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Health Care thoughts: Regulatory Weirdness

by Tom aka Rusty Rustbelt

Health Care : Regulatory Weirdness

Nursing homes (SNFs and NFs) are very highly regulated, more regulated than hospitals.

Included in the regulatory regime is a minimum of one survey per year by the state, with additional state and federal surveys possible.

I’ve read hundreds of the voluminous survey reports and am occasionally asked to review a report.

The survey I read recently was quite good, not surprising being a new building with an excellent nursing staff. There were the usual nit-picky citations, and two major cites.

The first major cite was for very minor inconsistencies among nurses notes, QA reports, incident reports and infection control tracking. Emphasis on the “minor.” Dumb.

The second was on the disaster plan. The facility does not have the typical long halls but has a pod structure built around a central area, a very nice building. In the case of wind or a tornado warning each pod would move residents to the safest place in the pod.

The surveyors want everyone moved to the central area, where there are 8 foot high windows facing west overlooking the patio, a perfect source of glass shard shrapnel.

The home has two choices: agree with the surveyors or spend time and money appealing. Agreement is usually the best course of action.

The nurses already have decided – when the tornado siren sounds they will put the residents in the safest place, not the state mandated danger zone.

Never assume regulatory activity really accomplishes its goal.

Tom aka Rusty Rustbelt

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Market Failure Cannot Be Resolved Without Regulation

Matthew Richardson, a professor at NYU Stern School of Business, offers his thoughts on risk management and the economy.

Market Failure Cannot Be Resolved Without Regulation

Matthew Richardson on November 23, 2010, 12:00 AM

I am all for free markets and not mucking them up with government intervention. But the economic theory of regulation tells us that if there is a market failure, it cannot be resolved privately. The public sector must get involved.

The most illustrative examples of such failures in U.S. financial markets were the frequent financial panics from the 1850s until the Great Depression. Those episodes taught us that when illiquid, asset holdings (e.g., loans) of the financial sector are financed short-term (e.g., by deposits), and are hit by a severe macroeconomic downturn, failures of financial firms can lead to system-wide runs on deposits. This in turn leads to a massive disruption of the system that provides credit to households and corporations. When economists bandy about the term systemic risk, this is the type of event they are referring to.

The market failure here is that, although each financial institution may have been behaving optimally on an individual basis, the firm had no incentive to take into account the effect of their actions on the system as a whole. In economics, we call this a negative externality and it is analogous to an industrial firm causing pollution. In the example above, financial failure of one bank increased the possibility of runs on other banks, leading to the system-wide collapse.

The government regulation to address the market failure in this case was to insure retail depositors against losses (today’s FDIC guarantee), thus stopping the cycle of bank runs. Of course, these government guarantees came at great cost, not least the resulting moral hazard. So the government had to enact offsetting regulation and charge banks premiums for deposit insurance, restrict them from certain risky activities, and subject them to prompt corrective action.

This served financial markets well for over a half century. As time passed, however, the regulation became antiquated. Over the last two decades, deposit premiums became mispriced, some financial firms like Fannie Mae and Freddie Mac grew so large that they became too-big-to-fail, and shadow banks—banks such as off-balance sheet vehicles, money market funds, and investment banks that operate outside of the system—proliferated, performing bank-like functions albeit with little or no regulation. In fact, in this financial crisis, we faced modern day equivalent runs on most of the shadow banking sector.

One might argue that the government is not capable of effective regulation and makes matters so much worse that it would be better to accept systemic risk and deregulate. But the legislative response to the Great Depression and its success would suggest otherwise.

And in terms of the government’s latest financial reform, the Dodd-Frank Act is clearly well intended by focusing regulation for the first time on systemic risk. Moreover, the legislation plugs some obvious holes in the financial system like off-balance sheet financing, OTC derivatives, rating agencies, and mortgage underwriting, among other areas. That said, the legislation ultimately falls short in both its approach and focus.

After a recent presentation to 170 or so risk management executives on Dodd-Frank, I took a quick poll and the vast majority believed another financial crisis was going to occur within the next ten years. This should not be surprising. The legislation does not charge systemically risky firms upfront for the systemic risk imposed upon others; instead, choosing to penalize surviving firms when a crisis occurs. This creates a free rider problem which will lead to a race to the bottom. Moreover, in terms of moral hazard, the legislation leaves in place mispriced government guarantees, and, with respect to excess leverage, conditions for regulatory arbitrage persist. There is also no attempt to create a level playing field by regulating shadow banks and banks similarly

Nevertheless, while there is little doubt that regulatory failure played an important role in the crisis, the solution should not be to walk away and leave systemic risk in place. I would still take Dodd-Frank over the current system or, more extreme, a world with zero financial regulation and frequent financial panics. But we still have plenty of wood to chop on the regulatory front. This is just the middle innings of a very long game ahead.

Matthew Richardson is a professor of finance at NYU Stern School of Business.

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Interlude / Self-Indulgent Advt

I want one of these positions:

The Office of Complex Financial Institutions (which the agency has assigned the acronym CFI) “will perform continuous review and oversight of bank holding companies with more than $100 billion in assets as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council,” the FDIC said. This division will also be in charge of using the FDIC’s new liquidation powers over “bank holding companies and non-bank financial companies that fail.”

If one because it will make me feel less guilty about turning down an opportunity at Fannie Mae earlier this summer.

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Peanut Butter Regulations

by Rusty Rustbelt

PEANUT BUTTER REGULATIONS

Watching people spread peanut butter is interesting.

I am a semi-neurotic peanut butter spreader, I try to cover most of the bread and try to get the thickness close to even, but I am not a perfectionist-neurotic spreader. There are also slap-and-eat messy spreaders.

Having dealt with a wide range of government regulatory agencies over 35 years, dealing with both health care and small business, I am familiar with “peanut butter regulation.”

Peanut butter regulation spreads regulatory effort evenly over all regulated entities, even when it is well known that 20% of the targets represent 80% of the problems.

Nursing home regulation comes immediately to mind. Also food safety. And the SEC.

Regulation and regulatory capture are a hot topic these days. Do we need more targeted regulatory efforts?

Peanut butter regulation reminds me of drunk driving checkpoints, stop everybody and eventually the cops find a drunk. Is there a better way?

Some regulators are complaint based, such as wage-and-hour and OSHA, should these agencies be more like peanut butter?

We gotta get better.

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Crooked Timber notes from the FT

First, go read Henry on the lambasting of, especially, Turkey by U.S. idiots. Apparently, any U.N. vote is wholly the responsibility of everyone except the people who presented the resolution.

Note also that the editorial page has a much more interesting piece on economics than all those Zogby myths. Maybe more about that later, but for now, let’s pull the appropriate (in more ways than one) quote:

In reality, conflicts of interest abound – between buyers and sellers, short and long terms, equity and debt, taxpayers and shareholders. Context is all-important – the idiosyncrasies of age, financial circumstances and geography. How do we provide a “neutral” framework for such crooked timber?

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Ross Douthat and the cocoon

Robert Waldmann

Douthat is worried about the Republican information cocoon. He thinks that conservatives should not rely so much on Fox News and should be open to media which they consider unfriendly (such as his employer the New York Times). He argues that Republicans achieved more back before Fox
In the age Before Fox News, on the other hand (B.F.N., to historians), the American Right managed to lower taxes, slow government’s growth to a crawl , whip inflation, and deregulate important swathes of the American economy, among other Reagan-era accomplishments.

After the jump, I click Douthat’s link and consult an obscure source called the Wikipedia.

Douthat shows how people who live in cocoons make fools of themselves. First click *his* link. You will find that the graph does not show a slowdown in the growth of government spending under Reagan. I assumed that he had defined government as not including the military and so had a misleading graph which supported his claim, but, in fact, he just showed a graph which shows slow growth of spending after the end of the cold war and during the Clinton Presidency including the 6 years of Republican control of congress. I think he is counting the Reagan years as starting at the trough of the Volker recession and he definitely doesn’t count Bush Sr as a pre-Fox Republican. He’s really definitely measuring trough to peak and timing presidencies by looking at recessions. And this is the conservative warning about living in a cacoon.

Oddly, I mean to post about another gross historical error in that brief quotation. It is the claim that under Reagan “important swathes of the American economy” were deregulated. I don’t know what Douthat has in mind. I certainly don’t recall any such important deregulation under Reagan (well there was deregulation of S&Ls and you know how that turned out). I think he is thinking of Airline Deregulation Act of 1978. I’m sure that all Republicans agree that Reagan deregulated the airlines and that Carter didn’t deregulate anything, but they are wrong. Note there was an even huger Democratic majority in the Senate in 1978 than there is now. Or maybe it was the deregulation of interstate trucking via the motor carrier act of 1980 . Or maybe it was the phased deregulation of oil prices which began on April 5 1979 . Sure seems like the deregulating conservative hero Ronald Reagan had a Southern accent and grew peanuts.

But Reagan must have deregulated. Everyone knows Reagan deregulated. What exactly ? I have used “refuted by 5 minutes of googling” as my standard for rejection of reality for years now. This time, I stuck to Wikipedia. Recall this is from a post arguing that Republicans ought to be reality based.

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La cupidité

If I’m reading this link from my usual news source correctly, Joseph Stiglitz’s new book Freefall: America, Free Markets, and the Sinking of the World Economy is being sold in France under the title Le triomphe de la cupidité (The Triumph of Greed).

The sole B&N customer review so far is a confused jumble:

If you take away the authors attempts to sell the need for big government and socialism it is a excellent book on present problems in the financial markets. He shows how we are living beyond our means and that in the future our living standard will probably go down. He does a excellent job at examining the large banks failures and the need for regulations to protect the public from the large banks greed.

If you take away the need for big government, you get the need for more regulation. If you take away the need to control large bank failures, you get large bank failures produced by excess risk (“living beyond our means” = “privatize the profits, socialize the risks”).

Fifteen years ago, everyone coming out of Business School was talking about how they learned about “risk.” While it is true that those people are not running large financial institutions, they are starting to reach upper management levels. So it’s possible that “smart guys started working on Wall Street” won’t be the problem next time. (h/t Floyd Norris, again)

They might get it right the next time.

Is that the way to bet?

Happy cupidité Valentine’s Day.

*For the record, I was still six years away from entering it, eight from graduation. Never let it be said I was a First Mover.

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America’s governance mind: FUBAR

by divorced one like Bush
UPDATED: Jim Watt  Remember him?

If you did not see it, go watch this weeks Bill Moyers Journal.  Part 2 is here.

From the second part we get all we need to know about where we’re going regarding government for, of and by the people and how little regard there is at the top for the seriousness of such a declaration and its implementation in perpetuity.

BILL MOYERS: Let me show you something that Ben Bernanke said to the annual meeting of economists earlier this week, last Sunday, I think it was.

BEN BERNANKE: The best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach for constraining the housing bubble than a general increase in interest rates.

DAVID CORN: Whoops.

BILL MOYERS: Whoops what?

DAVID CORN: Well, now he’s saying what a lot of us said earlier? That we should have had better regulation, you know, rather than just fiddling with interest rates?…

BILL MOYERS: You have a great chart in your story in “Mother Jones” on that.

DAVID CORN: I mean, my favorite one that I wrote about, and I don’t know him personally. He could be a great guy. Never even met him. I tried to interview him, but he wouldn’t consent. Mark Patterson. He’s the chief of staff for Timothy Geithner, the Treasury Department Secretary. He was a lobbyist for Goldman Sachs. What did he do as a lobbyist for Goldman Sachs? He lobbied against a bill in the Senate to restrain it was a very modest bill, to restrain CEO compensation.

Basically, gave shareholders the right to say, “We think you’re paying them too much.” It wasn’t even mandatory. It wouldn’t even cut back pay. He you know, Goldman Sachs would have none of that. He lobbied against that bill. Who authored that bill? Barack Obama, when he was a Senator. So, the guy who fought Barack Obama on CEO pay, an issue that Barack Obama says he cares about. And I believe he does. Is now running the Treasury Department for Tim Geithner. I mean, this really doesn’t make a lot of sense to me.

Yeah. Makes no sense to me either. In fact, the only mind that can make sense of such dichotomy in purpose and intent is a schizophrenic mind.

UPDATE
In responding to a comment by Guest who I assume is Cantab (we forget to check our sign-in names, Oh well), I mentioned James Watt.

Jim Watt’s experiences during and after his term as Secretary of the Interior is the perfect book end to Mark Patterson mentioned above. Back when Jim boy was Secretary, he got his ass booted. Sure, he created some messes. He was after all, the prototype for what we have in our administrative offices of our government.

From Wiki:

For over two decades, Watt held the record for protecting the fewest species under the Endangered Species Act in United States history… According to the environmental groups, Watt decreased funding for environmental programs,[5] restructured the department to decrease federal regulatory power,[5] wished to eliminate the Land and Water Conservation Fund (which had been designed to increase the size of National Wildlife Refuges and other protected land),[5] eased regulations on oil[5] and mining[6][5] companies, and favored opening wilderness areas and shorelands for oil and gas leases.[5]…In 1983, Watt banned The Beach Boys from playing a Fourth of July concert on the National Mall in Washington, D.C., saying that rock concerts drew “an undesirable element”; the group had played each year on the Mall on the Fourth of July from 1976 to 1981.

But, unlike Bush’s Metal of Freedom winners, Watt’s got booted. Sure, it took this to do it:

A public controversy erupted after a speech by Watt on September 21, 1983, when he said about his staff: “I have a black, a woman, two Jews and a cripple. And we have talent.”[13] Within weeks of making this statement, Watt submitted his resignation letter.[13][14]

but at least it was done. Not now though. Such countervailing, diametric behavior is apparently immune to public desire.

Worse though, is the loss of memory when people acted up-front. Jim Watt’s never hide his ideology. Also is the loss of memory of what justice used to mean in America:

In 1995, Watt was indicted on 25 counts of felony perjury and obstruction of justice by a federal grand jury.[15] The indictments were due to false statements made to a grand jury investigating influence peddling at the Department of Housing and Urban Development, which he had lobbied in the mid to late 1980s. On January 2, 1996, as part of a plea bargain, Watt pleaded guilty to one misdemeanor count of withholding documents from a federal grand jury. On March 12, 1996 he was sentenced to five years’ probation and ordered to pay a $5,000 fine and perform 500 hours of community service.[16]

Now we call it “politicizing government”.

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New Year’s Tax Resolutions

by Linda Beale

A quote from Amartya Sen, and my New Year’s Tax Resolutions (for Congress and the Obama Administration)

The time between December 30 and January 4 seems to be filled with lists. Along with the ever-present list of “to dos” that haven’t been done and still are hanging around waiting for our attention, there are everyone’s “10 best” lists (e.g., the ten best movies–regretably, I don’t think I saw ten new movies in 2009, so can only say I thought Slumdog was a decent showing) or their opposite (e.g., the ten worst celebrities of the year, every one of them with Tiger Woods and Gov. Sanford firmly placed near the top). And of course there are those New Year’s resolutions that we are supposed to deliberate over and then deliver on when the New Year rolls around–mine is to join my hubby in his morning walk and to give up doughnuts completely.

Not being one to gather quotes all year just for this final celebration, here’s one quote that I believe is worth thinking about as we head into the new year. Amartya Sen writes, in “The Idea of Justice” (Belknap Press 2009), at 32:

Being smarter may help the understanding not only of one’s self-interest, but also how the lives of others can be strongly affected by one’s own actions. Proponents of so-called ‘Rational Choice Theory’ (first proposed in economics and then enthusiastically adopted by a number of political and legal thinkers) have tried hard to make us accept the peculiar understanding that rational choice consists only in clever promotion of self-interest (which is how, oddly enough, ‘rational choice’ is defined by the proponents of brand-named ‘rational choice theory’). Nevertheless, our heads have not all been colonized by that remarkably alienating belief. There is considerable resistance to the idea that it must be patently irrational–and stupid–to try to do anything for others except to the extent that doing good to others would enhance one’s own well-being.”


In light of Sen’s helpful clarity about the ridiculousness of ‘rational choice theory’, I also offer the following as the resolutions that I wish Congress and the Obama administration (and/or various administrative agencies thereof) would make (and follow through on) for this new year of 2010.

1) The Treasury should resolve that it will no longer provide special dispensation to the financial institution powers that be, such as its invalid notice indicating that it would not enforce the law on loss corporations for too-big-to-fail banks, thus allowing too-big-to-fail banks to become even bigger by buying loss banks, and then allowing them to use those losses in direct contravention of the law and avoid paying income tax for years (or perhaps decades). A similar “notice” went out recently–Notice 2010-12–stating that Treasury will continue to fail to enforce the rules under section 956 regarding what constitutes an obligation and hence relieving US shareholders of controlled foreign corporations ( many of them possibly the same too-big-to-fail banks) of further US taxpaying obligations. (This notice continued the nonenforcement decision Treasury had made in 2008, in Notice 2008-91. Too bad decisions do not make a good decision.)

2) The Supreme Court should resolve to deal with the problem of financial institutions claiming patent protection for all kinds of financial software and financial engineering “solutions” and for others claiming patent protection for tax planning strategies by releasing a decision in the Bilski case that clarifies the “abstract idea” exception. The Court should say that no patent can be granted for innovations that merely utilize the positive laws to assert that a transaction carried out in a particular way will have a particular legal result, or for other methods of conducting transactions or of organizing human activity that do not involve the technological arts, as understood under European patent law.

3) Congress should resolve to end the preferential treatment of those few Americans who own most of the financial assets of the country by ending the capital gains preference.

4) Congress should resolve to eliminate the preferential tax treatment of the earned income of hedge fund and equity fund managers (the so-called “carried interest”), and any other “partners” that manage partnerships and earn a share of the partnership’s gains as their compensation (such as real estate partnerships).

5) In order to restore some sort of balance between worker and employer, Congress should eliminate the business deduction for any compensation in excess of 20 times the average salary (about $1 million). The cap on compensation deduction to apply to compensation in any form (stock, assets, cash), whether or not “performance related”.

6) In order to treat the gifts of ordinary Americans to charities of their choice the same as the gifts of multi-millionaires to charities of their choice, Congress should repeal the special rule that permits a charitable contribution deduction for the value of stocks rather than the investment basis in the stocks. Will that limit contributions that are made? Perhaps, though it is clear that contributors do so for many reasons and not merely for the contribution deduction.

7) Congress should resolve to resolve the estate tax situation once and for all, before some do-nothing heir-to-be decides that 2010 is the right time for the wealthy person in his life to go. Congress should enact a modest exemption of $2 million but should make the estate tax rates progressive (beginning at2009s 45%, but moving up to at least 65% for the largest estates).

8) Congress should resolve to revisit the tax brackets. We have an economy in which the average income is around $50,000, but there are individuals who make more than $500 million a year. That spread is so large that it cannot be adequately addressed by brackets that focuse on the first $350,000 or so. Those who make $200 million a year have incredibly more freedom of choice, and the few dollars they pay in taxes are merely peanuts compared to the precious funds from an average family. We need to make the income tax more progressive by adding additional rate brackets–perhaps as many as 3 or 4 more. That would still be a far cry from the income tax system before Reagan took office, when we had top rates more than double today’s top rates. But it would address the dire fiscal need of the country in a way that is doable without creating undue suffering.

9) Congress and Treasury should resolve to clean up the partnership tax rules so that they do not offer such extraordinary flexibility to partners to arrange their affairs to avoid taxation–for example, by eliminating the electivity permitted to partners in many places in the rules (make the remedial method the only method allowed for taking into account book-tax disparities in contributed property) and by changing the way that partners take account of partnership debt (such as being able to get distributions of nonrecourse debt that monetize partnership property appreciation).

10) Congress should re-visit the rules on mergers and acquisitions, so that a tax-free merger becomes an unusual event. Part of the problem we are facing today is that multinational corporations have grown so big that they wield enormous power globally and can sometimes appear to be able to order laws to suit them. Witness the fact that we are well beyond the beginnings of the financial system crisis, and no single piece of legislation imposing new and better regulations on the banks have been enacted. The size of corporations ensures that they will become as focused on raising rents for their managers as they will on making profits for shareholders, and that they will care not one whit for the ordinary American who is their customer, or their low-wage employee, or the resident of a town that they leave derelict when they move to sunnier shores. We say that the rationale for tax-free reorganization provisions is to encourage efficient organization of corporations. But efficiency is not God, and in fact focus on efficiency may leave democracy and fairness far behind. We should give tax-free treatment only to shareholders who get no boot for any of their stock, and only in transactions where a high percentage of the consideration is stock (perhaps 80% or more).

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Finding $20 Bills on fhe Street

I gave a guest lecture in Intermediate Macro last year. Normally, I try not to do such things, but I was staring at some data and the offer came at the same time the data started making sense, so I said yes.

I gave them a presentation on the similarities and differences between Economics and Finance. How Economics is the Best of All Possible Worlds while Finance never is; how tax and regulatory arbitrage drives structures and products; how transaction costs are never minor; how intermediation drives investment in specific areas of finance in ways that don’t really get dealt with in Economics.*

One of the things we know in Economics is that there are not $20 bills on the street. (Ted Gayer of the Brookings Institute made this argument twice recently. If this were true, “first mover advantage” would also have to be nonexistent.)

Investment managers talk about finding $20 on the street all of the time. Most of the time, they can prove this.

Sometimes, they can’t. If you invest in a retirement fund of any sort, this is the one post you should read for the new year. Especially for this:

However there is a way of proving that a fund is not a Ponzi – and that is to “show us the money”. If the assets are really there then it should be possible to convince regulators of that fact by showing them the assets. If Bernie Madoff had been asked to prove the existence of all the money he supposedly managed then he would have been caught because he could not comply. An honest fund should be able to comply fairly quickly – sometimes within 20 minutes – but almost certainly within a week.

and this

I have heard lots of criticism of the Australian Securities regulator. However on this important matter their actions were exemplary. They did what the SEC could not do and act on a “Markopolos letter” within weeks. They did what the SEC should have done when they investigated Madoff – and attempted to confirm the existence and value of the assets.

Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any moneys going out. They acted to protect investors. This showed responsiveness that Mary Schapiro and American regulators can only aspire too.

This is one of the reasons we pay transaction costs. That “SEC fee” when you sell shares of a stock are intended to ensure that the market remains “rational.” Which is why the greatest evil of economic modeling, imnvho, is that it often treats the very things that might make its premises viable as irrelevant to its model.

UPDATE: According to Blogger, this is the 5,000th Published Post at AB.

*If you’re really curious—and probably no one is—the presentation is here.

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