Monday, October 12, 2015

Uncertain Health in an Insecure World - 61

“Foundational Myths”

Social policy change and innovation are frequently conflated, but they are concepts with very different drivers and  masters. The foundational myths of America are gun ownership (for personal safety), capitalism (for societal wealth), and world-leading healthcare (via technology).

Let's explore an interface between the latter two myths.

The 26th U.S. President Theodore Roosevelt once exclaimed, “Oh, for a one-handed economist!” The 33rd U.S. President Harry Truman pleaded, “Give me a one-handed economist! All my economists say, ‘On the one hand, and on the other hand…’ ”.

The implication?... Economists are indecisive.

On Friday September 12, 2008, the Iraq war-weary post-9/11 and -Katrina administration of the 43rd U.S. President George Bush was limping through its eighth and final year in office. In the pre-Uber era dusk, a line of black cars delivered the most world’s powerful financial minds to the New York Federal Reserve Bank in lower Manhattan.

The final straw in a fragile global credit market had snapped.

These current and former private sector professionals, not elected officials, were put in charge of The Problem. Career financiers all, they understood that the global upside and downside of a big U.S. bank bailout would eventually become clear, long after they and their elected counterparts had moved on.

So they made a damn decision!

By October 2008, former Goldman Sachs investment banker and CEO, Secretary of the Treasury Hank Paulson (above), was orchestrating the U.S. government bailout of big banks like Goldman Sachs, JP Morgan Chase, Citigroup, Bank of America, and Wells Fargo. Back then, people wondered why the U.S. government rescued these financial institutions.

In 2015, the answer to why the big banks were saved appears more obvious. In fact, Ben Bernanke (above), U.S. Federal Reserve chairman at the time, clearly rationalized this decision in his new book, “The Courage to Act”. On the basis of the best information available, Paulson, Bernanke and others acted.

Let’s review a little of the situational complexity.

The March 2008 acquisition of failing Bear Stearns by JP Morgan Chase was made possible by US$29B in government financing. By early September, the government-backed private mortgage agencies, Fannie Mae and Freddie Mac, received US$200B in capital to assure their liquidity.

But Lehman Brothers’ assets were too troubled for the government to sell or infuse. Its US$32B commercial real estate portfolio was particularly suspect. The gaping “hole” in Lehman’s balance sheet was too big. As someone noted, “The air kind of went out of the room” through that hole.

The British Office of the Exchequer and the U.S. Department of the Treasury contemplated the risk to taxpayers of backstopping a Lehman bailout through national banks (i.e. Barclays, Credit Suisse). With Warren Buffett lurking in the shadows, and with the fate of global insurer A.I.G. also hanging in the balance, they eventually pulled the plug on Lehman Bros.

As one Treasury Department adviser later put it, “We lost the patient.”

Also in 2008, money market funds (the first, the Primary Fund, est. in 1970) were a US$3.5T market. Many corporations relied upon MMF’s to meet their day-to-day cash needs, including payroll. While MMF’s were not covered by federal deposit insurance, these AAA-rated investments were deemed “ultra-safe”, while producing higher annual yields than bank deposits (4-8%/year). Their share values were never less than US$1 (a “buck”). But with the failure of Lehman (its Primary Fund holdings = 1.2% or US$785M), “breaking the buck” was becoming a real risk to this entire financial sector.

At 4:00 PM on Tuesday September 16, 2008 the Primary Fund share value fell to US$0.97. The "ultra-safe" global money market fund sector was now also teetering on the brink.

That week, General Electric (GE) could not secure its daily float of cash flow needs. GE Capital was suffering from these financial sector pressures, putting the entire global conglomerate at risk, and drawing down its profits (below).

Lame duck politicians from both parties in the U.S. Congress, charged with protecting the public’s interests, raised concerns about the authority by which the Fed’s rescue actions made the U.S. government an 80% equity holder in A.I.G..

They were largely ignored.

On November 4, 2008 Barack Obama was elected the 44th U.S. President.

 By March 2009, President Obama said, “I have more than enough to do without having to worry about the financial system.” Obama's administration inherited the ‘mortgage-backed securities’ crisis, and would breathe its toxic financial fumes for the next two terms. Their political decision, beyond the troubled asset rescue (TARP) and economic stimulus (ARRA) programs, was to double down on healthcare reform via the Affordable Care Act (ACA).

They say, "Never waste a good crisis!"

One year later in March 2010, Obamacare became the law of the land.

As evidenced by its negative initial reaction to Obamacare, the U.S. medical establishment is a well-entrenched trade organization largely dedicated to gradual incremental innovation. Their codependent healthcare delivery and insurance partners are fundamental to this mass market, and are deeply embedded in the economies of every major developed country in the world.

Led by avowed Obamacare opponent Rep. Fred Upton [right, below], and joined by Rep. Diana DeGette [left, below], on July 10, 2015 the U.S. House of Representatives passed the bipartisan 21st Century Cures Act to increase NIH funding while loosening FDA new drug approval criteria (like no clinical trials!).

This act is a quirky good-for-bad policy trade-off.

This act is why politicians cannot be solely entrusted with solving a good crisis.

 U.S. Medicare (est. 1965) is correctly characterized as a socialistic benefit program that is too big to fail. Medicare's trustees still project that ceteris paribus, the program will be insolvent by 2030. It's too early to know whether Obamacare is too big to fail.

The wages of big bailouts - societal and financial - are telling. Big banks have gone from controlling 15% of U.S. GDP to controlling 60%. Since 2008, Wall Street money managers have gone from controlling 45% of U.S. wealth to controlling 55%.

In 2015, America has universal healthcare coverage, but wealth inequity is at its greatest ever. For example, less than 10% of Black Americans own public equities. 

Politicians and economists are not The Problem. But nor are they are really part of The Solution.

The search for the one handed leadership continues... It's called the American Experience!

One one hand, we in the Square understand and applaud American Exceptionalism, But on the other hand, undisciplined and ungoverned action has perverse outcomes that institutionalize inequities.

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