energy policies to lessen our dependence on oil and reduce the volume of American dollars flowing into the coffers of states promoting militant Islamic terrorism. Indeed, the aftermath of the attacks led us to attack one nation that NEVER HAD nuclear weapons while starving a war in another country for resources that allowed that war to destabilize another country that DOES have nuclear weapons and has repeatedly engaged in proliferation of the weapons and the technology to make them to numerous other countries.
One year ago on September 15, 2008, the bankruptcy of Lehman Brothers triggered a month of near-constant financial failures which nearly triggered the collapse of our entire financial system and led to TRILLIONS of dollars being given away with zero accountability for the recipients. Yet twelve months after that wakeup call that made the market crashes of October 19, 1987 and October 29, 1929 look relatively benign in comparison , NOT A SINGLE CHANGE has been made to the regulation of the institutions that brought our entire economy to the brink. Indeed, we instead are seeing stories about executives of banks receiving TARP money using foreclosed properties of their institutions as personal vacation resorts.
In other words, NONE of these events -- arguably among the biggest "black swan" events to impact the United States in its entire 233 year history and all within the last decade -- have altered the behavior of our government or the behavior of We The People in the slightest.
Stop and think for a moment how shocking those events were to your retirement savings, your livelihood and your loved ones. If none of THOSE events could wake up Americans and force a change, how shocking do you think the event that CAN force a change will be? Believe it or not, healthcare is NOT an existential problem for the United States. Failure to address it will not lead to the collapse of the country, just a sudden, painful collapse of a few related industries and a shifting of spending between employment sectors within the country. Healthcare is a mere warm-up issue to practice our problem solving skills in preparation for vastly more important issues --- energy and finance -- which ARE existential to the future of America as we know it. Both have the ability to cripple the core of our economy and both are currently acting to cement Americans in a role as debtors to the world rather than its leaders.
Wake up, America. The snooze button won't work forever.
Wednesday, September 09, 2009
The Speech We Needed
President Obama's speech of September 9, 2009 had three crucial goals:
1) replace the current sense of paralysis for one of momentum and progress
2) outline a core set of principles that justify the structure of the proposals he's promoting
3) recast the core of the debate from a partisan political battle to a moral reflection of our collective American character -- an appeal to our "better angels"
At this point, any debate about whether the speech achieved those goals may be moot (or "mute" if yous ignert).
The more appropriate question would be -- What was the speech we needed?
Answering that question requires an understanding of the portion of the voting public that's still capable of moving the debate. Based upon most news stories over the past month of "town hall meetings", that audience is actually the large percentage of workers who actually have insurance coverage right now. To date, this group hasn't become terribly concerned or involved with the debate because even though they may not be thrilled with their employer-provided coverage, they have concluded
1) unemployment is high but I still have a job
2) my job provides coverage
3) I may not like the terms of my coverage but I've covered for the big stuff
In short, I got mine, I don't understand all this stuff, so just leave it alone.
Obama's speech ended with a fabulous rhetorical flourish related to goal #3 -- We did not come to fear the future. We came here to shape it. None of that is going to click with the "I got mine" crowd.
What would click?
Here's an abbreviated speech that would have made the appropriate point to the appropriate subset of Americans that could really drive their elected officials to ensure substantive change is made to both health care and health insurance.
--------------------------------------------
My fellow Americans, on the issue of healthcare, we Americans are divided into several distinct camps based on a combination of long-held ideological views and short-term indifference. Frankly, for those of you out on the fringes of the left or right of this issue, nothing I say here will convince you of the merit of any change in your views. We already know how many don't have insurance. We already know the costs of emergency care for those without insurance is being subsidized by those of us with coverage or by taxpayers. We already know insurance companies want to be free to cherry pick low-risk customers yet at the same time preventing lower-cost alternatives from being provided to those excluded from coverage.
For those who have been comfortably indifferent to this issue, it is you who need to listen to what I'm going to state here. I'm talking about you out there with jobs, with families, with employer-paid healthcare insurance who are still ambivalent about the dangers posed by our current insurance and care delivery systems. I'm talking about those of you out there comfortably retired with a pension and retiree health care coverage and a 401k.
Wake up.
You have a job now, but we have fifteen percent real unemployment. Your wages have been flat but you haven't aggressively sought higher paying jobs because at least you have healthcare coverage. Even if you have a job you may not like or sub-par pay, you worry about changing employers because you worry about taking a chance with a new employer who might lay you off with no way to come back to your prior job and resume coverage. Even if you don't worry about the employer change, you worry about whether the new employer's insurance will exclude coverage for a pre-existing condition for you or a family member. The feeling of healthcare coverage limbo between jobs isn't the real issue though.
The real issue you need to understand is the very real chance you don't actually have the coverage you think you do. You've been tolerating a possibly crappy job, possibly crappy pay, a possibly crappy corporate employer to hang on to dear life for insurance coverage that when you REALLY need it may turn out to be a phantom -- an very expensive illusion. The minute you file a claim for a serious (expensive) condition, you encounter a giant corporation bent on finding rules allowing them to exclude payment or allowing them to drop you entirely. After you've paid thousands in premiums for years. After being diagnosed with a condition that will now likely allow any other insurance company to exclude you leaving you completely alone.
The real issue you need to understand is that any healthcare coverage you may enjoy as a retiree of any large company faces grave dangers in the current financial climate. The financial contraction is not over, tighter credit markets will continue to squeeze weak financial institutions including banks and insurance companies and investment firms, further squeezing company pension plans, 401k balances, and reserves for employee / retiree healthcare coverage. If your former employer goes bankrupt, obligations for retiree healthcare are the first to be jettisoned in any bankruptcy.
The current system of healthcare insurance and providers is acting as a growing drag on EVERY sector of the American economy and has reached critical mass in its ability to kill jobs, bankrupt firms and bankrupt families. The only way to break the downward spiral, stabilize the economy and begin re-orienting the delivery of care is to
1) force insurance companies to compete without exclusions or retroactive denial of coverage
2) provide alternate sources of coverage to break the death grip of employers on insurance pricing
3) combine meaningful tort reform with objective, public reporting on care quality to eliminate defensive medicine
That's what the American people deserve, that's what I aim to deliver and that's what you should demand from your Representatives and Senators in this chamber.
--------------------------------------------
THAT'S the speech I would have preferred hearing to kick-start reform.
1) replace the current sense of paralysis for one of momentum and progress
2) outline a core set of principles that justify the structure of the proposals he's promoting
3) recast the core of the debate from a partisan political battle to a moral reflection of our collective American character -- an appeal to our "better angels"
At this point, any debate about whether the speech achieved those goals may be moot (or "mute" if yous ignert).
The more appropriate question would be -- What was the speech we needed?
Answering that question requires an understanding of the portion of the voting public that's still capable of moving the debate. Based upon most news stories over the past month of "town hall meetings", that audience is actually the large percentage of workers who actually have insurance coverage right now. To date, this group hasn't become terribly concerned or involved with the debate because even though they may not be thrilled with their employer-provided coverage, they have concluded
1) unemployment is high but I still have a job
2) my job provides coverage
3) I may not like the terms of my coverage but I've covered for the big stuff
In short, I got mine, I don't understand all this stuff, so just leave it alone.
Obama's speech ended with a fabulous rhetorical flourish related to goal #3 -- We did not come to fear the future. We came here to shape it. None of that is going to click with the "I got mine" crowd.
What would click?
Here's an abbreviated speech that would have made the appropriate point to the appropriate subset of Americans that could really drive their elected officials to ensure substantive change is made to both health care and health insurance.
--------------------------------------------
My fellow Americans, on the issue of healthcare, we Americans are divided into several distinct camps based on a combination of long-held ideological views and short-term indifference. Frankly, for those of you out on the fringes of the left or right of this issue, nothing I say here will convince you of the merit of any change in your views. We already know how many don't have insurance. We already know the costs of emergency care for those without insurance is being subsidized by those of us with coverage or by taxpayers. We already know insurance companies want to be free to cherry pick low-risk customers yet at the same time preventing lower-cost alternatives from being provided to those excluded from coverage.
For those who have been comfortably indifferent to this issue, it is you who need to listen to what I'm going to state here. I'm talking about you out there with jobs, with families, with employer-paid healthcare insurance who are still ambivalent about the dangers posed by our current insurance and care delivery systems. I'm talking about those of you out there comfortably retired with a pension and retiree health care coverage and a 401k.
Wake up.
You have a job now, but we have fifteen percent real unemployment. Your wages have been flat but you haven't aggressively sought higher paying jobs because at least you have healthcare coverage. Even if you have a job you may not like or sub-par pay, you worry about changing employers because you worry about taking a chance with a new employer who might lay you off with no way to come back to your prior job and resume coverage. Even if you don't worry about the employer change, you worry about whether the new employer's insurance will exclude coverage for a pre-existing condition for you or a family member. The feeling of healthcare coverage limbo between jobs isn't the real issue though.
The real issue you need to understand is the very real chance you don't actually have the coverage you think you do. You've been tolerating a possibly crappy job, possibly crappy pay, a possibly crappy corporate employer to hang on to dear life for insurance coverage that when you REALLY need it may turn out to be a phantom -- an very expensive illusion. The minute you file a claim for a serious (expensive) condition, you encounter a giant corporation bent on finding rules allowing them to exclude payment or allowing them to drop you entirely. After you've paid thousands in premiums for years. After being diagnosed with a condition that will now likely allow any other insurance company to exclude you leaving you completely alone.
The real issue you need to understand is that any healthcare coverage you may enjoy as a retiree of any large company faces grave dangers in the current financial climate. The financial contraction is not over, tighter credit markets will continue to squeeze weak financial institutions including banks and insurance companies and investment firms, further squeezing company pension plans, 401k balances, and reserves for employee / retiree healthcare coverage. If your former employer goes bankrupt, obligations for retiree healthcare are the first to be jettisoned in any bankruptcy.
The current system of healthcare insurance and providers is acting as a growing drag on EVERY sector of the American economy and has reached critical mass in its ability to kill jobs, bankrupt firms and bankrupt families. The only way to break the downward spiral, stabilize the economy and begin re-orienting the delivery of care is to
1) force insurance companies to compete without exclusions or retroactive denial of coverage
2) provide alternate sources of coverage to break the death grip of employers on insurance pricing
3) combine meaningful tort reform with objective, public reporting on care quality to eliminate defensive medicine
That's what the American people deserve, that's what I aim to deliver and that's what you should demand from your Representatives and Senators in this chamber.
--------------------------------------------
THAT'S the speech I would have preferred hearing to kick-start reform.
Sunday, August 16, 2009
Recess Bullies and Town Hall Tantrums
Without exaggeration, the three most important issues facing the United States involve its fossil fuel addictions, a systemically corrupt and incompetent banking and financial system and a healthcare system that is bankrupting our real economy. Each has been neglected for so long that the danger posed by each has reached existential proportions for the country and have become intertwined in their impacts and the barriers each poses to solving any of the three.
After seven months of meandering, the new Congress not only failed to produce concrete proposals for debate in the area of healthcare, it failed to even define a framework of three or four key areas in which changes must be made and explained / sold to the public. Where there's a void, there's uncertainty and where there's uncertainty, there is fear to be sowed and exploited -- by all sides.
And so it has. As 535 elected representatives returned to their districts for summer recess, attempts at explaining current proposals or "listening" to voters became opportunities for free media exposure of pre-planned verbal bullying and the adult equivalent of temper tantrums that probably embarrassed many children. The hype around these recess bullies and town hall tantrums merits a bit of analysis in one key area but a return to focusing on the fundamentals is urgently required.
Politics -- Obama's Colossal Mistake
Define the terms and you define the debate -- and often the results. Healthcare constitutes seventeen percent of GDP in the United States (see #1). Nothing that massive and complicated can be changed in the slightest regard without massive resistance from those currently benefiting from that status quo. Despite campaign rhetoric that tagged healthcare reforms as a do-or-die issue for America, despite abundant examples in recent political history of issues being distorted or shut down entirely by poll-tested catch-phrases like "death tax" or "defense of marriage" and despite recent history in the very specific area of healthcare of any attempts at reform being labeled socialist, President Obama kicked off the healthcare reform initiative by doing…
...virtually nothing.
No strawman proposal. No prescribed limit on total cost. No prescribed limit on offsets in other spending to help cover the cost. No concrete timeline for the overall process that might help triage the problem and allow a more focused, informed debate.
Outsiders have no way of knowing what the thinking was among Obama's advisors that led to this approach. The only plausible explanation is that Team Obama felt financial stability in the banking and auto industries was still not assured as of January 20, 2009 and a collapse in either area could magnify an economic meltdown. Those issues required the new Team Obama to continue a very heavy-handed, top-down approach to intervention begun by Team Bush that was wildly unpopular with the public. As such, healthcare reform could be tossed to a Democratic Congress for the initial grunt work and a wildly popular Obama with a perceived electoral mandate to fix healthcare could step in at the last minute to iron out any wrinkles or remove a few sticking points while avoiding the appearance of even more micromanagement of the economy by the Executive Branch.
That might have been the thinking but it has turned out to have disastrous consequences. The most damaging outcome of the initial hands-off strategy by the Obama Administration is that Obama failed to establish a vocabulary for the debate. In the absence of a common vocabulary, any parties with an interest in preserving or expanding the status quo have been able to fill the void with their own spin with millions in paid advertising. Better yet, opponents have scored millions of dollars worth of free coverage created by equally uninformed reporters covering ginned up "conflict" with someone screaming at their Senator or Representative in front of hundreds. That makes much better television than video of hundreds of the uninsured lined silently lined up in the dark in the middle of the night waiting for a free clinic to open so they can try to get dental care or an eye exam.
Many say a Presidency comes down to the first eighteen months in office. Beyond that, Congress has to focus on fundraising and mid-term elections. Beyond twenty four months, the incumbent President has to worry about re-election and nothing controversial or important has a chance of being enacted. At this point, President Obama could be viewed as nearly halfway through his "real term" and the healthcare issue is nearly dead in the water. Miracles might happen and some improvements might come out of nowhere but Congress has never done its best work on short order. The failure to define the terms of an honest debate on healthcare lies predominately with President Obama and time and support are rapidly dwindling to salvage ANYTHING out of a reform effort, much less the changes that are really required.
So what vocabulary needs to be established for a legitimate debate of healthcare reforms? All of the following terms are being used and abused in the current debate:
* competition
* tort reform
* death panels versus death taxes
* status quo
Reality -- Competition in Health Care and Health Insurance
Any discussion of government involvement in expanding coverage quickly highlights significant confusion about the difference between health CARE and health INSURANCE as well as the competition in each segment. That confusion, whether incidental or intentional, helps mask many of the problems in both segments and the flaws with proposed changes. Health CARE involves analysis of symptoms by medically trained doctors and nurses, diagnosis of potential causes and the delivery of treatments to correct or at least mitigate diagnosed illnesses. Heath INSURANCE is a financial product that exchanges uncertain costs with uncertain timings and individually uncertain probabilities of occurrence for a fixed cost. Our system has linked care and insurance in amazingly inefficient ways but they have to be analyzed separately.
Increased government involvement in providing insurance is opposed by many for fear a cheaper government solution will somehow steal customers away from large publicly traded insurance companies by offering cheaper, subsidized coverage -- as if the government was going to complete in the computer market by offering a cheaper, more desirable computer than either Apple or numerous Wintel style manufacturers. This argument conveniently omits mentioning that the business model of most insurance companies is NOT to sell MORE policies to produce more profits. The model for the past ten to fifteen years has morphed into one involving statistically discriminating against entire classes of customers to sell to a smaller and smaller base of wealthier customers able to pay higher and higher premiums who never get sick and never generate charges for treatments and drugs.
Open your Econ 101 textbooks and review the chapter on supply and demand when prices are higher and supply smaller than aggregate demand would normally dictate. Theoretically, the only time that’s possible is when supply is met by so few competitors such that each competitor in the market place is large enough that their "supply curve" begins approximating the overall "supply curve" of the industry -- the classic definition of a monopoly. At first, it's hard to argue the insurance industry acts as a monopoly given the hundreds of firms in the business. However underlying economic theory says that's exactly what's happening. Your experience should bear this out as well. Every November when your employer requires re-enrollment for the next year's healthcare coverage, do YOU get to pick among any insurance plans in your state or only those pre-selected by your employer? Do you have more or fewer choices this year than last year? Even if you get a choice between three or four different plans, is that REALLY a choice? Is your favorite doctor or dentist available under all the plans?
The truth is that insurance companies don't want to serve huge swaths of the population because their business model isn't based upon efficient claim service, it's based upon collection of premiums and denial of payouts. While they can't efficiently serve large segments of the population, they sure don't want anyone else serving them either. This is perfectly logical from their selfish perspective but completely illogical from society's perspective. It's as though Lamborghini, Ferrari, Porsche, Mercedes and Lexus only wanted to sell $100,000 autos but didn't want anyone else trying to sell $20,000 autos. Also note that one proposal put forth by the insurance industry involves eliminating state-by-state licensing so firms don't have to manage fifty unique sets of rules to offer coverage. That sounds like they want to compete for more business but more than likely, only under their existing business model of selective coverage and denial of payouts.
Problems with the lack of competition for healthcare insurance are getting worse with time. In 2002, the Government Accounting Office produced a report for Missouri Senator Christopher Bond (see #2) summarizing key statistics for insurance carriers selling "small group" coverage in the 50 states. In 2002, the median number of firms offering "small group" insurance was 28 per state and the five largest firms represented 75% of the market in 19 the 34 states that responded but more than 90% in seven states.
In 2009, the GAO provided a similar report to the same Congressional committee (see #3). How have things changed? Quoting from the report:
--------------------------------------------
* The median market share of the largest small group carrier has increased to about 47 percent in 2008 from the 43 percent reported in 2005 and the 33 percent reported in 2002. Twenty-four of the 29 states providing information in both 2002 and 2008 saw increases in the market share of the top carrier that ranged from about 2 to 39 percentage points. In contrast, the top carriers in 5 states lost market share with decreases ranging from about 1 to 16 percentage points.
• The number of states with a combined market share of the five largest carriers of 75 percent or more has also increased since our 2002 survey. The combined market share of the five largest small group carriers represented three-quarters or more of the market in 34 of 39 states, compared to 26 of 34 states reported in 2005 and 19 of 34 states reported in 2002.
--------------------------------------------
Reality -- Tort Reform and Insurance Costs
Understanding the lack of competition within the healthcare and health insurance industries is also crucial to understanding motivations of those proposing so-called tort reform measures. The term "tort reform" is usually used as a label for proposals which would impose caps on "giant malpractice damages" that increase malpractice insurance premiums for individual doctors and institutions which in tern drive up care costs which drive up consumer insurance costs. Proponents of this type of tort reform also claim -- with some validity -- that the risk of sky-high malpractice judgments against doctors and hospitals drives additional unnecessary medical tests as "defensive medicine." Perhaps worst of all, high malpractice insurance costs drive many doctors out of particular specialties (obstetrics for one) or out of practice entirely -- "who needs the aggravation?"
This argument for tort reform sounds very logical and reasonable but ignores two problems with the current system. First, most "tort reform" proposals also aim at strengthening restrictions protecting HMOs and insurance staffs from lawsuits for malpractice when, in fact, many patients' care is DIRECTLY affected by employees who are NOT licensed to practice medicine, prescribe drugs or second-guess the decisions of those who ARE so licensed. It also ignores the fact that many of the unneeded tests and procedures being performed and referrals being ordered aren't "defensive medicine" at all. A better term might be "offensive medicine" because many are ordered because the doctors participate in the profits of the labs or hospitals doing the work -- a direct conflict of interest. When patients think the doctor is the expert and some third party is paying the bill, offensive medicine can be highly profitable.
An imaginary problem? Tell that to the 25 percent of heart patients at a hospital in Redding, California operated by Tenet Healthcare who were treated with bypass surgery despite having no serious health problems (see #4). Redding is a small town with a population of about 80,000 yet it led the country in the number of bypasses performed on Medicare patients at the time the FBI shut down the cardiac practice in 2002. Despite the obvious fraud and criminal malpractice, neither Tenet Healthcare nor its two cardiologists who performed the procedures were criminally prosecuted (#5). They paid a fine of $54 million to the government and Tenet paid $395 million to about 796 patients involved. SEVEN HUNDRED AND NINETY SIX patients. Average costs for CABG procedures vary widely (see earlier notes on that) but charges at this facility averaged $300,000 PER PROCEDURE during that time.
There are clearly thousands of lawsuit-happy patients and lawyers exploiting insurance companies and driving up costs for healthcare. However, tort reform that simply caps damages to individuals will simply reduce the uncertainty of legal fees for insurance companies and bad doctors, making lawsuit damages a predictable cost of doing business which can be budgeted like the cost of tongue depressors and magazine subscriptions for the waiting room. To balance out the risk between providers and patients, tort reform proposals MUST require doctors and hospitals to collect and report auditable statistics on patient acuities, treatments and outcomes. If doctors are operating within statistically normal ranges of patient acuity and procedures performed for those conditions and a bad outcome happens, the tort reform caps apply. If a doctor's choice of treatment for a given condition lies outside some boundary of "normalcy" and a bad outcome occurs, patients have a right to sue without caps on damages.
Improved use of statistics to trend treatments and outcomes is possibly the SINGLE most important strategy for improving virtually every aspect of the healthcare and health insurance problem. Suppose a patient presents with symptoms W, X, Y and Z and a doctor proscribes a few tests but decides tests A, B and C are not required. Under the current system, if a bad outcome occurs and later a lawyer decides the doctor should have ordered test A, the doctor faces an expensive and time consuming battle that takes even more resources away from patient care. If the doctor had the backing of a national database of independently certified results saying that 99 percent of the time, patients with symptoms W, X, Y and Z never benefited from having those tests performed, the inclination to order those tests defensively might be reduced. If the database statistics came with clear-cut limits on malpractice judgments, such defensive tests could easily be reduced 20 to 30 percent.
Some doctors and hospitals have seen the light on improving access to statistics. However, only a minority offer access to statistics regarding cases and outcomes like this summary (see #6) for Dartmouth-Hitchcock hospital. Virtually NONE publish actual costs of procedures performed. As another interesting exercise, try to find statistics for average costs of a heart bypass operation (a coronary artery bypass graft or CABG). You'll find numbers ranging from $20,000 (see #7) to $68,367 (see #8) to even $135,000 (see #9). How would a prospective patient reconcile cost variances like that?
Reality -- Death Panels and the Real Death Tax
Ask most people what comes to mind after hearing the term "death tax" and the vast majority will respond with "inheritance" or "estate tax" -- and somewhere Republican pollster Frank Luntz smiles. In a masterstroke of linguistic and political manipulation / fraud, he helped link the two concepts to help efforts aimed at reducing or eliminating the federal estate tax. The majority of Americans think estate taxes harm them when the vast majority of Americans (certainly NOW after the financial meltdown) will not die with an estate worth over $1,00,000.which is the ACTUAL final trigger point at which the tax applies after the un-sunset of the sunset that expires after 2009 (see #10).
Republicans tried the same tactic with healthcare reform by inventing the term "death panel" which was immediately shot down after finding similar proposals in Republican legistlation in the last decade. Instead of being clever with language, it might be useful for once to be PRECISE with language when debating public policy and end-of-life healthcare costs and taxes provides a great opportunity. The real "death tax" in America is imposed when families of elderly patients headed for long-term assisted living or skilled nursing facilities for hospice care coordinate "planned giving" of assets of the patient to family members in the years / months leading up to hospitalization so by the time the real bills arrive, the "patient" is technically impoverished and eligible for Medicare so US taxpayers pick up the tab for the final months. Many state Medicaid websites and law firm web sites provide advice on exactly how to do this (see #11).
Here's a common scenario. In the final years of life, an elderly person with some financial means begins transferring up to $12,000 per year to family or friends on a tax-free basis. As long as they stay below the $12,000 limit for a five year "look-back" period from the time the nursing home stay begins, those gifts don't hurt the patient's eligibility for Medicaid payment of their nursing home bills. Neither does up to $500,000 in home equity. The net result is a "half-millionaire" can manage to protect up to $60,000 in cash funds (in addition to the equity on a principle residence) from being used to pay a bill other taxpayers wind up covering. That $60,000 would cover roughly fifteen months in a typical nursing facility.
This sounds harsh, it sounds like class envy, it sounds crass, even cruel somehow. Is it though? If you are elderly and you have FIVE HUNDRED THOUSAND dollars or, more precisely, you have FIVE HUNDRED AND SIXTY THOUSAND dollars, why ON EARTH should I or any other tax payer be picking up ANY of the cost of an expense that is now a very predictable part of life? This is the true "death tax" -- a tax liability you impose on OTHER PEOPLE when you die. By transferring the cost of a predictable cost of later years to "other people's money", it removes any incentive for patients and their families from making more appropriate financial decisions for covering those costs. Perhaps more importantly, it removes any incentive for many families to make more appropriate ethical decisions concerning end-of-life treatments, many of which are not improving quality of life under any objective standard.
Reality - Is There Any Such Thing as a Status Quo?
Let's give opponents of particular health care reform proposals or ANY reform whatsoever the benefit of the doubt for a moment. Let's assume they have principled objections to some perceived flaw in reform proposals and prefer our leaders simply stop, take an electoral breather and regroup for a more thoughtful attempt in another year or two. The assumption is that if left unchanged, things will remain about as bad as they are right now, within some range of tolerable certainty. Opponents might even argue that this in fact happened in the 1990s with the Clinton plan and nothing melted down after doing nothing then. We can choose "nothing" again and get the status quo.
BZZZZZZZZZZZZZTTTTT. Nope. Uncontrolled healthcare costs are one of the three existential problems facing the United States economy and perhaps our society. We face nearly 16 percent unemployment (9.5 percent "looking" plus 6.5 percent "given up") and continued declines in factory orders are driving continued declines in manufacturing which will continue to generate job losses which will continue to drive bankruptcies from mortgage foreclosures and medical bills, feeding a horrific downward financial spiral in the entire economy. Reducing healthcare spending through improved efficiency on procedures provided and elimination of needless procedures is REQUIRED to stabilize the economy. Not three or five years down the road but AS SOON AS POSSIBLE. Failure to do so will make American labor and products less competitive on the world market, accelerate further job losses, increase the rolls of the uninsured, and further expose families to bankruptcy and an utter collapse in their standard of living. For the long term, failure of American business to reduce health care costs will cost America the jobs of the future, be they in electric cars, solar or wind energy technology or the next big thing. If you think this is hyperbole, note that the China's exponential growth coincided not only with new trade policies but with the collapse of healthcare reform efforts in the Clinton era.
Doing nothing now might be an option but keeping the status quo is not. The current situation will get markedly worse -- not only for those without coverage but even for those currently employed and covered.
==========================================
#1) http://www.nchc.org/facts/cost.shtml
#2) http://www.gao.gov/new.items/d02536r.pdf
#3) http://www.gao.gov/new.items/d09363r.pdf (2009)
#4) http://www.usatoday.com/money/industries/health/2003-08-06
-tenet-settlement_x.htm
#5) http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/18/INGN1O5DUM1.DTL
#6) http://www.dhmc.org/qualityreports/list.cfm?metrics=CT
#7) http://www.consumeraffairs.com/news04/2005/bypass.html
#8) http://www.dane101.com/current/2006/05/10
/where_is_heart_bypass_surgery_the_cheapest
#9) http://www.crd.york.ac.uk/CRDWeb/ShowRecord.asp?View=Full
&ID=22003001376
#10) http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
#11) http://www.markfreemanelderlaw.com/myths.asp
After seven months of meandering, the new Congress not only failed to produce concrete proposals for debate in the area of healthcare, it failed to even define a framework of three or four key areas in which changes must be made and explained / sold to the public. Where there's a void, there's uncertainty and where there's uncertainty, there is fear to be sowed and exploited -- by all sides.
And so it has. As 535 elected representatives returned to their districts for summer recess, attempts at explaining current proposals or "listening" to voters became opportunities for free media exposure of pre-planned verbal bullying and the adult equivalent of temper tantrums that probably embarrassed many children. The hype around these recess bullies and town hall tantrums merits a bit of analysis in one key area but a return to focusing on the fundamentals is urgently required.
Politics -- Obama's Colossal Mistake
Define the terms and you define the debate -- and often the results. Healthcare constitutes seventeen percent of GDP in the United States (see #1). Nothing that massive and complicated can be changed in the slightest regard without massive resistance from those currently benefiting from that status quo. Despite campaign rhetoric that tagged healthcare reforms as a do-or-die issue for America, despite abundant examples in recent political history of issues being distorted or shut down entirely by poll-tested catch-phrases like "death tax" or "defense of marriage" and despite recent history in the very specific area of healthcare of any attempts at reform being labeled socialist, President Obama kicked off the healthcare reform initiative by doing…
...virtually nothing.
No strawman proposal. No prescribed limit on total cost. No prescribed limit on offsets in other spending to help cover the cost. No concrete timeline for the overall process that might help triage the problem and allow a more focused, informed debate.
Outsiders have no way of knowing what the thinking was among Obama's advisors that led to this approach. The only plausible explanation is that Team Obama felt financial stability in the banking and auto industries was still not assured as of January 20, 2009 and a collapse in either area could magnify an economic meltdown. Those issues required the new Team Obama to continue a very heavy-handed, top-down approach to intervention begun by Team Bush that was wildly unpopular with the public. As such, healthcare reform could be tossed to a Democratic Congress for the initial grunt work and a wildly popular Obama with a perceived electoral mandate to fix healthcare could step in at the last minute to iron out any wrinkles or remove a few sticking points while avoiding the appearance of even more micromanagement of the economy by the Executive Branch.
That might have been the thinking but it has turned out to have disastrous consequences. The most damaging outcome of the initial hands-off strategy by the Obama Administration is that Obama failed to establish a vocabulary for the debate. In the absence of a common vocabulary, any parties with an interest in preserving or expanding the status quo have been able to fill the void with their own spin with millions in paid advertising. Better yet, opponents have scored millions of dollars worth of free coverage created by equally uninformed reporters covering ginned up "conflict" with someone screaming at their Senator or Representative in front of hundreds. That makes much better television than video of hundreds of the uninsured lined silently lined up in the dark in the middle of the night waiting for a free clinic to open so they can try to get dental care or an eye exam.
Many say a Presidency comes down to the first eighteen months in office. Beyond that, Congress has to focus on fundraising and mid-term elections. Beyond twenty four months, the incumbent President has to worry about re-election and nothing controversial or important has a chance of being enacted. At this point, President Obama could be viewed as nearly halfway through his "real term" and the healthcare issue is nearly dead in the water. Miracles might happen and some improvements might come out of nowhere but Congress has never done its best work on short order. The failure to define the terms of an honest debate on healthcare lies predominately with President Obama and time and support are rapidly dwindling to salvage ANYTHING out of a reform effort, much less the changes that are really required.
So what vocabulary needs to be established for a legitimate debate of healthcare reforms? All of the following terms are being used and abused in the current debate:
* competition
* tort reform
* death panels versus death taxes
* status quo
Reality -- Competition in Health Care and Health Insurance
Any discussion of government involvement in expanding coverage quickly highlights significant confusion about the difference between health CARE and health INSURANCE as well as the competition in each segment. That confusion, whether incidental or intentional, helps mask many of the problems in both segments and the flaws with proposed changes. Health CARE involves analysis of symptoms by medically trained doctors and nurses, diagnosis of potential causes and the delivery of treatments to correct or at least mitigate diagnosed illnesses. Heath INSURANCE is a financial product that exchanges uncertain costs with uncertain timings and individually uncertain probabilities of occurrence for a fixed cost. Our system has linked care and insurance in amazingly inefficient ways but they have to be analyzed separately.
Increased government involvement in providing insurance is opposed by many for fear a cheaper government solution will somehow steal customers away from large publicly traded insurance companies by offering cheaper, subsidized coverage -- as if the government was going to complete in the computer market by offering a cheaper, more desirable computer than either Apple or numerous Wintel style manufacturers. This argument conveniently omits mentioning that the business model of most insurance companies is NOT to sell MORE policies to produce more profits. The model for the past ten to fifteen years has morphed into one involving statistically discriminating against entire classes of customers to sell to a smaller and smaller base of wealthier customers able to pay higher and higher premiums who never get sick and never generate charges for treatments and drugs.
Open your Econ 101 textbooks and review the chapter on supply and demand when prices are higher and supply smaller than aggregate demand would normally dictate. Theoretically, the only time that’s possible is when supply is met by so few competitors such that each competitor in the market place is large enough that their "supply curve" begins approximating the overall "supply curve" of the industry -- the classic definition of a monopoly. At first, it's hard to argue the insurance industry acts as a monopoly given the hundreds of firms in the business. However underlying economic theory says that's exactly what's happening. Your experience should bear this out as well. Every November when your employer requires re-enrollment for the next year's healthcare coverage, do YOU get to pick among any insurance plans in your state or only those pre-selected by your employer? Do you have more or fewer choices this year than last year? Even if you get a choice between three or four different plans, is that REALLY a choice? Is your favorite doctor or dentist available under all the plans?
The truth is that insurance companies don't want to serve huge swaths of the population because their business model isn't based upon efficient claim service, it's based upon collection of premiums and denial of payouts. While they can't efficiently serve large segments of the population, they sure don't want anyone else serving them either. This is perfectly logical from their selfish perspective but completely illogical from society's perspective. It's as though Lamborghini, Ferrari, Porsche, Mercedes and Lexus only wanted to sell $100,000 autos but didn't want anyone else trying to sell $20,000 autos. Also note that one proposal put forth by the insurance industry involves eliminating state-by-state licensing so firms don't have to manage fifty unique sets of rules to offer coverage. That sounds like they want to compete for more business but more than likely, only under their existing business model of selective coverage and denial of payouts.
Problems with the lack of competition for healthcare insurance are getting worse with time. In 2002, the Government Accounting Office produced a report for Missouri Senator Christopher Bond (see #2) summarizing key statistics for insurance carriers selling "small group" coverage in the 50 states. In 2002, the median number of firms offering "small group" insurance was 28 per state and the five largest firms represented 75% of the market in 19 the 34 states that responded but more than 90% in seven states.
In 2009, the GAO provided a similar report to the same Congressional committee (see #3). How have things changed? Quoting from the report:
--------------------------------------------
* The median market share of the largest small group carrier has increased to about 47 percent in 2008 from the 43 percent reported in 2005 and the 33 percent reported in 2002. Twenty-four of the 29 states providing information in both 2002 and 2008 saw increases in the market share of the top carrier that ranged from about 2 to 39 percentage points. In contrast, the top carriers in 5 states lost market share with decreases ranging from about 1 to 16 percentage points.
• The number of states with a combined market share of the five largest carriers of 75 percent or more has also increased since our 2002 survey. The combined market share of the five largest small group carriers represented three-quarters or more of the market in 34 of 39 states, compared to 26 of 34 states reported in 2005 and 19 of 34 states reported in 2002.
--------------------------------------------
Reality -- Tort Reform and Insurance Costs
Understanding the lack of competition within the healthcare and health insurance industries is also crucial to understanding motivations of those proposing so-called tort reform measures. The term "tort reform" is usually used as a label for proposals which would impose caps on "giant malpractice damages" that increase malpractice insurance premiums for individual doctors and institutions which in tern drive up care costs which drive up consumer insurance costs. Proponents of this type of tort reform also claim -- with some validity -- that the risk of sky-high malpractice judgments against doctors and hospitals drives additional unnecessary medical tests as "defensive medicine." Perhaps worst of all, high malpractice insurance costs drive many doctors out of particular specialties (obstetrics for one) or out of practice entirely -- "who needs the aggravation?"
This argument for tort reform sounds very logical and reasonable but ignores two problems with the current system. First, most "tort reform" proposals also aim at strengthening restrictions protecting HMOs and insurance staffs from lawsuits for malpractice when, in fact, many patients' care is DIRECTLY affected by employees who are NOT licensed to practice medicine, prescribe drugs or second-guess the decisions of those who ARE so licensed. It also ignores the fact that many of the unneeded tests and procedures being performed and referrals being ordered aren't "defensive medicine" at all. A better term might be "offensive medicine" because many are ordered because the doctors participate in the profits of the labs or hospitals doing the work -- a direct conflict of interest. When patients think the doctor is the expert and some third party is paying the bill, offensive medicine can be highly profitable.
An imaginary problem? Tell that to the 25 percent of heart patients at a hospital in Redding, California operated by Tenet Healthcare who were treated with bypass surgery despite having no serious health problems (see #4). Redding is a small town with a population of about 80,000 yet it led the country in the number of bypasses performed on Medicare patients at the time the FBI shut down the cardiac practice in 2002. Despite the obvious fraud and criminal malpractice, neither Tenet Healthcare nor its two cardiologists who performed the procedures were criminally prosecuted (#5). They paid a fine of $54 million to the government and Tenet paid $395 million to about 796 patients involved. SEVEN HUNDRED AND NINETY SIX patients. Average costs for CABG procedures vary widely (see earlier notes on that) but charges at this facility averaged $300,000 PER PROCEDURE during that time.
There are clearly thousands of lawsuit-happy patients and lawyers exploiting insurance companies and driving up costs for healthcare. However, tort reform that simply caps damages to individuals will simply reduce the uncertainty of legal fees for insurance companies and bad doctors, making lawsuit damages a predictable cost of doing business which can be budgeted like the cost of tongue depressors and magazine subscriptions for the waiting room. To balance out the risk between providers and patients, tort reform proposals MUST require doctors and hospitals to collect and report auditable statistics on patient acuities, treatments and outcomes. If doctors are operating within statistically normal ranges of patient acuity and procedures performed for those conditions and a bad outcome happens, the tort reform caps apply. If a doctor's choice of treatment for a given condition lies outside some boundary of "normalcy" and a bad outcome occurs, patients have a right to sue without caps on damages.
Improved use of statistics to trend treatments and outcomes is possibly the SINGLE most important strategy for improving virtually every aspect of the healthcare and health insurance problem. Suppose a patient presents with symptoms W, X, Y and Z and a doctor proscribes a few tests but decides tests A, B and C are not required. Under the current system, if a bad outcome occurs and later a lawyer decides the doctor should have ordered test A, the doctor faces an expensive and time consuming battle that takes even more resources away from patient care. If the doctor had the backing of a national database of independently certified results saying that 99 percent of the time, patients with symptoms W, X, Y and Z never benefited from having those tests performed, the inclination to order those tests defensively might be reduced. If the database statistics came with clear-cut limits on malpractice judgments, such defensive tests could easily be reduced 20 to 30 percent.
Some doctors and hospitals have seen the light on improving access to statistics. However, only a minority offer access to statistics regarding cases and outcomes like this summary (see #6) for Dartmouth-Hitchcock hospital. Virtually NONE publish actual costs of procedures performed. As another interesting exercise, try to find statistics for average costs of a heart bypass operation (a coronary artery bypass graft or CABG). You'll find numbers ranging from $20,000 (see #7) to $68,367 (see #8) to even $135,000 (see #9). How would a prospective patient reconcile cost variances like that?
Reality -- Death Panels and the Real Death Tax
Ask most people what comes to mind after hearing the term "death tax" and the vast majority will respond with "inheritance" or "estate tax" -- and somewhere Republican pollster Frank Luntz smiles. In a masterstroke of linguistic and political manipulation / fraud, he helped link the two concepts to help efforts aimed at reducing or eliminating the federal estate tax. The majority of Americans think estate taxes harm them when the vast majority of Americans (certainly NOW after the financial meltdown) will not die with an estate worth over $1,00,000.which is the ACTUAL final trigger point at which the tax applies after the un-sunset of the sunset that expires after 2009 (see #10).
Republicans tried the same tactic with healthcare reform by inventing the term "death panel" which was immediately shot down after finding similar proposals in Republican legistlation in the last decade. Instead of being clever with language, it might be useful for once to be PRECISE with language when debating public policy and end-of-life healthcare costs and taxes provides a great opportunity. The real "death tax" in America is imposed when families of elderly patients headed for long-term assisted living or skilled nursing facilities for hospice care coordinate "planned giving" of assets of the patient to family members in the years / months leading up to hospitalization so by the time the real bills arrive, the "patient" is technically impoverished and eligible for Medicare so US taxpayers pick up the tab for the final months. Many state Medicaid websites and law firm web sites provide advice on exactly how to do this (see #11).
Here's a common scenario. In the final years of life, an elderly person with some financial means begins transferring up to $12,000 per year to family or friends on a tax-free basis. As long as they stay below the $12,000 limit for a five year "look-back" period from the time the nursing home stay begins, those gifts don't hurt the patient's eligibility for Medicaid payment of their nursing home bills. Neither does up to $500,000 in home equity. The net result is a "half-millionaire" can manage to protect up to $60,000 in cash funds (in addition to the equity on a principle residence) from being used to pay a bill other taxpayers wind up covering. That $60,000 would cover roughly fifteen months in a typical nursing facility.
This sounds harsh, it sounds like class envy, it sounds crass, even cruel somehow. Is it though? If you are elderly and you have FIVE HUNDRED THOUSAND dollars or, more precisely, you have FIVE HUNDRED AND SIXTY THOUSAND dollars, why ON EARTH should I or any other tax payer be picking up ANY of the cost of an expense that is now a very predictable part of life? This is the true "death tax" -- a tax liability you impose on OTHER PEOPLE when you die. By transferring the cost of a predictable cost of later years to "other people's money", it removes any incentive for patients and their families from making more appropriate financial decisions for covering those costs. Perhaps more importantly, it removes any incentive for many families to make more appropriate ethical decisions concerning end-of-life treatments, many of which are not improving quality of life under any objective standard.
Reality - Is There Any Such Thing as a Status Quo?
Let's give opponents of particular health care reform proposals or ANY reform whatsoever the benefit of the doubt for a moment. Let's assume they have principled objections to some perceived flaw in reform proposals and prefer our leaders simply stop, take an electoral breather and regroup for a more thoughtful attempt in another year or two. The assumption is that if left unchanged, things will remain about as bad as they are right now, within some range of tolerable certainty. Opponents might even argue that this in fact happened in the 1990s with the Clinton plan and nothing melted down after doing nothing then. We can choose "nothing" again and get the status quo.
BZZZZZZZZZZZZZTTTTT. Nope. Uncontrolled healthcare costs are one of the three existential problems facing the United States economy and perhaps our society. We face nearly 16 percent unemployment (9.5 percent "looking" plus 6.5 percent "given up") and continued declines in factory orders are driving continued declines in manufacturing which will continue to generate job losses which will continue to drive bankruptcies from mortgage foreclosures and medical bills, feeding a horrific downward financial spiral in the entire economy. Reducing healthcare spending through improved efficiency on procedures provided and elimination of needless procedures is REQUIRED to stabilize the economy. Not three or five years down the road but AS SOON AS POSSIBLE. Failure to do so will make American labor and products less competitive on the world market, accelerate further job losses, increase the rolls of the uninsured, and further expose families to bankruptcy and an utter collapse in their standard of living. For the long term, failure of American business to reduce health care costs will cost America the jobs of the future, be they in electric cars, solar or wind energy technology or the next big thing. If you think this is hyperbole, note that the China's exponential growth coincided not only with new trade policies but with the collapse of healthcare reform efforts in the Clinton era.
Doing nothing now might be an option but keeping the status quo is not. The current situation will get markedly worse -- not only for those without coverage but even for those currently employed and covered.
==========================================
#1) http://www.nchc.org/facts/cost.shtml
#2) http://www.gao.gov/new.items/d02536r.pdf
#3) http://www.gao.gov/new.items/d09363r.pdf (2009)
#4) http://www.usatoday.com/money/industries/health/2003-08-06
-tenet-settlement_x.htm
#5) http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/02/18/INGN1O5DUM1.DTL
#6) http://www.dhmc.org/qualityreports/list.cfm?metrics=CT
#7) http://www.consumeraffairs.com/news04/2005/bypass.html
#8) http://www.dane101.com/current/2006/05/10
/where_is_heart_bypass_surgery_the_cheapest
#9) http://www.crd.york.ac.uk/CRDWeb/ShowRecord.asp?View=Full
&ID=22003001376
#10) http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
#11) http://www.markfreemanelderlaw.com/myths.asp
Tuesday, June 16, 2009
Everyone to the Lifeboats!
It's nearly impossible to watch television without seeing ads for firms setting up card tables at local hotels wanting to "turn your old, broken, unwanted gold jewelry into cash." Better yet, call an 800 number to have a padded envelope mailed to your home, stuff it with all your unwanted gold jewelry, mail it back, and someone will melt it down, tell you exactly how much actual gold there was, and send you a check for that amount of gold.
Okay, quick question. How many people would trust a firm they've only heard of via television to honestly report the amount of real gold in the junk sent in and cut a check at the current exchange rate? Assuming you get a check at all? Of course, sophisticated investors are too smart to mail in their money to someone else who will tell them after the fact how much they'll really get for their investment.
Right?
The interesting thing about economics, money and human psychology is that when everything seems to operating within a range of predictability, everyone involved begins thinking they understand more than they really do about the mechanics of the system. Indeed, participants begin thinking they understand more than can be known about the system. The longer things operate within that predictable range, the greater the tendency to extrapolate that current behavior (as they (mis)understand it) beyond the range supported by the underlying fundamentals.
Treasuries provide one recent example of this phenomena. In December of 2008, demand for three month Treasuries skyrocketed so much that yields actually went negative for a brief period of time before cooler heads prevailed and realized paying $1.01 today for $1.00 three months from now made no sense. Buyers caught up in the frenzy lost track of the fact that the Treasury market does not exist to provide a zero-risk piggy bank for investors to stash an unlimited amount of money. It exists to produce cash for the government when it needs to borrow funds. When it has what it needs, supply goes to zero. When the number of investors needing an extremely low risk place to keep cash for short intervals is relatively small, the Treasury market satisfies that need as a side-effect of the government meeting its fiscal needs. When the demand for short term safety drastically outweighs the government's need for short term cash, the mechanism breaks down from the perspective of the investor seeking a safe haven.
Treasuries aren't the only example. Between summer 2007 and summer 2008, investors looking for both safety and quick profits piled into crude oil and drove the price to $145 dollars before reality kicked in and the price dropped like a stone -- 75 percent in five months. Demand didn't drop 75% but the distortion created by an influx of cash from speculators trying to avoid liquidity issues in other segments (MBSs / CDOs) evaporated once the mismatch between supply and demand became too large to ignore.
When markets are volatile and people feel economically insecure, the psychological urge to look for a "lifeboat" is not only unavoidable, it's a rational reaction. However, a quick look at another common "lifeboat" investment -- gold -- points out that every lifeboat has its limits. For those first entering the lifeboat who are able to time a graceful exit, lifeboats can be extremely profitable. However, making money off a lifeboat is vastly different than PRESERVING money in a lifeboat. Understanding the difference requires understanding three key factors:
1) how big is the lifeboat?
2) what is it good for?
3) when does a lifeboat make sense?
How Big Is the Lifeboat?
Here are some basic facts about gold:
* there are roughly 145,000 metric tonnes of gold in existence as of 2001 (#1)
* precious metals like gold, silver and platinum are measured in troy ounces (12 troy ounces per pound)
* there are 32,150 troy ounces per metric ton
* the price of gold as of June 14, 2009 is $937.05 per troy ounce or $30,126,157.50 per tonne
Thus, the total value of all known gold reserves in the world is $4,368,292,837,500 or $4.4 trillion dollars. A staggering amount of money.
Or is it?
The gross domestic product of the United States for 2008 was $14.29 trillion (#2). For the European Union, $18.39 trillion (#3). For the world, $60.69 trillion (also #3). Hmmm. That means all gold reserves are only worth about 7.25 percent of yearly economic activity.
What Is It Good For?
The answer isn't "absolutely nothing" but the correct answer is much less obvious than it would appear to casual investors. Gold obviously has decorative value as it has for centuries in jewelry and it has some utilitarian value in dentistry and as a conductor in computer circuit boards, etc. For most people, gold's true value is perhaps its most intangible -- as the ultimate, perfect medium of exchange -- MONEY. Gold is worth something because it's gold and it's always been worth something.
Skipping that ultimate metaphysical argument, let's just accept that at face value. After advancing beyond gold coins as a medium of exchange to fiat coins and currencies, gold has always been viewed as the financial medium of last resort any time faith in fiat money waned or outright collapsed. Psychologically, people feel a desire to pile into gold as a life raft when they fear an economy based on fiat money is about to capsize.
The "lifeboat" analogy of gold really doesn't make sense though. To see why, one has to understand three key inequalities in economics:
money does not equal GDP does not equal wealth
In the American economy of $14.29 trillion for 2008, there wasn't $14.29 trillion in cash in existence all at once in the wallets of consumers and cash registers of businesses. A much smaller amount of actual cash cycles through the economy multiple times throughout the year. Each time it changes hands as part of a transaction that produces net value, it gets counted and increments GDP.
More importantly, GDP does not equate to wealth because GDP is an immediate measure of simple economic activity and does NOT reflect the source of funds that paid for the activity. Wealth on the other had DOES reflect the source of funds of economic activity and it reflects the cumulative result over time. If you spend $50,000 per year, you're creating $50,000 of economic activity but if you're borrowing $50,000 per year to do it, your wealth is certainly not increasing $50,000 per year.
Gold's current role in the worldwide economy is that of ballast -- a psychological / economic backstop for fiat currencies to ensure any fluctuations in percieved value of any one currency can be acted upon without a free-fall drop. Current worldwide stores of gold cannot act as a final last resort store of value without producing massive, crippling fluctuations in values and halting virtually all worldwide trade. In other words, gold's role is to stabilize a very small part of worldwide MONEY to ensure money continues to flow to produce GDP which over time produces long term wealth. It does not and cannot scale to protect wealth itself.
Imagine for a moment that every single American household attempted to shift all of their non-home net worth into gold. According to the Federal Reserve's Flow of Funds report for 1Q2009 (see #4), home equity accounted for 41.4 percent of household net worth so the balance not tied up in homes amounts to $29.51 trillion. What would happen?
When $29.51 trillion dollars go searching for $4.4 trillion in gold, two disastrous things happen -- simultaneously.
Since the supply of gold is relatively unchanged over any short period of time and demand has skyrocketed, the price of gold skyrockets. More importantly, the price of all other assets being sold falls as people unload stocks, bonds and other commodities. Anyone pursuing this trade sells at an artificial low to buy at an artificial high. They are also climbing into a very crowded lifeboat. The more rapidly the price goes up as more people climb in, the more danger they face from a few people deciding to suddenly cash out and make it evident how little liquidity there is in holding gold at 2x to 7x normal prices. Now imagine how volatile the climate would be if everyone in the world was trying to get into the boat, not just American investors.
When Does a Lifeboat Make Sense?
The above thought experiment is sheer hyperbole. Clearly, gold has played a valuable role for decades in calming nerves and allowing investors to hedge concerns about exchange rates between individual currencies. But what if currencies around the globe are in decline? What if the combination of collapsing banks (and contracting credit) and mushrooming fiscal deficits (and possible inflation) are paralyzing investors who aren't sure what do? In particular, what if doubts about the American economy in particular are sowing doubts about the use of the US dollar as a world currency? Are investments in commodities -- gold in particular -- a useful hedge against drops in dollar-denominated wealth?
The pro arguments are relatively straightforward. What about the con arguments? Are the fears driving people to the boat well founded?
Here are a few things to consider:
1) How practical is an "un-wind" of a US dollar-denominated investment? -- For example, if China decides to reduce purchases of new Treasuries due to concerns over mushrooming US deficits, a precipitous drop in demand for new Treasuries will also tank values of existing Treasuries, crippling China's existing holdings. China understands this very well. This doesn't mean they'll continue pouring more into Treasuries but it puts a lower bound on how quickly they can diversify their holdings, for their own selfish bottom line. Given the amount we owe, they clearly have the upper hand, but in a very real sense, they are trapped and cannot literally exit their position without damaging their own export-dependent economy as well.
2) What are the alternatives for a world currency? -- Does anyone think the Russian ruble can provide a more trusted medium of exchange for international contracts for goods / services? Do you want Vladmir Putin as the world's central banker? How about the Chinese yuan, the currency of a country trying to walk the tightrope of leveraging high tech in its economy while hiding "tank man" from Google search results twenty years after the Tiananmen Square massacre?
3) Who plans on financing the international cop on the beat? -- If the rest of the world has grown tired of America serving as the world's policeman around oil shipping lanes and keeping bitter enemies with nuclear weapons (Pakistan / North Korea) in opposite corners from high growth economies (India / South Korea), what's going to happen when we pull our troops home? Will North Korea suddenly open the border, stop starving its citizens and turn on the lights at Bally's Casino in Pyonyang? Which economies will suffer most when those uneasy stalemates return to full conflicts?
4) How much do you really know about accounting standards, corporate law and property rights in emerging countries? -- Would you really be comfortable directly investing most of your wealth in a Russian or Chinese firm? Or how about a European Union country? Despite the attempt at a single currency adopted by most members, those members all still pursue a hodge-podge of fiscal policies. Any confidence their politicians will be able to resist deficit spending for local constituents without tanking the shared currency?
4) Where are alternatives for high-growth investment and what currency do you want to use for profits? -- See questions #2 and #3.
Takeaways
With all of the monumentally stupid things the United States has done to our own banking system and economy, it's important to keep in mind several key things. First, when we did this to ourselves, many other countries copied us and wound up damaging their economies as well -- in some cases, inflicting more damage than we did.
Second, in economics, everything is relative. Capital won't flee a market that drops 40% if a 40% loss is the best return available.
Third, nothing in economics scales to infinity. Finding an investment capable of growing $1 million or even $1 billion at 10 percent per year is vastly more feasible than finding an investment that can absorb $100 billion or $1 trillion and grow that 10 percent per year. Any attempt to swing large amounts of capital from one asset class to another or from one economy to another overnight will inevitably produces bubbles and subsequent crashes.
Finally, in economics and society, everything is linked. If things tank badly enough in the United States for you to be worried about converting a large portion of your net worth into gold, MANY aspects of society throughout the world will be vastly different than they are now. Even if the pyramid of industrial economies collapse, will your position be any more desirable if your assets are invested in a firm operating in one of the economies at the bottom of the pile?
============================
#1) http://en.wikipedia.org/wiki/Official_gold_reserves
#2) https://www.cia.gov/library/publications/the-world-factbook/geos/US.htm
#3) http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
#4) http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf
Okay, quick question. How many people would trust a firm they've only heard of via television to honestly report the amount of real gold in the junk sent in and cut a check at the current exchange rate? Assuming you get a check at all? Of course, sophisticated investors are too smart to mail in their money to someone else who will tell them after the fact how much they'll really get for their investment.
Right?
The interesting thing about economics, money and human psychology is that when everything seems to operating within a range of predictability, everyone involved begins thinking they understand more than they really do about the mechanics of the system. Indeed, participants begin thinking they understand more than can be known about the system. The longer things operate within that predictable range, the greater the tendency to extrapolate that current behavior (as they (mis)understand it) beyond the range supported by the underlying fundamentals.
Treasuries provide one recent example of this phenomena. In December of 2008, demand for three month Treasuries skyrocketed so much that yields actually went negative for a brief period of time before cooler heads prevailed and realized paying $1.01 today for $1.00 three months from now made no sense. Buyers caught up in the frenzy lost track of the fact that the Treasury market does not exist to provide a zero-risk piggy bank for investors to stash an unlimited amount of money. It exists to produce cash for the government when it needs to borrow funds. When it has what it needs, supply goes to zero. When the number of investors needing an extremely low risk place to keep cash for short intervals is relatively small, the Treasury market satisfies that need as a side-effect of the government meeting its fiscal needs. When the demand for short term safety drastically outweighs the government's need for short term cash, the mechanism breaks down from the perspective of the investor seeking a safe haven.
Treasuries aren't the only example. Between summer 2007 and summer 2008, investors looking for both safety and quick profits piled into crude oil and drove the price to $145 dollars before reality kicked in and the price dropped like a stone -- 75 percent in five months. Demand didn't drop 75% but the distortion created by an influx of cash from speculators trying to avoid liquidity issues in other segments (MBSs / CDOs) evaporated once the mismatch between supply and demand became too large to ignore.
When markets are volatile and people feel economically insecure, the psychological urge to look for a "lifeboat" is not only unavoidable, it's a rational reaction. However, a quick look at another common "lifeboat" investment -- gold -- points out that every lifeboat has its limits. For those first entering the lifeboat who are able to time a graceful exit, lifeboats can be extremely profitable. However, making money off a lifeboat is vastly different than PRESERVING money in a lifeboat. Understanding the difference requires understanding three key factors:
1) how big is the lifeboat?
2) what is it good for?
3) when does a lifeboat make sense?
How Big Is the Lifeboat?
Here are some basic facts about gold:
* there are roughly 145,000 metric tonnes of gold in existence as of 2001 (#1)
* precious metals like gold, silver and platinum are measured in troy ounces (12 troy ounces per pound)
* there are 32,150 troy ounces per metric ton
* the price of gold as of June 14, 2009 is $937.05 per troy ounce or $30,126,157.50 per tonne
Thus, the total value of all known gold reserves in the world is $4,368,292,837,500 or $4.4 trillion dollars. A staggering amount of money.
Or is it?
The gross domestic product of the United States for 2008 was $14.29 trillion (#2). For the European Union, $18.39 trillion (#3). For the world, $60.69 trillion (also #3). Hmmm. That means all gold reserves are only worth about 7.25 percent of yearly economic activity.
What Is It Good For?
The answer isn't "absolutely nothing" but the correct answer is much less obvious than it would appear to casual investors. Gold obviously has decorative value as it has for centuries in jewelry and it has some utilitarian value in dentistry and as a conductor in computer circuit boards, etc. For most people, gold's true value is perhaps its most intangible -- as the ultimate, perfect medium of exchange -- MONEY. Gold is worth something because it's gold and it's always been worth something.
Skipping that ultimate metaphysical argument, let's just accept that at face value. After advancing beyond gold coins as a medium of exchange to fiat coins and currencies, gold has always been viewed as the financial medium of last resort any time faith in fiat money waned or outright collapsed. Psychologically, people feel a desire to pile into gold as a life raft when they fear an economy based on fiat money is about to capsize.
The "lifeboat" analogy of gold really doesn't make sense though. To see why, one has to understand three key inequalities in economics:
money does not equal GDP does not equal wealth
In the American economy of $14.29 trillion for 2008, there wasn't $14.29 trillion in cash in existence all at once in the wallets of consumers and cash registers of businesses. A much smaller amount of actual cash cycles through the economy multiple times throughout the year. Each time it changes hands as part of a transaction that produces net value, it gets counted and increments GDP.
More importantly, GDP does not equate to wealth because GDP is an immediate measure of simple economic activity and does NOT reflect the source of funds that paid for the activity. Wealth on the other had DOES reflect the source of funds of economic activity and it reflects the cumulative result over time. If you spend $50,000 per year, you're creating $50,000 of economic activity but if you're borrowing $50,000 per year to do it, your wealth is certainly not increasing $50,000 per year.
Gold's current role in the worldwide economy is that of ballast -- a psychological / economic backstop for fiat currencies to ensure any fluctuations in percieved value of any one currency can be acted upon without a free-fall drop. Current worldwide stores of gold cannot act as a final last resort store of value without producing massive, crippling fluctuations in values and halting virtually all worldwide trade. In other words, gold's role is to stabilize a very small part of worldwide MONEY to ensure money continues to flow to produce GDP which over time produces long term wealth. It does not and cannot scale to protect wealth itself.
Imagine for a moment that every single American household attempted to shift all of their non-home net worth into gold. According to the Federal Reserve's Flow of Funds report for 1Q2009 (see #4), home equity accounted for 41.4 percent of household net worth so the balance not tied up in homes amounts to $29.51 trillion. What would happen?
When $29.51 trillion dollars go searching for $4.4 trillion in gold, two disastrous things happen -- simultaneously.
Since the supply of gold is relatively unchanged over any short period of time and demand has skyrocketed, the price of gold skyrockets. More importantly, the price of all other assets being sold falls as people unload stocks, bonds and other commodities. Anyone pursuing this trade sells at an artificial low to buy at an artificial high. They are also climbing into a very crowded lifeboat. The more rapidly the price goes up as more people climb in, the more danger they face from a few people deciding to suddenly cash out and make it evident how little liquidity there is in holding gold at 2x to 7x normal prices. Now imagine how volatile the climate would be if everyone in the world was trying to get into the boat, not just American investors.
When Does a Lifeboat Make Sense?
The above thought experiment is sheer hyperbole. Clearly, gold has played a valuable role for decades in calming nerves and allowing investors to hedge concerns about exchange rates between individual currencies. But what if currencies around the globe are in decline? What if the combination of collapsing banks (and contracting credit) and mushrooming fiscal deficits (and possible inflation) are paralyzing investors who aren't sure what do? In particular, what if doubts about the American economy in particular are sowing doubts about the use of the US dollar as a world currency? Are investments in commodities -- gold in particular -- a useful hedge against drops in dollar-denominated wealth?
The pro arguments are relatively straightforward. What about the con arguments? Are the fears driving people to the boat well founded?
Here are a few things to consider:
1) How practical is an "un-wind" of a US dollar-denominated investment? -- For example, if China decides to reduce purchases of new Treasuries due to concerns over mushrooming US deficits, a precipitous drop in demand for new Treasuries will also tank values of existing Treasuries, crippling China's existing holdings. China understands this very well. This doesn't mean they'll continue pouring more into Treasuries but it puts a lower bound on how quickly they can diversify their holdings, for their own selfish bottom line. Given the amount we owe, they clearly have the upper hand, but in a very real sense, they are trapped and cannot literally exit their position without damaging their own export-dependent economy as well.
2) What are the alternatives for a world currency? -- Does anyone think the Russian ruble can provide a more trusted medium of exchange for international contracts for goods / services? Do you want Vladmir Putin as the world's central banker? How about the Chinese yuan, the currency of a country trying to walk the tightrope of leveraging high tech in its economy while hiding "tank man" from Google search results twenty years after the Tiananmen Square massacre?
3) Who plans on financing the international cop on the beat? -- If the rest of the world has grown tired of America serving as the world's policeman around oil shipping lanes and keeping bitter enemies with nuclear weapons (Pakistan / North Korea) in opposite corners from high growth economies (India / South Korea), what's going to happen when we pull our troops home? Will North Korea suddenly open the border, stop starving its citizens and turn on the lights at Bally's Casino in Pyonyang? Which economies will suffer most when those uneasy stalemates return to full conflicts?
4) How much do you really know about accounting standards, corporate law and property rights in emerging countries? -- Would you really be comfortable directly investing most of your wealth in a Russian or Chinese firm? Or how about a European Union country? Despite the attempt at a single currency adopted by most members, those members all still pursue a hodge-podge of fiscal policies. Any confidence their politicians will be able to resist deficit spending for local constituents without tanking the shared currency?
4) Where are alternatives for high-growth investment and what currency do you want to use for profits? -- See questions #2 and #3.
Takeaways
With all of the monumentally stupid things the United States has done to our own banking system and economy, it's important to keep in mind several key things. First, when we did this to ourselves, many other countries copied us and wound up damaging their economies as well -- in some cases, inflicting more damage than we did.
Second, in economics, everything is relative. Capital won't flee a market that drops 40% if a 40% loss is the best return available.
Third, nothing in economics scales to infinity. Finding an investment capable of growing $1 million or even $1 billion at 10 percent per year is vastly more feasible than finding an investment that can absorb $100 billion or $1 trillion and grow that 10 percent per year. Any attempt to swing large amounts of capital from one asset class to another or from one economy to another overnight will inevitably produces bubbles and subsequent crashes.
Finally, in economics and society, everything is linked. If things tank badly enough in the United States for you to be worried about converting a large portion of your net worth into gold, MANY aspects of society throughout the world will be vastly different than they are now. Even if the pyramid of industrial economies collapse, will your position be any more desirable if your assets are invested in a firm operating in one of the economies at the bottom of the pile?
============================
#1) http://en.wikipedia.org/wiki/Official_gold_reserves
#2) https://www.cia.gov/library/publications/the-world-factbook/geos/US.htm
#3) http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
#4) http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf
Tuesday, May 19, 2009
The Dealer Debacle
The news about the shutdown of hundreds of Chrysler and GM dealers across the country has been covered ad nauseum (or add nausea?) on the local and national news. Despite the flurry of coverage and interviews of long-time dealers standing in front of empty lots, no one's really asking very useful questions about the process and the real impact to the economy at the national or local level.
Here are a few questions I haven't heard addressed.
How much PROFIT opportunity is really being eliminated by the closing of hundreds of dealers? For dealers of American cars who have been dependent on factory rebates and huge discounts from sticker prices for over a decade, it seems relatively little money was made off actual new car sales after factoring in interest payments as the cars sat on the lot, inventory taxes, insurance, etc. I've heard most dealers make their money off after-the-sale service because (amazingly) many buyers still feel obligated to take cars back to the dealer even for routine service.
If dealers actually made most of their money from service -- not sales -- and car quality doesn't miraculously improve by an order of magnitude, is there not the same net opportunity for service profits and employment hours off the same amount of cars that are being sold right now? If the market used to be 9 million and has now shrunk to 6 million cars sold per year, the same number of labor hours will be required to service those cars whether they were sold by 5500 dealers or 4400. There would seem to be a path to daylight for dealers who maintained a good reputation for customer service and honesty as a pure service play in the industry. It might be MORE profitable to focus on service rather than worrying about carrying costs for new cars featuring iffy styling changes for notoriously fickle buyers.
How will dealer closings REALLY affect local and state tax revenues? Assuming aggregate demand for new or used cars is NOT a function of the number of dealers, the total number of cars sold will remain roughly the same, whether 5500 dealers sell them or 4400. Granted, in some local communities, the closing of dealerships may shift city tax revenues from hamlet A to hamlet B but at the state level, overall tax revenues should be roughly a wash.
Why are soon-to-be-former dealers being forced to sell all of their inventory in an arbitrary one-month interval? The technical answer lies in the institutions backing the "bridge loans" used by the dealer to cover the inventory on the lot. It also has something to do with coverage for warranty work for cars bought from an "unauthorized" dealer, thought this is a fuzzy area. This may be the single most damning action GM and Chrysler can take to burn every last remaining bridge they have to potential buyers. The car is the car, regardless of who handles the retail sale. Forcing the wholesale liquidation of nearly 20 percent of the current national inventory when there is already weak credit and at least a two-month glut of unsold vehicles does nothing but harm:
* it pits soon-to-be-former-dealers against survivors in price competition, potentially weakening the survivors
* it depresses retail prices of ALL cars across the entire country
* it depresses resale values, again hurting survivor dealers and owners
* it undermines confidence in potential buyers of GM and Chrysler in those firm's true ability and interest in standing behind their products
How big is the harm? Do some simple math. Assume the domestic market has shrunk to 6 million cars or about 500,000 units per month. Most dealers have at least a two-month inventory on hand or at least 1,000,000 cars. GM's and Chrysler's combined share is about 35 percent of the market so the inventory on the dropped dealers' lots adds up to roughly 70,000 vehicles. If you figure the average car is about $22,000 dollars, this forced liquidation might drop prices on those units another 30 percent or $6600 per car or about $426 million. However, those price cuts won't just affect prices at the dealers going under. It will drive down prices on the ENTIRE backlog of roughly 350,000 GM and Chrysler cars. That's $2.31 billion. With a B.
What were the surviving dealers thinking for the past six months? Heck, some poster on the Fool (me, in fact) figured out in November that American manufacturing capacity was going to see a 33 percent cut. It doesn't take a genius to see the retail operations would see a similar cut. When dealers saw the backlog of cars building between November 2008 and May 2009, could they not see a liquidation coming that would further depress prices? Why did they take any more inventory and take on more loans for that inventory? Why did they not pursue more aggressive discounting before the predictable liquidation flood hits and (hopefully only temporarily) drops prices 30 to 40 percent? The wider losses that might have been suffered by accelerating clearance sales would have been NOTHING compared to the losses they will suffer on their inventory now.
Here are a few questions I haven't heard addressed.
How much PROFIT opportunity is really being eliminated by the closing of hundreds of dealers? For dealers of American cars who have been dependent on factory rebates and huge discounts from sticker prices for over a decade, it seems relatively little money was made off actual new car sales after factoring in interest payments as the cars sat on the lot, inventory taxes, insurance, etc. I've heard most dealers make their money off after-the-sale service because (amazingly) many buyers still feel obligated to take cars back to the dealer even for routine service.
If dealers actually made most of their money from service -- not sales -- and car quality doesn't miraculously improve by an order of magnitude, is there not the same net opportunity for service profits and employment hours off the same amount of cars that are being sold right now? If the market used to be 9 million and has now shrunk to 6 million cars sold per year, the same number of labor hours will be required to service those cars whether they were sold by 5500 dealers or 4400. There would seem to be a path to daylight for dealers who maintained a good reputation for customer service and honesty as a pure service play in the industry. It might be MORE profitable to focus on service rather than worrying about carrying costs for new cars featuring iffy styling changes for notoriously fickle buyers.
How will dealer closings REALLY affect local and state tax revenues? Assuming aggregate demand for new or used cars is NOT a function of the number of dealers, the total number of cars sold will remain roughly the same, whether 5500 dealers sell them or 4400. Granted, in some local communities, the closing of dealerships may shift city tax revenues from hamlet A to hamlet B but at the state level, overall tax revenues should be roughly a wash.
Why are soon-to-be-former dealers being forced to sell all of their inventory in an arbitrary one-month interval? The technical answer lies in the institutions backing the "bridge loans" used by the dealer to cover the inventory on the lot. It also has something to do with coverage for warranty work for cars bought from an "unauthorized" dealer, thought this is a fuzzy area. This may be the single most damning action GM and Chrysler can take to burn every last remaining bridge they have to potential buyers. The car is the car, regardless of who handles the retail sale. Forcing the wholesale liquidation of nearly 20 percent of the current national inventory when there is already weak credit and at least a two-month glut of unsold vehicles does nothing but harm:
* it pits soon-to-be-former-dealers against survivors in price competition, potentially weakening the survivors
* it depresses retail prices of ALL cars across the entire country
* it depresses resale values, again hurting survivor dealers and owners
* it undermines confidence in potential buyers of GM and Chrysler in those firm's true ability and interest in standing behind their products
How big is the harm? Do some simple math. Assume the domestic market has shrunk to 6 million cars or about 500,000 units per month. Most dealers have at least a two-month inventory on hand or at least 1,000,000 cars. GM's and Chrysler's combined share is about 35 percent of the market so the inventory on the dropped dealers' lots adds up to roughly 70,000 vehicles. If you figure the average car is about $22,000 dollars, this forced liquidation might drop prices on those units another 30 percent or $6600 per car or about $426 million. However, those price cuts won't just affect prices at the dealers going under. It will drive down prices on the ENTIRE backlog of roughly 350,000 GM and Chrysler cars. That's $2.31 billion. With a B.
What were the surviving dealers thinking for the past six months? Heck, some poster on the Fool (me, in fact) figured out in November that American manufacturing capacity was going to see a 33 percent cut. It doesn't take a genius to see the retail operations would see a similar cut. When dealers saw the backlog of cars building between November 2008 and May 2009, could they not see a liquidation coming that would further depress prices? Why did they take any more inventory and take on more loans for that inventory? Why did they not pursue more aggressive discounting before the predictable liquidation flood hits and (hopefully only temporarily) drops prices 30 to 40 percent? The wider losses that might have been suffered by accelerating clearance sales would have been NOTHING compared to the losses they will suffer on their inventory now.
Sunday, May 17, 2009
The War on Terror and Logic -- 2009 Edition
It's May 2009 and we're about five months into a new Presidential Administration and new Congress. The new players have had a chance to orient themselves, take a few meetings, read a few intelligence briefs and make a few decisions regarding the War on Terror (TM) and Logic. So how are they doing? Well, judging from recent events, terror seems to be holding up quite nicely. Logic? Not so much.
The Obama campaign ran on a pledge to close the Guantanamo Bay internment camp for terrorist suspects. Obama the candidate also ran on a pledge to eliminate the use of military tribunals to decide the fate of the terrorist suspects, citing material flaws with the process. Obama the President initially made good on the pledge to close Guantanamo and began pushing to move detainee trials to civilian venues but flip-flopped on the civil trials stance in the past week. That change will in turn jeopardize the ability to transfer detainees to civilian facilities and close Guantanamo as desired by January 2010.
The debate over these issues has not only drawn Dick Cheney out of his undisclosed retirement bunker back into the spotlight, but has pitted the Democratic Speaker of the House Nancy Pelosi against the entire CIA, requiring its current Director and long-time Democratic power broker Leon Panetta to defend his agency from his own party. These debates and the resulting press coverage have featured several new fallacies of logic which are likely to crop up repeatedly and are thus worth documenting and discussing.
Picking up where we left off from the Bush era... (see links #1 through #5)
FALLACY #13: Enhanced interrogation techniques are required because they are uniquely capable of forcing bad guys to divulge vital security information unavailable by other means.
FALLACY #14: Enhanced interrogation techniques are not torture.
#13 and #14 are flip sides of the same bad coin. Former VP Cheney has repeatedly claimed information was gleaned from enhanced interrogation of prisoners that thwarted attacks on the United States. He claims there is a laundry list of vital facts obtained from the enhanced interrogation of key suspects and has filed a petition (rejected by the Obama Administration and CIA) to make that list public. Even if such a document exists, the fact that terrorist A provided fact X under enhanced interrogation does not prove fact X wasn't already known via other methods or that fact X could not have been learned by other means and other sources without "enhanced interrogation."
If enhanced interrogation techniques are so effective at reducing hardened terrorist suspects to compliant, truth-telling snitches, one would think one, maybe two, okay maybe FIVE trips to the interrogation room would do the trick. In reality, numerous journalists (Seymour Hersch and Jane Mayer to name two) and internal military and CIA records show that DOZENS of suspects were "interrogated" DOZENS and HUNDREDS of times over the course of months and years. So much for #13. If #13 isn't true, the continued administration of "enhanced interrogation techniques" which provided no useful information over the course of months / years is nothing BUT torture serving no strategic purpose.
FALLACY #15: Bi-partisan support of a strategy means the strategy is correct. -- The occasion of long-time political opponents suddenly agreeing upon something is often touted as a certain guarantee that X simply MUST be the correct thing to do. In reality, it doesn't mean X is right, it doesn't mean X is wrong. It simply means a multitude of political and legal forces have mysteriously shifted to temporarily align goals which may have nothing to do with the benefit of We the People. Keep in mind that until about August 2007, the vast majority of people agreed that low interest rates and zero-down mortgage loans were a great way to keep the economy moving.
#15 is currently being used by Democrats and Republicans alike to support the Obama Administration's sudden reversal on the use of military tribunals instead of American civil courts for detainees. The Obama Administration's new rational hasn't been well explained much but is clearly resulting from a combination of feedback from the military and CIA about protecting information that might come up in trials and feedback from states fearful of having "terrorists" kept in Federal or state prisons should convictions occur.
Wow. Where does one start?
The terrorist attacks on September 11, 2001 were not aimed at freeing those convicted and imprisoned for the 1993 World Trade Center bombing. There's no proof that holding terrorist suspects without trials or International Red Cross access in Camp X-Ray produces any less risk of future domestic terrorist attacks than keeping them in the SUPERMAX SHU at Florence, Colorado. Arguments about where terrorist trials take place and their impact on terrorist recruitment are entirely misplaced. Recruitment of new terrorists has relatively little to do with Internet access to photos of a few naked, abused prisoners or even a few dead prisoners. Recruitment has EVERYTHING to do with the breakdown of public education in not only Iraq and Afghanistan but Pakistan as well. The militias aren't gathering recruits by holding up prison abuse photos, they're recruiting by destroying the fabric of local society and holding guns to the heads of teenage boys left with no alternative for survival.
FALLACY #16: We cannot close Guantanamo Bay because European countries are refusing to take released prisoners, Middle East countries don't want them returning to destabilize their countries and we don't want terrorists on American soil.
First of all, if any current detainees are given a fair trial and found guilty of aiding and abetting terrorism or direct attacks against the United States, they're not GOING to be released, they'll be kept in prison. If someone is worried about a convicted terrorist escaping from a SHU at an American SUPERMAX prison facility, they probably should plan a weekend drive to one of our fabulous federal prison complexes and check the place out. If we trust those facilities to hold convicted cocaine cartel bosses controlling armies of narco-terrorists, I think they can handle a few more twenty-something brain-warped Islamic terrorists. They won't get out, they won't have anyone to talk to promote more terrorism here in America or anywhere else, they'll virtually disappear.
The argument behind #16 really involves the fear of what will happen when we have to release detainees held for years without a fair trial who are IN FACT innocent or whose prosecution was compromised by gross incompetence of American officials responsible for their interrogation or subsequent internment. Arguing against releasing a detainee who is in fact INNOCENT is essentially an argument that "if they weren't a terrorist going in, they might be so angered by their unjust capture / detainment that there's a high likelihood they will BECOME a terrorist when we release them."
Wow. That's a stunningly perverted take on the most basic concept of justice and liberty. If you are falsely accused of murder and framed by a career-minded, get-tough-on-criminals DA and an accomplice providing bogus forensic tests then we find one year or ten years or twenty years later you are innocent, you STILL have to rot in jail for life because you might be really pissed and might actually kill someone upon your release? That's EXACTLY the argument being made about detainees at Guantanamo.
What about detainees with indirect or direct ties to actual terrorist plots or actual terrorist attacks? Those who use the argument behind #13 are essentially claiming others who SUPPORT the closing of Guantanamo actually want to release detainees who might have been tortured or whose convictions might be jeopardized by evidence obtained under torture -- REGARDLESS of the detainee's actual culpability. No such argument is being made. The tighter rules of evidence suggested by the Obama Administration's revised tribunal policy are virtually identical to those of civilian law. Civilian courts do not require the release of a suspect if fact X confirming his guilt was divulged via unlawful coercion of the suspect or someone else. If fact X can be proven through testimony or evidence from other sources unrelated to the tainted evidence, fact X can still be introduced to the trial and used to support a conviction. The only time the suspect must be freed is if the ONLY source of fact X is the testimony obtained via illegal means and no alternate facts obtained via legal means exist to support a conviction.
FALLACY #17: If members of both parties knew about X and said nothing to object, X must be acceptable. -- This argument is being used to damage House Speaker Nancy Pelosi, who lately seems to require no outside help in undermining her credibility on virtually any issue. Dick Cheney and others have claimed Pelosi was among a handful of Congressional members who received secret briefings about both the domestic surveillance program and enhanced interrogation techniques. Giving Dick Cheney the benefit of the doubt momentarily, silence on Pelosi's part at the time doesn't indicate the programs were justified or legal. Silence on Pelosi's part merely indicates Pelosi is part of the problem and her actions require investigation like the rest of the players. The other aspect to this fallacy is that it assumes that information shared with Congress at the time about X was complete and factual. If the information conveyed what we know now, then certainly, silence on the part of those receiving it is quite daming. However, what if the information -- by mistake or intent -- was framed as "contingencies being reviewed for legality and effectiveness" and not yet actual operational policy? In that event, any defense of the actions taken using this logic collapses.
FALLACY #18: The existence of dozens or hundreds of documented cases throughout Iraq, Afghanistan, Guantanamo Bay and other secret CIA black sites does NOT prove abuse was directed at the highest levels of government. -- New York Representative Peter King (R) was interviewed on the May 17 edition of Face the Nation and explicitly rejected any claim that abuse and torture were condoned as a matter of policy. He said the following: (#6)
--------------------------------
No, because there was no connection at all between the CIA memos, the interrogations that were carried out, the extra interrogations of Khalid Sheikh Mohammed and the others, have nothing to do with with MP reservists might have been doing at Abu Ghraib. That was out-and-out torture, that was out-and-out humiliation and debasing of prisoners, and there is no way that they knew what was going on as far as the CIA examining Khalid Sheikh Mohammed. That is a phony argument that’s thrown out there to try to meld it all together.
--------------------------------
King's argument ignores the fact that descriptions of the abuse by the victims and of those inflicting the abuse are nearly identical across many sites, despite the majority of enlisted personnel having no advanced training in interrogation techniques. He also ignores the fact that military facilities like Abu Ghraib had CIA officers on site providing guidance on targets and techniques. Finally, he ignores the fact that the photos of the abuse taken by Lynndie England and her cohorts did not involve the worst of what took place at Abu Ghraib. As author Jane Mayer documented in her book The Dark Side, the worst abuse was administered in an isolated prison block referred to as "Tier Alpha One" reserved for the exclusive use of "OGAs" -- "other government agencies" -- without Army MPs present. How did the CIA officers remain on base without an agreement between Army and CIA leaders? How was that agreement not known to brass within CENTCOM, the Pentagon and Langley?
King's argument also reflects a profound ignorance of the tactics used by groups pursuing such extra-legal activities. Compartmentalization of those enlisted to do the dirty work is a key component of the strategy to guard against discovery of the larger program and chain of command when a portion of the operation is compromised. Compartmentalization is core to the strategy of the very terrorist organizations we claim to be fighting. Apparently, King understands so little about the tactics of our opponent he cannot recognize them when we use them ourselves.
The key point to remember about Peter King's appearance on Face the Nation is that he did directly state that the abuses at Abu Ghraib constituted torture. "Out-and-out torture" were his exact words (see above). He just doesn't believe that abuse was performed under the direction of senior government or military officials. Watch this space for future flip-flops.
FALLACY #19: Releasing 200 new photos of prisoner abuse will further derail our campaign against terrorism by providing more recruitment material for Al Qaeda and the Taliban. -- Let's assume that the 200 photos in question don't constitute 200 unique cases of abuse and that there might be five or ten photos of the same incidents, yielding 20 to 40 new actual cases of abuse. The United States has already publicly confirmed the existence of these photos, thus confirming the actual incidents themselves and confirming their severity as being similar to previous documented cases. If progress in the war on terror is jeopardized by photos of abuse we've already publicly confirmed, the war on terror isn't in danger of being lost due to PR on an Internet scale. It is being lost at the local level in impoverished villages where local and state governments in Iraq, Afghanistan and Pakistan are failing to provide basic public services and protect the safety of their citizens. The war is being lost through brutal intimidation applied directly at the local level through grisly public dismemberments and beheadings.
The additional photos WILL be released at some point. It's only a matter of months, years or decades. The debate over the photos is really a debate about the ability of the American government and the American people to face facts and change course. We need to understand how our country came to the conclusion that organized, systemic torture was effective and appropriate in defending the country when it is neither. More importantly, we need to understand why our country continues to involve itself in so many strategies that require secrecy that is antithecal to a properly functioning government and society.
========================================
#1) http://watchingtheherd.blogspot.com/2006/05/war-on-terror-and-logic.html
#2) http://watchingtheherd.blogspot.com/2006/05/democrats-came-to-same-conclusion.html
#3) http://watchingtheherd.blogspot.com/2006/05/constitutional-crisis.html
#4) http://watchingtheherd.blogspot.com/2006/09/war-on-logic-continues.html
#5) http://watchingtheherd.blogspot.com/2007/07/war-on-terror-and-logic-have-shovel.html
#6) http://www.cbsnews.com/htdocs/pdf/FTN_051709.pdf
The Obama campaign ran on a pledge to close the Guantanamo Bay internment camp for terrorist suspects. Obama the candidate also ran on a pledge to eliminate the use of military tribunals to decide the fate of the terrorist suspects, citing material flaws with the process. Obama the President initially made good on the pledge to close Guantanamo and began pushing to move detainee trials to civilian venues but flip-flopped on the civil trials stance in the past week. That change will in turn jeopardize the ability to transfer detainees to civilian facilities and close Guantanamo as desired by January 2010.
The debate over these issues has not only drawn Dick Cheney out of his undisclosed retirement bunker back into the spotlight, but has pitted the Democratic Speaker of the House Nancy Pelosi against the entire CIA, requiring its current Director and long-time Democratic power broker Leon Panetta to defend his agency from his own party. These debates and the resulting press coverage have featured several new fallacies of logic which are likely to crop up repeatedly and are thus worth documenting and discussing.
Picking up where we left off from the Bush era... (see links #1 through #5)
FALLACY #13: Enhanced interrogation techniques are required because they are uniquely capable of forcing bad guys to divulge vital security information unavailable by other means.
FALLACY #14: Enhanced interrogation techniques are not torture.
#13 and #14 are flip sides of the same bad coin. Former VP Cheney has repeatedly claimed information was gleaned from enhanced interrogation of prisoners that thwarted attacks on the United States. He claims there is a laundry list of vital facts obtained from the enhanced interrogation of key suspects and has filed a petition (rejected by the Obama Administration and CIA) to make that list public. Even if such a document exists, the fact that terrorist A provided fact X under enhanced interrogation does not prove fact X wasn't already known via other methods or that fact X could not have been learned by other means and other sources without "enhanced interrogation."
If enhanced interrogation techniques are so effective at reducing hardened terrorist suspects to compliant, truth-telling snitches, one would think one, maybe two, okay maybe FIVE trips to the interrogation room would do the trick. In reality, numerous journalists (Seymour Hersch and Jane Mayer to name two) and internal military and CIA records show that DOZENS of suspects were "interrogated" DOZENS and HUNDREDS of times over the course of months and years. So much for #13. If #13 isn't true, the continued administration of "enhanced interrogation techniques" which provided no useful information over the course of months / years is nothing BUT torture serving no strategic purpose.
FALLACY #15: Bi-partisan support of a strategy means the strategy is correct. -- The occasion of long-time political opponents suddenly agreeing upon something is often touted as a certain guarantee that X simply MUST be the correct thing to do. In reality, it doesn't mean X is right, it doesn't mean X is wrong. It simply means a multitude of political and legal forces have mysteriously shifted to temporarily align goals which may have nothing to do with the benefit of We the People. Keep in mind that until about August 2007, the vast majority of people agreed that low interest rates and zero-down mortgage loans were a great way to keep the economy moving.
#15 is currently being used by Democrats and Republicans alike to support the Obama Administration's sudden reversal on the use of military tribunals instead of American civil courts for detainees. The Obama Administration's new rational hasn't been well explained much but is clearly resulting from a combination of feedback from the military and CIA about protecting information that might come up in trials and feedback from states fearful of having "terrorists" kept in Federal or state prisons should convictions occur.
Wow. Where does one start?
The terrorist attacks on September 11, 2001 were not aimed at freeing those convicted and imprisoned for the 1993 World Trade Center bombing. There's no proof that holding terrorist suspects without trials or International Red Cross access in Camp X-Ray produces any less risk of future domestic terrorist attacks than keeping them in the SUPERMAX SHU at Florence, Colorado. Arguments about where terrorist trials take place and their impact on terrorist recruitment are entirely misplaced. Recruitment of new terrorists has relatively little to do with Internet access to photos of a few naked, abused prisoners or even a few dead prisoners. Recruitment has EVERYTHING to do with the breakdown of public education in not only Iraq and Afghanistan but Pakistan as well. The militias aren't gathering recruits by holding up prison abuse photos, they're recruiting by destroying the fabric of local society and holding guns to the heads of teenage boys left with no alternative for survival.
FALLACY #16: We cannot close Guantanamo Bay because European countries are refusing to take released prisoners, Middle East countries don't want them returning to destabilize their countries and we don't want terrorists on American soil.
First of all, if any current detainees are given a fair trial and found guilty of aiding and abetting terrorism or direct attacks against the United States, they're not GOING to be released, they'll be kept in prison. If someone is worried about a convicted terrorist escaping from a SHU at an American SUPERMAX prison facility, they probably should plan a weekend drive to one of our fabulous federal prison complexes and check the place out. If we trust those facilities to hold convicted cocaine cartel bosses controlling armies of narco-terrorists, I think they can handle a few more twenty-something brain-warped Islamic terrorists. They won't get out, they won't have anyone to talk to promote more terrorism here in America or anywhere else, they'll virtually disappear.
The argument behind #16 really involves the fear of what will happen when we have to release detainees held for years without a fair trial who are IN FACT innocent or whose prosecution was compromised by gross incompetence of American officials responsible for their interrogation or subsequent internment. Arguing against releasing a detainee who is in fact INNOCENT is essentially an argument that "if they weren't a terrorist going in, they might be so angered by their unjust capture / detainment that there's a high likelihood they will BECOME a terrorist when we release them."
Wow. That's a stunningly perverted take on the most basic concept of justice and liberty. If you are falsely accused of murder and framed by a career-minded, get-tough-on-criminals DA and an accomplice providing bogus forensic tests then we find one year or ten years or twenty years later you are innocent, you STILL have to rot in jail for life because you might be really pissed and might actually kill someone upon your release? That's EXACTLY the argument being made about detainees at Guantanamo.
What about detainees with indirect or direct ties to actual terrorist plots or actual terrorist attacks? Those who use the argument behind #13 are essentially claiming others who SUPPORT the closing of Guantanamo actually want to release detainees who might have been tortured or whose convictions might be jeopardized by evidence obtained under torture -- REGARDLESS of the detainee's actual culpability. No such argument is being made. The tighter rules of evidence suggested by the Obama Administration's revised tribunal policy are virtually identical to those of civilian law. Civilian courts do not require the release of a suspect if fact X confirming his guilt was divulged via unlawful coercion of the suspect or someone else. If fact X can be proven through testimony or evidence from other sources unrelated to the tainted evidence, fact X can still be introduced to the trial and used to support a conviction. The only time the suspect must be freed is if the ONLY source of fact X is the testimony obtained via illegal means and no alternate facts obtained via legal means exist to support a conviction.
FALLACY #17: If members of both parties knew about X and said nothing to object, X must be acceptable. -- This argument is being used to damage House Speaker Nancy Pelosi, who lately seems to require no outside help in undermining her credibility on virtually any issue. Dick Cheney and others have claimed Pelosi was among a handful of Congressional members who received secret briefings about both the domestic surveillance program and enhanced interrogation techniques. Giving Dick Cheney the benefit of the doubt momentarily, silence on Pelosi's part at the time doesn't indicate the programs were justified or legal. Silence on Pelosi's part merely indicates Pelosi is part of the problem and her actions require investigation like the rest of the players. The other aspect to this fallacy is that it assumes that information shared with Congress at the time about X was complete and factual. If the information conveyed what we know now, then certainly, silence on the part of those receiving it is quite daming. However, what if the information -- by mistake or intent -- was framed as "contingencies being reviewed for legality and effectiveness" and not yet actual operational policy? In that event, any defense of the actions taken using this logic collapses.
FALLACY #18: The existence of dozens or hundreds of documented cases throughout Iraq, Afghanistan, Guantanamo Bay and other secret CIA black sites does NOT prove abuse was directed at the highest levels of government. -- New York Representative Peter King (R) was interviewed on the May 17 edition of Face the Nation and explicitly rejected any claim that abuse and torture were condoned as a matter of policy. He said the following: (#6)
--------------------------------
No, because there was no connection at all between the CIA memos, the interrogations that were carried out, the extra interrogations of Khalid Sheikh Mohammed and the others, have nothing to do with with MP reservists might have been doing at Abu Ghraib. That was out-and-out torture, that was out-and-out humiliation and debasing of prisoners, and there is no way that they knew what was going on as far as the CIA examining Khalid Sheikh Mohammed. That is a phony argument that’s thrown out there to try to meld it all together.
--------------------------------
King's argument ignores the fact that descriptions of the abuse by the victims and of those inflicting the abuse are nearly identical across many sites, despite the majority of enlisted personnel having no advanced training in interrogation techniques. He also ignores the fact that military facilities like Abu Ghraib had CIA officers on site providing guidance on targets and techniques. Finally, he ignores the fact that the photos of the abuse taken by Lynndie England and her cohorts did not involve the worst of what took place at Abu Ghraib. As author Jane Mayer documented in her book The Dark Side, the worst abuse was administered in an isolated prison block referred to as "Tier Alpha One" reserved for the exclusive use of "OGAs" -- "other government agencies" -- without Army MPs present. How did the CIA officers remain on base without an agreement between Army and CIA leaders? How was that agreement not known to brass within CENTCOM, the Pentagon and Langley?
King's argument also reflects a profound ignorance of the tactics used by groups pursuing such extra-legal activities. Compartmentalization of those enlisted to do the dirty work is a key component of the strategy to guard against discovery of the larger program and chain of command when a portion of the operation is compromised. Compartmentalization is core to the strategy of the very terrorist organizations we claim to be fighting. Apparently, King understands so little about the tactics of our opponent he cannot recognize them when we use them ourselves.
The key point to remember about Peter King's appearance on Face the Nation is that he did directly state that the abuses at Abu Ghraib constituted torture. "Out-and-out torture" were his exact words (see above). He just doesn't believe that abuse was performed under the direction of senior government or military officials. Watch this space for future flip-flops.
FALLACY #19: Releasing 200 new photos of prisoner abuse will further derail our campaign against terrorism by providing more recruitment material for Al Qaeda and the Taliban. -- Let's assume that the 200 photos in question don't constitute 200 unique cases of abuse and that there might be five or ten photos of the same incidents, yielding 20 to 40 new actual cases of abuse. The United States has already publicly confirmed the existence of these photos, thus confirming the actual incidents themselves and confirming their severity as being similar to previous documented cases. If progress in the war on terror is jeopardized by photos of abuse we've already publicly confirmed, the war on terror isn't in danger of being lost due to PR on an Internet scale. It is being lost at the local level in impoverished villages where local and state governments in Iraq, Afghanistan and Pakistan are failing to provide basic public services and protect the safety of their citizens. The war is being lost through brutal intimidation applied directly at the local level through grisly public dismemberments and beheadings.
The additional photos WILL be released at some point. It's only a matter of months, years or decades. The debate over the photos is really a debate about the ability of the American government and the American people to face facts and change course. We need to understand how our country came to the conclusion that organized, systemic torture was effective and appropriate in defending the country when it is neither. More importantly, we need to understand why our country continues to involve itself in so many strategies that require secrecy that is antithecal to a properly functioning government and society.
========================================
#1) http://watchingtheherd.blogspot.com/2006/05/war-on-terror-and-logic.html
#2) http://watchingtheherd.blogspot.com/2006/05/democrats-came-to-same-conclusion.html
#3) http://watchingtheherd.blogspot.com/2006/05/constitutional-crisis.html
#4) http://watchingtheherd.blogspot.com/2006/09/war-on-logic-continues.html
#5) http://watchingtheherd.blogspot.com/2007/07/war-on-terror-and-logic-have-shovel.html
#6) http://www.cbsnews.com/htdocs/pdf/FTN_051709.pdf
Sunday, May 10, 2009
Grades Are In -- A Banker's F
On May 7, 2009, the Federal Reserve officially released the results of the so-called stress tests applied to America's biggest banks. If you believe the Fed, the tests were intended to identify remaining vulnerabilities in banks to additional declines in the overall economy so they can shore up any minor problems and install confidence in the markets that the system is sound and capable of providing credit to businesses and consumers.
So what were the final grades? Officially, ten of the nineteen banks analyzed were found to be in need of additional capital. Not "insolvent" mind you, not in danger of an "imminent collapse", just in need of a few billion here or there so they can be counted on to lend money even if employment or GDP drop a few more percentage points. The banking equivalent of a little repointing around a few loose bricks. Sounds like the equivalent of a Gentlemen's C.
That's what you might believe from the commentary on the results from the Fed and Treasury, who tried to dance a fine line between the forgiving but stern dean clearly telling the struggling students they need to endeavor to improve their grades "or else" without panicking their parents into pulling them out of school entirely. If you analyze the true financial position of the ten in trouble and the circular logic trapping the Fed, the Treasury and (by proxy) American taxpayers into a never-ending chain of conflicting interests and self-defeating financial positions, the real grade for these ten has to be a Banker's F.
The Mechanics of Banking
Traditional banks make money by
1) attracting deposits (counted as liabilities on their books) by paying interest
2) lending money (counted as assets on their books) and collecting interest from borrowers
3) using interest payments from loans to pay interest owed to depositors
4) pocketing the difference
They also make money by charging interest rates on credit cards that make loan sharks envious, charging huge fees for using foreign ATMs, paying bills late or overdrafting checking accounts, but that's not really germane to the analysis here (smile).
If the bank is successful at managing this delicate balance and can prove it can make money with its practices, the bank can attract additional capital by selling shares to investors then loaning out a fraction of that additional money like they do the deposits to start the cycle and make even more income.
An extremely conservative bank nervous about having enough money on hand for withdrawals by depositors would keep virtually all depositor dollars in the vault but would then never make any additional money to pay the depositor's interest and would quickly go out of business. A bank that lent every depositor's dime out to borrowers would not have enough on hand to satisfy withdrawals by depositors which would quickly destroy any confidence of depositors to put their money in the bank and it would collapse.
The trick to banking is deciding how much to lend and how much to keep on hand. This balance is usually represented as the reserve ratio, the fraction of assets on hand (numerator) versus deposits (denominator). The REAL trick of banking is that this ratio is not only critical to the profitability of individual banks but it has a huge impact on the entire economy because the lower the ratio, the more fiat money is being created out of thin air for the economy to use. If the ratio isn't low enough, the money supply cannot keep up with population growth, much less economic growth. If the ratio is too low, an excess of fiat money beyond what's needed to keep pace with population growth and "safe" economic growth will be created, causing the excess to chase phantom profits and pipe dreams, producing inflation and/or bubbles in specific asset classes.
This all sounds relatively scientific but the usefulness of the ratio as a guardrail is only as good as the quality of the assets used in the numerator. Therein lies the flaw with the reserve ratio rule, the recent track record of financial regulation and the attempt to use stress test results to instill confidence in the system.
Truth or a Really Good Story?
The key takeaways from the release of the stress test results were that
* all of the nineteen banks tested proved to be solvent in the current economic state…
* BUT that ten of them would technically fall short of the desired reserve ratio…
* IF a few key economic statistics worsened by X amount
One of the key variables used in the model was unemployment which was tested at a worst-case level of 10.3 percent. How much of a "margin" is a 10 percent worst-case estimate when unemployment is already at 9 percent and has jumped 4 percent in one year? Higher unemployment will produce lower household incomes, more mortgage defaults and lower demand for homes, all of which will drastically impair the value of major asset classes counted in the numerator of these banks' reserve ratios.
Another key limit tested by the analysis was a drop in home prices by 22 percent. This actually sounds like a much more severe worst-case test than the 10.3 percent assumption on unemployment but it likely ignores a major "location, location, location" factor of the housing bubble and the compound fraud in mortgage backed security ratings and credit default swaps that fueled it. There are several areas of the country which saw home prices jump over one hundred percent over the past six to eight years. As starry-eyed homebuyers and speculators began chasing ever-rising prices, huge numbers of loans were issued against those inflated values, then fed into the MBS wholesale chop shop to be carved up and traded as high-quality rated securities among investors which then became assets on the banks of books to fuel additional fiat money expansion which expanded demand for housing in a circular loop.
The real point is that large numbers of empty homes in bubble markets won't simply drift back down to "normal" values. They are likely to decline far below that -- even to zero -- as vandalism, damage from the elements and failed models of ex-urban living drive future buyers elsewhere. In essence, what has to be modeled is not the aggregate value of all homes but the value of homes directly involved with the most risky mortgages that will default and the chain of mortgage backed securities and credit default swaps piled on top of those bad loans. That drop is very likely to be far greater than a mere 22 percent, again rendering the stress test results meaningless.
Circular Logic / Circular Firing Squad
The pattern of intervention established so far by the Treasury and Federal Reserve Bank renders the entire stress test effort pointless as a confidence building exercise. As the PR team hit the news shows to promote the test results, a subtext of the message sent to banks and the public was basically that no banks were found to have gaps that reasonable efforts in the private sector could not fill and therefore once the banks plug those gaps, that's it -- no more money from taxpayers. Unfortunately, nearly two years of haphazard public policy and private, inscrutable decision-making at the Fed have firmly planted the following ideas in the minds of bankers, investors and the public:
1) housing prices cannot be allowed to find a new floor for fear of triggering more collapses in the value of mortgage backed securities on the books of banks worldwide
2) further drops in MBS values held by banks cannot be allowed for fear of rendering many large banks insolvent under normal reserve ratio requirements
3) banks failing to meet reserve ratio requirements will further tighten credit to businesses and consumers, further accelerating economic contraction
4) banks rendered insolvent by collapsing MBS valuations and direct mortgage portfolios will trigger further payments of credit default swap contracts in amounts that none of the counterparties to those swap contracts can actually fulfill
5) the Federal Reserve is willing to print as much money required -- devaluing the dollar -- and hand it over as many formerly-non-member institutions as necessary to prevent a collapse of non-member institutions from exposing the insolvency of its members
6) the Treasury is willing to inject as many taxpayer dollars as needed to into failing automakers to defer massive job cuts that would deepen and prolong the economic slowdown
7) the more the government borrows to drop into bailouts, the more reluctant foreign holders of Treasury investments become of buying more US debt, reducing demand for Treasuries, which lowers Treasury prices which poses interest rate pressures on an economy already critically dependent on low interest rates for any recovery / expansion
8) to prop up the value of Treasury bills to satisfy foreign investors, the Fed will do everything in its power to maintain low short term interest rates, punishing savers and encouraging more to attempt to invest in stocks, commodities or derivatives to combat the risk of inflation produced by printing trillions of dollars
What are investors, bankers and consumers / taxpayers to conclude from this list of self-defeating policy goals? First, these banks ARE still in trouble and WILL need more capital to survive. Second, by failing to force divestitures and downsizing of the trouble firms as part of the risk remediation, the government is allowing them to remain "too big to fail" which means the government WILL have to bail them out when the time comes. Third, by leaving these banks TBTF, the government is encouraging private investors to keep their capital out of the banks so the government can cover the losses until a point of equilibrium is reached. Finally, these philosophically incoherent goals are likely to produce economic statistics and performance like few have experienced or can predict. The level of risk facing every type of investor has never been higher and has room to grow.
So what were the final grades? Officially, ten of the nineteen banks analyzed were found to be in need of additional capital. Not "insolvent" mind you, not in danger of an "imminent collapse", just in need of a few billion here or there so they can be counted on to lend money even if employment or GDP drop a few more percentage points. The banking equivalent of a little repointing around a few loose bricks. Sounds like the equivalent of a Gentlemen's C.
That's what you might believe from the commentary on the results from the Fed and Treasury, who tried to dance a fine line between the forgiving but stern dean clearly telling the struggling students they need to endeavor to improve their grades "or else" without panicking their parents into pulling them out of school entirely. If you analyze the true financial position of the ten in trouble and the circular logic trapping the Fed, the Treasury and (by proxy) American taxpayers into a never-ending chain of conflicting interests and self-defeating financial positions, the real grade for these ten has to be a Banker's F.
The Mechanics of Banking
Traditional banks make money by
1) attracting deposits (counted as liabilities on their books) by paying interest
2) lending money (counted as assets on their books) and collecting interest from borrowers
3) using interest payments from loans to pay interest owed to depositors
4) pocketing the difference
They also make money by charging interest rates on credit cards that make loan sharks envious, charging huge fees for using foreign ATMs, paying bills late or overdrafting checking accounts, but that's not really germane to the analysis here (smile).
If the bank is successful at managing this delicate balance and can prove it can make money with its practices, the bank can attract additional capital by selling shares to investors then loaning out a fraction of that additional money like they do the deposits to start the cycle and make even more income.
An extremely conservative bank nervous about having enough money on hand for withdrawals by depositors would keep virtually all depositor dollars in the vault but would then never make any additional money to pay the depositor's interest and would quickly go out of business. A bank that lent every depositor's dime out to borrowers would not have enough on hand to satisfy withdrawals by depositors which would quickly destroy any confidence of depositors to put their money in the bank and it would collapse.
The trick to banking is deciding how much to lend and how much to keep on hand. This balance is usually represented as the reserve ratio, the fraction of assets on hand (numerator) versus deposits (denominator). The REAL trick of banking is that this ratio is not only critical to the profitability of individual banks but it has a huge impact on the entire economy because the lower the ratio, the more fiat money is being created out of thin air for the economy to use. If the ratio isn't low enough, the money supply cannot keep up with population growth, much less economic growth. If the ratio is too low, an excess of fiat money beyond what's needed to keep pace with population growth and "safe" economic growth will be created, causing the excess to chase phantom profits and pipe dreams, producing inflation and/or bubbles in specific asset classes.
This all sounds relatively scientific but the usefulness of the ratio as a guardrail is only as good as the quality of the assets used in the numerator. Therein lies the flaw with the reserve ratio rule, the recent track record of financial regulation and the attempt to use stress test results to instill confidence in the system.
Truth or a Really Good Story?
The key takeaways from the release of the stress test results were that
* all of the nineteen banks tested proved to be solvent in the current economic state…
* BUT that ten of them would technically fall short of the desired reserve ratio…
* IF a few key economic statistics worsened by X amount
One of the key variables used in the model was unemployment which was tested at a worst-case level of 10.3 percent. How much of a "margin" is a 10 percent worst-case estimate when unemployment is already at 9 percent and has jumped 4 percent in one year? Higher unemployment will produce lower household incomes, more mortgage defaults and lower demand for homes, all of which will drastically impair the value of major asset classes counted in the numerator of these banks' reserve ratios.
Another key limit tested by the analysis was a drop in home prices by 22 percent. This actually sounds like a much more severe worst-case test than the 10.3 percent assumption on unemployment but it likely ignores a major "location, location, location" factor of the housing bubble and the compound fraud in mortgage backed security ratings and credit default swaps that fueled it. There are several areas of the country which saw home prices jump over one hundred percent over the past six to eight years. As starry-eyed homebuyers and speculators began chasing ever-rising prices, huge numbers of loans were issued against those inflated values, then fed into the MBS wholesale chop shop to be carved up and traded as high-quality rated securities among investors which then became assets on the banks of books to fuel additional fiat money expansion which expanded demand for housing in a circular loop.
The real point is that large numbers of empty homes in bubble markets won't simply drift back down to "normal" values. They are likely to decline far below that -- even to zero -- as vandalism, damage from the elements and failed models of ex-urban living drive future buyers elsewhere. In essence, what has to be modeled is not the aggregate value of all homes but the value of homes directly involved with the most risky mortgages that will default and the chain of mortgage backed securities and credit default swaps piled on top of those bad loans. That drop is very likely to be far greater than a mere 22 percent, again rendering the stress test results meaningless.
Circular Logic / Circular Firing Squad
The pattern of intervention established so far by the Treasury and Federal Reserve Bank renders the entire stress test effort pointless as a confidence building exercise. As the PR team hit the news shows to promote the test results, a subtext of the message sent to banks and the public was basically that no banks were found to have gaps that reasonable efforts in the private sector could not fill and therefore once the banks plug those gaps, that's it -- no more money from taxpayers. Unfortunately, nearly two years of haphazard public policy and private, inscrutable decision-making at the Fed have firmly planted the following ideas in the minds of bankers, investors and the public:
1) housing prices cannot be allowed to find a new floor for fear of triggering more collapses in the value of mortgage backed securities on the books of banks worldwide
2) further drops in MBS values held by banks cannot be allowed for fear of rendering many large banks insolvent under normal reserve ratio requirements
3) banks failing to meet reserve ratio requirements will further tighten credit to businesses and consumers, further accelerating economic contraction
4) banks rendered insolvent by collapsing MBS valuations and direct mortgage portfolios will trigger further payments of credit default swap contracts in amounts that none of the counterparties to those swap contracts can actually fulfill
5) the Federal Reserve is willing to print as much money required -- devaluing the dollar -- and hand it over as many formerly-non-member institutions as necessary to prevent a collapse of non-member institutions from exposing the insolvency of its members
6) the Treasury is willing to inject as many taxpayer dollars as needed to into failing automakers to defer massive job cuts that would deepen and prolong the economic slowdown
7) the more the government borrows to drop into bailouts, the more reluctant foreign holders of Treasury investments become of buying more US debt, reducing demand for Treasuries, which lowers Treasury prices which poses interest rate pressures on an economy already critically dependent on low interest rates for any recovery / expansion
8) to prop up the value of Treasury bills to satisfy foreign investors, the Fed will do everything in its power to maintain low short term interest rates, punishing savers and encouraging more to attempt to invest in stocks, commodities or derivatives to combat the risk of inflation produced by printing trillions of dollars
What are investors, bankers and consumers / taxpayers to conclude from this list of self-defeating policy goals? First, these banks ARE still in trouble and WILL need more capital to survive. Second, by failing to force divestitures and downsizing of the trouble firms as part of the risk remediation, the government is allowing them to remain "too big to fail" which means the government WILL have to bail them out when the time comes. Third, by leaving these banks TBTF, the government is encouraging private investors to keep their capital out of the banks so the government can cover the losses until a point of equilibrium is reached. Finally, these philosophically incoherent goals are likely to produce economic statistics and performance like few have experienced or can predict. The level of risk facing every type of investor has never been higher and has room to grow.
Subscribe to:
Posts (Atom)