Chris Walen, some time "banking industry analyst and co-founder of Institutional Risk Analytics" recently stated on the The Daily Ticker that there's no down side to not raising the debt ceiling:
"My view is that Congress should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America's political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible."
Let's take a look at his assertion for a second:
Geithner and other fiscal policy makers are no doubt driven by the uncertainty principle in finance (not unlike Heisenberg's uncertainty principle in Physics) - it's a basic mantra with economists and financiers. ANY uncertainty in the underlying assumptions or mechanics of the markets MUST be eradicated, for only with certainty can efficient economic markets function (or other words to that effect.)
What Mr. Walen proposes to do is inject uncertainty into the markets. So what's interesting is that no one really knows what would happen if the US defaulted (which is what we're really talking about, even if it's a few days or weeks) on its debt. What is known is that every economist, banker, treasurer in the world uses a basic assumption of the "risk-free" rate to be US government debt. Every other rate in the world is in some way based on it. So for the US to default on its debt, even for a matter of days, could have the equivalent effect of us waking up one day and discovering that the laws of gravity were annulled, and the moon had left its orbit about the earth ... Or not.
But for a "banking industry analyst" to assert there's no downside to allowing this to happen is simply irresponsible, or slavish adherence to some dogma that has no basis in fact or history. Truth is we don't know.
But wait! "All he's saying is that we should cap the debt and pay the interest out within that cap" you say.
Perhaps, but let's look at the reality our friends in Congress are dealing with.
This suggestion is only valid if, as part of the process, Congress is clear that debt is serviced before anything else including essential services, military, fire fighting, CDC etc. We'll have made a point of paying debt holders their interest before ensuring the national trust and security. Goodbye pork barrel legislation that buys all those corporate campaign contributions. While we could spend days or years arguing the merit of this as a decision, and its consequences, the ONLY way to not raise the debt level without a priori addressing the spending issues is to agree to something like this.
I guess another nit to cite is that Social Security, which makes up about $760BN in the current budget (if memory serves me right - it's almost identical to military spending before black ops (estimated somewhere between $50-100BN a year) or off budget military spending including the wars in Iraq and Afghanistan (currently running something like $50BN and $120BN for 2011 (Congressional Research Service - page 7 note the chart)) is non discretionary spend which ostensibly has its own source of funding (the $2 - $3 Trillion set aside in SSAN payments). This, coupled with other non-discretionary spending (Medicare - $468 billion, Medicaid - $269 billion, (both of which have independent funding sources) TARP - $13 billion, and all other mandatory programs - $598 billion.) totals $2.1 Trillion out of a $3.7 Trillion budget. (About.com US Economy)
Some other inconvenient truths here:
1) Debt servicing (the INTEREST we pay on treasury notes, bonds and other Federal Debt) is about $241 BN in the current budget, or about 15% of total discretionary spend. (GovernmentSpending.com)
2) Somewhat dated (as of July 2010) but likely still directionally direct - the average maturity of Treasury debt is about 55% maturing within 36 months (~30% within 12 months), which means that we have to reissue about $4.2 Trillion in debt within the next year to stay at the current debt ceiling. (Presentation to the Treasury Borrowing Advisory Committee U.S. Department of Treasury Office of Debt Management February 1, 2011 page 20)
So, put plainly, to move forward with capping the debt we have to be prepared to:
1) Cut 15% of the discretionary budget immediately - given the incredible lack of foresight or intestinal fortitude shown by the current occupants of the Capitol Building (both sides of the aisle) I'd say we have a better chance of a small planetary body striking Washington and destroying the planet, thus eradicating the problem entirely with no work involved (they can all breath a sigh of relief!), and/or
2) Refinance the existing debt (for certainly we wont be able to retire any of it given constraints identified above) with increasing expense (e.g. higher interest rates), which
3) Leads to debt servicing occupying an even greater portion of the discretionary spend leading to
4) repeating at point one ad nauseum.
So unless I've missed something, to facilely suggest, as Chris Walen implies, that we should freeze the debt ceiling without increasing revenues and/or decreasing outlays FIRST, without catastrophic consequences coming from some quarter, either through defaulting on debt covenants, or by essentially shutting government down by dealing with the debt servicing issue, is misinformed at best.
Personally I think there's a better chance of waking up and finding the laws of physics have been overturned than for Congress to successfully freeze the debt ceiling as Chris Walen has proposed. The banking system will yank the rope they have Congress by balls with just like they did during the last financial fiasco (the market melt down of 2008) and get them moving. Look to Gierthner and other financial mavens including the heads of the banks to increasingly get shrill about this in the next few weeks.
Meanwhile, I look forward to seeing the Moon spiraling out of orbit, being able to leap tall buildings in a single bound (but wait, how do I get back down with no gravity?) and other such fantasies!
Friday, June 10, 2011
Wednesday, June 8, 2011
Response to 11th Circuit Court of Appeals discussion on "Obamacare"
As reported in the LA Times today, the 11th Circuit Court of Appeals is considering the constitutionality of Obama's healthcare reform:
"the judges opened the arguments by saying they knew of no case in American history where the courts had upheld the government's power to force someone to buy a product."
And Acting U.S. Solicitor General Neal K. Katyal raising the point:
"... that healthcare is unique and unlike purchasing other products, like vegetables in a grocery store. "You can walk out of this courtroom and be hit by a bus," he said. And if such a person has no insurance, a hospital and the taxpayers will have to pay the costs of his emergency care..."
Interesting if facile questions all around by the bench. Really the only issue at stake here is can the government mandate an individual to purchase a product?
So let's think about it - you are required (by law, duly passed decades ago and in force since in every state that I know of) to purchase auto insurance as part of owning and operating a car - so we've opened the door on mandating purchase of a service already. (Although arguably you do have the choice of NOT owning and operating a car, just good luck getting anywhere or earning a living without one in our auto-centric communities) So to through out that they've never heard of government having these powers before is either a disingenuous belief, or an outright falsehood-which is it?
On this topic remember George Bernard's prostitute joke (see The Independent- at the bottom of the article) which certainly applies:
"Best joke about prostitution ever done was by Bernard Shaw. He was at a party once and he told this woman that everyone would agree to do anything for money, if the price was high enough. `Surely not, she said.' `Oh yes,' he said. `Well, I wouldn't,' she said. `Oh yes you would,' he said. `For instance,' he said, `would you sleep with me for... for a million pounds?' `Well,' she said, `maybe for a million I would, yes.' `Would you do it for ten shillings?' said Bernard Shaw. `Certainly not!' said the woman `What do you take me for? A prostitute?' `We've established that already,' said Bernard Shaw. `We're just trying to fix your price now!'
The second issue raised here (and frankly immaterial from a legal standpoint, but important to understand from a healthcare reform standpoint) - is whether we want to admit it or not, you and I already pay for all the uninsured - and at the absolute highest rates you can think of.
The uninsured wind up in Emergency Rooms with life threatening conditions, often at end of life. Our laws prevent ERs from turning anyone away in this condition (can you imagine a society where someone with a GSW to the head is turned away from the hospital because they can't show proof of insurance? Not sure I want to live in that country). Because of this, the state agrees to pay the ERs for anyone who can't pay - and where does that money come from? Well you and me in the form of taxes.
So to put everyone into some form of a health plan is actually a cost savings device - it should lead to earlier, lower cost interventions for many of these people, and should also ensure that we're paying negotiated rates and not rack rates. (as an example I just had lab work done - rack rate if I didn't have insurance - $650, with negotiated rates - $54. Sort of begs whether Healthcare providers are engaged in discriminatory pricing in violation of Robinson-Patman, something I'll leave to another day.)
Lastly on this point - by mandating coverage, the state can entice private insurers to come to the market with products designed to be compliant with the regulators mandated design for minimally compliant healthcare plans. Without creating the market for 50 MM new members, the insurance companies will not bother. Plain and simple. (I used to manage Product Development for one of the major West Coast healthcare insurers ...) The only other reasonable alternative would be to go to socialized medicine from the start, by-pass how we entice private ensurers to enter the market and deliver the services directly. But we don't want to go there. Do we?
There's lots that is wrong with "Obamacare" that should be changed. But if we're going to challenge its consitutionality let's stay focused on the powers of the Congress to act, and not mix that up with whether it's a good bill that should be continued and implemented - that's not a question for the Judiciary, that's for the Legislative branch of the government.
"the judges opened the arguments by saying they knew of no case in American history where the courts had upheld the government's power to force someone to buy a product."
And Acting U.S. Solicitor General Neal K. Katyal raising the point:
"... that healthcare is unique and unlike purchasing other products, like vegetables in a grocery store. "You can walk out of this courtroom and be hit by a bus," he said. And if such a person has no insurance, a hospital and the taxpayers will have to pay the costs of his emergency care..."
Interesting if facile questions all around by the bench. Really the only issue at stake here is can the government mandate an individual to purchase a product?
So let's think about it - you are required (by law, duly passed decades ago and in force since in every state that I know of) to purchase auto insurance as part of owning and operating a car - so we've opened the door on mandating purchase of a service already. (Although arguably you do have the choice of NOT owning and operating a car, just good luck getting anywhere or earning a living without one in our auto-centric communities) So to through out that they've never heard of government having these powers before is either a disingenuous belief, or an outright falsehood-which is it?
On this topic remember George Bernard's prostitute joke (see The Independent- at the bottom of the article) which certainly applies:
"Best joke about prostitution ever done was by Bernard Shaw. He was at a party once and he told this woman that everyone would agree to do anything for money, if the price was high enough. `Surely not, she said.' `Oh yes,' he said. `Well, I wouldn't,' she said. `Oh yes you would,' he said. `For instance,' he said, `would you sleep with me for... for a million pounds?' `Well,' she said, `maybe for a million I would, yes.' `Would you do it for ten shillings?' said Bernard Shaw. `Certainly not!' said the woman `What do you take me for? A prostitute?' `We've established that already,' said Bernard Shaw. `We're just trying to fix your price now!'
The second issue raised here (and frankly immaterial from a legal standpoint, but important to understand from a healthcare reform standpoint) - is whether we want to admit it or not, you and I already pay for all the uninsured - and at the absolute highest rates you can think of.
The uninsured wind up in Emergency Rooms with life threatening conditions, often at end of life. Our laws prevent ERs from turning anyone away in this condition (can you imagine a society where someone with a GSW to the head is turned away from the hospital because they can't show proof of insurance? Not sure I want to live in that country). Because of this, the state agrees to pay the ERs for anyone who can't pay - and where does that money come from? Well you and me in the form of taxes.
So to put everyone into some form of a health plan is actually a cost savings device - it should lead to earlier, lower cost interventions for many of these people, and should also ensure that we're paying negotiated rates and not rack rates. (as an example I just had lab work done - rack rate if I didn't have insurance - $650, with negotiated rates - $54. Sort of begs whether Healthcare providers are engaged in discriminatory pricing in violation of Robinson-Patman, something I'll leave to another day.)
Lastly on this point - by mandating coverage, the state can entice private insurers to come to the market with products designed to be compliant with the regulators mandated design for minimally compliant healthcare plans. Without creating the market for 50 MM new members, the insurance companies will not bother. Plain and simple. (I used to manage Product Development for one of the major West Coast healthcare insurers ...) The only other reasonable alternative would be to go to socialized medicine from the start, by-pass how we entice private ensurers to enter the market and deliver the services directly. But we don't want to go there. Do we?
There's lots that is wrong with "Obamacare" that should be changed. But if we're going to challenge its consitutionality let's stay focused on the powers of the Congress to act, and not mix that up with whether it's a good bill that should be continued and implemented - that's not a question for the Judiciary, that's for the Legislative branch of the government.
7 minutes ago ·
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