I have received comments from two readers who disagree with my take on the economy. One says he doesn't agree with anything I say another finds my comments on consumption to be "facile."
I am amused when fans of President Obama dump on his policies. In case I did not make myself crystal clear I support the president's policies except for a couple of technical problems. The president in his address on the economy yesterday noted the initial success of the Feds several programs to revive the credit market, which I have carefully explained in my columns, and fully support. He also emphasized the need to get his stimulus program up and running as soon as possible, which I have also described and support.
President Obama made it clear in his speech that we need to crank up consumption in order to put people back to work. Now I know that the Republicans are calling the stimulus plan "excessive" government spending that will really not put anyone back to work. The also drag out the bugaboo about future indebtedness burdening our progeny. I see the Republican strategy as simply one of shoring up their position for the next election. If the president's plans work they will say they worked because Republican amendments and additions made them better. If they fail the Republicans will be able to say to the voters, "We told you so."
I mentioned in a previous article that I was surprised by the many Obama supporters who oppose his "excessive" spending. I also mentioned that while the president enjoys strong support from the public his programs do not.
So I say to those who commented on my economic views that mine are exactly the same as held by the Obama team and I did not vote for them. And while I am certainly in no position to implement my suggestions, the president and his people can, and will.
Leo Cecchini
April 2009
Wednesday, April 15, 2009
Tuesday, April 14, 2009
SAVING MEDICARE
One of the major initiatives of President Obama's plan to correct the economy is his overhaul of Medicare and Medicaid. All agree that the nation's health care is too expensive. We get the same level of health care as is received in Western Europe but at about 2.4 times the cost in Europe.
President Obama wants to get better return on the government's dollar from its expenditures on Medicare. He then points the finger at everyone's favorite whipping boy, the health care insurance companies, e.g. Blue Cross. He believes we can get more for our Medicare dollar by curbing the insurance companies.
Well his plan is what I call "penny wise, pound foolish." As a cost saving measure the president wants to do away with what are called, "Medicare Advantage" plans. Essentially for a fixed payment from Medicare, usually so much per participant per month, the health insurance company agrees to pay for all medical care for the participant. Obama sees a problem here, Medicare pays a fee for the participant, but the participant may not use any health care, or much less than the fee paid. Thus Medicare is paying for a service that is not used.
The problem is that the Obama administration does not understand basic insurance. What it is actually paying is an insurance premium to the health care insurer who then agrees to cover all "losses" which in this case means health care expenses.
What the Obama team also does not understand is that by paying the insurance premium they limit Medicare's exposure for that participant to the premium. If there were no such plan Medicare would have to pay the participant's medical costs, up to very high limits. Thus not paying the premium would in effect set Medicare up for unlimited losses, the very reason we use insurance.
Moreover, the health care insurer provides a limit on the cost of medical care. Those medical services that agree to its fee structure only receive what the insurer will pay. And this is a great savings. My latest medical service procedure was billed by the physician and his group for $5110. Blue Cross paid $2320 and I had to pay $120 in co-payment. In short Blue Cross saved Medicare $1768 and me about $1200.
Clearly the real culprit in sky-high medical costs are the health care providers, not the insurers. In fact the insurers are the only reason that health care costs have not gone even higher. Doing away with the very effective "Medicare Advantage" plan will simply insure that health care costs rise even faster, instead of bringing them under control.
Leo Cecchini
April 2009
President Obama wants to get better return on the government's dollar from its expenditures on Medicare. He then points the finger at everyone's favorite whipping boy, the health care insurance companies, e.g. Blue Cross. He believes we can get more for our Medicare dollar by curbing the insurance companies.
Well his plan is what I call "penny wise, pound foolish." As a cost saving measure the president wants to do away with what are called, "Medicare Advantage" plans. Essentially for a fixed payment from Medicare, usually so much per participant per month, the health insurance company agrees to pay for all medical care for the participant. Obama sees a problem here, Medicare pays a fee for the participant, but the participant may not use any health care, or much less than the fee paid. Thus Medicare is paying for a service that is not used.
The problem is that the Obama administration does not understand basic insurance. What it is actually paying is an insurance premium to the health care insurer who then agrees to cover all "losses" which in this case means health care expenses.
What the Obama team also does not understand is that by paying the insurance premium they limit Medicare's exposure for that participant to the premium. If there were no such plan Medicare would have to pay the participant's medical costs, up to very high limits. Thus not paying the premium would in effect set Medicare up for unlimited losses, the very reason we use insurance.
Moreover, the health care insurer provides a limit on the cost of medical care. Those medical services that agree to its fee structure only receive what the insurer will pay. And this is a great savings. My latest medical service procedure was billed by the physician and his group for $5110. Blue Cross paid $2320 and I had to pay $120 in co-payment. In short Blue Cross saved Medicare $1768 and me about $1200.
Clearly the real culprit in sky-high medical costs are the health care providers, not the insurers. In fact the insurers are the only reason that health care costs have not gone even higher. Doing away with the very effective "Medicare Advantage" plan will simply insure that health care costs rise even faster, instead of bringing them under control.
Leo Cecchini
April 2009
"COOL IT" AND GLOBAL WARMING
A response to my last item about the philosophy of the economy causes me to reflect on the concern about the environment. I am constantly amazed at the hubris of many "environmentalists." They really believe that mere mortals can do more damage to the world than cosmic forces. I suggest they see the latest "end of the world" film, "Knowing," which has mankind destroyed on earth by a massive solar flare. Or perhaps they could reflect on the billions of years of earth's history and the many times it was totally altered by cosmic forces.
Yes, we all want to live in a comfortable, safe, sound environment. I doubt anyone would say no here. The real question is economics, what are the costs and trade offs to achieve a particular environment. It comes as no surprise to me that the best book I have seen on the subject is the one done by a Danish economist named Bjorn Lomborg and titled, "Cool It." Lomborg does not deny that the earth is getting warmer or that man's activities has added to the warming trend. Instead he focuses on the results of the warming and the appropriate response to these.
A central point Lomborg raises is the concern about rising temperatures causing more deaths due to heat. He says yes, this will occur. But that has to be compared to the many more that will not die because of reduced cold. He notes that in Europe about 200,000 die because of excess heat each year while some 1.5 million die from excess cold. For Britain he shows that a 3.6 degree F increase in temperature will mean 2000 more heat deaths but 20,000 fewer cold deaths.
Lomborg's main concern is that the funds and energy being demanded for stemming the rising temperatures could be better used for other major problems that cause more harm to mankind. In short, he views the situation that of an economist, does the end justify the cost?
I go a bit further. I say global warming cannot come too soon. The earth is a cold place. The average temperature of the earth is 60 degrees F or 15 degrees C. At this temperature the unprotected human corpus expires in a matter of minutes or a few hours. Indeed, the largest use of fossil fuels goes to keeping the body warm - building shelter, heating those shelters, manufacturing clothes, producing food and so on. Therefore, upping the average temperature will actually reduce our need for fossil fuels.
My problem with many "environmentalists" is a lack of perspective. Yes, the earth is getting warmer, where's the news, it has been doing this for the last 10,000 years. The issue is what changes will this bring and what is the best way to handle the changes. As Lomborg and I maintain, lowering the deaths from hypothermia is a change for the good and needs no response.
Leo Cecchini
April 2009
Yes, we all want to live in a comfortable, safe, sound environment. I doubt anyone would say no here. The real question is economics, what are the costs and trade offs to achieve a particular environment. It comes as no surprise to me that the best book I have seen on the subject is the one done by a Danish economist named Bjorn Lomborg and titled, "Cool It." Lomborg does not deny that the earth is getting warmer or that man's activities has added to the warming trend. Instead he focuses on the results of the warming and the appropriate response to these.
A central point Lomborg raises is the concern about rising temperatures causing more deaths due to heat. He says yes, this will occur. But that has to be compared to the many more that will not die because of reduced cold. He notes that in Europe about 200,000 die because of excess heat each year while some 1.5 million die from excess cold. For Britain he shows that a 3.6 degree F increase in temperature will mean 2000 more heat deaths but 20,000 fewer cold deaths.
Lomborg's main concern is that the funds and energy being demanded for stemming the rising temperatures could be better used for other major problems that cause more harm to mankind. In short, he views the situation that of an economist, does the end justify the cost?
I go a bit further. I say global warming cannot come too soon. The earth is a cold place. The average temperature of the earth is 60 degrees F or 15 degrees C. At this temperature the unprotected human corpus expires in a matter of minutes or a few hours. Indeed, the largest use of fossil fuels goes to keeping the body warm - building shelter, heating those shelters, manufacturing clothes, producing food and so on. Therefore, upping the average temperature will actually reduce our need for fossil fuels.
My problem with many "environmentalists" is a lack of perspective. Yes, the earth is getting warmer, where's the news, it has been doing this for the last 10,000 years. The issue is what changes will this bring and what is the best way to handle the changes. As Lomborg and I maintain, lowering the deaths from hypothermia is a change for the good and needs no response.
Leo Cecchini
April 2009
Monday, April 13, 2009
A PHILOSOPHICAL LOOK AT THE NEW ECONOMY
Well the economic story is moving past the technical debate about how to stop the downward spiral and start moving up again. We are now into a philosophical debate.
The cover story on the latest issue of TIME magazine was a piece by an author who has apparently made his mark as a latter day Savanarola, the 15th Century monk who tried to cleanse Florence, Italy of excess. Savanarola got rid of the Medicis but was soon burned at the stake for heresy. The TIME writer preaches against the excesses of our modern society and believes the current economic downturn will be the genesis of a more prudent society.
I fundamentally reject notions that we are engaged in excess consumption. In my book there is no excess demand, just short supply. What is wrong with all families owning their own home? What is wrong with wanting a modern home with the attendant conveniences? What is wrong with wanting quality education? What is wrong with wanting more leisure time to enjoy life? What is wrong with wanting to travel and explore the world? What is wrong with wanting good food? And on and on.
Again, my definition of economics is "the science of meeting the perceived needs of the people," with the operative word being "perceived." I eschew the endless debate about what constitutes the "proper level" of consumption. If the consumer wants it, how do we provide it? Of course I leave out demands for illegal items.
The salient feature of human history has been the desire to provide more for our heirs than we had for ourselves. We want a better world for our children. The difference between me and other economists is that they prefer that the parents determine what constitutes a better world, I leave it to the kids to determine what they want.
I expect to see more such talk about how to formulate our revived economy. But this is good, since it means that the bottom has been reached - "Been down so long, looks like up to me."
Leo Cecchini
April 2009
The cover story on the latest issue of TIME magazine was a piece by an author who has apparently made his mark as a latter day Savanarola, the 15th Century monk who tried to cleanse Florence, Italy of excess. Savanarola got rid of the Medicis but was soon burned at the stake for heresy. The TIME writer preaches against the excesses of our modern society and believes the current economic downturn will be the genesis of a more prudent society.
I fundamentally reject notions that we are engaged in excess consumption. In my book there is no excess demand, just short supply. What is wrong with all families owning their own home? What is wrong with wanting a modern home with the attendant conveniences? What is wrong with wanting quality education? What is wrong with wanting more leisure time to enjoy life? What is wrong with wanting to travel and explore the world? What is wrong with wanting good food? And on and on.
Again, my definition of economics is "the science of meeting the perceived needs of the people," with the operative word being "perceived." I eschew the endless debate about what constitutes the "proper level" of consumption. If the consumer wants it, how do we provide it? Of course I leave out demands for illegal items.
The salient feature of human history has been the desire to provide more for our heirs than we had for ourselves. We want a better world for our children. The difference between me and other economists is that they prefer that the parents determine what constitutes a better world, I leave it to the kids to determine what they want.
I expect to see more such talk about how to formulate our revived economy. But this is good, since it means that the bottom has been reached - "Been down so long, looks like up to me."
Leo Cecchini
April 2009
STIMULUS NOW!
Well the New York Stock Exchange is again bullish, further evidence that suspending "mark-to-market" on April 2 is having a positive effect. But restoring the flow of credit is only half the battle. If we had taken this step last fall we may have avoided the economy's nose dive, but we did not and we now have to deal with widespread unemployment. Yes, restored lines of credit thanks to suspending "mark-to-market", Government action, e.g. the "TARP", the "TALF", are doing their work, they will induce consumption and thus production and thus employment. But we let the problem go too long and this road to recovery will be too slow for the public to accept.
No, we have to get President Obama's stimulus program moving fast. I hear many say that only a small portion of the stimulus will be spent on direct consumption, e.g. building new roads and schools. They complain that "transfer" payments, e.g. extended unemployment payments, are indirect consumption that may or may not occur. Give me a break, someone on unemployment will not use extra cash to pay for essentials? Do you really believe that this person will invest the extra pay in a CD?
The formula is fundamental and easy to understand, inject more funds into the economy, extra funds mean higher consumption than before the injection, higher consumption means higher production, higher production means higher employment. Again, I am not concerned about how the funds are spent, I leave that to those examining quality, I deal with quantity. Just get the money out there as soon as possible.
Leo Cecchini
April 2009
No, we have to get President Obama's stimulus program moving fast. I hear many say that only a small portion of the stimulus will be spent on direct consumption, e.g. building new roads and schools. They complain that "transfer" payments, e.g. extended unemployment payments, are indirect consumption that may or may not occur. Give me a break, someone on unemployment will not use extra cash to pay for essentials? Do you really believe that this person will invest the extra pay in a CD?
The formula is fundamental and easy to understand, inject more funds into the economy, extra funds mean higher consumption than before the injection, higher consumption means higher production, higher production means higher employment. Again, I am not concerned about how the funds are spent, I leave that to those examining quality, I deal with quantity. Just get the money out there as soon as possible.
Leo Cecchini
April 2009
Thursday, April 9, 2009
WINNING THE ECONOMIC WAR
I reported last week the lifting of "mark-to-market" rules that I have been asking to do since last August. Now I see a rearguard action by the doomsayers based on the difference between "liquidity" and "involvency." The naysayers also warn that, while lifting "mark-to-market" rules have corrected the values for mortgage based assets, we still have problems with securitized non-mortgage debt.
During the "Financial Meltdown of 2008" and the "Great Recession of 2009" I have seen a constant debate between those involved about the exact nature of the financial crisis. Some say it is a lack of "liquidity" and others say it is a matter of "insolvency." Both arguments have merit.
The exact problem is that those valuing the securitized mortgages and the credit default swaps used to insure these investments, variously known as "securitized debt, derivatives, or toxic assets," were obstensibly marking their value to the "market." However, since there was no established market for these assets they marked them to "models" based on the property market.
As the property market went flat and then south, those doing the values devalued the mortgage based assets as much as 90%. This in turn savaged the balance sheets of those holding the assets. With their balance sheets out of kilter the holders, banks and other financial groups, had to borrow to compensate for the lost value of their mortgage based assets. But their balance sheets did not allow this borrowing. So for the "liquidity" crowd the problem was the inability to borrow and for the "solvency" crowd the holders were bankrupt since assets were clearly worth less than debt.
On April 2 the Feds lifted the "mark-to-market" rules that allowed valuations of the mortgage based assets to their maturity or long term value instead of the "market" that did not exist. It has worked immediately. I heard one expert say yesterday that the mortgage based assets had been corrected. However, he warned that there are still problems with non-mortgage securitized debt, essentially student loans, auto loans, credit card debt, and commercial debt that has been bundled and sold as "securitized debt."
I do not see any real problems caused by securitized non-mortgage debt. There is no market to mark against since, as with the securitized mortgages, there is no established market for trading these. But more importantaly, no one is valuing securitized non-mortgage debt to "models" based on the values of the underlying item, i.e. no one is valuing auto loans to the current prices or sales of autos. I suppose one could devalue student loans by saying that graduating students face a more difficult job market and will be less likely to find work. But this has not yet been done. So, unlike the securitized mortgages, there will be no panic devaluing of securitized non-mortgage debt.
No we have passed the first major hurdle. Now to implementing the Obama Stimulus Plan. More on that later.
Leo Cecchini
April 2009
During the "Financial Meltdown of 2008" and the "Great Recession of 2009" I have seen a constant debate between those involved about the exact nature of the financial crisis. Some say it is a lack of "liquidity" and others say it is a matter of "insolvency." Both arguments have merit.
The exact problem is that those valuing the securitized mortgages and the credit default swaps used to insure these investments, variously known as "securitized debt, derivatives, or toxic assets," were obstensibly marking their value to the "market." However, since there was no established market for these assets they marked them to "models" based on the property market.
As the property market went flat and then south, those doing the values devalued the mortgage based assets as much as 90%. This in turn savaged the balance sheets of those holding the assets. With their balance sheets out of kilter the holders, banks and other financial groups, had to borrow to compensate for the lost value of their mortgage based assets. But their balance sheets did not allow this borrowing. So for the "liquidity" crowd the problem was the inability to borrow and for the "solvency" crowd the holders were bankrupt since assets were clearly worth less than debt.
On April 2 the Feds lifted the "mark-to-market" rules that allowed valuations of the mortgage based assets to their maturity or long term value instead of the "market" that did not exist. It has worked immediately. I heard one expert say yesterday that the mortgage based assets had been corrected. However, he warned that there are still problems with non-mortgage securitized debt, essentially student loans, auto loans, credit card debt, and commercial debt that has been bundled and sold as "securitized debt."
I do not see any real problems caused by securitized non-mortgage debt. There is no market to mark against since, as with the securitized mortgages, there is no established market for trading these. But more importantaly, no one is valuing securitized non-mortgage debt to "models" based on the values of the underlying item, i.e. no one is valuing auto loans to the current prices or sales of autos. I suppose one could devalue student loans by saying that graduating students face a more difficult job market and will be less likely to find work. But this has not yet been done. So, unlike the securitized mortgages, there will be no panic devaluing of securitized non-mortgage debt.
No we have passed the first major hurdle. Now to implementing the Obama Stimulus Plan. More on that later.
Leo Cecchini
April 2009
Thursday, April 2, 2009
BYE BYE "MARK-TO-MARKET"
Well it has taken me since last fall to get the authorities to take action but here it is, the Financial Accounting Standards Board, FASB, has modified the "mark-to-market" rules allowing banks and others to value their "securitized debt" holdings to "models" instead of the "market." I use parentheses since the "markets" they were using were actually "models" based on the property market. The "models" they will now use are the long term or maturity value of the assets, reduced by actual losses.
I expect this to cause an immediate effect on the balance sheets of those holding "securitized debt" instruments. However, given the severe decline in the financial system, it may take some time for these improved balance sheets to translate into increased lending.
The other immediate effect will be to reinforce the Feds move to revive the "securitized debt" industry. Again, the Feds are pouring $400 billion into Fannie Mae and Freddie Mac to generate more mortgages that will be "securitized." The Fed TALF Program will also generate some $ 1 trillion in "securitized debt" based on non-mortgage loans, e.g. student loans, car loans and credit card debt.
While all of this is good, we will still need President Obama's stimulus package to jump start the stalled economy. Taken into account the combination of the various plans to revive the credit market and the direct stimulus to the economy, I would expect the US economy to be back to 2007 levels by the end of this year if not sooner.
Leo Cecchini
April, 2009
I expect this to cause an immediate effect on the balance sheets of those holding "securitized debt" instruments. However, given the severe decline in the financial system, it may take some time for these improved balance sheets to translate into increased lending.
The other immediate effect will be to reinforce the Feds move to revive the "securitized debt" industry. Again, the Feds are pouring $400 billion into Fannie Mae and Freddie Mac to generate more mortgages that will be "securitized." The Fed TALF Program will also generate some $ 1 trillion in "securitized debt" based on non-mortgage loans, e.g. student loans, car loans and credit card debt.
While all of this is good, we will still need President Obama's stimulus package to jump start the stalled economy. Taken into account the combination of the various plans to revive the credit market and the direct stimulus to the economy, I would expect the US economy to be back to 2007 levels by the end of this year if not sooner.
Leo Cecchini
April, 2009
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