Annals of the Great Recession XV.

The TARP and the stimulus bill were intended to recover from the financial crisis of 2008-2009.  What about preventing a re-run in the future?  The Dodd-Frank Act required banks to hold larger capital reserves and to submit to “stress tests” to evaluate how well they could deal with a future financial crisis on the scale of 2008.   Curiously, the law also limited the trade in “credit default swaps.”  Admittedly, the wholesale trade in these insurance policies against a collapse of the bubble seems to have been what sunk the AIG insurance group.  On the other hand, they were an investment by people who saw the bubble for what it was rather than blindly believing what they were told.

One effect of the new legislation appears to be that it has encouraged the consolidation of the banking system.  It has been argued that the costs of complying with the new regulations are more than smaller banks can bear, so they have sold out to already big banks that are better able to shoulder the burden.

It is said that generals are always preparing to fight the last war.  Banks and investors are on guard against sub-prime mortgages.  However, “bubbles” can develop in any asset.[1]  So, some kind of new crisis is always possible.  Can the government and the financial system respond effectively to a new crisis?  The answers are not encouraging.

First, a flight from Keynesian demand-management policies followed quickly on the financial crisis.  President Bush encountered considerable difficulty in getting Republicans to accept the TARP.  President Obama opted for a stimulus bill that Paul Krugman warned was half as big as it needed to be, spread over two years instead of front-loaded into one year, and contained a bunch of tax cuts that would be used to reduce debt instead of engaging in new spending.  Both Republicans and Democrats have proved critical of deficit spending plans.

Second, in the absence of a Keynesian policy on the part of the Congress and President, the Federal Reserve Bank launched a long program of “quantitative easing.”  It bought huge amounts of both MBSs and U.S. treasury debt as a way of pumping money into a slow-recovering economy.  It has only recently begun to unwind this position and to raise interest rates.  That means that it would be difficult to counter a new recession by cutting interest rates.

There may also be a deep hostility to government intervention on the part of many voters.  The policies that saved the American—and world—economy from a new Depression looked very much like a privatization of gains and a socialization of losses.[2]  Thus, in 2007, the top 10 percent of income-earners held 71 percent of the nation’s wealth; now the top 10 percent hold 77 percent.  That is about an 8 percent increase.  The Fed’s quantitative easing pushed up asset prices when ownership of stocks and bonds is concentrated in the upper income groups.

In 2007, the bottom 90 percent of earners held 29 percent of the nation’s wealth; today the bottom 90 percent hold 23 percent.  That is an average 20 percent drop in assets for the vast majority of Americans.  Even so, it is worse for some than for others.  Back in 2007, the median lower-income family had about $18,000 in assets.  Today they have about $11,000 in assets.  Doubtless that fall largely represents the loss of the houses they bought without being able to pay for them.  Would Congress tolerate a new TARP or a new stimulus bill?

Maybe.  The combination of the recent tax revisions and the huge spending bill that enjoyed bipartisan support seem likely to massively expand the deficit.  Maybe stimulus is back in style if you put in enough treats for everyone.  Locking up a bunch of bankers might have to be one of those treats.

[1] See: Alexandre Dumas, The Black Tulip (1850).

[2] President Obama may have contributed to this with his denunciation of the rich as “the people who tanked the economy.”  Bill Gates and Warren Buffett tanked the economy?

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Annals of the Great Recession XIV.

To review, the presidents from 1981 to 2017 were Ronald Reagan (1981-1989), George H.W. Bush (1989-1993), Bill Clinton (1993-2001), George W. Bush (2001-1009), and Barack Obama (2007-2017).  The chair-people of the Federal Reserve Bank were Alan Greenspan (1987-2006), Ben Bernanke (2006-2014), and Janet Yellin (2014-2018).  So, those are the people upon whose watch various things happened.[1]

Between 1997 and 2006 the government eased regulations on lending and encouraged home-ownership among new groups.[2]  Mortgage originators—banks or mortgage companies—did what they were allowed and even encouraged to do: they issued mortgages (loans) to “sub-prime” borrowers.[3]  These amounted to hundreds of billions of dollars of risky loans.  Rather than hold these dangerous loans on their own books, the loan originators re-packaged the mortgages as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS), then sold these packages to investors.[4]  With many previously-excluded buyers seeking a limited stock of housing, housing prices rose by a national average of 124 percent.  The value of the CDOs and MBSs also rose.  Prices for both exceeded their real value.[5]

Then, in 2007 and 2008, it became apparent why sub-prime borrowers had previously had trouble getting loans.  The number of defaults started to rise sharply.  The MBSs and CDOs dropped toward their real value.  Financial institutions that had purchased these “instruments” suddenly found immense sums wiped off the asset side of their ledgers without their liabilities (what they owed other people) being reduced.  Bankruptcy loomed for the banks unless they could get rid of these dogs in a hurry and replace them with more valuable assets.  First Bear, Sterns, and then Lehman Brothers failed.  Seeking to stop the bleeding, banks pulled in the reins on all lending, including for productive investment.  The whole economy rapidly slowed during 2008.  The Dow Jones Industrial Average fell by 50 percent.  This reduced the values of many assets held by the upper and middle-classes, causing them to cut spending in order to reduce their own debts.  With consumption spending and investment both falling, the unemployment rate jumped to 10 percent by late 2009.

Acting quickly, the George W. Bush administration pushed through a Troubled Asset Relief Program (TARP) that bought $700 billion worth of bad debt from the banks.  The Obama administration launched a mini-Keynes stimulus program of $757 billion.  The Federal Reserve Bank cut interest rates to near zero and held them there for a long time.

[1] “The long shadow of the financial crisis,” The Week, 13 April 2018, p. 11.

[2] In part, this seems to have had a worthy purpose.  Houses are a key middle-class asset, but “red-lining” by banks had long restricted access to home purchases by African-Americans and other groups.  See: https://en.wikipedia.org/wiki/Redlining

[3] Sub-prime borrowers are ones with poor credit-worthiness.  For an explanation of how credit-worthiness is determined, see: https://www.investopedia.com/terms/f/ficoscore.asp  Very often, these are referred to in public discourse as “sub-prime loans,” as if the problem existed only with “predatory” lenders.  This seems to me to resemble referring to illegal immigrants as “un-documented immigrants,” as if the only problem is a bureaucratic foul-up with issuing them some documents.

[4] Apparently, it was possible for the purchasers to discern that the CDOs and MBSs were very risky—and possibly worthless—investments.  Most people did not do so.  A few did.  See: Gregory Zuckerman, The Greatest Trade Ever (2009) and Michael Lewis, The Big Short (2010).  The bets against the housing buble were called credit default swaps.

[5] This is called a “bubble.”

Memoirs of the Addams Administration 31.

After the latest (but perhaps not last) attempt to “repeal and replace” the Affordable Care Act (ACA), some Republicans have fallen back.  Lamar Alexander suggested that a bipartisan effort to “stabilize and strengthen” the ACA.[1]  Will President Trump accommodate himself to this inconvenient truth?  The president could scuttle the ACA’s healthcare market places by refusing to authorize the payment of the subsidies that enable “Cost Sharing Reductions” in premiums.  Under the Obama administration a federal judge held that payment of the subsidies without a Congressional appropriation is illegal.  The case awaits final resolution in the Supreme Court, but the Trump administration has continued to make the payments in the meantime.  Halting the payments would lead to an estimated 19 percent jump in premiums nation-wide.  Does Donald Trump want to shove millions of Americans off medical insurance?

Six months into his administration, President Trump has begun to encounter resistance from fellow Republicans.[2]  They are eager to embrace a strong line against Russia, they can’t do anything to bring a resolution to the “collusion” story, and they’re angry about his verbal assault on Attorney General Jeff Sessions (so recently one of their own).  If Republicans break from the president, he will have little choice but to abandon a legislative agenda in far of issuing a blizzard of executive orders and vetoing Republican legislation out of spite.  Those will be contested in the courts.  On the other hand, if Republicans break from the president, they will have little chance of advancing their own legislative agenda unless they can unite with Democrats to over-ride a presidential veto.  Of course, cooler heads may prevail.

Playing to his base, the president announced that transgender troops would be barred from further service in the military, and the Justice Department launched an investigation of affirmative action admissions policies by universities.[3]  There may be legitimate reasons for limiting transgender troops in the military.  It isn’t clear that the president knows any of them.  Rather, he seems to have been over-responding to pressure from Christian conservative Republicans.  In any event, the Pentagon said that a tweet is not the same thing as a formal order, that there is a formal review of transgender service people under way; and that all troops will continue to be treated with respect.  In terms of affirmative action, there is a sense in some quarters that it has been turned into a system of “set asides” for African-Americans and, to some extent, for Hispanic-Americans.  Given the over-supply of colleges, it doesn’t have much effect.

Under these adverse conditions, a steadier hand in the White House became vital.  President Trump’s churning of his White House staff reached a new stage.[4]   Chief of Staff Reince Priebus and Press Secretary Sean Spicer left, while Anthony Scaramucci became director of communications.  Then Secretary of Homeland Security John Kelly took over as chief of staff.  Next thing you know, Scaramucci got booted out of the White House.  Kelly, a retired Marine Corps general often portrayed in the media as a Drill Instructor screaming orders up the noses of staffers, tried to impose some order.  (No such option appears available to the Congressional Republicans.)  One key task for Kelly will be dealing with leaks from the sieve-like White House.  It will fall to the Justice Department to stanch the leaks from the Trump Resistance within the federal bureaucracy.  Editorials and columnists generally agreed that a far more challenging task lay in the need to wrangle an undisciplined president.

[1] “Health care: What happens now?” The Week, 11 August 2017, p. 6.

[2] “The GOP: Rebelling against Trump,” The Week, 11 August 2017, p. 16.

[3] “Justice Department to target affirmative action,” The Week, 11 August 2017, p. 6.

[4] “Embattled Trump turns to Kelly,” The Week, 11 August 2017, p. 4.

Memoirs of the Addams Administration 30.

“The great thing about hitting yourself in the head with a hammer is that it feels so good when you stop.”  Recently, almost two-thirds (64 percent) of Americans desired the preservation of the Affordable Care Act (ACA) as it currently exists or with reforms of “problem areas.”[1]   Are there “problem areas”?  Yes.  Here are a couple of examples.  First, there are many people who are caught in a tight spot by earning too much to qualify for subsidies, but too little to be able to afford health insurance.  Second, only a few insurance companies had any experience at providing/pricing health insurance to poor people.  The Obama administration lured many other health insurers into participating in the healthcare market places by promising that all sorts of healthy rubes would pay premiums without needing much care.  Then, the Obama administration failed to enforce the “mandate.”  Many people did not even bother to get health insurance.[2]  The lack of young, healthy fools ready to be gouged for the benefit of older, wealthier people lies at the root of the instability in healthcare market places.  Third, the survival of the system depends upon continuing subsidies from appropriations passed by Congress.  The Republicans have declined to pass such appropriations and a federal court has held that spending without an appropriation is unconstitutional.  This case has not yet been heard by the Supreme Court.  When the Court does hear the case, it seems likely to support the initial decision.

Then, there are all the bad-press issues.  President Barack Obama said that “If you like your insurance, you can keep it” (or words to that effect).  Then the government cancelled a lot of insurance policies as “garbage policies” when the policy-holders really liked those policies.  The “roll-out” of the healthcare.gov web-site was a humiliating mess.  The Supreme Court held that the extension of Medicaid could not be forced on states that didn’t wish to participate by the threat to withhold other Medicaid funding.[3]  Naturally, these colossal screw-ups colored the perception of the ACA for a time.  Now, however, with the ACA an established—if imperfect—reality,[4] Republicans might do well to concentrate on remediation.

Such remediation might consist of getting rid of the ACA mandate on what must be covered; getting rid of the “mandate” that everyone must be covered; allowing/encouraging a few experienced companies to provide insurance for previously uninsured Americans[5]; expanding the range of those people eligible for subsidies; appropriating the moneys needed to make the system work; and not trying to coerce states that don’t want to expand Medicaid.

This will not be easy for Republican law-makers to do.  It abandons ideas of personal responsibility, to which many Republican voters are committed.  It expands spending, when we are already neck-deep in red-ink.  On the other hand, it will not be easy for Democrat law-makers to do.  It abandons the idea of “equal access” to health care and it abandons another federal suppression of state autonomy.

Then we can argue about how to close the budget deficit.  Anthoer difficult task.

[1] “Poll Watch,” The Week, 11 August 2017, p. 17.

[2] About 15 million people did get health insurance solely out of fear of the Internal Revenue Service (IRS).  These 15 million resent having to buy something they don’t need and constitute the core of those people who would “lose” this insurance under various Republican plans.

[3] This class-based program of medical insurance covers many Trump voters as well as the voters whom the Trump voters despise for other reasons.

[4] Like Social Security, Medicare, and the Espionage Act of 1918.

[5] Yes, I understand that this will create a two-tier medical care system.  “What are you, fresh offa da boat?  Expect that the streets are paved with gold?  ‘Merica is hard place to live.  Still, is better than the Old Country. “  NB: Imagined monologue, not a quote from the text.

Memoirs of the Addams Administration 29.

Unable to leave well enough alone, the Republican Senate leaders made yet another attempt to “repeal and replace” the Affordable Care Act.[1]  Without having any commonly-agreed plan, they managed to get a formal debate started.  First, the Senate voted down a broad plan to repeal and replace.  Then it voted down a plan to repeal and give Congress two year to replace it with something else.  Then it voted down a “skinny repeal” that just got rid of the mandate.[2]  Despite its flaws, the Affordable Care Act (ACA) helps—as well as vexes—many lower income Americans of both parties.  Opinion polls since the election have tended to show broad support for preservation of universal health insurance.  With a narrow 52-48 majority in the Senate, the Republican leadership cannot force through any legislation that would alienate more than two Republican senators.  Lisa Murkowski (Alaska) and Susan Collins (Maine) come from states that may have a substantial number of people who want to vote Republican, but who also live in marginal economic circumstances.  Their opposition alone isn’t enough to block “repeal and replace”: Vice President Pence can cast the tie breaker.  However, one more Republican dissident—like John McCain—and the measure loses.  In either case, Murkowski and Collins get covered for the next election for having done the right thing.  So, the question becomes: how to fix the problems with the ACA, rather than trying to roll it back?

Donald Trump campaigned against the North American Free Trade Agreement (NAFTA), calling it “the worst trade deal maybe ever signed anywhere.”  Once elected, he insisted on a renegotiation of the agreement.  This immediately became engulfed in the hysteria following Trump’s surprise election.  It also drew heat from Trump’s highly public spat with the president of Mexico.  Nevertheless, Mexico and Canada agreed to engage in a re-negotiation of NAFTA.  The negotiations are scheduled to begin on 16 August 2017.  Now the government has released a statement of its objectives for the negotiations.  Contrary to the worst fears of the immediate post-election Trump hysterics, the American objectives are solidly “mainstream ideas for furthering trade liberalization.”[3]  Generally speaking, NAFTA trade benefits the American economy even though it is often seen as the source of job-loss.  Reality proved more compelling than rhetoric.  Perhaps Trump and the Senate leadership should let Commerce Secretary Wilbur Ross (who oversees the NAFTA negotiations) run health-care reform?

Six months into his first term, President Trump began a major churning of his staff.  Sean Spicer had the reputation for being a decent guy.  Then he took the job as White House Press Secretary.  Six months of humiliating Hell followed.  Then, President Trump concluded that his image problems sprang from poor representation.  He hired Anthony Scaramucci as communications director.[4]  Spicer promptly resigned.[5]  Chief of Staff Reince Priebus, Trump’s direct connection to mainstream Republicans, then got the heave.

Donald Trump governing as a non-party mediator still has—theoretical—potential.

[1] “Senate Republicans grapple with Obamacare repeal,” The Week, 4 August 2017, p. 7.

[2] The Congressional Budget Office (CBO) estimated that ending the mandate would leave 15 million more people without insurance.  This can be taken as an official measure of the number of people who buy insurance under duress.  It can be added to whatever number just don’t buy it regardless of the mandate to get a total number of people who are opposed to the mandate.  On the other hand, it can be subtracted from the numbers of those estimated by the CBO to be left without insurance issued on other versions of “repeal and replace.”

[3] “Issue of the week: A softer U.S. line on NAFTA,” The Week, 4 August 2017, p. 42.

[4] Scaramucci deleted Twitter posts in favor of gun control, action on climate change,, legal abortions, and ending use of the death penalty.  “Noted,” The Week, 4 August 2017, p. 18.

[5] “White House: Spicer’s out, “The Mooch” is in,” The Week, 4 August 2017, p. 18.

Medicaid Essentials.

There is a good argument that the “welfare state” has been created out of changing social needs.  In 1965, as part of his “Great Society” effort to “complete” Franklin D. Roosevelt’s New Deal, President Lyndon B. Johnson signed the law creating Medicaid.  The law extended medical insurance to the “deserving poor”: children, pregnant women, the disabled, and geezers unable to afford long-term care.[1]  By 2013, 57 million people were covered by Medicaid.[2]

In 2014, the Affordable Care Act (ACA) allowed states to extend Medicaid coverage to all those who earned 138 percent of the federal poverty level or less.  Some 31 states expanded Medicaid.  This added 17 million people to the Medicaid rolls.  Even though 19 states did not expand Medicaid, the total cost of the program rose to $574 billion in 2016.

Did the expansion of Medicaid improve health outcomes?  One might suppose that it would take a while to tell.  All the same, Harvard rushed out a study that that found a 6 percent drop in mortality among poor populations in states that expanded Medicaid after 2014.[3]  A Kaiser Family Foundation study found that there isn’t much difference between private insurance and Medicaid—except that Medicaid recipients are just as likely to get care that they wouldn’t have received otherwise.

The aging of the American population poses a huge challenge to Medicaid.  The chief problem is “long-term care”: home health aides and nursing home care.  Medicaid provides for such “long-term care.”[4]  Anyone who exhausts their savings paying for home health-care or a nursing home qualifies for Medicaid.  Better than 60 percent of people—mostly women because women tend to outlive men—in nursing homes are covered by Medicaid.  This amounts to 21 percent of total Medicaid spending and the share is only likely to grow.  About 18 percent of “Baby Boomers” will need nursing home care.  Most of them don’t have the resources to pay for it, so they will become public charges as they/we have been public charges throughout life.

Republicans wanted (and still want) to scale back spending on Medicaid.[5]  In particular, they want to roll-back the Obama administration’s extension of Medicaid to the “working poor” while leaving in place health coverage for the “deserving poor.”  In contrast, the vast majority (70 percent) of Americans favor maintaining Medicaid spending at its current level.

In the near term, there isn’t any real prospect of cutting entitlement spending.  It is a different question to ask if America can afford such spending.  The ACA loaded $875 billion in new taxes on upper income earners.  This seems to be the real source of funding for the ACA, rather than the revenues derived from “mandatory” insurance participation.[6]  The Republican “repeal and replace” plan would roll-back these taxes.  The House version would have cut spending by $834 billion.  Grimy though it may be, this turns into a debate over spending on an “undeserving” past versus spending on an uncertain future.  Boomers should have saved more.

[1] On the distinction between the “deserving” and Undeserving” poor, see http://www.herinst.org/BusinessManagedDemocracy/culture/work/deserving.html  It doesn’t matter if this is a nonsensical distinction.  In contemporary Democratic party ideology, ALL poor people are the “deserving poor,” as re many members of the middle class.  However, Republicans hold the White House, both houses of Congress, and the Supreme Court.  For that matter, it is clear that many conservative Democrats hold to the same beliefs.

[2] “The battle over Medicaid,” The Week, 23 June 2017, p. 11.

[3] Not to be callous, but over two years, the death rate declined by 6 percent and this is the result of extending Medicaid?  Is this reduced or merely postponed mortality or just a short-term deviation?

[4] Fat black ladies from the Caribbean, mon, sticking tubes in you and wiping your ass.

[5] People on Medicaid usually don’t vote Republican.  If the “reform” passes, they never will.

[6] My sons received forms for the last two years in which they were supposed to certify that they had health insurance.  However, they were not required to submit those forms with their tax returns.  That is the “mandate.”

Memoirs of the Addams Administration 27.

The third attempt to “repeal and replace” the Affordable Care Act (ACA) has already died.  Last week, however, it seemed like it might work.  Senate Majority leader Mitch McConnell tried adding inducements to win back “moderate” Republican senators.  Senator Ted Cruz added a proposal to require insurance companies to sell one full “Obamacare” policy in return for the freedom to offer more stripped-down policies as well.[1]  As is now known, McConnell’s effort to pull in votes from the two wings of the Republican party failed.

It is worth noticing several points that were not well articulated in the commentary.  First, critics claimed that the Cruz proposal would trigger a flight from the ACA standard policies on the part of younger, healthier (and often lower income) people.  That is, the ACA created not just an “entitlement” for some, but an irksome burden for many others.  Second, late in the Obama administration, a federal court held that the money for the insurance subsidies does not come from any Congressional appropriation.  Hence spending that money is illegal.  The Trump administration has not stopped paying the subsidies or hurried the case to the Supreme Court.  It seems likely that this Court would affirm the lower court.  In that case, the subsidies would stop and the market places would encounter some turbulence.  Third, the Republican party alone did not put Donald Trump into the White House.  Many traditionally Democratic voters switched side to vote for him.  Letting Mitch McConnell and other mainstream Republican decide the form of a new health-care law works against the interests of Trump’s own base.  He might do better to actually try to lead in conjunction with the Republican “moderates” and whatever Democrats he can pry loose.

The latter may not be so far-fetched as it sounds.[2]  First, Democrats have been debating whether the embrace of Bernie Sanders by many Democrats amounted to a sugar high.[3]  After the triumph of marriage equality,[4] transgender rights became an important liberal cause.  There are a great many gay people, but not a lot of transgender people.  Certainly their rights deserve as much protection as do those of anyone else.  However, was it politically wise to unleash the whole force of right-minded contempt on the many people who have not yet reached the point now occupied by urban liberal opinion?[5]  Then, you don’t see a lot of “We Oppose Our Local Police” yard-signs out there.  There are about 1,000 police shootings of civilians every year.  Focusing on a few high-profile cases, no matter how egregious they appear at first glance, may not be a winner.[6]  Democrats are divided over these and other issues.  The current chaos inside the Republican Party offers some of them a chance to actually accomplish something.  Much would depend upon Trump deciding to be president and Democrats shifting toward pragmatism.

[1] “Divided GOP haggles over health-care bill,” The Week, 21 July 2017, p. 5.

[2] “Democrats: Should they shift to the center?” The Week, 21 July 2017, p. 16.

[3] Meanwhile, in Venezuela,…

[4] Which I fully supported.  Why should gay people be the only ones with a socially-approved out?

[5] It is worth reflecting on how long it took for President Obama’s position on marriage equality to evolve.  An estimated 25 percent of people self-identify as liberals.  A recent survey of small town Americans reported that just over two-thirds of the respondents felt that they had different values from people in urban areas (probably why they’re still stuck in the boonies).  Almost as  many (56 percent) believe that the federal government does  more to help the cities than for people like them. “Poll Watch,” The Week, 30 June 2017, p. 17.  Hillary Clinton lost in the Electoral College, not in the popular vote.

[6] Of the 80 police officers arrested for fatal shootings since 2005, 28 have been convicted.  “Noted,” The Week, 30 June 2017, p. 16.  One can read this as a warning against a rush to judgement until all the facts come out.  Or you can read it as a sign that juries of ordinary citizens are reluctant to second-guess the police officers who protect their communities from other dangers.