Let me start by saying that for more than 50 years, I have favored universal healthcare.  The question is how do we get it?

I have been receiving solicitations for support of the Healthcare Public Option.  They say, please send a fax to your senators, or sign a petition to Congress urging them not to abandon the Public Option so that everyone will have a choice of private healthcare insurance or the Public Option.  Here are four Healthcare Reform criteria recommended by one of the emails I received:

• Available to all of us: A strong public health insurance option should be available to anyone who chooses to participate. If you like your current plan, you can keep it; if you want to participate in the public health insurance plan, you can choose that.

• A national plan with real bargaining clout: In order to truly control costs and compete with private health insurance plans, a strong public health insurance option must be available nationwide.

• Ready on day one: Every day we wait on real reform, health care costs continue to rise. A strong public health insurance option with a broad network of providers right out of the gate is key to building a competitive program that will help control costs.

• A truly public plan: To ensure it’s held to the highest standards of accountability, a public health insurance option must be truly publicly run—accountable and transparent to Congress and to voters.

This sounds like Medicare for everyone

There seems to be an assumption that a national public healthcare insurance organization can use its bargaining power to reduce healthcare costs.  This point of view may be a little naïve.  Nancy-Ann DeParle and her staff at the White House have been holding weekly seminars on healthcare reform, and serious discussion of controlling costs usually leads to a consensus that we need a different model of healthcare delivery to control healthcare costs.

Medicare is certainly better than being old with no health insurance.  However, Medicare is a fee-for-service health insurance plan whose costs have been rising rapidly, at a rate far exceeding the rate of inflation.  The only way that Congress has agreed to fix the escalating costs of Medicare is to cap payments to doctors and hospitals, and threaten to actually reduce the fee schedule.

Medicare needs reform.  Medicare does not pay for preventive care; it should, even if it does not substantially reduce overall healthcare costs.  Medicare does not pay for immunization; it should.  Medicare does not pay physicians for telephone or email consultations.

In my opinion, the Medicare fee schedule pays primary care physicians too little, and in many cases pays specialists too much.  We need a healthcare system that allows people to go to the physician of their choice, including both primary care physicians and specialists, but encourages people to use their primary care physicians to coordinate their care when they have complex conditions or chronic diseases.

We need a healthcare system that pays for treatment of a disease or condition, rather for each procedure performed.

We all want to control healthcare costs; who does not?  It would be nice to have a list of major healthcare cost categories, so that we could focus on the major cost categories.

Here is my list of major healthcare cost categories:

• Care during last year of life.
• Treatment of chronic diseases such as diabetes, Parkinson’s disease, Cerebral Palsy.
• Lifestyle issues such as obesity, smoking, nutrition, and lack of regular exercise.
• Mental health problems such as depression.
• Emergency room visits by the uninsured
• Insurance administrative costs (healthcare providers and insurers)

The Public Option may reduce the last two costs, but what about the first four cost categories?  It is difficult to find credible data on what these costs are in the U.S. Nevertheless, I assert that these categories need to be addressed by healthcare reform.  How is the Public Option going to reduce costs for these categories better than a system of non-profit healthcare cooperatives?

Dr. J. Deane Waldman, MD, gives the following list[i] of what drives up healthcare costs:

There are nine reasons for escalating health care costs.
1. New value (new medical capabilities) resulting in
2. More people who live longer.
3. Inefficiency, Reconciliation and Disconnection
4. Regulatory compliance and unfunded mandates
5. Perverse incentives
6. Defensive medicine
7. Adverse outcomes and errors
8. Profits taken out of healthcare (insurance and medical malpractice)
9. Fraud and embezzlement

As Dr. Waldman writes, we want to preserve the first two items while reducing the others.  Again, it is difficult to find credible data quantifying these reasons for health care costs.  Nevertheless, any comparison of the Public Option versus the Non-Profit Healthcare Cooperatives Option should address these causes of rising healthcare costs.

I hasten to explain that I support President Obama’s overall objectives and guiding principles for healthcare reform, whereas Dr. Waldman has been very negative about President Obama’s program.  Remember, however, that the President has stated that he would like to achieve a bipartisan agreement on healthcare reform.  Therefore, I call on Dr. Waldman to tell us what program he would propose in place of the Public Option proposed by the Obama Administration.  How would Dr. Waldman design legislation to reduce the factors driving up healthcare costs?

There seems to be a consensus on the creation of a healthcare insurance exchange from which people could choose a healthcare plan if they don’t get one from their employers.  The debate is over whether the choices offered through the healthcare insurance exchange should include a publicly managed option in addition to private insurance plans.

Senator Kent Conrad (D, ND) has proposed a national network of healthcare cooperatives as an alternative to the public health insurance option favored by the Obama Administration.  Rather than being dismayed by this proposal, I am reminded of the Japanese healthcare system.

Japan spends 8% of GDP on healthcare, versus 16% for the United States, but Japan has lower infant mortality and the Japanese live longer than we Americans.  Although genetics and diet may play small roles, Japan must be doing something right with their universal healthcare system.  The Japanese government requires everyone to have health insurance.  Many Japanese get their healthcare insurance through their employer, but if not, they can get healthcare insurance through a nonprofit community-based insurer.  These insurers are not allowed to deny anyone coverage, or charge extra, because of pre-existing conditions.  Only the poor get a government subsidy for their healthcare insurance.

The Japanese healthcare system is highly competitive.  There is no gatekeeper requirement.  Anyone can go to their internist, or directly to a specialist of his/her own choosing.  Unlike the British National Health System, 80% of Japanese hospitals are privately owned and managed by doctors.

To hold down costs, Japan regulates the prices of healthcare procedures in great detail.[ii] The Japanese regulators hold biannual meetings with doctors and hospitals to negotiate prices.  There is constant pressure to increase efficiency and reduce prices for healthcare procedures such as MRIs and quadruple coronary bypass surgery.

The argument for a public option is that it will provide competitive pressure to hold down healthcare costs.  The tacit assumption is that Japanese-style price regulation is not possible in the United States, so we must rely on artificial market forces to control healthcare costs. Of course, you can imagine the Republicans howling about the giant government bureaucracy that would be required to regulate healthcare prices in the United States, despite the fact that the Japanese Health Ministry is not so large.  The rest of us should howl about the high cost of our current healthcare system.

Fundamentally, we must make a commitment that everyone in the country is entitled to good quality healthcare.  We need to end a system that provides incentives to insurance companies to drop sick people and deny coverage to people with pre-existing conditions, or make premiums for those people so expensive that they cannot afford their healthcare insurance.  I think we should take the profit out of healthcare insurance, crack down on fraud and abuse, pay doctors well but not exorbitantly, and relieve new doctors of the huge debts that they now face by public financing of accredited medical schools.   Germany has competitive healthcare insurance companies, even though they are not allowed to make a profit.  Just the prospect of higher executive salaries for growing insurance companies is enough to keep the companies competitive [ii]. If we made all U.S. healthcare insurance companies nonprofit, we would not need a “public option”.

[ii] http://www.pbs.org/wgbh/pages/frontline/sickaroundtheworld/

Benefits of single-payer vs. fee-for-service medicine

Similar longitudinal surveys in different countries are beginning to reveal the institutional and cultural variations in these life cycle dynamics. A new investment in international longitudinal surveys on aging may eventually unravel the changing dynamics at the end of the life cycle across time and countries. One recent comparison showed that health improved with socio-economic status in both England and the United States. It also showed, however, that English health status is better than in the United States at each socio-economic level.

J. Banks, M. Marmot, Z. Oldfield, J. P. Smith, JAMA 295, 2037 (2006).

http://jama.ama-assn.org/cgi/content/abstract/295/17/2037

http://jama.ama-assn.org/cgi/reprint/295/17/2037

Thanks to John Wirt.

Today the New York Times reported that the Obama Administration will soon adopt this blog’s recommendations concerning regulation of the financial services industry, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments, such as CDOs, that contributed to the economic crisis.

Soon Paul Volker and Timothy Geithner will propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

“The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.”[i]

The FDA budget needs to be doubled to deal with the safety of the food supply and the crisis in the integrity of the pharmaceutical industry.  Many articles have been written about the pharmaceutical industry promoting their proprietary drugs despite questionable efficacy.  There are many documented cases of drug companies suppressing test results that might question the efficacy of their proprietary drugs.  The FDA should be more vigilant in dealing with issues of drug efficacy.

There is another, less widely discussed problem with prescription drugs.  Americans expect their pharmacies to dispense the drugs prescribed by their doctors, with the correct dosage on the label.  However, there is a growing problem of prescription drugs from unregulated factories not meeting quality standards.

American and European drug plants are closing as Chinese and Indian plants undercut them in price.  The Chinese and Indian drugs are purportedly pharmaceutically identical to the American and European drugs they replace, but is that assertion really true and are they safe?  No-one really knows, because the FDA rarely inspects drug manufacturing plants outside the United States.  Any company importing drugs or pharmaceutical ingredients into the United States is supposed to test the supplies before using them.  However, Chinese manufacturers are notorious for giving samples that pass tests and then changing the ingredients or the manufacturing process after passing the sample test.  In 2008, Chinese manufacturers substituted a cheap fake for dried pig intestines used to make heparin, which is used to prevent clotting during surgery and dialysis.  81 people died of allergic reactions and tens of thousands of people around the world were exposed to danger before the FDA got the situation under control.  This is not an isolated case.  It is estimated that 8% of over-the-counter drugs in China are counterfeit.[i]

One often-mentioned way to reduce medical expenses is to encourage the use of generic drugs.  The asserted reason is that generic drugs are not only much less expensive, but also pharmacologically equivalent to brand name drugs.  However, the healthcare reform discussion often neglects the lack of FDA regulation of generic drug manufacturers, especially the lack of inspection of the increasing number of drug manufacturing plants outside the United States.  Not only are generic drugs often different from their supposed brand-name equivalents, but drug potency varies from manufacturer to manufacturer.

For example, practicing pharmacists are aware that warfarin, the generic version of coumadin, is not actually equivalent to coumadin.  Coumadin (and warfarin) is an anticoagulant drug, and the wrong dosage of this drug can lead to internal bleeding, including hemorrhage, with serious consequences.  Hungarian warfarin has been found to be 20% higher effective dosage than Indian warfarin of the same nominal dosage, with brand-name Coumadin falling in between.  (I found this out when I refilled a warfarin prescription that was randomly dispensed with warfarin manufactured in a different country, and my INR changed by 30% at the next weekly test.)

Another example is the recent (September 24, 2008) FDA list of 32 finished drugs and 7 active pharmaceutical ingredients manufactured by Dewas and Paonta Sahib facilities of Ranbaxy Laboratories, banned because those sites failed to pass FDA inspections.  We do not know how long those drugs were on the market in the United States before the inspections.

The FDA budget should be doubled.  The FDA should promulgate a rule that neither drugs (whether prescription or over-the-counter) nor their ingredients may be imported into the United States unless the FDA has inspected the manufacturing plant within a year of importation.  The inspection costs should be recovered by fees imposed on the drug manufacturers.  Improve the FDA drug manufacturing plant database.  Also develop a source database system for all produce sold in the United States.

President-elect Obama is inviting Americans to spend part of the holiday season talking about health care — and report back to him.  As he gears up for major health reform legislation next year, Obama is encouraging average Americans to host informal gatherings to brainstorm about how to improve the U.S. system.  “In order for us to reform our health care system, we must first begin reforming how government communicates with the American people,” Obama said in a statement last week. “These Health Care Community Discussions are a great way for the American people to have a direct say in our health reform efforts.”[ii] 

From December 15 through December 31, 2008, this blog will focus on healthcare, with the objective of collecting healthcare stories and polishing recommendations to be submitted to the Obama Transition Team.  You can find healthcare pages listed to the right of this post.  Click on Obama HealthCare Forum as well as topics of interest under it, and comment on the contributions you see on the page focussing on that topic.

Background

President-elect Barack Obama has begun preparing to change the U.S. healthcare system, reaching out to his supporters and interest groups to build grass-roots support for the huge undertaking.  “Every American is feeling the pressure of high health costs and lack of quality care, and we feel it’s important to engage them in the process of reform,” said Obama transition team spokeswoman Stephanie Cutter.

U.S. healthcare costs now account for about 16 percent of U.S. gross domestic product — or $2.3 trillion — a proportion projected to grow to 20 percent or $4 trillion by 2015.[i] 

The United States now spends more on healthcare than any other developed nation, yet has some 47 million people without health insurance. Most insured people receive coverage through their employers but businesses complain that exploding costs threaten their competitiveness in a global market.  High worker healthcare costs have been cited as a major reason why U.S. automakers are in such trouble.

At the press conference today when he introduced Tom Daschle as his nominee for Secretary of Health and Human Services, President-elect Obama said “What we want to make sure is that any plan that we have starts with the premise that rising costs are unsustainable.  We can’t insure everybody under the current program without bankrupting the government, business or states. We are going to spend a lot of time figuring out how to streamline the system,” He added. “We are also going to examine programs that aren’t giving us a good bang for our buck.”

Many health reform advocates believe Obama will need broad public support to overhaul an industry that has become among the most intractable of U.S. political problems.  Remembering what happened to the healthcare reform proposal led by Hillary Clinton in 1993, the Obama camp wants to gain broad public input early, before the insurance companies and drug companies start an intensive lobbying  and advertising campaign to defend their interest in the current system, which almost all experts and the majority of voters recognize is broken.  Daschle has already launched an effort to create political momentum last week in a conference call with 1,000 invited supporters culled from 10,000 who had expressed interest in health issues, promising it would be the first of many opportunities for Americans to weigh in.

Note the Editorial in the December 14th New York Times:

http://www.nytimes.com/2008/12/14/weekinreview/14sack.html?ref=weekinreview

[ii] http://www.washingtonpost.com/wp-dyn/content/article/2008/12/05/AR2008120503322.html

The Congressional Financial Industry Rescue Panel led by Harvard Law Professor Elizabeth Warren is supposed to monitor the disbursement of the $700 billion in bailout money, but it is also required by law to provide Congress with recommendations for reforms to the financial regulatory structure, a report that she said it would deliver by Jan. 20.[i]  What kind of regulatory structure should be considered?

To prevent a recurrence of the problems that led to this current financial crisis, the United States and indeed the entire world need a new rigorously enforced regulatory structure for the financial services industry.  In the United States, legislation is needed to establish a streamlined framework for regulating the equity, debt, commodity and derivatives markets.  The functions of the SEC and CFTC, as well as functions undertaken by the Fed and the Treasury on an ad hoc basis, should be transferred to this new regulatory agency.[ii]

The federal government needs to regulate all aspects of the financial services industry.  As Barack Obama said in his speech on March 27, 2008, “We need to regulate financial institutions for what they do, not what they are.”[iii] The basic principles should be based on asking what role the financial institution plays in the economy.  If it is accepting and keeping retail and commercial deposits, with FDIC insurance, it should be regulated as a commercial bank.  If it invests the shareholder capital in risky assets, using leverage to increase its returns, it should be regulated as an investment bank.  Some 21^st Century version of Glass-Steagall is necessary to protect taxpayers from the need to bail out investment banks.

With Elizabeth Warren as chairman of the Financial Industry Rescue Panel, we can expect a strong consumer protection element in the recommendations.  She has recently proposed that mortgage products should be examined and tested for safety.    She and her daughter Amelia Warren Tyagi wrote “Of all the borrowers who were sold subprime mortgages in the past five years, nearly 60 percent would have qualified for prime mortgages if brokers had offered them; the subprime mortgages carried so many rate escalators, prepayment penalties, and other traps that even would-be prime borrowers defaulted.”[iv]  When actual costs and unfavorable terms are regularly concealed, the regulatory authority should order those products removed from the market.  Warren and Tyagi have proposed a Financial Product Safety Commission, which would require that companies reveal the true cost of credit.  This is a good idea, and should be included in the recommendations, but it is a small part of the reforms needed to protect the 21^st Century economy from another financial meltdown.

Leverage needs to be controlled for all financial institutions, whether they are called banks or insurance companies or hedge funds or commodity futures trading companies.  No company should be allowed to operate with so much leverage that its failure could threaten the entire global financial system, a situation in which we have found ourselves during the past two years.  To be more specific, leverage of 30:1 is outrageously too high.  Fines are not a sufficient deterrent to the greed of some people who will use high leverage whenever they think they have a chance to make a large fortune risking other people’s money.  Legislation needs to specify significant prison time for people who violate the rules of the new financial system. 

Now that we have mentioned hedge funds, the question is whether they have any redeeming social value.  Banks keep depositors money safe and put money to work by lending to households and businesses based on the lender’s assessment of their ability to pay the loans back.  Insurance companies spread risk among large groups of customers, sparing the focus of hardship on the unlucky few.  Financial advisers help people and businesses save and invest wisely.  Venture capitalists raise funds for entrepreneurs who create innovative products and services.  Hedge funds should not be allowed to exist just to gamble on giant returns by using greater leverage than is allowed of regulated financial institutions.  As a minimum, hedge funds should be regulated with regard to leverage and the transparency of their operations.  If hedge funds cannot find a contributing role in the real economy, they should be shut down.

The new financial order must ensure the independence of the financial rating companies.  We need to separate the funding of financial rating companies (like Moodys, Standard & Poors, and Fitch) from the financial engineers who came to them for ratings.  We have suffered from a system under which bond issuers paid the ratings companies to rate their bonds, and the ratings companies sold consulting services to tell the issuers how to tweak the composition of their Collateralized Debt Obligations to get AAA ratings. The federal government needs to police conflicts of interest like that.

Transparency is a key issue.  New Deal legislation sought to increase transparency in the interstate offering and sale of securities.  The Securities Act of 1933 requires every U.S. public company to register new securities (with the SEC after 1934) and to offer (interstate) securities only through a truthful prospectus giving basic financial information as well as stating the risk involved in investing in the offered securities.  Corporations were also required to issue audited annual reports on the status of the business.  The Securities Exchange Act of 1934 focused on the sale of securities in secondary markets, creating the Securities and Exchange Commission (SEC) to monitor and enforce corporate reporting, ensure conformance with regulations, as well as to detect and punish accounting fraud, false information distribution, insider trading or other violations of the securities law.[v]  Unfortunately, despite additional legislation (e.g., the Investment Company Act of 1940, the Investment Advisors Act of 1940, and the Sarbanes-Oxley of 2002), federal laws have not kept up with the pace of financial chicanery (described in the industry as innovation).

There needs to be more transparency of all kinds of financial instruments, including the kind of mortgage-backed securities, collateralized debt obligations and credit default swaps that have created the multi-trillion dollar financial meltdown we have experienced over the past eighteen months.  For example, standardized credit default swaps should be traded through a CDS clearinghouse (something that Tim Geithner has been encouraging in recent months). Legislation is needed to establish a streamlined framework for regulating the equity, debt, commodity and derivatives markets.  The functions of the SEC and CFTC, as well as functions undertaken by the Fed and the Treasury on an ad hoc basis, should be transferred to this new regulatory agency.[vi]

Size is also an issue.  No financial institution should be allowed to grow into a company that it is too big to fail.  Sandy Weill was right when he predicted the repeal of the Glass-Steagall Act after he created Citigroup, but he was also right in what he implied, which was that he had created an institution that had an inherent advantage over its rivals because it was too big to fail.  Citigroup must be broken up.  If the Citigroup management does not spin off parts of its business voluntarily, then antitrust litigation should be used to break up the company.  Furthermore, we need to reverse the trend during the Paulson era of turning to the biggest banks to absorb other big banks that get into trouble.  We must ensure that there are no more Citigroups in the future.

We hope that that the Warren Panel will lay out a framework by January 20 and then work with the new Economic Recovery Advisory Board to be chaired by Paul Volker to address in more detail the proposed financial system regulatory framework.

[i] http://www.nytimes.com/2008/12/02/business/02tarp.html?_r=1

[ii] http://westonpolicy.wordpress.com

[iii]http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms

[iv] http://www.law.harvard.edu/news/2008/10/23_warren.html

[v] http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

[vi] http://westonpolicy.wordpress.com

Hi. I am Stephen Herron, AKA: Connecticut Man1 from various community Blogs and from my own Blog: Drinking Liberally in New Milford. Bur kindly asked me to cross-post this for your consideration here at Weston Policy. While I originally wrote this in January of 2007, concerning the cost of health care to consumers and service provided, it is equally applicable to the savings for the auto industry and all other industries, as well. And that is not my opinion, that is the opinion of the successful auto industry management. The ones like Toyota that aren’t asking for a bailout. Below the original post are added reactions and actions from various communities for us to take and one comment that would suggest even the Big 3 wholeheartedly agree with the idea of Single payer Universal Health Care.

At the time I wrote this in 2007, each vehicle assembled in the United States cost GM $1,525 for health care; those made in Canada cost GM $197. Probably more savings now since this was written nearly two years ago:

In U.S., it’s pay more, get less – Universal Health Care
Why is this man smiling?

In U.S., it’s pay more, get less:
“A RELATIVE BARGAIN: George Mercieca, a worker at a GM assembly plant in Oshawa, Ontario, shows off his Canadian health care card. GM spends an average of $1,385 a year on medical bills for hourly workers in Canada. An American autoworker costs the company about $5,000, but studies show Americans are no healthier than their foreign counterparts.”

He is smiling because he has a great job with better medical benefits than most Americans could ever hope for under our failed health care for profit system. The kind of job that Connecticut , and the USA as a whole, can never hope to attract under our current system. If you do not believe me then ask yourself “what does the manufacturing industry have to say about this?”

While training issues are less of a problem here in Connecticut because we have a decent educational system, health care is cited as a major issue for Toyota’s choice of Ontario as the location of a new factory for their Rav-4s slated to open in 2008:

“The level of the workforce in general is so high that the training program you need for people, even for people who have not worked in a Toyota plant before, is minimal compared to what you have to go through in the southeastern United States,” said Gerry Fedchun, president of the Automotive Parts Manufacturers’ Association, whose members will see increased business with the new plant.

Acknowledging it was the “worst-kept secret” throughout Ontario’s automotive industry, Toyota confirmed months of speculation Thursday by announcing plans to build a 1,300-worker factory in the southwestern Ontario city.

“Welcome to Woodstock – that’s something I’ve been waiting a long time to say,” Ray Tanguay, president of Toyota Motor Manufacturing Canada, told hundreds gathered at a high school gymnasium.

The plant will produce the RAV-4, dubbed by some as a “mini sport-utility vehicle” that Toyota currently makes only in Japan. It plans to build 100,000 vehicles annually.

The factory will cost $800 million to build, with the federal and provincial governments kicking in $125 million of that to help cover research, training and infrastructure costs.

Several U.S. states were reportedly prepared to offer more than double that amount of subsidy. But Fedchun said much of that extra money would have been eaten away by higher training costs than are necessary for the Woodstock project.

He said Nissan and Honda have encountered difficulties getting new plants up to full production in recent years in Mississippi and Alabama due to an untrained – and often illiterate – workforce. In Alabama, trainers had to use “pictorials” to teach some illiterate workers how to use high-tech plant equipment.

“The educational level and the skill level of the people down there is so much lower than it is in Ontario,” Fedchun said.

In addition to lower training costs, Canadian workers are also $4 to $5 cheaper to employ partly thanks to the taxpayer-funded health-care system in Canada, said federal Industry Minister David Emmerson.

“Most people don’t think of our health-care system as being a competitive advantage,” he said.

It is clearly an advantage for any company that wants to open up a business in any industry… A 4 to 5 dollar per hour advantage. An advantage so great that any state that passes true-single-payer Universal Health care first will be positioned to become a mecca for any company considering opening any kind of business.

We already have an educational advantage over the most of the USA, having a highly rated school system and a high rate of college graduates. Why the hold up on giving these businesses the real money savings that Universal Health Care would provide and the other best reason to set up shop in Connecticut?

Because of lobbying from the insurance and pharmaceutical industries. We need to take them out of the loop in the decision making process for this issue since we know they will fight it tooth-and-nail. We need to look at what is best for the people of Connecticut and for all industries, not just those two lobbying behemoths.

And just how much more is health care costing us?

Medical bills soar

Divide the nation’s medical bill evenly across the population, and each of us paid $6,102 in 2004, according to the Organization for Economic Cooperation and Development. That’s 50 percent more than the residents of the country with the next-highest health care bill, Switzerland ($4,077), and more than double the average for industrialized nations ($2,546).

…snip…

Those countries provide health care for all their residents for less money than the United State spends while it leaves an estimated 46 million without insurance.

That’s contradicted by studies conducted by Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins School of Public Health. “We have about the same number of MRIs and CT scanners as Canada, the U.K. and France, and far fewer than Japan,” Anderson said. “We have the same number of doctors, doctor visits, hospitals and inpatient days at hospitals.

“The difference is we pay two to 2 1/2 times more for virtually identical services.”

The average U.S. physician earned $180,000 in 2004, Anderson said; in Canada, it was $100,000 (in U.S. dollars).

Even after adjusting for the higher income of U.S. residents, Americans pay on average $2,000 more per year for health care than the residents of the next-highest paying country, Anderson said.

One out of every seven dollars spent today in the United States goes for health care — a record 15.3 percent of the gross domestic product in 2004, the latest year for which statistics are available. By comparison, Canada spends 9.9 percent of its GDP; Japan spends 8.0 percent.

By 2015, one out of every five dollars spent in the United States will go for health care, according to projections by the Centers for Medicare and Medicaid Services. If those projections hold, the average American’s share for medical needs alone will be a staggering $12,320.

For all that money, you would expect Americans to be healthier than their foreign friends. The opposite is true.

Whoa! They are healthier than us, and they pay less? It is not just a monetary cost:

If you’re born in the United States, chances are that you’ll die younger than people born in other industrialized nations. The United States has the lowest life expectancy of 14 nations measured by the World Health Organization. U.S. life expectancy in 2001 was 77.1; Canada, 79.7; Italy, 79.8; Japan, 81.5

The infant mortality rate is higher in the United States than in other industrialized nations. In 2003, seven infants died for every 1,000 live births in the United States — the worst rate of 19 countries measured by the Organization for Economic Cooperation and Development.

I am thinking that anyone that is really PRO-LIFE, and not just talking about it for partisan political reasons, would have to be shocked by those infant mortality rates. Why aren’t they screaming about this issue? If they are really honest about being pro-life than they should be our allies on true Universal Heath Care.

As for manufacturers, just how much profit margin can health care open up for them?

Those vehicles, often parked on the same dealer lot as identical vehicles produced in U.S. plants, have one notable difference: Each vehicle assembled in the United States cost GM $1,525 for health care; those made in Canada cost GM $197.

The higher salaries of Canadian autoworkers offset much of the health care savings for the company, said Jim Cameron, labor relations director for GM Canada. But at the cash-strapped automaker, such a huge health care cost differential is hard to ignore. The difference is primarily a result of Canada’s national health care system, in which most medical bills are paid by the government. Most countries have similar systems.

WHAT THE F***!!! The GM employees get higher wages up there too? And GM still racks up more profits from production up north in Canada then they can down here? How much more of this are you Nutmeggers willing to take?

Can you imagine the shockwave across the nation if a car manufacturer or some other large industry chose to locate in Connecticut over other states or countries… And it could happen.

Do you want to continue to pay more just to get less? Less healthy workers, less money, less jobs, less profit for industry as a whole.

Why not get more? More people that actually have coverage? More healthy workers that are more productive? More savings in health care for us and for industry? More manufacturers picking Connecticut as their destination of choice? More smiles on Nutmeggers’ faces.

Universal Health Care is the answer to everyone getting more.

_________________

It might be the answer to save all US industries.

There is an off the shelf answer sitting there getting dusty. Ask Rep. John Conyers, Rep. Dennis Kucinich and the other cosigners about H.R. 676. It would be a huge step towards helping every industry in this nation become competitive.

If you need to know about a health care plan that can fix many of the problems with our privatized ripoff:

The United States National Health Insurance Act

H.R. 676

“Expanded & Improved Medicare For All”

*introduced by Reps. John Conyers, Dennis Kucinich, Jim McDermott and Donna Christensen

“National health insurance is not only the best answer,

it is the only answer to eliminating health disparities.“

If you live in CT-05 you may want to know that Rep. Chris Murphy has yet to sign up as a co-sponsor to this bill. Ya think it is time to remind him how important H.R. 676 is to all Americans?

Rep. Chris Murphy’s contact info

Chris Murphy
(202) 225-4476,
1 Grove Street, New Britain CT 06053

If you live elsewhere, you might want to consider contacting your own Congress critters, as well.

_________________

 Here are some reactions from around the internet added to it below.)

Some more actions we can take to bring this change, via Bruce Dixon at the Black Agenda Report:

What We Can Do to Protect US Jobs, Accomplish Universal Health Care, and Hold the New President Accountable.

1. Get the information about single payer health care and spread what the corporate media won’t.Be a frequent visitor at the web site of Physicians for a National Health Care Plan, http://pnhp.org. There you will find research material, talking points, frequently asked questions and answers, press releases and new information every day, enough to answer anybody’s questions on single payer, and to provide answers to all the lies and propaganda spread by the insurance companies. This is the stuff to write about, to blog about, to send and forward to everyone on your email list.
2. Email, call and visit your member of Congress about single payer health care and saving US jobs.Whether they already support HR 676 or not, remind your elected representative that US industries cannot compete with those in societies which offer free health care. Demand that single payer health care ought to be part of any legislative deal to save US auto companies.Phone calls and emails are good. Letters and faxees are better. But group visits of five or more people to district offices are the most potent weapons of persuasion. Organize one. Nearly all members of congress have open hours during which constituents can make an appointment with or drop in on the Great Man or Woman to discuss issues of importance. If you video any of these visits, we will be happy to post them here, and in some cases if you organize the visit, we can arrange to shoot the video. Email us for details.
3. Call a public meeting or teach-in at your school or neighborhood to talk about single payer health care.Pnhp.org and others can help you arrange authoritative and knowledgeable speakers. Video that too so others not present at the event can see it.This is not the time to lay back, to wait and see what the new administration does or wants to do. Every day we wait before organizing to inform each other and publicly pressure the new president and his party to keep their promises is a day that the parasitic private health insurers enjoy unrestricted and unfettered access to the new administration behind the scenes. Elite pressure occurs behind the scenes. Pressure in the public interest is — well — public.This won’t be easy. Nearly every Democratic president since Harry Truman has aimed at some kind of solution to the health care mess. Producing an aroused public makes it easier for the new administration and its party to do the right thing. But if we don’t get loud about the link between saving jobs and delivering health care early in an Obama administration, a precious opportunity will be lost that we may never see again.

And… Just to be clear on what the BIG 3 really thinks about single payer universal health care, from tiggers thotful spot at TPM:

Yes, (The best way to ‘rescue’ General Motors is single payer health care) great minds think alike.

This is from a letter that the Big Three executives SENT to the Canadian govt:

The public health care system significantly reduces total labour costs for automobile manufacturing firms, compared to the cost of equivalent private insurance services purchased by U.S.-based automakers; these health insurance savings can amount to several dollars per hour of labour worked. Publicly funded health care thus accounts for a significant portion of Canada’s overall labour cost advantage in auto assembly, versus the U.S., which in turn has been a significant factor in maintaining and attracting new auto investment to Canada…

For both employers and workers in the auto industry, it is vitally important that the publicly funded health care system be preserved and renewed, on the existing principles of universality, accessibility, portability, comprehensiveness, and public administration…

From Ozzie, a couple of videos discussing single payer health care:

Nick Skala, formerly of PNHP and co-founder of Health Care for All Illinois details quite a bit. Part 1.

Part 2 here.

From Imavehmontah on savings with single payer universal health care:

Single payer healthcare means replacing the present patchwork quilt of payment mechanisms for the cost of health care with a single point source payer. That single payer is responsible for defining the benefits package that is covered, actuarial predictions of what the cost would be for those services, collecting the money required to cover those costs, and disbursement of the money. The single payer obviously has a great amount of power and responsibility for health care. There may or may not be the addition of other payers for services that are outside of the benefits package chosen by the single payer. Some single payer systems have also allowed people to “opt-out” of being covered by a single payer system and go it alone, with or without the help of other insurance companies or plans.

Why is single payer advantageous? There are a number of ways that single payer plans (can potentially) improve care and reduce costs:

When all people are in a large common pool, the single payer has enormous leverage to negotiate prices.

When all people are in a common pool, the single payer can prospectively look at the relative values provided by different modes of treatment and decide which modalities are most cost effective for the populace at large.

The single payer can preferentially fund and reward preventive care (which may even include preventions typically not thought of as “health care” like smoking cessation), which frees up resources that may otherwise be wasted.

The single payer can reduce greatly the amount of resources required to get reimbursement for service provided, freeing those resources to be used for other health care services.

The single payer can reduce geographic maldistribution of health care resources.

The single payer has no fear that money invested in services that keep people healthy will become a reward for someone else down the line as people change health care plans.

Being involved in a single payer system raised the awareness and accountability of all of participants in the system. It quickly becomes clear that it is in your interest to make sure that your neighbors take advantage of preventive services and behaviors because everybody wins.

A single payer plan can (if properly designed) be more responsive to local needs and variations, and more locally accountable.

A single payer system can improve the use of health care technology for information use that will give us a clearer picture of how to allocate resources for the best return on investment.

A single payer system can greatly reduce the percentage of the total GNP that health care consumes, benefitting all industry.

Now, there are going to be a lot of anecdotal replies to this about this description. I admit that not all single payer implementations realize these potentials. But nonetheless these are the possible benefits in a well designed system.

neroden on systems eliminated by single payer universal health care:

I’ll count Medicare (parts A and B) as continuing to exist, because they would likely form the basis of the single payer system. If the single-payer system was “built fresh” they would go away too.

(1) All private insurance companies, including all HMOs and PPOs. There might be a small number left to provide “supplemental” insurance.

(2) Medicaid. Subsumed by single-payer.

(3) S-CHIP. Subsumed by single-payer.

(4) Medicare [Dis]Advantage. This is private companies.

(5) Medicare Part D. Elimination of private companies.

(6) Health care compensation from auto insurance. (Compensation for lost wages and “quality of life” would continue, but would be much simpler to adjudicate; premiums would drop).

(7) Health care compensation for ‘worker’s comp’. (Compensation for lost wages and “quality of life” would continue, but would be much simpler to adjudicate; premiums would drop.)

(8) “preferred providers”, doctors accepting some insurances and not others, and all similar doctors’ office paperwork. Every doctor would either be “in the national system” or not, and very few would not.

(9) State and local health insurance systems for their employees. Subsumed by single-payer.

(10) Self-funded insurance schemes from corporations (like GM) and universities (like Cornell). Subsumed by single-payer.

(11) Special “flu clinics” and other such schemes for getting basic preventative medicine to everyone. Everyone would have a regular doctor in the system and that doctor would offer preventative medicine for free.

(12) Health care aspect of disability insurance for business. (Compensation for lost wages would continue, but would be much simpler to adjudicate; premiums would drop.)

(13) Federal government employees insurance system. Subsumed by single-payer.

(14) Charity care budgets at emergency rooms. Subsumed by single-payer.

It would instantly save many corporations, hospitals, and individuals from bankruptcy.

Current estimates are that the tax increase needed would be very small. The administrative savings from combining Medicare, Medicaid, S-CHIP, and the Government Employees insurance program is substantial; the savings from pricing power are large; and the government already covers all the people with the highest health care costs (children, the elderly, the poor, and the military), so adding all the “cheap” people costs a lot less proportionally. Estimates are that the government already pays 7/8 of all health care spending in the country, so that gives you a good sense of the necessary increase.

People relatively well-to-do would presumably see their taxes go up slightly, as would well-to-do businesses. However, almost anyone who is actually paying for their insurance would end up saving money. Only people who are uninsured and healthy (who benefit by getting coverage), or who have their insurance entirely paid for by employers (which is very rare these days) would have a net increase in costs.

What it would require is firing a lot of people — the people working for the health insurance companies, or working in other offices to deal with the health insurance companies. That’s where the out-of-pocket savings for most Americans would come from: the fired paper-pushers. That is the actual downside: elimination of jobs, but since they’re wasteful make-work, or even make-trouble, jobs, I think it’s worth it. We could come up with a job placement program for them.

While it would eliminate insurance company jobs that PRODUCE NOTHING (except for the leeching effect off of our paychecks) these jobs would be replaced by more productive jobs in the health care industry. More Doctors, Nurses, technicians and other supporting jobs for hospitals, clinics and industries that produce health care products.

Jobs that would be more beneficial to individuals, industry and to society as a whole.

Invoking moral hazard instead of rigorously regulating the financial industry has resulted in the worst financial crisis since the early 1930s.  To prevent a recurrence of the problems that led to this financial crisis, the United States and indeed the entire world need a new vigorously enforced regulatory structure for the financial services industry.

Citigroup Bailout

On Monday, the Bush Administration announced the terms of the Citigroup bailout.  Over the weekend, Citigroup identified a pool of U.S. residential and commercial mortgage loans, leveraged business loans and other related assets with a nominal value of $308 billion; the U.S. government agreed to provide insurance.  For that asset pool, Citigroup agreed to be responsible for the first $29 billion in losses, and 10% of the remaining losses, with the U.S. government picking up the rest.  The government risk was assigned among agencies as follows:  The Treasury will take the first $5 billion in government losses, and the Federal Deposit Insurance Corp. will absorb the next $10 billion in losses. If the asset pool losses exceed those triggers, the Federal Reserve will grant a loan for the remaining losses.  In exchange for that insurance, Citigroup sold $27 billion in preferred stock to the U.S. Treasury for $20 billion.  The preferred stock will have a dividend rate of 8%.[i] 

Conditions of the rescue included an agreement that Citigroup will not pay quarterly dividends of more than 1 cent a common share for three years unless the company obtains consent from the three federal agencies, as well as restrictions on executive compensation, including bonuses. Commentators said the deal raised the issue of moral hazard in dealing with large financial institutions.[ii]

Definition of Moral Hazard

According to Wikipedia, “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions…  [In finance], a moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, and other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.”[iii]

Role of the Concept of Moral Hazard in Paulson Actions

Treasury Secretary Hank Paulson has worried publicly about moral hazard while dealing with the current financial crisis, which began in the Spring of 2007 when more than the expected percentage of subprime mortgages started defaulting.  Two Bear Stearns hedge funds, which used high leverage to buy subprime mortgage-backed securities and also bought credit default swaps to reduce risk, collapsed and were liquidated in July 2007.  For the rest of 2007, the damage seemed to be contained, but during the week of March 10, 2008, rumors and short sellers brought down Bear Stearns.  On March 16, 2008, under the leadership of Hank Paulson and Ben Bernanke (chairman of the Federal Reserve), the government encouraged J.P. Morgan Chase (Jamie Dimon, CEO) to acquire Bear Stearns at a low stock price – originally $2 but a week later raised to $10 per share.  To facilitate the deal, the Federal Reserve Bank of New York gave a loan of $29 billion, to be repaid from the sale of Bear Stearns assets valued at $30 billion in a mark-to-market exercise on March 14, 2008.[iv]   Mr. Paulson argued that the large decline in Bear Stearns stock price in the week before the acquisition (and a $133 per share 52-week high) negated the moral hazard concern.

To try to avert a recession, Congress authorized and the U.S. Treasury sent economic stimulus checks to almost everyone in the country.  The Bush Administration hoped that an economic downturn had been averted.  However, oil and gasoline prices went up during the summer of 2008, housing prices continued to decline, and mortgage delinquencies continued to rise.  A few people started to worry about derivatives such as credit default swaps.  Home foreclosures started to set records.

Fannie Mae and Freddie Mac

As concern mounted about the solvency of Fannie Mae and Freddie Mac, Treasury Secretary Paulson requested from Congress the authority to bail them out if necessary.  The Housing and Economic Recovery Act of 2008-passed by the United States Congress on July 24, 2008 and signed into law by President George W. Bush on July 30, 2008-expanded regulatory authority over Fannie Mae and Freddie Mac by the newly established Federal Housing Finance Agency (FHFA), and gave the U.S. Treasury the authority to advance funds for the purpose of stabilizing Fannie Mae, or Freddie Mac, limited only by federal debt limits, which were increased.

On September 7, 2008, James Lockhart, director of the FHFA, announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA.  He cited their combined losses of $14.9 billion and their difficulty in raising sufficient fresh capital to continue to perform their mission as mortgage defaults continued to climb.  Treasury Secretary Paulson and Federal Reserve Chairman Bernanke sat next to Lockhart as he told the CEOs of Fannie and Freddie that they were losing their jobs as part of the takeover.  The takeover was described as one of the most sweeping government interventions in private financial markets in decades, but Congress had created these Government-Sponsored Enterprises (GSE) to provide liquidity in the home mortgage market, and most investors had assumed all along that Fannie Mae and Freddie Mac bonds would be backed by the U.S. Government if any difficulty arose.  The Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating.  To assert moral peril, the common stockholders lost their entire investment, and preferred stock dividends were suspended.

In suspending Fanny and Freddie’s preferred dividends, the Treasury and the Fed underestimated the impact on ordinary Main Street banks, which were only allowed to own preferred stock.  According to the Financial Times, “Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship…, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.”[v]  The preferred dividend suspension wiped out $36 billion in capital that U.S. banks had to write down, at the same time the Treasury and the Fed were trying to improve the capital position of banks, both large and small.  Thus another mess was created in the name of minimizing moral hazard.

Lehman Brothers Bankruptcy

Allowing Lehman Brothers go bankrupt on September 15, 2008, in an attempt to minimize future moral hazard, turned out to be a huge mistake. In addition to many thousands of creditors holding its bonds, Lehman had made derivatives deals with 8000 firms, and other firms held credit default swaps with notional value of hundreds of billions that were triggered by the Lehman bankruptcy. Lehman was reported to be involved in as much as $1 trillion in outstanding derivative transactions.  The entangling counterparty risk was enormous, affecting financial institutions as well as individuals all over the world.  Scores of hedge funds that had hundreds of millions in cash and other securities parked with Lehman’s prime brokerage operation in London had their accounts frozen.[vi] Law suits abounded, asking for the return of frozen collateral.  Wind farm operators were left to scramble for alternate sources of funding, because Lehman Brothers had had a big green energy program.

Before the election, and long before Barack Obama started assembling his economic policy team, Ezra Klein reported that Tim Geithner had argued in favor of rescuing Lehman Brothers, it could not be allowed to file for bankruptcy, because the entangling counterparty risk was too great for the markets to handle.[vii]  Hank Paulson said Congress wanted to send a signal that bad risk management would not be rewarded.  Lehman fell.  The result was a catastrophe.  Despite the government rescue of AIG the following day, financial institutions lost all trust to lend to each other, and the credit crisis reached disaster proportions.  Swap sellers sold equities to raise cash to pay swap buyers, driving down global stock markets.  In the two months following the Lehman Brothers bankruptcy, the U.S. stock market alone declined approximately $5 trillion in addition to the approximately $3 trillion decline from its peak to the last trading day before the Lehman bankruptcy.  That is quite a price to pay to minimize moral hazard.

How did we get into this mess?

The primary cause of the current financial crisis was the deregulation of the financial services industry, not moral hazard.  The precursor was the Savings and Loan Crisis.  S&Ls had previously been restricted to investing depositor funds in home loans and community development projects.  During the Reagan Administration, S&L deposit insurance was raised from $20,000 to $100,000 per account, and S&Ls were allowed to invest in any real estate project they wanted – shopping malls, out-of-state hotels, even casinos. Risk-taking S&L executives lost money on poor investments.  The Federal Savings and Loan Insurance Corporation was overwhelmed by the losses, and the federal government was forced to close many S&Ls, refund depositors’ money and take over foreclosed properties. 

Remembering the lessons learned from the S&L crisis, Congress passed the Home Ownershi and Equity Protection Act (HOEPA) in 1994, giving the Federal Reserve the power and duty to regulate the mortgage lending industry, to require adequate disclosure and prevent predatory lending.  However, Federal Reserve Chairman Alan Greenspan, a lifelong Republican, was reluctant to regulate mortgage lending.  Dr. Greenspan publicly encouraged people to make use of adjustable rate mortgages, which he said would lower the cost of home ownership.

When, in July 1998, the Commodity Futures Trading Commission proposed to regulate OTC financial derivatives such as swaps, SEC Chairman Arthur Levitt objected.  Less than two months later, we almost had a world-wide financial crisis when highly-leveraged LTCM collapsed but was saved by several commercial and investment banks at the instigation of the Treasury and the Federal Reserve.  

Unfortunately, our government leaders learned nothing from the LTCM near-disaster in 1998.  Alan Greenspan (with support from Treasury Secretary Robert Rubin) persuaded Congress to pass legislation removing from the CFTC the power to regulate financial derivatives.  The OTC derivatives market remained unregulated, providing a means for banks and other financial institutions to skirt capital requirements and increase their leverage.

In 1999, a Republican Congress repealed the Glass-Steagall Act, a cornerstone of New Deal regulation.  The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corporation (FDIC) and separated investment banks from commercial banks.  Commercial banks were part of the banking system. They created credit. They were regulated, supervised, usually enjoyed FDIC insurance, and had access to advances from the Fed in emergencies. Investment banks were allowed to take more risks in their investments, but any losses on those investments would have to be borne by their shareholders, not the government.[viii]

However, during the Reagan Administration in the 1980s, regulators who didn’t believe in regulation either allowed explicit waivers of some aspects of Glass-Steagall or looked the other way as commercial banks and investment banks became more alike. In 1998, Travelers CEO Sandy Weill created the world’s largest financial supermarket Citigroup, with $700 billion in assets, via a $140 billion merger of the consumer and commercial banking giant Citicorp with the financial services conglomerate Travelers Group, whose businesses covered credit card services, consumer finance, retail brokerage, bond trading, investment banking and insurance.[ix]  The deal would enable Travelers to market mutual funds and insurance to Citicorp’s retail customers while giving the banking divisions access to an expanded client base of investors and insurance buyers.  This merger was a gross violation of the Glass-Steagall Act.  The basic premise of Glass Steagall had been to prohibit retail banks from selling common stocks to unsophisticated depositors, and to segregate insured banks from the risk-taking culture of investment banks.   This merger was not the first violation of the Glass Steagall Act, just the most flagrant.  Weill predicted at the time of the merger that legislation would obviate the need to divest prohibited assets.  Under the leadership of Senator Phil Gramm (R, Texas), and supported by Treasury Secretary Larry Summers, Glass-Steagall was officially repealed in November 1999 by Gramm-Leach-Bliley Act.[x]

In 2000, the Federal Reserve established an advisory committee chaired by Walter Shipley, former CEO of Chase Manhattan Bank.  The Shipley panel recommended specific changes in regulatory oversight to improve risk management and to require better disclosures for all financial institutions.  However, Fed Chairman Greenspan chose to ignore the recommendations of the Shipley committee, as he had ignored HOEPA.  Last month, Alan Greenspan admitted to a hostile Congressional Oversight Committee that his deregulatory philosophy had a flaw.  Thanks a lot, Mr. Greenspan.  Ten years too late!

Deregulation ideology continued to prevail in this decade. In 2003, the Federal Government preempted authority from the states when several state Attorneys General tried to investigate and rein in deceptive and fraudulent peddling of subprime mortgages.  In 2004, the SEC held a basement hearing with only representatives of five major investment banks, including Goldman Sachs – led by Hank Paulson, now Treasury Secretary – in attendance, and agreed to relax capital requirements on those banks, and allow them to operate at higher leverage.  Meanwhile, the unregulated credit default swap market grew from $900 billion in 2000 to $62 trillion in 2007, or four times U.S. GDP, threatening the entire global capitalist system.[xi]

Treasury Secretary Hank Paulson has been consistently behind the curve in dealing with this financial crisis.  Nationalizing Fannie Mae and Freddie Mac in the waning days of summer (September 7, 2008) was the right thing to do.  However, allowing Lehman Brothers go bankrupt on September 15, 2008 turned out to be a huge mistake. In addition to many thousands of creditors holding its bonds, Lehman had made derivatives deals with 8000 firms, and other firms held credit default swaps with notional value of hundreds of billions that were triggered by the Lehman bankruptcy.  The entangling counterparty risk was enormous, affecting financial institutions as well as individuals all over the world.  Financial institution lost all trust to lend to each other, and the credit crisis reached disaster proportions.  Swap sellers sold equities to raise cash to pay swap buyers, driving down global stock markets.  In the two months following the Lehman Brothers bankruptcy, the U.S. stock market alone declined approximately $5 trillion in addition to the approximately $3 trillion decline from its peak to the last trading day before the Lehman bankruptcy.  Millions of people will lose their jobs as the recession deepens.  Millions of hard-working people with limited financial acumen have seen their savings destroyed and their retirement dreams deferred.

Where does financial services policy go from here? 

The federal government needs to regulate all aspects of the financial services industry.  As Barack Obama said in his speech on March 27, 2008, “We need to regulate financial institutions for what they do, not what they are.”[xii] The basic principles should be based on asking what role the financial institution plays in the economy.  If it is accepting and keeping retail and commercial deposits, with FDIC insurance, it should be regulated as a commercial bank.  If it invests the shareholder capital in risky assets, using leverage to increase its returns, it should be regulated as an investment bank.  Some 21^st Century version of Glass-Steagall is necessary to protect taxpayers from the need to bail out investment banks.

Leverage needs to be controlled for all financial institutions, whether they are called banks or insurance companies or hedge funds or commodity futures trading companies.  No company should be allowed to operate with so much leverage that its failure could threaten the entire global financial system, a situation in which we have found ourselves during the past two years.  To be more specific, leverage of 30:1 is outrageously too high.  Fines are not a sufficient deterrent to the greed of some people who will use high leverage whenever they think they have a chance to make a large fortune risking other people’s money.  Legislation needs to specify significant prison time for people who violate the rules of the new financial system. 

Now that we have mentioned hedge funds, the question is whether they have any redeeming social value.  Banks keep depositors money safe and put money to work by lending to households and businesses based on the lender’s assessment of their ability to pay the loans back.  Insurance companies spread risk among large groups of customers, sparing the focus of hardship on the unlucky few.  Financial advisers help people and businesses save and invest wisely.  Venture capitalists raise funds for entrepreneurs who create innovative products and services.  Hedge funds should not be allowed to exist just to gamble on giant returns by using greater leverage than is allowed of regulated financial institutions.  As a minimum, hedge funds should be regulated with regard to leverage and the transparency of their operations.  If hedge funds cannot find a contributing role in the real economy, they should be shut down.

The new financial order must ensure the independence of the financial rating companies.  We need to separate the funding of financial rating companies (like Moodys, Standard & Poors, and Fitch) from the financial engineers who came to them for ratings.  We have suffered from a system under which bond issuers paid the ratings companies to rate their bonds, and the ratings companies sold consulting services to tell the issuers how to tweak the composition of their Collateralized Debt Obligations to get AAA ratings. The federal government needs to police conflicts of interest like that. [xii] 

Transparency is a key issue.  New Deal legislation sought to increase transparency in the interstate offering and sale of securities.  The Securities Act of 1933 requires every U.S. public company to register new securities (with the SEC after 1934) and to offer (interstate) securities only through a truthful prospectus giving basic financial information as well as stating the risk involved in investing in the offered securities.  Corporations were also required to issue audited annual reports on the status of the business.  The Securities Exchange Act of 1934 focused on the sale of securities in secondary markets, creating the Securities and Exchange Commission (SEC) to monitor and enforce corporate reporting, ensure conformance with regulations, as well as to detect and punish accounting fraud, false information distribution, insider trading or other violations of the securities law.[xiii]  Unfortunately, despite additional legislation (e.g., the Investment Company Act of 1940, the Investment Advisors Act of 1940, and the Sarbanes-Oxley of 2002), federal laws have not kept up with the pace of financial chicanery (described in the industry as innovation).

There needs to be more transparency of all kinds of financial instruments, including the kind of mortgage-backed securities, collateralized debt obligations and credit default swaps that have created the multi-trillion dollar financial meltdown we have experienced over the past eighteen months.  For example, standardized credit default swaps should be traded through a CDS clearinghouse (something that Tim Geithner has been encouraging in recent months). Legislation is needed to establish a streamlined framework for regulating the equity, debt, commodity and derivatives markets.  The functions of the SEC and CFTC, as well as functions undertaken by the Fed and the Treasury on an ad hoc basis, should be transferred to this new regulatory agency.[xiv]

Size is also an issue.  No financial institution should be allowed to grow into a company that it is too big to fail.  Sandy Weill was right when he predicted the repeal of the Glass-Steagall Act after he created Citigroup, but he was also right in what he implied, which was that he had created an institution that had an inherent advantage over its rivals because it was too big to fail.  Citigroup must be broken up.  If the Citigroup management does not spin off parts of its business voluntarily, then antitrust litigation should be used to break up the company.  Furthermore, we need to reverse the trend during the Paulson era of turning to the biggest banks to absorb other big banks that get into trouble.  We must ensure that there are no more Citigroups in the future.

We hope and trust that the new Economic Recovery Advisory Board to be chaired by Paul Volker will address these issues and recommend a new financial system regulatory framework.

Summary

Invoking moral hazard instead of vigorously regulating the financial industry has resulted in the worst financial crisis since the early 1930s.  This site is not alone in saying proper vigorous regulation of the financial industry must replace the concept of minimizing moral hazard as the means for preventing financial crises such as we have been experiencing for the last year and a half.[xv] 

In September 2008, with the worldwide economy teetering on the brink of calamity, Treasury Secretary Hank Paulson decided to reduce moral hazard by standing back, demanding that the financial industry heal itself, and allowing Lehman Brothers to go bankrupt when Barclays Bank could not accept the risks of a takeover.  The result:  Credit markets froze and stock markets crashed all over the world.  In the two months following the Lehman Brothers bankruptcy, the U.S. stock market alone declined approximately $5 trillion in addition to the approximately $3 trillion decline from its peak to the last trading day before the Lehman bankruptcy.  Citigroup tottered on the brink, and needed a federal bailout.  Millions of people will lose their jobs as the recession deepens.  Millions of hard-working people with limited financial acumen have seen their retirement savings deferred or destroyed.

The ad hoc Bush Administration response to the unfolding financial crisis has been guided by its failed laissez faire free market ideology.  Unable to break away from a flawed [Alan Greenspan's term] ideology, Treasury Secretary Paulson has zigged and zagged from one approach to another as he sought a temporary solution to contain a conflagration that he did not understand. 

Finding a buyer for Bear Stearns was the right thing to do.  Although the terms could have been formulated better, nationalizing Fannie Mae and Freddie Mac was the right thing to do.   Injecting capital into banks was the right thing to do.  Rescuing Citicorp was the right thing to do.  But none of these rescues fix the underlying cause.

To prevent a recurrence of the problems that led to this financial crisis, the United States and indeed the entire world need a new rigorously enforced regulatory structure for the financial services industry.  In the United States, Legislation is needed to establish a streamlined framework for regulating the equity, debt, commodity and derivatives markets.  The functions of the SEC and CFTC, as well as functions undertaken by the Fed and the Treasury on an ad hoc basis, should be transferred to this new regulatory agency.[xvi] 

[i] http://www.smartmoney.com/breaking-news/smw/?story=20081124075535

[ii] http://www.pbs.org/newshour/bb/business/july-dec08/citirescue_11-24.html

[iii] http://en.wikipedia.org/wiki/Moral_hazard

[iv] http://www.newyorkfed.org/newsevents/news/markets/2008/rp080324b.html

[v]http://www.nakedcapitalism.com/2008/09/banks-take-bigger-than-estimated-hit-on.html 

[vi] http://www.businessweek.com/investing/insights/blog/

archives/2008/10/lehman_bankrupt.html

[vii]http://www.prospect.org/csnc/blogs/ezraklein_archive?month=09&year=2008&base_name=pointing_fingers

[viii] http://en.wikipedia.org/wiki/Glass-Steagall_Act

[ix] http://en.wikipedia.org/wiki/Citigroup

[x]http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms

[xi] http://westonpolicy.wordpress.com

[xii]http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms

[xiii] http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

[xiv] http://westonpolicy.wordpress.com

[xv] http://seekingalpha.com/article/95858-moral-hazard-the-demise-of-lehman-brothers

[xvi] http://westonpolicy.wordpress.com

On Friday afternoon, October 24, I received an email from Christopher Shays’ constituent services asserting the need for Congressional hearings on malfeasance at Fannie Mae and Freddie Mac, for which Congressman Shays blamed the entire financial crisis that has spread from the United States to all parts of the world.  This is an assertion that I have heard repeated several times by John McCain and other Republicans during the past three months. 

While I agree that there was mismanagement at Fannie and Freddie, it was not the main cause of the current financial crisis.  The securitization of subprime loans started on Wall Street, at companies like Bear Stearns.  The creation of credit default swaps to “insure” these mortgage-backed securities started when J.P. Morgan suggested the idea to AIG.  If Fannie and Freddie had never bought, securitized or insured any subprime loans, their revenues would gone down but unregulated mortgage brokers would have just sold their loans to Wall Street firms.

The primary cause of the current financial crisis is deregulation ideology.  In 1994, Congress passed the Home Ownership and Equity Protection Act (HOEPA) giving the Federal Reserve the power and duty to regulate the mortgage lending industry, to require adequate disclosure and prevent predatory lending.  However, Federal Reserve Chairman Alan Greenspan, a lifelong Republican, was reluctant to regulate mortgage lending.  Dr. Greenspan publicly encouraged people to make use of adjustable rate mortgages, which he said would lower the cost of home ownership.

When, in July 1998, the Commodity Futures Trading Commission proposed to regulate OTC financial derivatives such as swaps, SEC Chairman Arthur Levitt objected.  Less than two months later, we almost had a world-wide financial crisis when highly-leveraged LTCM collapsed but was saved by several commercial and investment banks at the instigation of the Treasury and the Federal Reserve.   

Unfortunately, our government leaders learned nothing from the LTCM near-disaster in 1998.  Alan Greenspan persuaded Congress to pass legislation removing from the CFTC the power to regulate financial derivatives.  The OTC derivatives market remained unregulated, providing a means for banks and other financial institutions to skirt capital requirements and increase their leverage.  In 2000, the Federal Reserve established an advisory committee chaired by Walter Shipley, former CEO of Chase Manhattan Bank.  The Shipley panel recommended specific changes in regulatory oversight to improve risk management and to require better disclosures for all financial institutions.  However, Fed Chairman Greenspan chose to ignore the recommendations of the Shipley committee.  Last week, Alan Greenspan admitted to a hostile Congressional Oversight Committee that his deregulatory philosophy had a flaw.  Thanks a lot, Mr. Greenspan.  Ten years too late!

Deregulation ideology continued to prevail in this decade. In 2003, the Federal Government preempted authority from the states when several state Attorneys General tried to investigate and rein in deceptive and fraudulent peddling of subprime mortgages.  In 2004, the SEC held a basement hearing with only representatives of five major investment banks, including Goldman Sachs – led by Hank Paulson, now Treasury Secretary – in attendance, and agreed to relax capital requirements on those banks, and allow them to operate at higher leverage.  Meanwhile, the unregulated credit default swap market grew from $900 billion in 2000 to $62 trillion in 2007, or four times U.S. GDP, threatening the entire global capitalist system.[i]

Treasury Secretary Hank Paulson has been consistently behind the curve in dealing with this financial crisis.  Nationalizing Fannie Mae and Freddie Mac in the waning days of summer (September 7, 2008) was the right thing to do.  However, allowing Lehman Brothers go bankrupt on September 15, 2008 turned out to be a huge mistake. In addition to many thousands of creditors holding its bonds, Lehman had made derivatives deals with 8000 firms, and other firms held credit default swaps with notional value of hundreds of billions that were triggered by the Lehman bankruptcy.  The entangling counterparty risk was enormous, affecting financial institutions as well as individuals all over the world.  Financial institution lost all trust to lend to each other, and the credit crisis reached disaster proportions.  Swap sellers sold equities to raise cash to pay swap buyers, driving down global stock markets.  Now all the Kings’ horses and all the Kings’ men are having great difficulty putting Humpty Dumpty back together again. 

Mr. Shays is proud to say that he is a member of the House Financial Services Committee.  What was Mr. Shays doing to provide oversight and regulatory guidance during the years 2000-2006 when the Republicans controlled Congress as well as the White House, and the credit default swap market was growing out of control?  Did Mr. Shays heed Warren Buffet’s warning that unregulated credit default swaps were weapons of mass destruction?  Did Mr. Shays stand up in the House and urge adoption of the Shipley Committee recommendations on risk management and disclosures of financial institutions?  Was Mr. Shays warning about the dangers of increased leverage at investment banks and hedge funds?  Did Mr. Shays request any hearings in 2003 on the subprime mortgage concerns of the state Attorneys General?  The answer to all these questions is no.

I plan to vote for Jim Himes.  He understands the financial world and the need for regulatory reform.

The past month, and especially the past two weeks, has seen the worst worldwide financial debacle since the 1930s.  Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have worked seven days a week developing, proposing and implementing a combination of textbook and innovative solutions.  The crisis has only gotten worse.  What should they do next?  Here is a summary of the next actions to take.  Subsequent posts shall discuss each point:

1. The U.S. Treasury must immediately inject capital into those banks that are currently undercapitalized, but healthy enough and well-managed enough to succeed with government capital.  Systemically critical banks should be included at the discretion of the Secretary of the Treasury.  This must not be a giveway.  The government must take an equity stake in each bank that takes government funds, proportionate to the size of the capital infusion.  Urgent action is required.  There is no time to stall around to see who wins the presidential election in November.
2. The federal government (Treasury, FDIC, Federal Reserve) must identify banks that do not have the resources to succeed, and move swiftly to shut them down, transferring their operations to healthier banks.  There is no time for analysis paralysis.  Some mistakes are inevitable, but if bank examiners determine that a bank is below its capital reserve requirements, and cannot or will not immediately rectify the situation, it is better to shut it down than to wait for a run on the bank.
3. The U.S. Treasury should proceed expeditiously with plans to buy toxic assets that clog the balance sheets of financial institutions, as originally envisioned by Secretary Paulson.  Warrants or stock options should be obtained as part of the toxic asset purchases.
4. The Treasury should buy non-performing owner-occupied home mortgages at market value (not face value) and offer to refinance the mortgages at current fixed interest rates and principal equal to 90%-95% of the current value of the home if the owner shows the financial capability and commitment to pay the refinanced mortgage.  Appreciation sharing should be considered.
5. The Federal Reserve should offer credit lines to state and municipal governments that cannot obtain short-term funding due to the credit crisis.
6. Congress should pass an amendment to the bankruptcy law that would allow bankruptcy judges to force mortgage holders to renegotiate mortgages as part of the bankruptcy settlement.  Congress should repeal recently passed exemptions that allowed credit card debt to survive a personal bankruptcy with preferred standing.
7. Congress should write and pass a comprehensive regulatory reform act for the U.S. financial services industry.