Relevant and even prescient commentary on news, politics and the economy.

Have you Read the Health Care Law?

by Bruce Webb

Well me neither. I read through the Tri-Committee and HELP Bills and the Senate Finance Committee’s Chairman’s Mark and then both the Pelosi and Reid versions as introduced and followed as best I could the last minute revisions introduced by the Team of Ten but as I type I have yet to actually slog through the text as passed on Sunday night. I think I know what is in the bill and what was signed into law a few minutes ago but I don’t actually know. But I will. And you can too. And then maybe follow up with the proposed text of the reconciliation fix.

H.R.3590 – Patient Protection and Affordable Care Act
Given that this is the same bill as was passed by the Senate on Dec 24th some of you may be ahead of me here. But this is the law as it stands this morning Tuesday March 23

Health Care Bill – H.R. 4872 – Reconciliation Act of 2010
Hmm, I didn’t realize until just now that the Reconciliation Bill was in the form of a Substitute, meaning that absent any changes mandated by the Parliamentarian or other amendments approved by the Senate this would be the actual final version of the law to be sometime later this month.

Links to our friends (or at least my friend) at Open I am going to take some time and read through the bill and settle out what I think I know from reading all the previous iterations and what we are really dealing with going forward: 300% of FPL or 400%, 11% max out of pocket or 12% or 8.5%? It has been a blizzard of changing numbers. But soon enough it will be what it will be, time to dig down into the data in the true Angry Bear spirit.

Bon appetit!! And consider this an open topical Health Care thread.

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A Simple Explanation of How The Use of Derivatives Created The Great Recession

by cactus

A Simple Explanation of How The Use of Derivatives Created The Great Recession

In comments to a post by fellow Angry Bear Robert Waldman, reader Cantab writes:

Nobody here has come up with a believable story on how derivatives hurt the economy or were the cause of the recession. All we really get is a claim that they happened together and the further assertion that derivates [sic] caused the recession rather than the more likely story that derivatives were the victim of the recession.

I’m pretty sure Cantab is wrong but I don’t have the time to find the various posts that described the issue. But I can summarize:

1. Derivatives are about magnifying bets. A $2 bet on a derivative can be the same thing as a $100 bet on the asset that underlies the security. Thus, if the asset doubles in value, instead of taking home an extra $2 on your bet, you take home an extra $100. But if the price of the asset falls in half, instead of losing $2 on your bet, you lose $100.
2. On Wall Street, everyone leveraged up. After all, the worst that can happen when you gamble with monster leverage is that you go bankrupt. But if you win your bets, you make humongous profits.
3. Inevitably, when everyone is leveraged up, at least some of those who are leveraged must sooner or later make some bad bets. But the losses associated with these leveraged up bad bets was much bigger than in the past. Instead of losing $2 on their $2 bets as would have happened in the past, they lost $100. In the past, the losers’ assets would simply have been liquidated, and those assets would have been enough to cover a substantial part of the losses. With derivatives, liquidation covers an insignificant piece of what is owed.
4. Result: massive, and I mean massive, losses to the firm’s creditors. Perhaps big enough to drive their creditors out of business too. And those creditors have creditors too…
5. As a result of 4, a firm could win all its bets and still be driven out of business, simply by virtue of being stupid enough to bet against another firm who realized point 2. (And every firm on Wall Street, apparently, realized point 2.) In fact, a firm could be driven out of business despite winning its bets if one of its counterparties was stupid enough to bet against another firm who realized point 2. Being twice or three times removed from a loser might not be enough to keep a firm from being pulled under.
6. Derivatives are also opaque. There’s no way of knowing who took out which bets with who until someone declares bankruptcy.
7. Very quickly, it became apparent that any of the firms on Wall Street might already be on the inevitable path toward bankruptcy, but there was no way at all to tell the difference between those that were on that path and those that weren’t, or even if there were any firms that weren’t headed toward bankruptcy.
8. All deals ceased. The real world, that had gotten used to unlimited amounts of cheap money sloshing around, abruptly and without warning found itself cut off from its fix. Expansions plans, hiring, etc. were put on hold. And companies that were teetering on the edge that earlier would have found some savior on Wall Street found themselves having to shut down or scale back instead.

I have to admit, its taken me a while to come to terms to how big the derivative market was. I had no idea, no inkling of its size back in March of 2008 when I began asking what was different about the current recession. As a result, though I noted the possibility of a “major downturn”, I was surprised by exactly how big the downturn would really be. What scares me is that that I’m not seeing anything, anything at all that prevents or even makes the 8 steps I described above any less likely to occur. The bail-outs were madness. Those who knowingly go out of their way to play with dynamite should be allowed to blow themselves up, and the job of government should be to prevent the rest of us from having to deal with the consequences.

Which brings me back to something else I wrote in 2008. We need a public option… in the financial system. Let the public bank at the Fed the way the banks bank at the Fed. If given a choice between keeping my money at B of A or the Fed, I know which I’ll pick.

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China has options

by Rebecca Wilder

This morning there was an abundance of links evidencing the building anxiety over U.S.-China relations. Edward Harrison at Credit Writedowns links to a Reuters article, China vows to hit back if targeted by U.S. on yuan. Calculated Risk refers to commentary at the Financial Times and the Washington Post referencing China Losing Support of American Business Community.

Let’s think about the currency from a U.S. auto exporter’s viewpoint. The China Daily looks at China’s relatively “young” automotive market compared to its developed U.S. counterpart. But what if the yuan appreciates more than expected against the U.S. dollar? This market would develop much quicker than the article portends, and the room for revenue growth is vast.

Deutsche Welle also reports the benefits that Europe would incur from a stronger yuan compared to the U.S. dollar, which gives me pause: why exactly would Europe profit from an appreciation of the Chinese yuan against the U.S. dollar? The U.S. export industry, yes, but Europe? Deutsche Welle tells us:

“But Europe stands to benefit a lot, because with a revaluation, European products would become more affordable for Chinese consumers and companies alike and we would definitely feel the benefits in terms of better exports,” said Schularick.

This is an entirely one-sided argument: if the Chinese yuan appreciates, then export income would be diverted away from Chinese exports and toward Chinese imports, paving the way for Europe to reap the benefits. Same story as in the U.S. auto maker case, but with a twist: China has options.

First, China drops the currency peg, allowing its exchange rate to float (appreciate) against the U.S. dollar (USD). In this situation, the USD will depreciate not only against the Chinese yuan (CNY), but more likely against all currencies to which the USD is implicitly pegged via the yuan.

It’s pretty simple, really, if you think about cross rates: USD:CNY / EUR:CNY = USD:EUR. If USD:CNY falls (i.e., the U.S. dollar depreciates against the Chinese yuan), and that depreciation is not matched by an equal increase of the EUR:CNY (appreciation of the Eurozone euro against the Chinese yuan), then you get a depreciation of the U.S. dollar against the euro (the USD:EUR falls).

Point 1: as the Chinese yuan floats, it’s very likely that all else equal, the U.S. dollar depreciates against the euro. This improves the near-term prospects for U.S. exports to Europe, and reduces those for European exports to the U.S. (given sticky prices). Therefore, the increased demand for European exports to China will be offset somewhat by the decline in demand for those to the U.S.

Second, given that the Chinese do not allow the yuan to float (much more likely), who’s to say that the Chinese will not simply substitute one peg for another, i.e., target the euro to a larger degree? This would be very simple; and frankly, a euro peg would make more sense, given the trade flows between Europe and China.

Europe is a natural market for Chinese exports: in 2007, 24% of China’s exports landed in Europe, while 21% shipped to North America. All else equal, a euro peg would be quite an effective “export growth tool” if the Chinese shifted their asset base from U.S.-denominated assets toward Euro-denominated assets.

Point to 2: Europe would be very much worse off if China simply increased the weight of the euro in its currency target basket. The biggest economy in the Eurozone, Germany, is an “exporter” itself. Talk about trade wars!

U.S.-China bi-lateral relations SHOULD BE TREATED as a multi-lateral story; they’re interconnected.

Rebecca Wilder crossposted with News N Economics

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Conclusion to my Kauffman Institute Presentation

Note: This is “what I believe I said,” not“what I would have said” and is presented here solely to document the confluences that were, perhaps, clearer in my head than they were in the presentation itself.  As such, several references here are echoes of earlier pieces of the presentation. (Links to same will be updated as soon as possible.)

To review, there are three standard methods of reducing a fiscal debt: default, inflate, and taxation and/or budget cutting.  I believe it is clear that default is not desirable; the historic examples of 1917 Russia and the State of Louisiana are clear indicators that issues persist long after the act itself, and the recent suffering of the Argentineans in 2002 and 2003 clearly shows that, even at the time, default is at best a problematic solution, more an amputation than a lancing.

The second, moderate inflation, has the collateral issue that some of the assumed benefits of an inflationary policy—especially an inflationary policy in an environment with a relatively low savings rate—do not accrue to the country whose currency is the dominant one in the world.  As I noted earlier, David Beckworth is doing some research in this area, and I look forward to seeing the results.It seems safe to assume that the benefits of inflation will not accrue in the way a model might predict, and therefore “solving” the problem with inflation will require a suboptimal level to achieve optimal policy.  The chance of having to repeat “the Volcker experiment” would not be small, while the likelihood of success would not be so large.

Budget cutting is an abiding idea. While I’m perfectly willing to stipulate that one might be able to cut around 1% of GDP from the US defense budget, and that some direct consumption—though much of this is a State and Local issue more than a Federal one—might be reducible, this appears unlikely to have more than a marginal effect. While we like—indeed, make a living from identifying—marginal effects, the magnitude of the issue at hand requires more.  Since we generally can stipulate that transfer payments are at worst neutral (or, by Jim Baker’s “supply-side/conspicuous consumption” theory presented earlier, likely beneficial to both the velocity of money and overall tax revenues), gains from there will, at best, not help the team.



This leaves taxation, and it is perfectly reasonable to assume that taxation can be increased. Except that, as you can see from the graphic I have left on the screen, we have a large deadweight loss in health care spending. We spend approximately 6% more, on a percent-of-GDP basis, than the next country, with no noticeable economic value-added.  Having that deadweight loss hanging over the economy limits options—possibly as much or more than being the dominant currency.  And since the basic premise of this panel appears to be that we would prefer that the US Dollar remain the dominant world currency—that is, becoming the 21st century equivalent of 20th century Britain not being a desired outcome—we are left to the reality that we cannot solve the budget crisis without reducing or eliminating much of the deadweight loss in the health-care system.

Were we to solve only half of the difference and transfer that amount to tax revenues, we would solve the budget deficit without adding any drag to the economy, effectively substituting tax revenues for cost overruns. We would, in short, have produced a better team: a better engine for growth and a greater potential for entrepreneurial opportunity, even if a groundskeeper becomes underutilized in the process.

The most viable alternative to addressing the deficit by addressing the deadweight loss in the health-care system appears to be to yield our place as the world’s Reserve currency of choice. There does not appear to be much of an appetite for that, even if there were a clear mechanism to do so.

As economists we look for the suboptimal.  In this case, we can identify the areas where the returns are low—defense spending—the areas where spending growth might be moderated—Government Direct Consumption, although that is a very nominal portion of the Federal budget—and areas where there are clear deadweight losses—health care spending.  Only the latter shows much promise as a direct, not just a marginal, way to address the problem.

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Health Care & Teabaggers: the War Against an Abstraction

by Bruce Webb

Whence Teabaggery?

Opponents of Health Care Reform vow to keep up their efforts and sweep Republicans to victory in November. But where do they take their stand? Up to now they have been opposing potential legislation that existed mostly in their own imagination: Socialized Medicine, Obamacare, Government Bureaucrats between You and Your Doctor. But now that the die is cast, because in the bigger picture the reconciliation bill is just tinkering around the edges, what will actually change for the average Teabagger?

Will they have to get government approval to see a doctor? Well no. Will there be dramatic changes in their out of pocket expenses? Well no, if anything the change will be in the other direction. Will insurance or the hospital start denying them categories of care? Well no, same thing. The fact is that if you already have insurance, and from the looks of most of the Teabag crowd they already do, you will see zero change between now and November. At least negative change.

Will the passage of Obamacare put us on the path to Socialized Medicine? Well maybe, personally I believe that the changes in this bill will over the long-term drive change in that direction. But will anyone notice any big changes in the interim? Well no. And what changes they do notice will be positive, at least in the short run, because the sweeteners in the bill are front-loaded. More under the fold.

I know a young bartender in a Chinese restaurant that has a congenital condition in her leg. Nothing particularly disabling but enough to prevent her from buying insurance in the private market, like almost everyone in the hospitality industry except workers in big hotels she is on her own, if she gets sick enough to need to see a doctor it means cash payment at the Walk-In Clinic or a trip 20 miles North to the only Free Clinic in our area. Now if she gets really sick she is lucky enough to live in a city where the two main hospitals are operated by the Sisters of Providence who have an excellent record of writing off the costs of hospital stays for those who can’t afford to pay, God Bless the Nuns, but unless that case of flu has progressed to pneumonia my bartender is relying on tips to pay off the doctor.

Well under this bill she has some near immediate options. It establishes a High Risk Pool plan which would allow her to buy insurance that would cover her congenital condition and any illness that would require hospitalization. Given her income level she might not be able to afford the unsubsidized premiums, but then she has family that would probably help if the interim, her Dad has a new job as a government lawyer in DC and could probably throw some dollars her way until the Exchange and its subsidies kick in, whereas right now she couldn’t get insurance coverage at any price. And she is not alone here, I am in that same category, insurance companies would simply laugh if I applied. Under this new bill and right away, if you apply for insurance through a private company and are denied, or are offered insurance at an unaffordable rate you will be eligible for the new High Risk Pool. Yes it will be expensive and no maybe you won’t be able to afford it normally but if it comes right down to it that insurance will be available.

I suppose there may be a teabagger or two who doesn’t know anyone in the position of my bartender friend or me, who doesn’t know someone working in a service job or at a store making too much to qualify for Medicaid but not enough to pay for insurance. Maybe some of these people have never walked past a collection jar on the counter raising funds for an otherwise unaffordable operation for some local kid, never heard an appeal for donations for a fellow church-goer, but somehow I doubt it, when you lower this to the concrete level it is not all about giving health care to brown people in the inner city, in fact many of those people have access to health care, it is about people they rub shoulders against every day.

The Republican Party is betting that its supporters will remain white-hot over an abstraction that will have little to zero impact on their own lives but will have huge positive impacts on people in their own communities. If you are middle class and insured you will probably see no changes at all in the next six months, on the other hand the waitress down at the cafe might be able to finally enroll in a health plan. Or you might finally be able to consider the possibility of an early retirement rather than holding onto your job waiting for Medicare to kick in. How long will Boehner and Beck, themselves wealthy white men with health care paid for, be able to whip people up over abstractions like ‘Obamacare’ in the face of day to day reality?

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A Brief Review of Econned

by cactus

A Brief Review of Econned

I have read the first few chapters of Econned by Yves Smith, that’s about where I re-evaluate and decide whether its worth reading through the first 80% of the book. When the answer is yes, I usually re-evaluate the 80% mark. As a result, I don’t always get all the way through a lot of books I pick up. Time is a valuable commodity.

Anyway, I’ve gotten far enough to decide that not only is it worth going forward, I will be finishing this one. I also believe I’ve gone far enough to know this book is worth recommending if you’re looking at a book to tell you about the causes of the Great Recession. What I’ve seen so far – Smith covers a lot of ground that is well trodden, but she does it well, and smoothly, entertainingly, and she connects the dots. Its fairly clear that a) the models of the world that much of the economics profession had were wrong (and here Smith pulls no punches – Paul Krugman, an ideological ally, is one of many targets) and b) many (most?) economists simply refuse to give up on models even if they don’t conform at all to the facts.

Now, its impossible to avoid discussion of the people involved in making the meltdown process happen, and little bits of gossip are what make a book readable. But unlike other books about the Great Recession I’ve picked up recently, such as David Wessel’s In Fed We Trust, Charles Gasparino’s The Sellout, and Andrew Ross Sorkin’s Too Big to Fail, the book is more about the ideas than the people, and more about what’s wrong with bad models or CDSs than the people peddling them. If you think knowing which big player puked on the way to which boardroom while Bear Stearns was imploding, or where a given CEO summered in 2008, this is probably not the book for you. If you want a good idea of what happened to get us to the period from 2007 to 2009, this book will help you understand.

In that regard, its like Barry Ritholtz’ Bailout Nation, another book worth reading. The difference is, Ritholtz’ language is a bit more colorful, and Bailout Nation is the story of a bunch of crooks and idiots and idiot-crooks run wild. Smith’s focus is more on the BS that pervades the economic profession that aided and abetted Ritholtz’ bunch of crooks and idiots and idiot-crooks run wild. The two books complement each other very nicely.

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Transatlantic Synchronicity

Robert Waldmann

Was just talking to his mom and dad (Dr Waldmann and Dr Waldmann). They had CNN on. I couldn’t see my screen from where I was talking on the phone, so I heard from Dr Waldmann (Thomas) that Stupak had said yes and that someone who is very pro-choice said she had no problem with the executive order because it adds nothing to the Hyde amendment. So he asked what’s going on and is this a fig leaf for Stupak

I said, no dad, a figleaf covers more. This is a maple leaf. The reference to Canada was inadvertant. We don’t have Medicare for all, but at least Stupak caved and got much to little to cover up his uhm leadership ability.

The text of the executive order here.

I’ll just quote the key parts after the jump.

“consistent with a longstanding Federal statutory restriction that is commonly known as the Hyde Amendment.


The Act maintains current Hyde Amendment restrictions governing abortion policy and extends those restrictions to the newly-created health insurance exchanges. Under the Act, longstanding Federal laws


as a result of both the Hyde Amendment and longstanding regulations containing the Hyde language. Under the Act, the Hyde language shall apply …”

I think that it would have been less humiliating for Stupak if Obama had not had that draft order written up. It basically says “Stupak is wrong. Everything he has said recently about the Senate bill is false. I am willing to tell people to follow the law, because the Constitution orders me to take care that the laws (the decades old laws in this case) are faithfully executed.”

Oh and I will support Stupak’s opponent in the primary anyway.

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Upcoming Attractions in Social Security

by Bruce Webb

Well it has been a relatively quiet winter on the Social Security front, but we are fast coming up on what I only half-jokingly call the “Bestest Day of the Year”, the release of the Annual Report of the Trustees of Social Security. The Report has in many recent years come out reliably on the last day of March but can be as late as May (as it was last year, perhaps because the Trustees were not all in place). When it does come out it can be found, viewed and downloaded at SSA: Trustees Reports. The first thing I look at is of course the bottom line, what the number is for the actuarial gap and the date for Trust Fund exhaustion, but the second thing I look at is the magnitude of the change from 2009 and more importantly the reasons for that change. For example a couple of years ago the outlook brightened more than I expected, and a few years before that had darkened more than expected. Well it turned out that changes in assumptions about immigration in the first case and interest rates in the latter accounted for almost all the difference, very little was actually due to short term economic projections. So if there is anyone out there really prepared to dig into the tables it might be worth your time to review the 2009 Report, or at least the 15 page Summary, both available at the link.

The Report takes on some new urgency this year because of the appointment of the President’s Deficit Commission, which really should be called the Entitlements Commission. Because its leadership has made it clear that taxes and military spending will NOT be on the table, this will all be about what Co-chairman Alan Simpson calls the Big Three: Social Security, Medicare, and Medicaid. And the deck has been stacked. For those who haven’t been following the Commission will have 18 members, six appointed by the President, only four of whom can be Democrats, six by the House and six by the Senate. And although there is a requirement for a 14 vote super-majority to advance a recommendation, something that would normally insure gridlock, it appears that Obama is appointing five people favoring ‘reform’ and only one firm defender of Social Security (Andy Stern of SEIU). Since it is a given that all six Republican Congressional members will be in favor of gutting Social Security, and knowing that of the three Senate Dems Durbin, Baucus and Conrad only the first is a lock to support Social Security as currently configured, blocking 14 votes means getting all 3 of Pelosi’s representatives, and we are already seeing reporting of intense pressure to appoint “at least one” Blue Dog. Meaning there is great risk of having ‘reformers’ walk in the door with 14 votes locked down. And the only way supporters are going to be able to fight back is to make sure they are using real numbers, and that their proposals don’t play tricks like applying a 5.2% worker paid fix to a problem scored 1.92% (as has been done before with LMS).

And along with posts dealing with the Report release and the Commission expect some re-caps of the ins and outs of Social Security finance itself. Familiar territory to some here, but necessary for people just entering the fray. But enough for today, the basketball is starting. Arrivederci.

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What is a Punk Staffer ?

Robert Waldmann

A punk staffer is a staffer who laughs when you say “A repo man spends his life getting into tense situations.”

John Boehner makes it clear. He agrees with Senator Durbin that, frankly, bankers own that place. However, he thinks that’s the way it should be. Why the constitution says right in article 1 of the constitution that congress may ”regulate trade between the several states so long as the masters of the universe approve of the regulations.” Boehner told bankers to protect the constitution and not let congress aka “punk staffers” deprive them of their legitimate authority to legislate.

Extensive efforts at achieving inter-generational communication follow the jump.

Repo has two meanings – A Repo account is the way in which hedge funds interact with most of the rest of the universe, the way in which Lehman hid assets and debt off it’s balance sheets and one of the ways in which non depositary institutions managed to make it possible for there to be a non-bank run on a non-bank.

A repo man is someone who repossesses (or forecloses on) automobiles purchased on credit from people who have not made required payments. Many (perhaps not most) people my age have fond memories of the truly twisted film “Repo Man” which followed the trials and tribulations of an LA punk who decided to become respectable and became a Repo Man.

Ah Repo Man.

I recall the film includes said punk eating from a can labeled with a bar code and the word “food” that is eating generic food (why pay more for the name brands like “meat” and “vegetables,” and seeing a friend get shot trying to rob a convenience store, said friend said (roughly) “society did this to me” Jr Repo man says “B.S. you are a suburban punk just like me.” His soon to be deceased friend replies “It still hurts.” I sure hope Boehner says the same thing on the second Wednesday after the first Monday in November 2010.

The brilliant twisted genius who directed that film also directed a totally other than completely honest film about Sid Vicious and Nancy Spungen (sp?) entitled “Sid and Nancy.” Sid Vicious was second fiddle to the butter commercial guy in the UrPunk band the (original) Sex Pistols. He was an actually totally authentic punk as is demonstrated by the fact that he destroyed himself before reaching half my current age.

Anyway Repo Man is important to people of my generation. One of the things which bother Beohner is that we are taking over. Now current staffers were probably not even born when Sid Vicious killed Nancy Spungen(sp?)’s cat, but if one is as old as Boehner, we all look alike. So ex-punks are people who find the use of Repo to refer to repurchase accounts funny (why don’t the masters of the universe call them repu accounts ? Would be bad for their repu tations?).

Also Boehner made it clear that the Republican party considers it necessary and proper for bankers to make it clear to Congress who is boss.

Many here like to dump on my PhD supervisor so I will just note that he took the ball dropped by Boehner and ran walked inched forward with it.

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