Dive Right Into The High Risk Pool: The GOP non-starter proposal to provide health insurance covering pre-existing conditions

Nevadans with pre-existing medical conditions are advised to jump into the High Risk Pool. This would be fine, except we don't have one. [DOI.nv pdf] The Republicans have yet another excuse at hand to refuse to reform the American health care system: The High Risk Pool. The suggestion is meant to counter the argument that people with pre-existing medical conditions are routinely refused coverage by private insurers, and therefore health care reform should incorporate access for those denied insurance. [TP]

It isn't. Under the GOP proposition states would be eligible for $15 billion total in federal funds over the next decade in aid for the creation of high risk pools for people the insurance corporations won't cover because of pre-existing medical problems, BUT individuals would pay up to 50% more than the premiums for average insurance coverage under the Republican plan; AND states would have to pick up the tap for the remainder of the costs with a "stable funding source," into which the Federal government would make a modest contribution.

A brief word about the capacity of the states to "pick up the tab from stable funding sources:" 43 states and the District of Columbia have been cutting services because of budget shortfalls. Health care access hasn't been immune: Rhode Island has eliminated health coverage for 1,000 low income parents, Minnesota has cancelled a health insurance program for 29,500 low income adults, and Tennessee froze the state enrollment in its state children's health insurance program. Washington increased premiums by an average of 70% for its health plan for low income residents. 24 states have pared down programs for the elderly and disabled. [CBPP] And, then there's the state of Nevada, with a $900 million deficit. [SofS] Nor is the high risk pool any more affordable for individual enrollees.

"Typically, high risk pool enrollees pay 150% to 200% of the standard rate charged by insurance companies for individual policies. Even so, state governments lose money by operating high risk pools. This is because everybody in the pool has a costly health condition -- no healthy people can absorb some of the risk." [HIAbout] Thus the result is that the very proposition that is supposed to answer the issue of affordability for eligible individuals is simply another expense beyond the capacity of that person to pay. [CMS pdf]

It's important to note that high risk pools would be able to deny coverage for pre-existing medical conditions which made the individuals (or families) eligible for pool coverage in the first place. "...People would be forced into the pools because of their pre-existing conditions, but the pools wouldn't pay for treatment of that condition." [TP] Even if the pool ultimately pays for medical treatment there's a wait time for eligibility.

"...the limitations on high risk pool coverage are also similar to those found in the individual market. In both cases, the deductibles, copays, and out-of-pocket expenses tend to be higher than those found in job-based coverage. You should also be aware that in almost every state, the pool imposes a preexisting condition exclusion period of 6 to 12 months. This means that you must wait 6 to 12 months for the pool to pay claims on the very same health condition that qualifies you for coverage in the pool in the first place." [HIabout]

Diving into the high risk pool assumes that the state has one, or that all 50 states can be required to establish one, whether they have the financial resources or not. Republicans are also advocating a proposed solution that is more expensive for the individuals in question rather than requiring insurance corporations cover everyone. Bluntly speaking, the high risk pool proposal allows the insurance corporations to continue to exclude coverage for those with pre-existing medical conditions behind the shield of high risk pools.

For Additional Information: See Frakt, Pizer, Wrobel, "High Risk Pools for Uninsurable Individuals: Recent Growth, Future Prospects," Health Care Financing Review, Winter 2004-05; available in PDF format. Kaiser Family Foundation, "State High Risk Programs and Enrollment, December 2008" link here

Flights of Fancy: Nevada and its Low Tax Mythology

If "lower taxes" were the fulcrum on which to lift an economy out of a recession, then Nevada ought to be booming. The state has the second lowest tax level in the nation: "Nevada's state and local tax burden has consistently ranked among the nation's lowest. Currently estimated at 6.6% of income, Nevada's state/local tax burden percentage ranks 49th highest nationally, well below the national average of 9.7%. Nevadans pay $3,245 per capita in state and local taxes." [Tax Foundation] (emphasis added)

A popular notion among supply-siders is that the lower the overall tax liability, the higher the level of business investment, and therefore, the higher the levels of employment. The rich, it is said, if not deprived of their wealth by taxation, will invest it in enterprises which in turn will drive employment upward. Nice theory. The fact is that Nevada, with its next to last in the nation tax assessment level, has a 13% unemployment rate. [DETR/BLS] Only Michigan with a 14.6% unemployment report is currently higher.

The Tax Foundation gave Nevada a nice high score (4th) in the nation in its rankings of State Business Tax Climate. [TTF] If the direct correlation between employment growth and business tax liabilities holds then we should see states with the "best" business tax climates also having the lowest rates of unemployment. If we were to cherry pick some numbers from the "top five" low business tax states we could extrapolate just such a conclusion. South Dakota, with the "best" business tax climate has a 4.7% unemployment rate; second place Wyoming has a 7.5% unemployment rate. Third place Arkansas has an 8.8% unemployment rate, and fifth place Florida has an unemployment rate of 11.8%. When two out of five states with low taxation rates (Nevada/Florida) have higher than average unemployment rates the correlation can't be made, and there's certainly no support for a causal relationship. Nor, can we compare the economies of South Dakota and Wyoming, based on primary industries, with Nevada and Florida, which both have significant tertiary industry economic components.

Suppose we tried it the other way around, and posited that higher taxes led to higher levels of unemployment. We'd have to cherry pick those numbers too in order to suggest a correlation. New Jersey, which ranks 50th in business tax climate has a 10.1% unemployment rate. 49th ranked New York has a 9.0% unemployment rate; and, 48th ranked California has a 12.4% unemployment rate. Not to put too fine a point to it, but all of these states, all ranked well below Nevada's rating for "supportive business tax climate," all have lower rates of unemployment. If unemployment rankings and business tax climate figures don't correlate, then perhaps we could explore other comparisons.

What if we looked at business tax climate rankings and state GDPs? That doesn't work either, because during the 2007-2008 economic meltdown every state's boat sank:

"Real economic growth slowed in all eight BEA regions. The Southwest region experienced the largest deceleration, with real GDP growth slowing from 3.6 percent in 2007 to 1.7 percent in 2008. A decline in nondurable goods manufacturing slowed growth in the Southwest. The Southeast region slowed from little growth in 2007 to no growth in 2008. Real GDP in the Great Lakes region, which was the slowest growing region in 2007, contracted in 2008. Declines in construction, manufacturing, and finance and insurance caused the slowdown in the Southeast and the contraction in the Great Lakes." [BEA]

While "no new taxes" and "get government out of the way" phrases may make for fine stump speech rhetoric, and compelling T'Bagger applause lines, in a fact based world they are about as logical and factual as announcing that if we all decided to wear blue clothing next Friday morning the GDP would expand by 0.6%.

Luntz, Ameriquest, De-Regulation and Debacle: Those Who Profited From Credit Meltdown Seek To Block Reform

Once upon a time in Nevada (and several other states) there were Ameriquest offices ready and most willing to make mortgages for prospective homeowners. However as of January 2010 the situation was entirely different, the LA Times explained: "Agreeing to settle 29 class-action lawsuits alleging predatory lending, the Ameriquest group of subprime lenders has pledged $22 million to repay aggrieved borrowers and their lawyers -- a fraction of its payments in previous suits before it shut down as the mortgage meltdown set in. The agreement potentially affects 712,000 borrowers from what once was the nation's largest subprime lender, based in Orange County. Many of the loans were from Argent Mortgage Co., an arm that funded borrowers through mortgage brokers." This statement sums up the demise of the company, but what of the people who funded its operations?

"The settlement includes no payment from the estate of Ameriquest founder Roland E. Arnall, a billionaire who died in 2008, or from the Wall Street firms that funded subprime lenders and transformed the loans into securities that proved toxic when the housing bubble burst." In short, the defunct firm was liable for its predatory lending practices and egregious servicing of home loans -- but not those happy little folks who sliced and diced the home loans into tranches and palmed them off on a ready market for securitized assets and credit default swaps.

How was it possible for Ameriquest and Countrywide, among others to inflate the housing bubble, muddy the waters about servicing mortgages, and in the words of one bankruptcy judge, satisfy the grounds for punitive damages because, "As for punitive damages, the Court finds that Ameriquest’s accounting practices are wholly unacceptable for a national mortgage lender." [ProPub]

The answer is both simple (there was too little regulation and oversight of mortgage transactions) and complicated (there are too many agencies tasked with regulating aspects of those mortgage transactions).

THE MAJOR PLAYERS

The agencies with partial oversight responsibility include HUD, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Trade Commission and the Federal Reserve. We'll take a quick look at what they were supposed to be doing, with the exception of the Federal Reserve because it is primarily concerned with monetary policy and has been discussed elsewhere.

The Department of Housing and Urban Development runs the Federal Housing Administration, familiar to most of us as the FHA. Among its responsibilities is to "Maintain and expand homeownership, rental housing and healthcare opportunities, and to Stabilize credit markets in times of economic disruption." Should a lender engage in questionable practices the Department's Compliance Division may suspend, debar, or issue an order for a limited denial of participation in HUD programs. [HUD] In June 2008 the Bush Administration, HUD waived rules against flipping properties acquired under foreclosures. [portalHUD. pdf] On March 31, 2008 Secretary of Housing and Urban Development Alonzo Jackson resigned under a large and growing cloud of allegations of mismanagement and malfeasance in office. [CBS]

The FDIC also has jurisdiction over some elements of the home loan industry, particularly as they relate to appraisal standards for real estate transactions made by bank holding companies. [FDIC] The agency also oversees implementation of the Community Reinvestment Act. [FDIC] Over discriminatory housing practices, [FDIC] home mortgage disclosure requirements, [FDIC] and adjustable rate mortgage caps. [FDIC] [For a complete list of FDIC jurisdictional components see: Table of Contents]

The Office of the Comptroller of the Currency is the agency charged with the oversight of all nationally chartered banks. On May 22, 2002 the OCC issued guidance concerning the level of risk being taken on by banks that offered this ominous statement: "Some banks seeking to generate high yields have begun to purchase securities backed by subprime consumer paper, trust preferred stocks and corporate bonds. As the default rate for some of these asset classes has increased, the securities have depreciated rapidly and many now have "other than temporary" impairment. It is not an unsafe or unsound practice to purchase securities that have high yields simply because of the type of collateral or structural complexity. However, it is unsafe and unsound to do so without an understanding of the security structure and a scenario analysis that shows that the bank has evaluated how the security will perform in different default environments." [OCCtreas.2002.19] Note that in 2002 the OCC did not discourage banks from indulging in investments in "subprime consumer paper," it merely opined that when wading in this stream some caution was required.

Well after the proverbial horse had long departed the epigraphical barn, the OCC determined in a 2009 bulletin that national banks had placed "undue reliance on credit ratings," earnings pressures had overridden liquidity needs, and there was inadequate valuation of "structured products." It should be noted at this point that the OCC had been actively pre-empting state jurisdiction over state banking and consumer protection statutes. "The Bush Administration and many banks clung to what is known as "preemption." It is a legal doctrine that can be invoked in court and at the rulemaking table to assert that, when federal and state authority over business conflict, the feds prevail — even if it means little or no regulation." [NBC] To put it another way: The bankers opened the barn doors and the OCC let the horses run at will.

The Office of Thrift Supervision was to be for savings & loan operations what the OCC was for nationally chartered banks. Indeed, it was as eager to be helpful to those under its supervision as the OCC was to encourage the activities of commercial banks. One University of Connecticut law professor summed up the situation on January 9, 2009: "The OTS is the worst federal regulator on the block,” she said. “It has a culture of being so permissive and cozy with the thrifts it regulates, that you can’t really break it without major reform. What we’re seeing is not only an attitude from the top but a pervasive way of doing business that has permeated even the front line examiners at OTS.” [WashInd]

To be eligible for OTS supervision all a company had to do was to purchase a savings & loan, and that is precisely what AIG did. The supervisors at the OTS responsible for AIG didn't follow through on questions about the corporation's expanding positions in credit default swaps. "

"Simply put, the job of the OTS was to make sure AIG did not take on too much risk and to assess the overall risk environment for the company and other global financial companies it oversaw. But records show that, for several years before the bailout, numerous problems had surfaced with AIG's derivatives business, among them major accounting errors. More recently, a 2007 dispute with trading partner Goldman Sachs touched off a series of reviews and disclosures questioning the value of AIG's swaps." [ProPub] Once more, the regulators acquiesced to the repeated reassurances from those who were supposed to have been regulated. To describe the OTS's behavior as "toothless" is to imply that it ever wanted to bite any of those savings & loans in the first place.

The Federal Trade Commission is supposed to enforce the Truth in Lending Act, but it was not until September 2007 that the agency decided it was necessary to warn approximately 200 advertisers and media outlets that some mortgage ads were deceptive. [NPR]

CAN WE SEE A PATTERN HERE?

It doesn't do to argue that if only there had been a bit more cooperation and coordination between and among the major players in the run up to the housing bubble and credit meltdown all the pain and financial suffering might have been avoided. The Department of Housing and Urban Development, underfunded and questionably staffed, seemed more intent upon encouraging the homeownership bubble than in reining in some of the more extravagant practices. The Office of the Comptroller of the Currency was busy usurping state consumer protection law enforcement, and telling nationally chartered banks that they should be very careful about derivative transactions -- but did not crack down on the emphasis bankers were placing on profits over solvency. The Office of Thrift Supervision with its "permissive culture" was hardly going to put the brakes on the boom. The FTC came to the fight late, and with relatively little ammunition.

There is plenty of information regarding the inadequacies of other agencies, like the SEC, in the de-regulation frenzy of the early 21st century, to fill several more posts such as this. However, if we look solely at those divisions that were supposed to regulate the mortgage loan sector there is ample evidence that the "permissive culture" wasn't the exclusive province of the OTS. And the result?

"It is difficult to see how self-regulation can work when appraisers are not independent of the mortgage companies and credit rating agencies are paid by the Wall Street bankers issuing securities. Greenspan and others also believed that bubbles were not possible, or would quickly dissipate, because markets correctly priced assets. The economy is also not self-correcting. Once confidence is shaken to the core, credit markets freeze up, as happened in the fall of 2008. If left alone, the real economy -- the economy for goods and services -- will slip into a prolonged depression unless the government stimulates spending." [MCall] Or, phased more succinctly:

"The need for Bush bailouts proves markets cannot self-regulate. The American people deserve to have the government look out for their interests rather than leaving Wall Street to their own devices." [D&W]

Some of those devices included Ameriquest's mortgages, about which the company wasn't overly concerned because after all, like those of so many more lenders such as IndyMac and Countrywide, the paper could be off loaded to Wall Street to be repackaged as securitized asset vehicles and bet on with credit default swaps. The paper generated more paper each time accumulating revenues, fees, and commissions. In more ways than one, we experienced an economy in which money was chasing money, nothing more.

And, those who oppose the creation of a Consumer Finance Protection Agency, those who argue that this "market" can be regulated with a minimum of inconvenience to the Mortgage Bankers Association or the American Bankers Association? Well, their numbers include none other than Frank Luntz, opponent of reform extraordinaire, who represents the interests of Bear Stearns, Merrill Lynch, PriceWaterhouseCooper, VanKampen Investments, and Ameriquest.

Recommended Reading

If you are going to read one article on the proposal to create the Consumer Finance Protection Agency, and the Luntz memo describing how Republicans should address the legislation -- make it this one.

Budgets and Balderdash: Nevada and US face deficits

** We now have "the plan" for balancing Nevada's budget: "Gov. Jim Gibbons’ senior staff released recommendations Wednesday evening to eliminate 235 jobs, close Nevada State Prison, and cut funding for school districts and higher education by 10 percent each." [LVSun] There's just one problem. The deficit is about $881 million, the Governor's staff is proposing $328 million, and the accumulated cuts total approximately $418 million. There are two suggestions that may actually end up costing more than they save: (1) "Reduce placements for the homeless mentally ill in housing by 142, resulting in more mentally ill on the street and in emergency rooms, but saving the state general fund about $4 million. (2) A 10 percent cut, or $6 million, passed down to Clark County’s Department of Family Services, which provides foster care and child protective services to children." The numbers don't add up, but as the legislators said, "It's a start." Unfortunately, we always seem to begin with cuts in programs for the most vulnerable among us.

** The Republicans in Congress have drafted their own budget plan, one which sounds suspiciously like they're going to party like it's 2005. In the Ryan Draft, the party calls for reducing benefits for those eligible for Social Security under 55 (disabled), and privatizing the Social Security system. The Draft also calls for privatizing Medicare, "it calls for the full privatization and phasing out of Medicare. It'll be replaced by a system of vouchers in which instead of getting Medicare you get a voucher to buy un-reformed private insurance." [TPM] If this sounds familiar, it is. President George W. Bush offered these suggestions a few years back.

Privatizing Social Security is, quite simply, another way to hand Wall Street investment firms another large pile of money compliments of the American public. Previous stacks of currency available to Wall Street firms have come from money market accounts and various forms of tax deferred retirement accounts. Having milked these opportunities for about all the growth they are worth, the investment houses have been lobbying hard for privatization of Social Security. While we're still in the wake of the financial tsunami left by the securitized asset derivatives debacle -- anyone want to put all of their retirement hopes on the stock market? The health insurance corporations would very much like to have Medicare phased out, and the taxpayer subsidized premiums paid into their unreformed corporate coffers.

And the prize, the "Roadmap" plan as proposed by Ryan would rid us of the deficit somewhere between 2060 and 2080.

A Little Outrage Music Please, Obama, Las Vegas and other matters

OK, Nevadans get a bit touchy about comments referring to our gaming (Heaven Forfend We Call It Gambling) industry, and yes, Las Vegas is one of the cities hit hardest by the bursting of the housing bubble and the credit meltdown. For a bit of perspective, try the Las Vegas Sun article on the latest flap between the President and the Nevada Congressional Delegation. We, like all other communities in the country, would really like to have it both ways. On one hand we want to be the Flashy Dashy Tinsel-Festooned Land Of Imagination, Destination Of Choice. We want tourists to believe in the Razzle-Dazzle. We want Las Vegas to be synonymous with Good Times and High Living. We want them to drop their discretionary income into our machines, and on our gaming tables.

On the other, we want to carve a place for ourselves in the Just Folks At Home Category. We're hard working, just plain folks, just like everyone else who needs some uplift during recessionary times, and people (maybe the President included) should be encouraging those things that would boost our sagging economy, not assailing the diversion of discretionary income into other realms. If we can get past the momentary pique, there are some important points left out of this discussion.

First, Nevadans are rightfully protective of gaming interests, because the industry represents a significant component in our statewide economy. However, that said, it is also evident that Nevada's economy is entirely too reliant on tourism, and hasn't managed to achieve a level of diversification necessary to secure a more balanced revenue stream. We've functioned as if the magical incantation of "low or no taxation" would serve to attract manufacturing and other economic activities to our region. To that end we've been parsimonious with our funding for higher education, not fully recognizing how local research and development elements are factored into corporate location decision making. In service of that incantation, we've been too reluctant to expend resources on our infrastructure, our airports, rail systems, water supplies, roads, bridges, and waste water treatment facilities. All of these also factor into manufacturing site decision making. And, we've been reluctant to invest in the education of our workforce. We like the training done by our community colleges -- we just don't want to spend all that much money on it.

Secondly, whether we like it or not, there is a kernel of truth in the President's message. One of the elements that got us into our present economic predicament is that we bought into the Bubble, and spent like it would last forever. We spent more than we had. The Bureau of Economic Analysis noticed. In 2005 Americans had a negative savings rate. In May 1985 the "average American" was saving about 11% of personal earnings, by 2005 the rate was a negative 0.5 percent. [BR] Did we think that jobs would last forever, or that the value of homes and real estate would never decline? Did we think that using a home equity loan to finance a vacation was a good idea? Some did. We've climbed back into the land of reality, but not so far as we did in the mid '80s. The last figures from the Bureau of Economic Analysis show "Personal saving as a percentage of disposable personal income was 4.8 percent in December, compared with 4.5 percent in November." If the President was in-artful, at least his remarks had the right directionality: We need to be encouraging people to save as if there is a tomorrow rather than to spend like there isn't one.

Luntz Talking Points: Financial Reform Part Two

Republican pollster and theme-meister Frank Luntz repeats his theme from the health care reform debate rephrased in anti-government verbiage in regard to the financial reform efforts. For Luntz, and other conservatives, there may be problems, but the government is never part of the solution. In order to make this case Luntz for continued deregulation of the financial sector, he must distort and perhaps even downright lie. Consider the following excerpt from his talking points for Republicans:

"You must acknowledge the need for reform that ensures this NEVER happens again. Despite the different perspectives on the causes of the crash, there is an agreement that the crisis must be addressed – that changes must be made so the mistakes that led to this point are never be repeated. The status quo is not an option. The system failed us – all of us – and the causes of the failure must be corrected. Now, more than ever, the American people question the government’s ability to effectively address the issue. Billions in handouts to Wall Street. A stimulus bill that isn’t creating jobs. Cash for Clunkers. Health Care. A “Credit Card Bill of Rights” that increases fees and interest rates on consumers. The American people believe Washington has gone wrong, and these legislative initiatives have become symbols of Washington’s inability to do anything right."

The meat of Luntz's argument against any government interference on behalf of investors and citizens is: " Billions in handouts to Wall Street. A stimulus bill that isn’t creating jobs. Cash for Clunkers. Health Care. A “Credit Card Bill of Rights” that increases fees and interest rates on consumers." Somehow, all of these must be characterized negatively -- whether that characterization is correct or not.

"Billions in handouts to Wall Street." If Wall Street is to be one of the villains, then Luntz is willing to toss the executives under the bus momentarily, and the Bush Administration along with them. On August 9, 2007 the Federal Reserve put $24 billion into the U.S. banking system via large purchases of securities, and put another $38 billion into the U.S. financial sector the following day. It wasn't enough to save Lehman Brothers, which started failing on August 22, 2007. By September 19, 2007 the situation had deteriorated to the point that portfolio debt limits for publicly traded Fannie Mae and Freddie Mac were increased by an annual rate of 2%. On July 11, 2008 federal regulators seized IndyMac Bank, the largest thrift to fail in the United States. September 7, 2008 the government took over Fannie Mae and Freddie Mac, putting them under conservatorship, planning to inject up to $100 billion into each corporation. The credit crisis continued.

By September 15, 2008 Lehman Brothers could no longer function, and filed for bankruptcy. The next day the Bush Administration announced an $85 billion emergency loan to rescue AIG in return for a 79.9% share of the company, which for all intents and purposes had become an insurance company with a hedge fund on top. The situation was so bad that the Federal Reserve and the central banks in Europe put $180 billion into money market accounts in an attempt to unfreeze lending between banks on September 17, 2008. There was a sincere and quite possibly cogent fear that money market accounts were going to collapse (and take small investors down with them) if something weren't done immediately.

Two days later, September 19, 2008 the Bush Administration announced the TARP program which was promoted as a way to get the "toxic assets" off bank books, thus freeing up credit for other purposes. House Republicans opposed the TARP funds, as too expensive and "an unacceptable federal intrusion into private business." While they opposed the funding, Washington Mutual Bank was seized by the FDIC, making it the largest bank failure in U.S. history. When the House failed to pass the $700 billion rescue plan the DJIA experienced its largest single day drop -- another historic, if unfortunate, moment on September 29, 2008. [WRAL] On December 19, 2008 President George W. Bush issued an executive order to declare that TARP funds could be spent on any program deemed necessary to avert the impending financial meltdown.

While it's easy to decry money expended bailing out incompetent, avaricious, bank management, it's not so simple to explain why the situation got so bad. Another chronology should be inspected, that of the housing bubble and related credit problems. Reuters provides a timeline of the home loan industry mess that should be referenced in regard to the activities of New Century, Ameriquest, Fremont General, and General Electric's credit wing. As has been discussed numerous times on this blog, the failure to properly oversee the actions of these private sector contributors to the meltdown, the failure to assiduously curtail the "bucket shop" operations on Wall Street, and the inability of the banks and hedge funds to determine the precise value of those by now thoroughly toxic assets clogging up bank balance sheets created a perfect storm of such proportion that banks were severely under-capitalized.

If we consider the aggregation of capital as a necessary component of finance, and finance as the arterial source of funds for every facet of our capitalist system, then we're forced to admit that when the arteries fail, the system will contract, and that contraction will have profound implications for our economy. Whether one was a supporter of the Bush Administration or not, it's necessary at this point to concede that when we speak of "under-capitalized banks" we are actually saying "banks about to fail." When we're talking of imminent bank failure we ought to be seeing the shades of the Great Depression Era bank failures. We were just that close.

We certainly can question how the issue of toxic asset valuation can be addressed, and we most assuredly can (and should) take into consideration how some of the bankers behaved in terms of executive compensation in the wake of the federal bailouts. We can bemoan the fact that TARP funds haven't yet freed up credit for small business loans and home foreclosure mitigation. [CNN] The central issue (how much are the toxic assets worth, and how can banks determine if they are sufficiently capitalized?) remains. However, at the core of the issue what is not in doubt is that there but for the recapitalization of our banking system we'd be looking at the specter of 1929. Luntz's configuration of the argument infers that because there were segmental controversies and failures, therefore government actions during the Bush Administration to prevent the collapse of our financial structure was a systemic failure. This simply is not the case.

"A stimulus bill that isn’t creating jobs." This has to be taken as an article of faith rather than as a statement of fact. There have been two essential lines of argument concerning this part of the Luntz Litany: (1) The Administration's accounting system over-estimates the number of jobs saved or created; and (2) The government can't create as many jobs as the private sector. What we don't know (and it's hoped we don't have to find out) is what might have happened without a stimulus package. We do know that as the bill was finally crafted it contained too many items with protracted results (tax cuts) and probably not enough direct aid for those unemployed, nor sufficient spending for infrastructure projects; both of which would have more immediate financial impacts on the U.S. economy. [WaPo] The seminal work on this topic remains Moody's chief economist Mark Zandi's analysis of the stimulus package. (pdf)

Another element that has to be taken into consideration is the efficiency of the funding pipeline. Too little oversight and the opportunities for waste, fraud, and abuse materialize. More rigorous funding and accountability standards require that the pace of funding be slowed down to a manageable quantity, which in turn may mean that funds aren't expended as quickly as an immediate recovery might require. Secondly, there is no way to quantify the capacity of state governments to utilize the funds. Some states, with rather more efficient departments, may have "shovel ready" projects in the works; others, with less efficient departmental operations or less willingness to accept and use federal funding, may not be positioned to make quick use of available monies.

We do know that the stimulus funds have directly created approximately 599,108 jobs during the fourth quarter of 2009, but we don't know how many jobs were saved or created indirectly via companies purchasing materials, supplies, and services for stimulus projects, or by people spending their tax cut funds, or spending unemployment benefits. [CNN] So, to say that there is a stimulus bill that isn't creating jobs is an over-generalization of a statement of belief rather than a quantifiable enunciation of credible information.

"Cash for Clunkers." There is one main source for the Republican notion that this program was in any way a failure, an Edmonds.com report that said the cars would have been traded in anyway, and therefore the program was unsuccessful. [CNN] It's important to note that Edmonds included sales of luxury vehicles and cars that didn't meet the program qualifications when it determined that sales weren't all that impressive. Television personalities were quick to announce the program was a "scam," albeit without introducing any evidence from the auto manufacturers to the contrary. On the other side of the issue, Ford Motor Company's sales analyst was quite pleased with the results. Ford posted sales of 158,838 units, up 2%, and Ford product retail sales were up by 9% over the previous year. GM reported a 54% increase in small car sales, with the delivery of 1,487 hybrid vehicles in one month, up 36.6% compared to one year ago.[GCC] The bottom line may well be that those manufacturers whose products and retailing plans were already in place did well (Ford, Toyota, and Hyundai) while those struggling like GM, Chrysler, and Nissan did not fare as well. [DF] To make a generalized pronouncement that the program was unsuccessful based on a study which incorporated non-eligible vehicle data is at least a somewhat crude distortion of the results.

"Health Care." Precisely how a reform program not yet enacted is deemed a 'failure' requires reverting to Luntz's talking points about health care reform, which bear a remarkable resemblance to Luntz's talking points in opposition to financial sector reform.

"A “Credit Card Bill of Rights” that increases fees and interest rates on consumers." This strains credulity. The credit card reforms are to be considered a failure because the banks carried out their threat to gouge consumers as much as possible prior to the date on which the reforms were to take effect. To believe this is to all but encourage corporate blackmail. The argument must be that if the bankers threaten to raise their rates and fees if they are required to adopt consumer friendly regulations, then we must not do anything to anger the bankers lest they carry out their threats. This is, in essence, to give the bankers carte blanche over their interactions with their customers.

About Face March

"The American people believe Washington has gone wrong, and these legislative initiatives have become symbols of Washington’s inability to do anything right." Luntz offers the following suggestion for broadcasting this sentiment: "Demand accountability – government accountability. Despite creating economic conditions comparative to the Great Depression, it is important to ask some basic questions -- What government regulator lost their job for their hand in the crisis? What government policies were changed? What laws were repealed? The obvious answer is none." Note that Luntz is calling for a reversal of the argument: Not how shall bankers and related managers in the financial sector be made more accountable, but how shall governmental officials be held accountable."

One might suggest answering Luntz's questions with some inquiries of our own. (1) What philosophy of "hands off" de-regulation promoted by a Republican administration helped or exacerbated the follies on Wall Street? (2) Why do Republicans not support efforts to rein in executive compensation for the executives and managers who indulged in those Wall Street follies? (3) Why do Republicans not support the repeal of the Commodities Futures Modernization Act of 2000 that allowed the excesses in the derivatives markets? (4) What policies both announced and enabled during the Bush Administration allowed free-marketeers on Wall Street to engage in "casino-trading" schemes? (5) What policies of OCC John Dugan, and incorporated in his "Green Book," promoted precisely the kinds of financial behaviors that got us into this mess?

The entire argument is a tautology: Government (in the latter Clinton and throughout the Bush terms) created a financial climate in which de-regulation was the prime philosophy. The de-regulation caused excesses. Therefore, the excesses are to be blamed on the government and not those who proposed the policies and then acted upon them. Phrased another way: Bankers and fund managers wanted less regulation, they got it; and, when they had it they abused it. Therefore, it's the government's fault for the bankers' bad behavior. This line of argument is perilously close to that of an adolescent who has been pleading with the parents for the use of the family car. "I promise I'll be careful." When the family wagon is returned with dings, dents and a bent quarter panel, the teen asserts "It's your fault the car is damaged, you're the one who let me use it.

Luntz's talking points should be read carefully, and refuted as promptly and completely as possible. We have the health care "debate" as a prime example of the extent to which Republican opposition to any and all reform will be broadcast, and how the cliches, distortions, and invalid arguments therein will be repeated until they have the "sound" if not the "substance" of fact. With the success of our economic recovery at stake we ought not dismiss the power of Luntz's phraseology to take hold in conservative quarters. If the coach of the opposing team is willing to give away the game plan, it would be careless not to prepare one's own plan with due cognizance of its main features.

The Central Mythology of Luntz Talking Points on Financial Reform

While citizens in Nevada, California, Arizona, and Florida watch their homes decline in value such that many are “under-water,” and small businesses are finding it difficult to get lines of credit from banks that still have an abominable load of toxic assets on their books, Frank Luntz is back – to tell the GOP how to fight financial reform efforts.

Luntz begins with the established mythology of the financial meltdown of 2008:

The Conservative (Republican) view: “government policies caused the bubble and its ultimate crash. Fannie Mae, Freddie Mac, the Federal Reserve, and the Community Reinvestment Act all had a role in the catastrophe. The government inflated economic bubbles with easy credit policies. Interest rates were kept intentionally low. Low-income families were encouraged to become homeowners despite the knowledge that many would never be able to pay them back. Government bought and backed these subprime loans, essentially encouraging brokers to find more subprime clients – risk be damned.”

This is easily revealed as mythology. Myth One: Fannie Mae and Freddie Mac promoted subprime loans. The facts show otherwise: “Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble. During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.” [McClatchy] Remember: Fannie and Freddie don't make loans. “Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans. It's a process called securitization, and by passing on the loans, banks have more capital on hand so they can lend even more.” [McClatchy]

“Government bought and backed these subprime loans, essentially encouraging brokers to find more subprime clients?” It's time for a reality check. “Fannie and Freddie did not guarantee and securitize substantial quantities of subprime loans. They had more Alt-A loans but these were still a relatively small portion of their overall business. In fact, as the subprime market was building, Fannie and Freddie lost market share because they weren't participating. Their involvement in the secondary market was far from the driving force in the creation of the subprime market.” [CAP] And, going a step further into the causality problem: “Fannie and Freddie weren’t the biggest players in this and, most importantly, started this practice very late in the game. In fact, the subprime market had already started to go bad when they started their purchases (which speaks poorly for Fannie and Freddie’s decision making, but precludes them from responsibility for the crisis).” [CAP] (emphasis added)

Those arguing for an unregulated market need to take note that during the “Bubble Years” FNMA and FHLM actually held less (from 48% to 24%) of the subprime loans sold into the secondary market. It was the lightly regulated private sector securitizing these loans. However, that hasn't stopped the Republicans from attempting to make Fannie and Freddie easy targets.

Myth Two: The Community Reinvestment Act forced banks to make loans to unqualified (minority) buyers, and when these people defaulted the crisis occurred. This argument has taken on a life of its own, one far removed from the financial facts of the matter. The Community Reinvestment Act was passed back in 1977 to prevent such egregious practices as “red lining,” that is, refusing to make loans (or making extremely costly loans) for real estate in minority neighborhoods. The conservative myth says that banks were forced to make loans to “unqualified” buyers (read: members of ethnic minorities) and those defaults caused the financial crisis.

One could make this argument except for one inconvenient fact. Most subprime loans were made by firms that were not subject to the Community Reinvestment Act. 50% of the subprimes were made by mortgage service companies not subject to federal supervision and another 30% were made by affiliates of banks or thrifts which were not subject to routine supervision or oversight. [Business Week] Quick addition tells us that 80% of the subprime loans were not subject to CRA supervision, and we also know that CRA supervised loans had lower rates than their private sector counterparts, and were less likely to end up in the tranched mortgage based securities that morphed into toxic assets. [Business Week] Daniel Gross, economics writer for Newsweek summed up the situation: “Let's be honest. Fannie and Freddie, which didn't make subprime loans but did buy subprime loans made by others, were part of the problem. Poor Congressional oversight was part of the problem. Banks that sought to meet CRA requirements by indiscriminately doling out loans to minorities may have been part of the problem. But none of these issues is the cause of the problem. Not by a long shot. From the beginning, subprime has been a symptom, not a cause. And the notion that the Community Reinvestment Act is somehow responsible for poor lending decisions is absurd.” Absurd though it may be, this has not prevented right wing commentators from alleging a causal connection between the CRA and the financial meltdown, nor has it addressed the fact that poor Congressional (and administrative) oversight of financial markets allowed, or may even have encouraged, the “Ownership Society,” mentality that made it imperative for Fannie and Freddie to enter the securitized asset marketplace with altogether too much enthusiasm.

Myth Three: The Fed Did It. If there is some culpability in the housing sector demise during the credit meltdown, it may lie with the Federal Reserve, which made cheap money available for the extension of credit. However, cries to dismantle the Federal Reserve system, or to stringently limit its capacity, range from the simplistic to the moronic. By tradition and authority, the Fed manages monetary policy. Obviously, there is a connection between monetary policy and financial practices, but we need to remember that the information the Fed needs to make monetary decisions will always be one step behind reality: “In practice, as previously noted, monetary policy makers do not have up-to-the-minute information on the state of the economy and prices. Useful information is limited not only by lags in the construction and availability of key data but also by later revisions, which can alter the picture considerably. Therefore, although monetary policy makers will eventually be able to offset the effects that adverse demand shocks have on the economy, it will be some time before the shock is fully recognized and—given the lag between a policy action and the effect of the action on aggregate demand—an even longer time before it is countered. Add to this the un­certainty about how the economy will respond to an easing or tightening of policy of a given magnitude, and it is not hard to see how the economy and prices can depart from a desired path for a period of time.” [Fed pdf]

The statement above is probably as close as we'll get to an admission from the Federal Reserve that rather than being an omniscient presence in the financial domain, it actually starts from a position of weakness. Monetary policies that loosened credit (lowered interest rates) did in all likelihood play a role in the Wall Street Casino operations during the housing bubble, and former Chairman Alan Greenspan came close to admitting as much.

But as the Fed slashed interest rates to nearly record lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income year after year. By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust. The New York Times reported on Greenspan's testimony to Congress, October, 2008 about the Fed's actions during the Bubble:

“Mr. Greenspan brushed aside worries about a potential bubble, arguing that housing prices had never endured a nationwide decline and that a bust was highly unlikely. Mr. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford. The Federal Reserve had broad authority to prohibit deceptive lending practices under a 1994 law called the Home Owner Equity Protection Act . But it took little action during the long housing boom, and fewer than 1 percent of all mortgages were subjected to restrictions under that law.” In short, there were some avenues along which the Fed could have regulated the mortgage markets with more caution and care, but Mr. Greenspan's predilection for “free market” ideology inhibited earlier action. Combine a propensity to “let the marketplace solve the problems,” with the aforementioned lack of timely data, and we have a recipe for disaster.

The Method to the Mythology

It doesn't take too much imagination to see the crucial point of the Luntz narrative in regard to regulating our financial markets: All the villains in this piece are government or quasi-government agencies. It's the Fed! It's the CRA! It's Fannie and Freddie! All meet at the same junction: Government = Bad; Deregulation = Good. The American economic system, with its intricately interconnected relationships between regulators, consumers, homeowners, bankers, manufacturers, and retailers, doesn't lend itself well to simplistic formulations of Good vs. Evil. However, what the conservative Republican mythology does do is to reduce the narrative to an easily digested formula of “Market Good, Regulators Bad.” And, it is from this central myth that the Luntz talking points on financial reform begin.

(to be continued)

Keep Health Care Reform On The Front Burner

Nothing would please Republicans inside the Beltway more than to see health care reform legislation tabled for eternity. To that end, they've made it abundantly clear from the outset that efforts by Senator Harry Reid (D-NV) and House Speaker Nancy Pelosi (D-CA) to get such legislation enacted would be met with a stall ball game, a four-corner offensive in which the GOP says "we all want to reform the system...just not this way," so "let's start over..." [WaPo]

Here is Minority Leader Rep. John Boehner (R-OH) as of February 1, 2010: "Despite the GOP's near-lockstep opposition to Democratic health-care efforts over the past year, Boehner insisted that he wasn't urging his Democratic colleagues to walk away from the cause. "Let's start over on common sense steps that we can take to make our system work better," the Ohio Republican said. "No one in Washington thinks our current health care system is perfect and certainly not Republicans." [WaPo] The insurance industry has been drumming the "let's start over" line since last summer.

Compare this latest statement to the original Frank Luntz talking points before the health care debate was making headlines back in 2009: "The status quo is no longer acceptable. If the dynamic becomes “President Obama is on the side of reform and Republicans are against it,” then the battle is lost and every word in this document is useless. Republicans must be for the right kind of reform that protects the quality of healthcare for all Americans. And you must establish your support of reform early in your presentation." [Luntz] Ah, yes, the GOP is all for "reform" just not the kind that would impinge on the profits of the insurance industry.

And, yes, this issue is political, very political. Remember in July 2009 Senator Jim DeMint (R-SC) setting the stage with his "Waterloo" comments? [Politico] It isn't too hard to conclude that the longer the GOP could stall health care reform legislation in the Senate, the more time the insurance industry would have to make its case that reform would have dire consequences for the American public, interestingly enough right along the lines described in the original Luntz presentation for the Republican Party.

There are still parliamentary options available for health care reform passage. Reconciliation procedures may seem distasteful, but they worked well for the Republicans during the passage of the Bush Administration tax cuts for America's wealthiest citizens.

That getting this legislation over the goal line will be difficult isn't at issue, that getting it passed during this session of Congress shouldn't be a question: "Congress has a historic opportunity to pass comprehensive health care reform legislation this year. Multiple strategies for improving quality and slowing the growth in total health system spending will help spark economic recovery, put the nation back on the road to fiscal responsibility, and ensure that families are able to get the care they need while having financial security and relief from rising insurance premiums." [TCF]