Senate Health Bill Ping Pong Without Conference Committee

House and Senate leaders have formally agreed to bypass a bicameral conference committee to merge two healthcare bills, and have opted to instead “ping-pong” the Senate bill over to the House and back again, according to House leadership aides.
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The Senate bill will serve as the vehicle by which Democrats hope to send a healthcare bill to Obama to sign into law. Under the “ping-pong” strategy, the House will take up the Senate bill and amend it, then send it back to the Senate for final approval.

From "Dems agree that House will take up, tweak Senate healthcare bill" by Jared Allen published on The Hill.

4 Million Fewer Registered Cars In US In 2009

An interesting side effect of lowered sales last year, though, is that the total number of vehicles in the overall U.S. car fleet dropped. There were 250 million cars here in 2008, and only 246 million at the end of 2009. We may have been buying fewer cars than we usually do in a year – there were around 10 million sold in 2009 – but we still got rid of 14 million units.

From "Number of cars in the U.S. dropped by four million in 2009 - is America's love affair ending?" by Sebastian Blanco on autobloggreen.

House Staff Comparison Of House-Senate Health Reform Bills

Poltico.com posted a "HOUSE-SENATE COMPARISON OF KEY PROVISIONS" of the two different versions of the health reform bills.

The document states that a Tri-Committee House staff prepared the 11 page document using budget and coverage data from the Congressional Budget Office or the Joint Committee on Taxation. The document is dated December 29, 2009.

(HT: Ezra Klein, Washington Post)

I also posted the link to the House document in the sidebar to this blog.

SEC's Madoff Scam Slayer

Carlo di Florio Named Director of SEC Office of Compliance Inspections and Examinations

SEC press release follows:

FOR IMMEDIATE RELEASE
2010-1

Washington, D.C., Jan. 4, 2010 — Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Carlo V. di Florio has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE).

Mr. di Florio comes to the SEC from PricewaterhouseCoopers (PwC), where he was a partner in the Financial Services Regulatory Practice and one of PwC's national leaders in corporate governance, enterprise risk management and regulatory compliance and ethics. As head of OCIE, Mr. di Florio will oversee the SEC’s nationwide examination programs for investment advisers, broker-dealers, mutual funds, credit rating agencies and self-regulatory organizations among other entities.

“A strong inspections and examinations unit is instrumental to the SEC’s investor protection efforts. Investors rely on our examiners to ensure that their financial professionals comply with the law,” said Chairman Schapiro. “Carlo brings the energy, insight, and experience necessary to ensure that we keep pace with the rapid changes in the industry and continue to build upon the reforms of the past year.”

Mr. di Florio said, “I’m honored to join Chairman Schapiro, the Commissioners and the SEC staff during this critical time of financial regulatory reform. I’m excited to collaborate with an outstanding team of talented and dedicated professionals across the country as we work together to strengthen our examination strategy, structure, training programs, processes and systems, while also recruiting colleagues with valuable new skill sets, including trading strategies, risk management and quantitative analytics.”

At PwC, Mr. di Florio has played a leading role in strengthening the corporate governance, risk management and regulatory compliance practice and defining new industry standards, including the Committee of Sponsoring Organizations (COSO) Enterprise Risk Management standard and the Open Compliance and Ethics Guidelines (OCEG). Mr. di Florio has extensive experience leading independent reviews and advising clients on regulatory expectations and industry leading practices across capital markets, investment management, banking and other financial services sectors and regulatory regimes.

In addition to helping financial institutions strengthen corporate governance and regulatory compliance programs, Mr. di Florio also has played a leading role in numerous high-profile engagements where PwC was retained to investigate corporate fraud, corruption, conflicts of interest and money laundering. In this regard, Mr. di Florio has directed international teams and engagements across numerous jurisdictions around the world.

Mr. di Florio received his Master of Laws (LL.M) with distinction from Georgetown University Law Center, his JD from Penn State University, and his BA in Political Economy from Tulane University.

Good Faith Error Caused Financial Mess, Not Fraud

...the essential question is one of knowledge and inevitable ignorance of the future, or knowledge and error, or what we may call the doctrine of plausible mistakes. As the witty observer Don Schackelford said about the savings and loan collapse of the 1980s, “the unintended folly of the reasonably decent was far more costly than the contrived villainy of the corrupted few.”

This is a fine phrase. In the same vein, here is Bagehot, writing in 1873, in one of my favorite passages of Lombard Street:

A manager sometimes committed frauds which were dangerous and still oftener made mistakes that were ruinous … Error is far more formidable than fraud: the mistakes of a sanguine manager are far more to be dreaded than the theft of a dishonest manager … The losses to which an adventurous and plausible manager, in complete good faith, will readily commit a bank, are beyond comparison greater than any which a fraudulent manager would be able to conceal.

How do ex ante credible and intelligent actors come to make such momentous mistakes? Well: “Many things which were considered impossible nevertheless came to pass.” For example, it was generally considered impossible for U.S. national average house prices to fall, let alone to fall by 30 percent, but they did.

From "Error vs. Fraud" by Alex J. Pollock on the American Enterprise Institute. Pollock is a resident fellow at the American Enterprise Institute. From 1991 to 2004, he was president and CEO of the Federal Home Loan Bank of Chicago.

Companies Will Drop Health Plans Under Health Reform

"A number of midsize employers are thinking they would drop coverage because it would be more economical to do that, given the penalties, and the employees would still receive coverage," says Dean Hatfield, senior vice president and health-practice leader at Sibson Consulting.

Read "Farewell, Company Health Plans?" on CFO.com by Alix Stuart.

Proxy Problem Of Carbon Based Pricing And Global Warming

Below is a comment I posted about the proxy problem on Core Economics, "Why we need a carbon price, again" by Joshua Gans in response to his post about the [gated] Financial Times article, "Lights on – or off? Low-carbon living is anything but easy..." by Tim Harford.

Tim Harford's conclusion does not follow from his obvious truths.

When the public sector and governments are measuring and monitoring a wanted positive social result, such as a reduction in global harm and warming, there is always a proxy problem. The government always selects some indirect, intermediate and prior effect to control.

The ultimate and desirable goal is to prevent substantial harm to the planet and its inhabitants. Right now, our focus is on global warming, but of course, there are many other ways to harm the planet and to increase global warming. Currently, we know some of the other ways to cause extensive planetary damage and global warming, but we have yet to discover or notice the many other things we do that cause harm.

The best market approach to global warming would be some current indicator that measures the intended result and measures or modifies all future temperature increasing output of the planet's inhabitants and companies. Something akin to the market price of a company's shares that measure in current value all the future earnings output of a company. Minimizing the value of an indicator that measures the summation of future global temperature increases would maximize the reduction in global warming.

As history shows, when a public policy focuses on an intermediate casual effect, in this case carbon output, behavioral changes occur in the measured effects, but often do not achieve the intended results. Changes in the output of complex systems are never easy to predict when behavioral and input changes occur.

As I mentioned, our goals are to protect the planet and inhabitants. If we reduce carbon output and global warming, but harm life on the planet, we have both succeeded and failed. For example, many processes to reduce global warming use intermediate products that rely on heavy metals and rare earth materials, which can be harmful to the planet's inhabitants. Gases, other than carbon-based gases, which we are not limiting, may also increase long-term global warming. A proxy measure, such as carbon output, will create behavioral changes, but may not necessarily result in greater benefit to the planet's inhabitants. We could be finding ourselves running from one fire to another, until we reach a point without any feasible solution.

For example, right now, the earth absorbs a certain amount of the sun's energy and that energy heats the earth and its atmosphere. Suppose that in response to a reduction in the use of carbon fuels through price increase to carbon, it is more economical to use solar energy absorbing materials, such as darker colored materials. A slight change in the overall reflectivity and absorption of the sun's energy on the earth could undo all the benefit achieved through carbon and greenhouse gas reductions. Similarly, an increase in use of lesser solar energy absorbing materials could accelerate the next ice age. A change to solar energy absorbing materials exposed to the sun would occur gradually, without notice, intent or consciousness of its global warming/cooling effect.

Simply reducing a proxy, which is an intermediate effect, will achieve the results measured by the proxy, but it may not prevent the crisis. In the end, the proxy reduction may not achieve the desired overall benefit of decreasing global warming.

There is much more uncertainty about the effects of using carbon based pricing than often discussed. The results could be environmentally positive or negative and decrease or increase global warming. Results from complex system changes are never exactly as one predicts or envisions.

There is more uncertainty to Harford's conclusion, "a broad-based, credible carbon price will be the foundation of any successful policy on climate change" then he and many other carbon based pricing economists realize.

US - USSR Cold War Stopped The Development Of Safer Nuclear Energy

Thorium once competed with Uranium as a safer and easier to use fuel for nuclear power plants in the 1950s and 1960s.

The element Thorium is more plentiful, requires less processing, has a much shorter half-life of hundreds of years instead of thousands, has safer by products and safety features are easier to build into power plants.

Uranium has one advantage. Uranium power plant radioactive by-products are used for nuclear weapons.

The 1950s and 1960s cold war need for nuclear weaponry resulted in the decision to use Uranium for nuclear power plants instead of Thorium, despite the known advantages of Thorium.

[Former US Director of Oak Ridge National Lab Defense Alvin] Weinberg and his men proved the efficacy of thorium reactors in hundreds of tests at Oak Ridge from the ’50s through the early ’70s. But thorium hit a dead end. Locked in a struggle with a nuclear- armed Soviet Union, the US government in the ’60s chose to build uranium-fueled reactors — in part because they produce plutonium that can be refined into weapons-grade material. The course of the nuclear industry was set for the next four decades, and thorium power became one of the great what-if technologies of the 20th century.

Read "Uranium Is So Last Century — Enter Thorium, the New Green Nuke" by Richard Martin in Wired magazine.

(HT: Slashdot)

Obama's Model Of Efficient Health Care Too Expensive For US Government

Dec. 31 (Bloomberg) -- The Mayo Clinic, praised by President Barack Obama as a national model for efficient health care, will stop accepting Medicare patients as of tomorrow at one of its primary-care clinics in Arizona, saying the U.S. government pays too little.

From "Mayo Clinic in Arizona to Stop Treating Some Medicare Patients" by David Olmos.

HAPPY NEW YEAR!

Happy New Year to my readers, followers and everyone else.

US Income Equality Would Create Political Instability And Unrest

When one considers income mobility in the US, one realizes that discussions about income inequality and wealth creation miss the main point. Achieving income equality and leveling wealth creation would lead to many more negatives than positives.

There is tremendous opportunity for individual wealth improvement in the US and the 'wealthy' and 'very wealthy' are an ever changing group of people from the lower income percentiles. This 'dynamism' is more prevalent in the US than any other country in the world. Policies to create income equality would remove this dynamic nature of our capitalistic economy and create true class warfare. It would lock people into their income percentiles. A Hyundai owner would never get rich enough to become a Mercedes owner. Wealth creation and extreme income gains are rare and it is its rarity that preserves our political stability. It gives hope to all that things will get better, that anyone can be a rich person, anyone can start a business, become a CEO, investment banker or top 100 lawfirm lawyer, etc.

For example:

There is considerable income mobility of individuals in the U.S. economy; half of taxpayers move to a different income quintile over 10 year periods.
About half of taxpayers who began in the bottom income quintile moved up to a higher income group.

A 2007 study found, "Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period."

The degree of mobility among income groups tends to be a stable phenomenon of the US.

See: https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-Report-Income-Mobility-2008.pdf [Link corrected].

Also see below from: http://www.heritage.org/research/taxes/bg1418.cfm

A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile.

A 1995 Federal Reserve Bank of Dallas report showed that almost three-fourths of those in the bottom quintile in 1975 were in a higher quintile by 1991, and almost 40 percent in the top quintile moved down to a lower quintile over the same period.

A 1996 Urban Institute study showed that large numbers of Americans move into a new income quintile, with estimates ranging from 25 percent to 40 percent in a single year. The same study found even higher mobility rates over longer periods: about 45 percent over five years and 60 percent over 9-year and 17-year periods.

In 1998, the Census Bureau reported that, on average, over 41 percent of Americans increased their inflation-adjusted income by 5 percent or more per year from 1984 to 1994.

The primary reasons for changes in income from year to year were changes in marital status, changes in the number of workers in the household, and moving into or out of full-time, year-round employment.

A 2000 Economic Policy Institute study showed that almost 60 percent of Americans in the lowest income quintile in 1969 were in a higher quintile in 1996, and over 61 percent in the highest income quintile had moved down into a lower income quintile during the same period.

A comment I posted on Mark Thoma's blog, Economist's View, "Is Our Tax System Helping Us Create Wealth?"

Security Theater Leads To Ineffectual Laws And Measures: Also Applies To Medical Reform And Other Legislation

"Security theater" refers to security measures that make people feel more secure without doing anything to actually improve their security. An example: the photo ID checks that have sprung up in office buildings. No one has ever explained why verifying that someone has a photo ID provides any actual security, but it looks like security to have a uniformed guard-for-hire looking at ID cards.

From "Is aviation security mostly for show?" by Bruce Schneier, Special to CNN.

Current health reform proposed legislation is more theater than effective changes to our medical and health care system. So is much of what Congress and state legislatures do these days.

Heart Medical Devices Approved Without Sufficient Scientific Review

medical devices implanted each year in hundreds of thousands of U.S. heart patients often are approved by government regulators based on insufficient scientific review, researchers said.

About two of three cardiovascular devices approved by the U.S. Food and Drug Administration from 2000 to 2007 were tested in a single clinical trial rather than multiple studies....

From Bloomberg's article, "Medical Device Studies Lack Scientific Rigor, Researchers Find" by David Olmos.

The article is a criticism of the FDA, but a more fundamental philosophical question is, what is the proper standard of review for medical devices and drugs?

The review standards determine what medical devices and treatment are approved, experimental and not approved. It also determines the cost incurred and time required by pharmaceutical and medical device companies to get approval for their new medical products. Higher approval costs act as a disincentive, especially for low cost and limited use products.

McKinsey On Using Bad Banks To Salvage Troubled Banks

Read McKinsey Consulting firm's thoughts and analysis on resolving banks with troubled assets in "Understanding the bad bank" by Gabriel Brenna, Thomas Poppensieker, and Sebastian Schneider, December 2009, McKinsey Quarterly.

“Bad banks” are back. The concept is simple. The bank divides its assets into two categories. Into the bad pile go the illiquid and risky securities that are the bane of the banking system, along with other troubled assets....What are left are the good assets that represent the ongoing business of the core bank.

Read the complete McKinsey article here.

Worth Repeating: Markets Fail, That's Why We Need Markets.

Thank you to Mark Perry for posting about and linking to an article by Arnold Kling and Nick Schulz published in the Christian Science Monitor.

Perry states:

This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy – in finance, high tech, manufacturing, services, and beyond – are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Read Mark's post, "Markets Fail. That's Why We Need Markets" here.

Excellent Post In Honor Of Ronald Coase's 99th Birthday By Landsburg

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out.... If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

This insight—so simple once stated, but thoroughly astonishing to the economists of 1960 (I’ve heard tales of this astonishment from several of the participants in Coase’s historic seminar)—means that in a case of externalities, pure theory can never tell you who should bear the costs; you’ve got to look at the specifics of the case.

From the excellent blog post, "Happy 99th Birthday, Ronald Coase" by Steve Landsburg.

Health Care Costs Will Only Get Worse

The Democrats' health care legislation, however, puts more distance between Americans and the payment process and promotes dependence on government. That will only drive down consumers' out-of-pocket expenses even further and force overall health care spending upward. Under such a regime, the system will be worse off than it is now.

From an Investor's Business Daily editorial, "Once Patients Pay, Health Costs Will Fall."

Copy of IBD article also at Carpe Diem by Mark Perry.

(HT: Mark Perry and Carpe Diem).

Updated GPO Link To Senate Health Care Bill, S3590

Today, the Government Printing Office posted the final PDF version of S3590, Patient Protection and Affordable Care Act that passed the Senate.

About an hour ago, I updated the sidebar link to the final GPO version of the Senate health care bill. It is a 2400 page PDF and it may take a few seconds or longer to open.[Sidebar links were removed.]

Complicated CDO Pricing Did Not Create The Banking Crisis

A comment I posted on Felix Salmon's Reuters blog, "It’s impossible to price a CDO" that blames the inability to compute CDO prices and Goldman Sachs for the financial crisis.

All derivatives, futures, options and swaps are zero sum. One counterparty’s gain is the other party’s loss. CDOs behave as any other derivatives behave when it comes to winners and losers.

For many years, farmers have used agricultural derivatives purchased at planting time to protect themselves from the uncertainty about crop yields and prices at harvest time. Speculators, investors and food companies are the counterparties to the farmers.

All the computers in the world combined and all the supercomputers cannot accurately predict harvest time prices. Weather, droughts, floods, hurricanes, frost, crop diseases, foreign growers internal country politics, wars, tariffs, strikes, oil price spikes, e coli and salmonella outbreaks and other price effecting events are too unpredictable to know with any degree of uncertainty in advance.

Yet, the agricultural derivatives markets work very well and without the ability to compute future outcomes.

There is much more to the CDO problem than nuclear waste mortgages and computational difficulties.

Financial nuclear waste sells all the time without blowups as occurred in the mortgage market. Investors with high-risk tolerance buy, invest in and trade debt of bankrupt companies, junk bonds of very low credit rated companies, start-ups, and other high risk, high probability of default debt all the time.

Financial markets exist for all kinds of debt with high degrees of uncertainty about future events and with high likelihood of defaults without major problems.

If Goldman was selling snake oil, there was nothing compelling the buyers to buy and invest in the snake oil. Was Goldman holding a gun to each investor and buyer’s head of the CDOs?

Furthermore, and a more compelling argument, is that US Treasury bonds of all maturities from a few days to 20 years was available to the same investors who purchased Goldman’s so called nuclear waste. When there was a safe, transparent alternative investment that all the buyers knew about, why did they buy CDOs? US Treasuries are better than AAA rated!

Additionally, private equity, hedge funds and mutual funds were not the investors who ran into problems purchasing CDOs, (the mutual fund that broke the buck was a higher risk fund that attempted to increase its yield by heavily investing in higher risk securities like mortgage derivatives and just because it called itself a money market fund the Fed panicked).

The banks, who are sophisticated investors, suffered the most losses from the CDO market collapse.

What really went wrong for the financial institutions from the collapse of the CDO markets due to excessive mortgage defaults was that the financial institutions were overly invested in these kinds of debt.

Market prices collapse all the time for different kinds of investments, be it Gold, foreign currencies, commodity prices, etc. There is one simple rule of investing that has stood the test of time and does not need a lot of computer power. The rule is DO Not Put All Your Eggs In One Basket. The banks were not diversified. They bet the bank on mortgage related debt and they lost. They were gamblers that put everything on red on the roulette wheel and black came up.

Why banks did it is a whole other discussion, but Goldman was not the cause. Yes, it had the product that blew up, but it id not create the hunger in the buyers and investors for that product. Goldman met the banks cravings for these investments, but it id not make the banks the junkies that they were for this crack.

If the CDO outcomes were not computable by the buyers, then the CDO outcomes were not computable by Goldman. Goldman could not know in advance that it would see windfall gains.

Furthermore, the CDOs that ran into the most problems were the ones originated after the housing market started to collapse and that data was publicly available to the investors, including as to which areas of the US were seeing the sharpest price declines. Plus, the investors knew or could easily ask Goldman and Goldman would tell them which areas of the country had the mortgages in the CDOs they were buying.

Most of the responsibility for the problems should go the regulators. They overlooked the lack of diversification and the overinvestment in mortgage derivative debt. They promulgated rules that allowed banks to hold for each dollar of capital against a residential mortgage, two and one half times as much CDO mortgage debt. The regulators, through capital rules that promoted capital arbitrage, turned banks into crack heads for CDOs and then failed to supervise their addicted banks.

Goldman was like a bartender. It had a secondary and not a primary responsibility. It did not create the alcoholics, but at some point, it should have seen that the regulators were not stepping up to the plate and that their customers were in over their heads and too drunk to drive anymore. However, the regulators created the drunken banks and not Goldman. Goldman was at worst opportunistic.

Obama Does Not Know How To Be A CEO

Years ago, Bill Gates once remarked that he had to be careful about comments he made to Microsoft employees. He said he once idly asked an employee and how a particular project was going and that caused million of Microsoft dollars to be diverted to that project.

Obama has no clue as to what it means to be a chief executive. The shambles of the two health care reform bills that we are now facing and trying to reconcile is a function of his lack of leadership as a CEO. Leaders know that people who work for them take a boss's comments as a directive, a guide to acceptable behavior and future worthwhile endeavors. Leaders need to provide some clarity as to specific product and service objectives, which for Obama are not just broad legislative agendas but the major items included or excluded from the bills. Otherwise, the ending legislation will reflect a Congressional power struggle chaotic mess. He needs to give Congress effective anchor points for inclusion in major legislation even if it upsets some of his constituency.

His glibness only undermines his clarity, creates an atmosphere of uncertainty, generates confusion about goals and politicizes the internal workings of the organization.

Whether we look at the dysfunctional specifics of the stimulus bill or the House and Senate health care bills, there is an obvious lack of goal orientation and effective supervision. Health care is passing because it is a 60-year goal of the Democratic Party. Very little, if any of the health care or stimulus legislation is a result of Obama. After Bush, with the severity of the recession and very high unemployment, passing safety net social programs, such as effective stimulus or health care for all, should have been a piece of cake and a slam-dunk. Instead, the stimulus law and the health care bills are ineffectual at achieving their intended societal goals and atrocities of the legislative process. If anything, his statements about not taxing the middle class or employer health benefits and his protectiveness of union Cadillac health plans have only made the entire legislative process more difficult for Congress and potentially hinder his achievement of universal, affordable health care.

Obama's leadership stops at rubric. Title a bill 'health care reform' or 'stimulus', leave his union pals alone and he is satisfied. CEOs that manage corporations as Obama manages the US, quickly find they lose market share, profits and their jobs through bankruptcy or replacement.

The President needs to provide clear goals with some legislative specificity. He needs to make tough choices and hold Congress and his subordinates accountable. He has to mature and become a leader quickly or his and the Democratic Party's popularity will continue to decline. Leadership is more than espousing nice statements about hopeful results. It is about making tough decisions and setting specific, realistic, achievable targets with the agreement of some and the disagreement of others of your loyal fans. If all your supporters agree with you, you are not making the tough choices you need to make. Pleasing everyone in your circle never gets tough things accomplished satisfactorily.

Above is the comment I posted on the Wall St. Journal, "Tax Audits Are No Laughing Matter: A president shouldn't even joke about abusing IRS power" by Glenn Harlan Reynolds. Reynolds' article is about President Obama's casual statements about asking the IRS to audit Arizona State University because it did not confer an honorary degree on the President.