Tag Archives: financial crisis

Treasury Secretary warns against banking deregulation

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According to Project Syndicate, the U.S. Treasury Secretary made a recent statement warning against any rollback of regulations that were put in place following the 2007 financial crisis.

He argued that the United States’ political system “may be taking us in a direction that is very dangerous.” Referring to moves to roll back elements of the new regulatory order established in response to the debacles of 2008-9, he lamented that “everybody wants to go back to the status quo before the great financial crisis.” And he declared that “one cannot understand why grown intelligent people reach the conclusion that you should get rid of all the things you have put in place in the last ten years.”

The article goes on to argue that deregulation is actually not likely because academics and the press are against it. But the statement is not about academics and the press, it is about “the political system”. And who has control over the political system? The finance industry. And of course they want deregulation to boost short-term profits, even though it is not in their long term interests to destroy the world economy they depend on to operate.

 

single payer

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What is there really left to say about single payer? It works well, almost everywhere except the United States, where it is deemed too expensive and politically impossible.

On the quality of our system, here are some stats from the Commonwealth Fund:

Adults in the U.S. are more likely than those in the 10 other countries to go without needed health care because of costs. One-third (33%) of U.S. adults went without recommended care, did not see a doctor when sick, or failed to fill a prescription because of costs. This percentage is down from the 2013 survey (37%). As few as 7 percent of respondents in the U.K. and Germany and 8 percent in the Netherlands and Sweden experienced these affordability problems.

Fourteen percent of chronically ill U.S. adults said they did not get the support they needed from health care providers to manage their conditions. This was twice the rate in Australia, Germany, the Netherlands, New Zealand, and Switzerland.

Although the U.S. has made significant progress in expanding insurance coverage under the Affordable Care Act, it remains an outlier among high-income countries in ensuring access to health care. The authors point out that all of the other countries surveyed provide universal insurance coverage, and many provide better cost protection and a more extensive safety net.

So the self-proclaimed “greatest country in the world” appears to be somewhat sick and poor compared to its peers at similar levels of wealth and development.

Our health care system is expensive because the finance and health care industries pay politicians to write the rules in ways that stifle competition, use cynical propaganda campaigns  and scare tactics to convince the public they are engaged in competition, keep information away from consumers that would allow them to make reasonable cost-effectiveness choices, and generally maximize their short term profits at the long term expense of public health and the economy. Hillary Clinton had a very succinct way of summarizing this:

In the past, the health insurance industry has deployed sophisticated propaganda efforts to divide single payer proponents and weaken any political support for the idea. Former Democratic presidential nominee Hillary Clinton once considered such a system, but wondered, “Is there any force on the face of the earth that would counter the money the insurance industry would spend to defeat it?”

Like I said, our health care system, including all the public and private elements, is off the global charts insanely expensive both in terms of total spending relative to our economy, and in terms of the value we get in return for that spending. Shifting any portion of this expensive system from private to public funding would mean that the government would be paying more of the price tag, and government revenues would have to go up to pay for that. In other words, yes, we would be paying higher taxes in place of the high insurance premiums, co-pays and out-of-pocket payments we are making directly to the finance and health care industries now. Cynical politicians, who remember are bought and paid for by these industries, purposely confuse voters by equating the portion of the bill paid by the government with the total cost of health care, as in this Washington Post article:

But the government’s price tag would be astonishing. When Sen. Bernie Sanders (I-Vt.) proposed a “Medicare for all” health plan in his presidential campaign, the nonpartisan Urban Institute figured that it would raise government spending by $32 trillion over 10 years, requiring a tax increase so huge that even the democratic socialist Mr. Sanders did not propose anything close to it.

Single-payer advocates counter that government-run health systems in other developed countries spend much less than the United States does on its complex public-private arrangement. They say that if the United States adopted a European model, it could expand coverage to everyone by realizing a mountain of savings with no measureable decline in health outcomes, in part because excessive administrative costs and profit would be wrung from the system.

In fact, the savings would be less dramatic; the Urban Institute’s projections are closer to reality. The public piece of the American health-care system has not proven itself to be particularly cost-efficient. On a per capita basis, U.S. government health programs alone spend more than Canada, Australia, France and Britain each do on their entire health systems. That means the U.S. government spends more per American to cover a slice of the population than other governments spend per citizen to cover all of theirs.

But they go on to point out that the reason these costs are so high is that “A big reason [the government] does not clamp down now on health-care spending is that it is hard to do so politically.”

It’s almost impossible to even try to tackle these problems unless and until we have constitutional reform making it clear that big business ownership of politicians is not the same thing as free speech by individual members of the public. And our elected officials who are owned by big business are not going to give us this constitutional reform. It’s a conundrum that seems almost impossible to solve – if the 2007 financial crisis did not whip up enough public anger to counteract and overcome industry propaganda, it is hard to imagine a crisis that would.

So we would have to get that constitutional amendment (somewhat blandly called “campaign finance reform”, which understandably does not spark the public imagination) done. If we did that, we could look at some incremental reforms to move us toward either single payer or a more efficient public-private system. One idea seems particularly attractive to me. The state exchanges under the Affordable Care Act are an attractive idea because they encourage insurance companies to compete against one another for consumer health care dollars. The ACA also established a pretty uniform set of minimum coverage requirements that make it clear what we are paying for. Understanding what you are buying, and then having some choice of providers of that service, is the basic foundation of a functioning market system. The market should be able to set reasonable prices under these conditions, in theory. The insurance companies have the bargaining power and incentive to take on the health care industry over price and drive prices down.

So this all sounds pretty good. Where it is clearly failing, it is because some insurers are choosing to pull out of the exchanges, leaving buyers without any choice and destroying that link between supply and demand. What would make sense to me is to figure out what the premium would be for people to buy into Medicare and/or Medicaid directly, and then require these Medicare and Medicaid options to be available on the exchanges in a given state if at any time the number of private insurers competing on the exchange drops to less than 3 (or maybe 2, but 3 seems better). That way the insurance industry has complete control over whether they choose to shoot themselves in the foot or not. This won’t happen without the constitutional amendment first.

A shorter-term incremental measure that could help without the constitutional amendment would be to create some kind of common platform for all insurance companies to share price and outcome with consumers. Some insurers already have their own systems for doing this, and we have the system of common procedure codes, but it is all way too confusing. The government could force the insurance and health care industries to get together, come up with a crystal clear communications strategy, and put it all on a common platform. They would be required to provide you with this crystal clear information at the beginning of every doctor, hospital, and pharmacy visit. All without the government paying a dime more of people’s health care cost or providing any more price controls than they do now.

April 2017 in Review

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Most frightening stories:

Most hopeful stories:

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

  • I first heard of David Fleming, who wrote a “dictionary” that provides “deft and original analysis of how our present market-based economy is destroying the very foundations―ecological, economic, and cultural― on which it depends, and his core focus: a compelling, grounded vision for a cohesive society that might weather the consequences.”
  • Judges are relying on algorithms to inform probation, parole, and sentencing decisions.
  • I finished reading Rainbow’s End, a fantastic Vernor Vinge novel about augmented reality in the near future, among other things.

the Black-Scholes equation

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This 2012 article from the Guardian goes into some detail on the Black-Scholes equation for pricing options, which bears some responsibility for the 2007-2008 financial crisis. It was cooked up by geniuses to spread risk, but misapplied by idiots to actually create risk. What are the geniuses cooking up now for the idiots to misapply next?

February 2017 in Review

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3 most frightening stories

3 most hopeful stories

3 most interesting stories

  • The idea of growing human organs inside a pig, or even a viable human-pig hybrid, is getting very close. Tiny brains can also be grown on a microchip. Bringing back extinct animals is also getting very close.
  • Russian hackers are cheating slot machines by figuring out the pattern on pseudo-random numbers they generate.
  • From a new book called Homo Deus: “For the first time ever, more people die from eating too much than from eating too little; more people die from old age than from infectious diseases; and more people commit suicide than are killed by soldiers, terrorists and criminals put together. The average American is a thousand times more likely to die from binging at McDonalds than from being blown up by Al Qaeda.”

January 2017 in Review

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I just realized I forgot to do a month in review post in January. Well, I had a lot going on in my personal life in January, most notably the arrival of a tiny new human being. Blog posts are not the only thing I forgot – I forgot to pay some important bills and to do some important paperwork at my job too.

3 most frightening stories

  • Cheetahs are in serious trouble.
  • The U.S. government may be “planning to roll back or dilute many of the provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products and those that impose restrictions on banks”.
  • “Between 1946 and 2000, the US and the Soviet Union/Russia have intervened in about one of every nine competitive national-level executive elections.” The “Great Game” is back in Afghanistan.

3 most hopeful stories

3 most interesting stories

banking deregulation is back

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Remember that financial crisis thing in 2008 where U.S. financial firms almost destroyed the world economy? No, neither does anyone in Congress, because they are dead set on destroying the regulations put in place after the crisis to try to keep it from happening again. Here is a long article from the Center for Public Integrity.

2016 in Review

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Each month this year, I picked three scary, three hopeful, and three interesting posts or groups of post from the month. Now I’m going to pick one of those three to represent each of the months. The choices are fairly arbitrary and the main point is just to review what the media was saying and what I was thinking about over the course of the year. Then I’ll see if I can identify any trends or come up with any insights.

Most Frightening Stories of the Year

  • JANUARY: Paul Ehrlich is still worried about population. 82% of scientists agree.
  • FEBRUARY: 77% of jobs in China may be threatened by automation.
  • MARCH: An IMF official uttered the words “economic derailment“. That sounds like it could be a real train wreck. Meanwhile Robert Gordon has expanded his pessimistic article on future growth into a book.
  • APRIL: Robert Paxton says Trump is pretty much a fascist. Although conditions are different and he doesn’t believe everything the fascists believed. Umberto Eco once said that fascists don’t believe anything, they will say anything and then what they do once in office has nothing to do with what they said.
  • MAY: The situation in Venezuela may be a preview of what the collapse of a modern country looks like.
  • JUNE: Trump may very well have organized crime links. And Moody’s says that if he gets elected and manages to do the things he says, it could crash the economy.
  • JULY: The CIA is just not that good at spying.
  • AUGUST: A former U.S. secretary of defense thinks the risk of nuclear war is higher now than during the cold war. The Republic Party platform appears to be outright in favor of nuclear weapons, while the Democratic Party platform includes a tepid commitment to maybe “reducing reliance” and spending on nuclear weapons. Jeffrey Sachs says the Syria War has become essentially a U.S.-Russia proxy war.
  • SEPTEMBER: The ecological footprint situation is not looking too promising: “from 1993 to 2009…while the human population has increased by 23% and the world economy has grown 153%, the human footprint has increased by just 9%. Still, 75% the planet’s land surface is experiencing measurable human pressures. Moreover, pressures are perversely intense, widespread and rapidly intensifying in places with high biodiversity.” Meanwhile, as of 2002 “we appropriate over 40% of the net primary productivity (the green material) produced on Earth each year (Vitousek et al. 1986, Rojstaczer et al. 2001). We consume 35% of the productivity of the oceanic shelf (Pauly and Christensen 1995), and we use 60% of freshwater run-off (Postel et al. 1996). The unprecedented escalation in both human population and consumption in the 20th century has resulted in environmental crises never before encountered in the history of humankind and the world (McNeill 2000). E. O. Wilson (2002) claims it would now take four Earths to meet the consumption demands of the current human population, if every human consumed at the level of the average US inhabitant.” And finally, 30% of African elephants have been lost in the last 7 years.
  • OCTOBER: According to James Hansen, the world needs “negative” greenhouse gas emissions right away, meaning an end to fossil fuel burning and improvements to agriculture, forestry, and soil conservation practices to absorb carbon. Part of the current problem is unexpected and unexplained increases in methane concentrations in the atmosphere.
  • NOVEMBER: Is there really any doubt what the most frightening story of November 2016 was? The United Nations Environment Program says we are on a track for 3 degrees C over pre-industrial temperatures, not the “less than 2” almost all serious people (a category that excludes 46% of U.S. voters, apparently) agree is needed. This story was released before the U.S. elected an immoral science denier as its leader. One theory is that our culture has lost all ability to separate fact from fiction. Perhaps states could take on more of a leadership role if the federal government is going to be immoral? Washington State voters considered a carbon tax that could have been a model for other states, and voted it down, in part because environmental groups didn’t like that it was revenue neutral. Adding insult to injury, WWF released its 2016 Living Planet Report, which along with more fun climate change info includes fun facts like 58% of all wild animals have disappeared. There is a 70-99% chance of a U.S. Southwest “mega-drought” lasting 35 years or longer this century. But don’t worry, this is only “if emissions of greenhouse gases remain unchecked”. Oh, and climate change is going to begin to strain the food supply worldwide, which is already strained by population, demand growth, and water resources depletion even without it.
  • DECEMBER: The geopolitical situation is not good. If Russia did hack the U.S. election, it wouldn’t be the first election they have hacked. The wars in Afghanistan and Iraq are not over, and the rest of the greater Middle East is increasingly a mess.

Most Hopeful Stories of the Year

Most Interesting Stories of the Year

  • JANUARY: The World Economic Forum focused on technology: “The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited. And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.”
  • FEBRUARY: Titanium dioxide is the reason Oreo filling is so white.
  • MARCH: Michael Pollan urged us to eat food. not too much. mostly psychedelic mushrooms.
  • APRIL: Genes can now be programmed just like circuits.
  • MAY: The world has about a billion dogs.
  • JUNE: Switzerland finished an enormous tunnel through the Alps that took 20 years to build.
  • JULY: I was a little side-tracked by U.S. Presidential politics. Nate Silver launched his general election site, putting the odds about 80-20 in favor of Hillary at the beginning of the month. The odds swung toward Trump over the course of the month as the two major party conventions took place (one in my backyard), but by the end of the month they were back to about 70-30 in favor of Hillary. During the month I mused about NAFTA, the fall of the Republic, the banana republic, The Art of the Deal, how to debate Trump, and Jon Stewart.
  • AUGUST: Here is a short video explaining the Fermi Paradox, which asks why there are no aliens. Meanwhile Russian astronomers are saying there might be aliens.
  • SEPTEMBER: Monsanto is trying to help honeybees (which seems good) by monkeying with RNA (which seems a little frightening). Yes, biotech is coming.
  • OCTOBER: Neil deGrasse Tyson says “we might expect to find as many as 100 alien civilizations in our galaxy communicating with radio waves right now.”
  • NOVEMBER: New technology can survey and create a 3D model of a room in seconds.
  • DECEMBER: According to Bill Gates, “new genome technologies are at the cusp of affecting us all in profound ways”. But an article in Nature says we should not be too hopeful about living much past 100.

And now for trends and insights…

Serious long-term threats related to population, food, water resources, natural capital depletion, biodiversity loss, and climate change. These are all inter-related. In past years I probably would have suggested that these threats are so likely and so consequential that we should focus nearly all our efforts on them. But things have changed a bit over the past year. Now it appears that we face dire short term threats as well in the form of serious geopolitical instability, risk of war and global economic stagnation. If you don’t deal with short term threats you might not be around to deal with the long term ones. And voters have chosen leaders in the past year who have no intention of dealing with the long term threats. They make no serious attempt to understand their nature or root causes. In fact, they don’t even acknowledge that the threats exist in many cases.

War. The possibility of war is certainly the biggest short-term threat we face. If we get through the next 4-8 years without a war between major powers or any sort of nuclear detonation, we will have to consider that a win. The greater Middle East from North Africa to Afghanistan is dangerously unstable, and the U.S. has already been drawn into a proxy war with Saudi Arabia and its allies on one side and Iran and Russia on the other side. And it appears that Russia may have played a direct role in influencing the U.S. election. An accidental clash between U.S. and Russian forces in Syria, Eastern Europe, or over the world’s oceans could be enough to set off a series of escalations and miscalculations that leads to a war nobody wants or stands to gain anything from. A naval confrontation between the U.S. and China could be a similar risk.

The Great Recession. Although the U.S. economy has picked up, the overall global growth and employment situation is deeply concerning. Rather than just a cyclical downturn, it may be a long term trend driven by demographics, debt, and underemployment caused by automation. The automation trend is going to be relentless. The 2007-8 financial crisis caused by excessive risk taking in the U.S. finance industry may just have been the straw that broke the camel’s back and made the long-term trends obvious, and another financial crisis that severe at a time of weakness might be the one the world doesn’t recover from. Our new U.S. leaders are already working with big business to roll back the necessary but still inadequate protections put in place after the ’07-8 crisis. Costs and risks imposed by climate change are not going to make the economy any better.

Technology. Technology brings us grave concern over the employment situation, but also great hope that we could see a long-term pickup in productivity, and therefore our overall wealth and quality of life. Of course, an increase in overall wealth and quality of life may help only a small slice of society if that society is structured to concentrate rather than share the wealth, and the leaders we have chosen in the U.S. for the next few years are clearly committed to the former. Extreme concentration of wealth could lead us eventually to a situation of such instability that the only outcomes are armed revolution in the streets or else absolute authoritarian control.

But let’s optimistically assume that our political system eventually comes up with a consensus on sharing the wealth. Now a higher rate of productivity growth (within ecological limits) would be good for everyone. In this world, people whose jobs are displaced by automation would be quickly retrained for new jobs, and they would be educated in the first place so that they are very flexible and adaptable to changing conditions. Over time, we could become so rich that we simply don’t have to work so much, and we could devote more of our time to leisure activities, learning for the sake of learning, the arts, civic and social activities, etc.

This might seem like a utopian vision, but it has happened in the past. People used to work incredibly long, hard hours to grow just enough food to survive, and they didn’t live all that long at that. Later people used to work long, hard hours in factories and sweat shops. Technology, cheap energy, and the wealth they have brought have made huge changes in working hours and life expectancy for most of us. With technology seemingly advancing all around us, the puzzle is why we aren’t seeing similarly spectacular advances today as we have seen in the past.

Advances like the tractor and electricity were enormous changes at the time of course. Maybe today’s technological advances, even though they seem impressive to us, simply aren’t as dramatic as these advances were in their time. That is the basic thesis of Robert Gordon, who I mention above. The World Economic Forum and Nouriel Roubini articles I mention above have good summaries of the advances we are seeing. Roubini categorizes them as:

  • ET (energy technologies, including new forms of fossil fuels such as shale gas and oil and alternative energy sources such as solar and wind, storage technologies, clean tech, and smart electric grids).
  • BT (biotechnologies, including genetic therapy, stem cell research, and the use of big data to reduce health-care costs radically and allow individuals to live much longer and healthier lives).
  • IT (information technologies, such as Web 2.0/3.0, social media, new apps, the Internet of Things, big data, cloud computing, artificial intelligence, and virtual reality devices).
  • MT (manufacturing technologies, such as robotics, automation, 3D printing, and personalized manufacturing).
  • FT (financial technologies that promise to revolutionize everything from payment systems to lending, insurance services and asset allocation).
  • DT (defense technologies, including the development of drones and other advanced weapon systems).

Roubini acknowledges the argument that these advances are not the equivalent of past advances, but also suggests that we may be in the lag phase between when technological advances happen and when they begin to have obvious effects on productivity. I think I said it pretty well in my post so I’ll repeat what I said:

Although the plow, the printing press, the steam engine, electricity, etc. were game changing, the game didn’t change as soon as they were invented. They had to catch on, infrastructure had to be built, resistance to change had to be overcome, and it took awhile. Each successive revolution happened faster though, which is why I am skeptical that this time is different… I think there is a lag, and it just hasn’t hit yet. If and when there is a sharp technology-driven surge in productivity, it doesn’t mean everything is going to instantly be great for everybody. As we produce more with less effort, there will be winners and losers, haves and have nots. And there will be a lag between when that starts and when it gets resolved. And just to beat a dead horse, we can’t just keep producing and consuming more forever unless we figure out a way to do that without growing our ecological footprint. And, we need to watch out for those defense technologies.

The information technology is all around us now, and the biotechnology is just starting to take off. 2017 could be the year when we have the same excitement in the popular imagination about biotech as we saw with the internet in the mid-1990s. Or maybe it will take a few years.

It is possible that our technology could advance so fast that ecological limits will cease to be relevant before they begin to exert a major drag force on our global economy and society. I don’t think it is safe to put all our eggs in that basket though. I am also saddened by the extreme and seemingly accelerating destruction of our planet’s ecosystems as we have known them throughout human history. We can try to preserve some of what is left, but even if we are successful it will be more like a museum or zoo recording what we used to have than a real, large-scale functioning planetary ecosystem.

There, I ended on a pretty pessimistic note. That’s how I feel at the moment. Not all stories have to have a happy ending. (This is exactly why King Lear is my favorite Shakespeare play, because the bad guys do bad things and get away with it, and sometimes real life is like that.) I just don’t want to get my hopes up about 2017. Come on 2017, maybe you will pleasantly surprise me.

Dodd-Frank

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After the risk of war, and the existential but somewhat abstract long-term catastrophe of climate change, the scariest risk we might face in the next 4-8 years is a roll-back of the limited protections put in place against a repeat of the 2008 financial crisis, or something worse. Trump is appointing people who are likely to make that happen. If the world is not in Great Depression 2.0 already, this could usher it in. I think it is entirely possible the world has entered a long-term economic downward spiral masked by the usual noise of ups and downs. This is from the blog Baseline Scenario:

The Wall Street Journal has a profile up on Mike Crapo and Jeb Hensarling, the key committee chairs (likely in Crapo’s case) who will repeal or rewrite the Dodd-Frank Wall Street Reform and Consumer Protection Act. It’s clear that both are planning to roll back or dilute many of the provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products and those that impose restrictions on banks (which, together, make up most of the act)…

Introductory economics, and particularly the competitive market model, can be seductive that way. The models are so simple, logical, and compelling that they seem to unlock a whole new way of seeing the world. And, arguably, they do: there are real insights you can gain from a working understanding of supply and demand curves.

The problem, however, is that the people who are most captivated by the first theorem of welfare economics (the one that says that competitive markets produce optimal outcomes) are often the least good at remembering the assumptions that don’t apply and the caveats that do apply in the real world. They forget that the power of a theory in the abstract bears no relationship to its accuracy in practice.

financial technology

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Here is an article about new “financial technology” by the author of a book called Money Changes Everything: How Finance Made Civilization Possible.

For example, even as we debate the relevance and usefulness of traditional financial institutions such as banks, another revolution is underway in the world of money. A mere decade after we thought we had mastered the intricacies of asset securitization, shadow banking and credit default swaps, an entirely new financial phenomenon has emerged. It is called FinTech – short for financial technology. FinTech involves the plumbing and wiring of the financial system. It is changing how we borrow, how we save, how we raise money for companies even how we assess our future; its possibilities, risks and relationships.

Some of these innovations you may already know: PayPal, Bitcoin, Financial Engines, Kickstarter, Prosper.com and Venmo. They are apps, payment systems, crowdfunding vehicles and peer to peer lending sites. Their use has spread rapidly along with other technological improvements in how we get things done. However these companies are the tip of a very large iceberg.

Many of the innovations in finance are buried in the complex, business to business infrastructure of the economy. These include new ways of detecting fraud, recording transactions, routing orders, valuing assets and even discovering hidden patterns in big data; massaging the fast, continuous flow of news, trades, tweets, satellite images, and Facebook posts. Financial companies – from the big players like Goldman Sachs and Blackrock down to your local bank and financial advisor believe FinTech will fundamentally alter their businesses — and they are rushing to get out ahead of competitors. This is because FinTech innovation tends to disrupt the existing structure. It disintermediates customers and providers of financial services, replacing them with peer-to-peer lending, instant money transfers, loans without loan officers, and investment without investment banks. These innovations are transformative, empowering and create a new infrastructure for exploring even greater opportunities but they threaten the status quo in ways that the securitization wave of the 2000’s never approached. Securitization mostly involved the same big players that ruled the markets in prior decades. FinTech brings a different cast of characters who are defining new communities of investors, new sources of knowledge and unfortunately new kinds of scams and risks. The top FinTech companies today include a lot of new names. How many of us have been following the likes of Credit Karma, Market Axcess, Square, Stripe and SoFi?

I’m all for cutting out the middlemen trying to rip us off. And I’m still looking for the perfect app for splitting a restaurant bill among a large party.