11.20.10
Posted in Politics at 4:36 pm by Administrator
With a new Congress incoming, the hopefully fortunate news for voters is the focus on restoring fiscal sanity. We have mountains of debt to work through, and cannot pretend that select groups will not have to bear burdens.
One proposal from the deficit cutting commission is to revisit inflation indexing in Social Security. This will likely happen. It’s a “technical” fix that is needed. They were vague about Medicare from newstories, but I believe Medicare should be more related to income. The trajectory of expenditures with Baby Boomers arrival over the next two centuries is overwhelming. Also, the incentives to overuse health care services exists in the program. If Republicans are really serious about cutting spending, they will quite playing politics with Medicare and do the hard work, the honest work.
So our message to retirees and those planning for now is— minimize the risk of large health care liabilities and find a balance between growth and conservatism in your retirement portfolio comprising all sources of income and investment. The economic picture is still a bit foggy, but the proper raincoat can protect you, whether grey clouds or downpours.
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11.03.10
Posted in Econ, Politics at 3:11 pm by Administrator
In spite of Republicans taking the House, the economic fundamentals of yesterday are still the same.
I read a recent analysis of the political and policy environment we face that was resonant. The facts remain.
1. The types of policies that led us to this financial crisis have not been fixed. Spending will need to be reigned in, tax policies reflect reality, and pro-growth polices adopted. Quit the tinkering around the edges and get to the hard decisions. Entitlement spending is out of control. Think longer term please.
2. The Fed needs to move from QE2 and onto developing better policies. Lower rates for savers (which we lacked too many pre-crisis) will not inspire consumption. “Monetary policy plays a key role in post-crisis economies, ” states a smart analyst, Michael Lewitt. Many top business leaders in financial services question the Fed’s actions and rationale. (See section on ‘The Stock of the Fed is Dropping’) The whole analysis “Keynesian Confusion” is well worth the read. Lewitt refers to many of the issues raised and dissected, more simply, in the RSI’s last two reports.
3. Create policies that inspire confidence and “real” economic growth prospects. Much of the American public gets the window-dressing charade played by Washington. Health care reform (tinkering with 15% of the economy) is a case in point. Stop it. Or else you will stunt or reverse one of the greatest economic dynamos in the world. Even China has more discipline than us right now. The whole currency manipulation thing is often a distraction for politicians who will not take responsibility and make hard choices. Our demographic profile is such that only sane policies can get us to the other side. Since government cannot support all the promises made in health care (Medicare) and social security somewhat, encourage private market solutions that complement what the public sector can realistically deliver.
Incrementalism that is reasonable is much better than shock-and-awe policies that please politicians, pacify the public for a day or two, and ultimately constrain future economic potential and choices. We need to step back into our leadership role in the global economy. This can be done gracefully and methodically, or painfully, with fits and starts, doing much damage to our image across the globe and Americans’ confidence along the way.
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01.27.10
Posted in Econ, Politics at 7:52 pm by Administrator
Yesterday, an industry trade group, the Insured Retirement Institute, said that Obama may mention annuities in his State of the Union address tonight. Whether he does or not, the insurance industry finally got some deserved recognition for one of the few products that did not unravel during the financial crisis –fixed annuities, which do not decline when markets falter, and their variable annuity counterparts that had added guarantees to curtail losses. You can read the IRI’s press release.
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09.18.09
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.
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04.14.09
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.
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03.27.09
Posted in Econ, Politics at 7:53 pm by Administrator
I’ve been reading blog posts by economist Uwe Reinhardt of Princeton in the NYT. He points out that lack of transparency is a big problem relative to health care providers (as we do too in white paper). Not to mention the many payers (Medicare, Medicaid, private insurers, and uninsured) with different pricing from hospitals. There are big regional disparities in health care pricing which cause a portion of the escalating costs (see blog post in Feb about HC). It is going to take an enormous amount of political will to pare down health care costs. There are many drivers that must be tackled, simultaneously or sequentially, on the supply and demand side.
This is going to take many, many years to work out. Medicare’s DRG payment system took many years to phase in. Reinhardt says Medicare’s DRG system would work well across the board to bring pricing into a more rational framework.
There’s still the cost-shifting phenomenon to deal with in Medicare. When one sector/area in health care gets squeezed, another area mushrooms, eg., after DRGs were implemented, the skilled nursing facility and home health care costs took off. I recently saw the WSJ light onto the “quicker and sicker” trend that began happening in the 80s, like it was something new. The insurance industry recognized this and LTC insurance came into being when limits on nursing home and home health care were then imposed by Medicare to control the new rising post-acute care costs. Of course, demographic factors are playing a role now. We are an aging population. We need to get wiser about health care…
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02.26.09
Posted in Econ, Politics at 7:42 pm by Administrator
To get an idea about Medicare spending growth in your area, see the latest from the New England Journal of Medicine (Look at the interactive graphic.)
It shows what regions have higher spending growth and outlines some ways to alter the growth trajectories. Health care spending is likened to an arms race. There are no financial rewards for collaboration, coordination, or conservative practice in Medicare. The authors suggest changing the volume-based system to incorporate partial capitation, bundled payment, and/or shared savings. They point to needed reform in overuse of hospitals, and unnecessary visits, tests, and minor procedures.
From my research, tests and minor procedures were key culprits in even more increases in Medicare Part B spending (for which retirees have greater cost-sharing.) And we identify this trend in the latest white paper. The Obama administration will have a complex task ahead bringing together all the disparate groups in health care, but at least someone has posed real ideas with supporting evidence as to a solution.
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02.12.09
Posted in Econ, Politics at 8:24 pm by Administrator
Before I read John Taylor’s (famous for the respected Taylor rule of montary policy) take on how the financial crisis was created, I had come to my own macro view on the series of events that lead us to this point:
• A global savings glut was created by excess liquidity.
• Too much liquidity was chasing higher returns.
• This led to excess risk-taking.
• The truth of this was revealed, ie., over-leveraged economic growth/activity was shown to be unsustainable, thus the swelling dam burst.
• We are in a new reality with a more conservative-minded investing mentality.
• Concerns over government policy distorting economic sustainability because of fiscal stimulus are warranted. If recessions are forms of corrections and the housing market boom needed to bust, how does the market economy get distorted in the future by the intervention?
Taylor recently wrote in the Wall Street Journal, Feb 9, that government actions and interventions caused, prolonged, and worsened the crisis according to his research. Here are the points he makes:
• Monetary excesses were the main cause of the housing boom; the Fed’s target interest rate from 2003-05 was held too low based on historical standards of good policy.(the glut theory)
• The effects of the boom and bust were amplified by the excess risk-taking because of excessively low interest rates and the use of subprime mortgages and ARMs.
• Ratings agencies underestimated risks of securitized mortgages, and Fannie and Freddie were encouraged to buy these mortgage-backed securities.
• Government prolonged the crisis when they misdiagnosed the causes of the financial strains which were becoming apparent in August 2007.They believed the problem to be a liquidity problem when it was a counterparty risk problem. A counterparty risk problem required a focus on transparency and the quality of bank’s balance sheets rather than the liquidity response that occured.
• The Economic Stimulus Act of 2008 giving rebates did little to jump-start consumption.
• The subsequent interest rate cuts were sharper than Taylor’s rule (usually adhered to in policy decisions). The dollar thus depreciated sharply and a corresponding large increase in oil prices (traded in dollars) occured. High oil hit the economy hard.
• After a year of mistaken prescriptions, the crisis worsened in Sept/Oct 2008, with a credit crunch added in.
• The vague $700 billion TARP (Troubled Asset Relief Program) introduced by Treasury was considered ill-conceived, and the official story that the economy was tanking led to the panic seen over the next few weeks.
• Seamingly fear-based explanations of programs to address the crisis amplified worries along with ad hoc decisions about who would fail (Lehman) and who to bail (Bear, AIG).
His conclusion: it didn’t have to be this way. He urges sound principles of monetary policy, basing gov’t interventions on clearly stated diagnoses (something this stimulus misses a bit on) and predictable frameworks for government actions. Massive responses with little explanation make things worse (like the market reaction to Geithner’s additional financial system rescue), so the crisis has shown so far.
At least with the passage of the stimulus, this round of intervention will be done and people and business can begin to plan and adjust accordingly.
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09.18.07
Posted in Econ, Politics at 5:15 pm by Administrator
Greenspan makes the circuit, being interviewed by all the top news outlets and venues. Today I listened to him speak about his book of memoirs on KERA 90.1 FM. He reiterated that Medicare is really one of the biggest problems we have in terms of public policy. His view is that more well-off beneficiaries will be paying more in the future. (He was asked what policy he would prescribe.)
The white paper has a few choice Greenspan quotes which relate to his ideas; my policy prescriptions mirror his. The program should be there for those who need it–those of middle income to lower income. Also he says the government needs to communicate its direction so that those who need to plan, may do so. So far, I’ve seen no presidential candidate make any health care proposal that includes the reality of Medicare’s prospects. Hillary goes universal again, but with a private sector twist. None of them want to tackle the Medicare problem before being elected, my guess.
As we’ve seen the forces of globalization (excess liquidity) create housing bubbles which later popped world-wide, so too less demand by foreign investors in holding Treasuries may force the hands of politicians to deal with reality (see white paper). Last week, Bernanke indicated that the current account deficit was not sustainable over the long term. I hope our goverment makes smarter moves for the whole population before events force our hands, giving more pain economy-wide than some smaller adjustments.
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