Posted in Econ, Politics at 5:13 pm by Administrator
The latest central bank report showed that household net worth grew 3.9% from the first quarter, but still down about 19% since the 3rd Q peak of 2007. Households cut debt by 1.7% annualized in this quarter. All that sounds good on an individual level, but government borrowing surged at a 28% rate owing to aid and rescues packages. State and local governments also incurred more debt, an 8.3% increase annualized. Relative to government debt, what goes up must come down, eventually. This is the part which is most worrisome.
While households become more prudent with their money, so too must the government become a better custodian. Global financial players have pressed the U.S. on this issue, as have American taxpayers. With the federal debt hangover for many years to come, and baby boomers entering the rolls of Medicare, Medicaid, and Social Security (SS), some serious work needs to begin toward putting our house back onto a fiscally sustainable path. Health care reform needs to address misaligned incentives in Medicare, and waste. Pension reform should be considered that creates better generational equity and moves away from clever SS trust fund accounting; Canada’s federal pension fund weathered the financial crisis better than most. It is separated out from politicians’ hands, requires mandatory adjustments for sustainability when things go wrong, and is run with a long-term view. See Boston College’s Retirement Center studies if one wants to dig deeper.
Good story from Bloomberg about the state of financial and economic affairs. Basically they report that stock market investors are more sanguine about recovery than bond investors, and why. The WSJ reports a couple of days ago that stock market investors need to slow down — investors are piling back into the market, pushing up PE ratios above historic averages, and may be repeating some past mistakes. See August 29th’s “Why Investors Need to Slow Down and See the Light.”
In other interesting bits relating to health care, our health care reform-seeking government put out a report about/for “seniors” and Medicare. First of all, I dislike the word seniors, it’s so last century, slightly insulting, and actually about three decades out-of-date. While they give many pertinent statistics about Medicare’s looming insolvency and why, it’s really not the whole story on Medicare. Benefit growth in Medicare is more about perverse economic incentives and abuse of the system than anything they describe. They do make reference to the fraud they have identified and dealt with, and hurray for them. There’s just a lot more to go, and overall health care reform will only go a small step toward fixing what ails Medicare — escalating costs from ever-expanding benefits (many of which are abused and worked around) and increasing numbers of beneficiaries. In 2010, when the baby boomers enter Medicare’s rolls, watch the spending explode. Some real solutions have been posed but politics is trumping real reform of a program that is an entitlement, and one that all taxpayers and beneficiaries need to watch more carefully.
I’ve been mostly silent about the legislation and debate being waged in health care, partly because it’s a moving target and partly because many of the proposals were ill-conceived. But I’ve heard one idea proposed that makes sense, and of course all the interest groups and their respective lawmakers are airing opposition. The idea is to allow the MedPac report to recommend cuts to the Medicare program. I used to read MedPac reports in the late-90s when I was solely focused on health care. Allowing the objective, non-politicized information to be informative and do some of the heavylifting in Medicare makes sense. Congress will not do their job on this. Perhaps MedPac data can help them.
The WSJ writes on July 24th: “The Medicare Payment Advisory Commission, created by Congress in 1997, has recommended more than $200 billion in cost cuts in the last year alone that lawmakers have ignored. Mr. Orszag wants to reconstitute the commission as an independent agency whose recommendations would automatically take effect — unless Congress expressly stops them.”
The Medicare problem will start eating all of our proverbial lunches. It needs to be reset, especially in light of the aging population. AARP doesn’t like the savings idea from MedPac unless the savings are spent to cover the uninsured, and I’m not sure that logic makes sense. AARP has had a strangehold on Medicare and all things “senior” for a while. It’s time to get real and think about generations to come.
How can we compete in a globalized world while bleeding and wasting so much on health care. Starting next year when Baby Boomers begin retiring, and into the following decade, soaring Medicare costs will put us in deficit even more. You think bank bailouts and economic stimulus deficits scare us now, wait til the public realizes they are paying for motorized wheechairs for those who may not need them, Viagra, and the like. It’s shameful. Frankly, Medicare pays for too many non-essentials already, in addition to incentives which encourage excess spending.
Retirees will also pay for this in terms of a less secure retirement. Excessive spending in Medicare will cause taxes to rise and the productivity gains of the last decade to evaporate. This spending will crowd out funds for education, which can create long-term growth of the economy to support government programs in turn. There is a whole feedback loop that the AARPs and lawmakers who want to spare their oxygen-supply provider constituents fail to acknowledge. If these deliberated ideas are not adopted, cuts will come somehow, and be very, very painful.
The US economy and political system took a big hit financially and in terms of reputation. If we cannot put the brakes on unbridled health care spending, we are going to see a crisis of another sort. Financial markets get it; there’s no where to hide, except of course behind politics.
A group called the Investors Working Group made up of former heavy-weights in the financial world and investors overseeing $3 trillion came out with a counter proposal about the new systemic risk regulator. They don’t want the Fed taking on the role as it might dilute their mission, the group says. One statement stood out:
“The lack of sufficient authority, resources and will on the part of regulators helped fuel the financial meltdown at least as much as the absence of systemic risk oversight,” the group said.
Ex-SEC Chair Donaldson was interviewed on NPR the latter part of week when the group’s report came out. His views were very compelling.
On the more theoretical side, The Economist just published (July 18) a briefing on the state of economics. The gist of it was that economists of all camps need to do some “spadework” about the causes of crises past and present to offer some fresh thinking. They say that neglected prophets like Hyman Minsky, who acknowledged a more holistic viewpoint about the “real” economy and the financial world than many of today’s economists, should be given another look. An idea of Minsky’s that I gravitated toward in my recent presentation was:
that in spite of longer term trend projections by economists about growth, inflation, etc. — short-term developments like bubbles and manias impact theoretical projections. (Financial innovation is included as a mania in my view because it was used in overly greedy ways, not the way economists intended. I am not knocking financial innovation at all, just how it manifested in practice over the last five years or so.) This is the space in which regulators overlooked or entirely missed the party that was going on. We had signs in the form of “irrational exuberance” a decade ago.
I finally believe that more “truth” or at least relevancy is coming forth that will eventually get us on the right path. The Investors Working Group offers a voice of reason that needs to be heard. And The Economist gets back to the roots of where some of the thinking originated that has informed the path of finance.
For some reason I had taken to reading the tea leaves about year 2008 on Dec 12, 2007 on PBS The World site. Here’s what I wrote, for your interest or entertainment:
• The volatility witnessed in U.S. financial markets will cause new thinking about retirement security in both private and public sectors. Risk/return tradeoffs will begin to resemble more rational thinking, ie., that financial innovation cannot hedge risks to the degree many theorists or sophisticated investors believed due to excess risk-taking not being incorporated into the models. Everything old becomes new and many things new become history. The Wild West of financial markets gets tamed until another day.
If you want to read the rest of my predictions, go here: http://tiny.cc/6SyGB
Indeed health care costs are over the top, and better efficiency is needed in the sector as well as properly aligned incentives. An op ed by former Lt. Gov of NY Betsy McCaughey in today’s WSJ spoke rationale that has been lacking in the debate. She accurately points out the fallacy of the Obama admins logic: that the only way to slow Medicare spending is to slow overall health care system spending thru comprehensive reform and legislation, carefully crafted of course. Medicare is fiscally unsound because of a lack of properly aligned incentives including distortions that increase supply and procedures, increasing numbers of beneficiaries, and the lack of updating needed to reflect demographic changes and levels of wealth appropriate for the times.
She points to the CBO suggesting wealthy seniors pay more and inching up eligibility ages similar to how social security has done. I have suggested this in my white paper; it’s really a no-brainer. Until we have greater transparency, policies which drive sustainability, and economic reality-based payments and benefits in Medicare, the administration’s PR team can fool many of the people much of the time as they try to expand coverage. The goals of squeezing HC costs and Medicare, and expanding access are two separate issues with their own differing sets of dynamics. Painting a broad brush stroke over the immensely complex health care system is futile.
The presentation in Denver this late May for a global pension funds conference crystallized some views. Whether a large institution, independent advisor, or an upcoming retiree – one thing is common to all – the need to re-think and re-tool plans going forward. The other issue which became clear was the need for a better game plan that includes transparency about funds available relative to promises made owing to demographics and budget realities — plus better education about financial and economic basics. Those planning for or approaching retirement need to do their own scenario planning to imagine a variety of economic outlooks. See a few sample slides.
As promised, the write up about Professor Hemang Desai’s research. It’s about how mutual fund managers that use short selling get better returns. Skip down to “Short sellers, the forensic accountants.” That’s the part most relevant to the previous post’s discussion about my concerns that regulation will target the wrong culprits. Read here.
Posted in Econ, Politics at 6:53 pm by Administrator
There’s a speech given today which sums up the series of events leading up to the financial crisis and impending economic malaise. It’s presented in fairly plain English as opposed to more technical Fed speak. He addresses the global savings and liquidity glut (which lead to excess capital chasing returns). Excessive risktaking ensued. Poor choices were made by lenders and other unscrupulous types, but also innocent investors were unaware of the risks they were taking. Financial markets imploded the latter part of 2008, and we are where we are.
He ends by saying that significant reforms to financial regulation and financial practices will be needed to reduce risks of future financial crises like this one. All true. What worries me is that regulation will be imposed that identifies the easy scapegoats rather than the true culprits, that politics and quick fixes will rule over reason. I was working with some financial research for a biz school recently that gives me this concern; one piece recently posted, and another upcoming. Will post later. No need to labor over content, but you’ll see what I mean. Good intentions gone astray.
