The image above is taken from a quick Excel spreadsheet I put together and uploaded here. You can download it and play with it as you wish. The user input cells are the 1st, 2nd, and 6th respectively ("Total Population," "Total Current Expenditure," and "Pct spending reduction." [NOTE: to speculate on the effects of spending increases, simply enter a negative decimal fraction, e.g., enter "-.25" to see the upshot of a 25% increase, and so forth.]
In my lengthy post "The U.S. health care policy morass," I cited some aggregate health care expenditure data proffered by the bipartisan National Coalition on Health Care.
In 2008, total national health expenditures were expected to rise 6.9 percent -- two times the rate of inflation. Total spending was $2.4 TRILLION in 2007, or $7900 per person1. Total health care spending represented 17 percent of the gross domestic product (GDP).
I roughly estimated the 2007 figure up in the spreadsheet to $2.55 trillion for 2008. The rest is simple long division and percentage math. Nothing fancy.
As I've observed in comments elsewhere, some analysts have argued that we can in fact cover everyone, with materially better outcomes, and save perhaps 30% in the process. Even so, do the per capita math (sit down first). 2008 estimated U.S. "health care" spending ~= $2.55 trillion. Divide by a 307 million U.S. population. Decrement by 30%. You still get more than $5,800 per year per person. And, substantially more if you restrict the gross "population" figure to only adult civilian non-institutionalized, i.e., those actually or potentially on the hook for payment. Now, of course, Congress is not buying the "save money" part. The draft Senate bill only speaks to reducing "the growth in spending" (link to that 852 page draft legislation document in my prior blog post appendix). So, re-do the math. Give yourselves more heartburn.
Recognizing that it's never going to be allocated strictly "per capita," (e.g., just look at the monthly "family of 4" data), then the essentially zero-sum game becomes deciding who (individually) or which socioeconomic strata have to pay proportionally more. It's worth noting that, even were we to somehow miraculously cut the NHE (National Health Expenditure) by 50% [1], the resulting aggregate amount would still be more than twice our military budget.
[1] Take out the military and those incarcerated or otherwise institutionalized, ratcheting down the population to, say, an even 300 million, enter a 50% aggregate cost reduction; you still would have more than $1,400 per month for a family of four. If you further deduct an estimated "retired" subset cohort from among the 39 million people over the age of 65 -- those who would now be almost exclusively recipient-beneficiary health care system users rather than tax/premium contributors, the per capita numbers worsen concomitantly, rather dramatically so.
I'm not making any of this up. This is just grade-school arithmetic based on some published national numbers, along with some readily adjustable Excel "what-ifs?"
Some reform advocates have long argued that we can indeed [1] extend health care coverage to all citizens, with [2] significantly increased quality of care, while at the same time [3] significantly reducing the national (and individual) cost. A trifecta "Win-Win-Win." Others find the very notion preposterous on its face. In the summer of 2009, this policy battle is now joined in full fury. I will try to add some constructive argument to the fray.
This likely will be a lengthy post that will accrue over time, given the complexity and importance of the topic, but,
FIRST, A PREFATORY STORY
In the mid-late 1990s, while caring for my terminally ill daughter in Hollywood, I recall reading that there were more MRI machines deployed in the Los Angeles area than in the entire nation of Canada, the inference being that the American economics of hugely expensive sense-extending diagnostic imaging technologies such as MRI units, CAT scanners, cardiac dynamic stress test machines, etc tended toward the economically problematic. Every medical institution feels compelled to have them to be credible, competitive Players in the market, but everyone also needs to keep them all profitably humming, with viable billable payers at the end of the back office line. And, every additional install exacerbates the billable utilization problem. Damned if you do, damned if you don't.
Well consider a brief true story from several decades ago, written by surgeon and writer Dr. Richard Selzer:
On the bulletin board in the front hall of the hospital where I work, there appeared an announcement. “Yeshi Dhonden,” it read, “will make rounds at six o’clock on the morning of June 10.” The particulars were then given, followed by a notation: “Yeshi Dhonden is personal physician to the Dalai Lama.” I am not so leathery a skeptic that I would knowingly ignore an emissary from the gods. Not only might such sangfroid be inimical to one’s earthly well-being, it could take care of eternity as well. Thus, on the morning of June 10, I joined a clutch of whitecoats waiting in the small conference room adjacent to the ward selected for the rounds. The air in the room is heavy with ill concealed dubiety and suspicion of bamboozlement. At precisely 6 o’clock, he materializes, a short, golden, barrely man dressed in a sleeveless robe of saffron and maroon. His scalp is shaven, and the only visible hair is a scanty black line each hooded eye.
He bows in greeting while his young interpreter makes the introduction. Yeshi Dhonden, we are told will examine a patient selected by a member of the staff. The diagnosis is as unknown to Yeshi Dhonden as it is to us. The examination of the patient will take place in our presence, after which we will reconvene in the conference room where Yeshi Dhonden will discuss the case. We are further informed that for the past two hours Yeshi Dhonden has purified himself by bathing, fasting, and prayer. I, having breakfasted well, performed only the most desultory of ablutions, and given no thought at all to my soul, glanced furtively at my fellows. Suddenly, we seem a soiled, uncouth lot.
The patient had been awakened early and told that she was to be examined by a foreign doctor, and had been asked to produce a fresh specimen of urine, so when we enter her room, the woman shows no surprise. She has long ago taken on that mixture of compliance and resignation that is that the facies of chronic illness. This was to be but another in an endless series of tests and examinations. Yeshi Dhonden steps to the bedside while the rest stand apart, watching. For a long time he gazes at the woman, favoring no part of her body with his eyes, but seeming to fix his glance at a place just above her supine form. I, too, study her. No physical sign nor obvious symptom gives a clue to the nature of her disease.
At last he takes her hand, raising it in both of his own. Now he bends over the bed in a kind of crouching stance, his head drawn down into the collar of his robe. His eyes are closed as he feels for her pulse. In a moment he has found the spot, and for the next half hour he remains of us, suspended above the patient like some exotic golden bird with folded wings, holding the pulse of the woman beneath his fingers, cradling her hand in his. All the power of the man seems to have been drawn down into this one purpose. It is tell patient of the pulse raced to the state of ritual. From the foot of the bed, where I stand, it is as though he and the patient had entered a special place of isolation, of apartness, about which a vacancy hovers, and across which no violation is possible. After a moment the woman rests back upon her pillow. From time to time she raises her head to look at the strange figure above her, then sinks back once more. I cannot see their hands joined in a correspondence that is exclusive, intimate, his fingertips receiving the voice of her sick body through the rhythm and throb she offers at her wrist. All at once I am envious -- not of him, not of Yeshi Dhonden for his gift of beauty in holiness, but of her. I want to be held like that, touched so, received. And I know that I, who have palpated 100,000 pulses, have not felt a single one.
At last Yeshi Dhonden straightens, gently places the woman’s hand upon the bed, and steps back. The interpreter produces a small wooden bowl into sticks. Yeshi Dhonden pours a portion of the urine specimen into the bowl, and proceeds to whip the liquid with the two sticks. This he does for several minutes until a foam is raised. Then, bowing above the bowl, he inhales the older three times. He sets down the bowl, and turns to leave. All this while, he has not uttered a single word. As he nears the door, the woman raises her head and calls out to him in a voice at once urgent and serene. “Thank you, doctor,” she says, and touches with her other hand the place he had held on her wrists, as though to recapture something that had visited their. Yeshi Dhonden turns back for a moment to gaze at her, then steps into the corridor. Rounds are at an end.
We are seated once more in the conference room. Yeshi Dhonden speaks now for the first time, in soft Tibetan sounds that I’ve never heard before. He has barely begun when the young interpreter begins to translate, the two voices continuing in tandem – a bilingual fugue, the one chasing the other. It is like the chanting of monks. He speaks of winds coursing through the body of the woman, currents that break against barriers, eddying. These vortices are in her blood, he says. The last spendings of an imperfect heart. Between the chambers of her heart, long, long before she was born, a wind had come and blown open a deep gate that must never be opened. Through it charged the full waters of her river, as the mountain stream cascades in the springtime, battering, knocking loose the land, and flooding her breath. Thus he speaks, and is silent.
“May we now have the diagnosis?” A professor asks.
The host of these rounds, the man who knows, answers. “Congenital heart disease,” he says. “Interventricular septal defect, with resultant heart failure.”
A gateway in the heart, I think. That must not be opened. Through it charge the full waters that flood her breath. So! Here then is the doctor listening to the sounds of the body to which the rest of us are deaf. He is more than doctor. He is Priest.
I know, I know, the doctor to the gods is pure knowledge you’re healing. The doctor to man stumbles, most often wound; his patient must die, as must he.
Now and then it happens, as I make my own rounds, but I hear the sounds of his voice, like an ancient Buddhist prayer, its meaning long since forgotten, only the music remaining. Then the jubilation possesses me, and I feel myself touched by something divine.
For me, such an inferentially instructive tale goes beyond mere abstract epistemological interest -- achingly so. Several years prior to being diagnosed with fatal liver cancer, my daughter also had encounters with non-western medical diagnostic assessments, one of which might well have saved her life (and this father's now permanently broken heart) had she not blown it off. As I wrote in my "1 in 3" essay, ruminating on this aspect of "alternative medicine":
It was, after all, a Santa Monica Chinese practitioner of acupuncture and herbal medicine, one Dr. Yi Pan, who first called Sissy's attention to a problem with her liver several years prior to her HCC diagnosis. She'd been referred to him by a girlfriend for attention to a menstrual problem. Dr. Pan had a diagnostic acumen requiring no x-rays, CT scans, or blood tests. Yet, the internet medical fraud site www.quackwatch.com dismisses traditional Chinese medicine as "ineffective," as do many other critics of alternative practices.
Tragically, Sissy summarily discounted his prescient admonition. I can only speculate wistfully on the implications of our having known three years earlier. __
Indeed. Indeed.
I bring up the foregoing only to pose some questions I ask myself all the time. To what extent is our potentially bankrupting dependence on crushingly expensive and ever more "sophisticated" medical technology at least in part a function of our enslaving cognitive enfeeblement wrought by reliance on such technologies? Would we have ICD-9 or CPT "dx" ("diagnosis") 3rd-party payor billing codes through which to encapsulate (and reimburse for) the (accurate, as they were) evaluative encounters of a Yeshi Dhonden or a Yi Pan?
The answer to the latter question is an unequivocal "no". ___
THE U.S. "HEALTH CARE" "SYSTEM"?
I will by no means be the first to note that our medical industry is not really a "system," nor is it predominantly about "health care." It is more aptly described as a patchwork post-hoc disease and injury management and remediation enterprise, one that is more or less "systematic" in any true sense only at the clinical level. Beyond that it comprises a confounding perplex of endlessly contending for-profit and not-for-profit entities acting far too often at ruinously expensive cross-purposes.
Another quick personal story:
During my first tenure (early 1990's) serving as an analyst for the Nevada/Utah Medicare Peer Review Agency (they're now called "QIO's" - Quality Improvement Organizations), in addition to our core Medicare oversight work, we had a number of small sidebar contracts, one of which involved ongoing analytical assessments of the Clark County Nevada self-funded employee health plan. One morning I accompanied my Sup, our Senior Analyst Dr. Moore, to a regular meeting of the plan's Executive Committee, wherein we would report on our latest plan utilization/outcomes evaluation.
A portion of the morning -- perhaps a half-hour, IIRC -- was always devoted to hearing claims denials appeals brought by Clark County employees. This day, two appeals were heard: one regarding an outpatient medical claim, the other concerning a dental encounter. The total sum at issue was about $350. Both appeals were denied, thereby "saving" the plan this nominal amount.
Bored by this administrative tedium, as I sat at the conference table, I did a quick, rough estimate back-of-the-envelope calculation. About a dozen executive/professional people consumed a half hour adjudicating these disputes, or, equivalently, 6 FTE hours. Assume a plausible blended G&A-multiplied cost estimate of the total compensation time for all these folks, plus all of the clerical/administrative time consumed in the processing (and subsequently denying) of these minor claims from the moment of their filing to this very hour.
Clark County easily spent well in excess of an additional $1,000 to "save" $350 at the expense of these two hapless employees, by my reckoning.
Similiar scenarios -- public and private -- surely play out every day within our "health care system." Clark County would have been way ahead to have simply vetted the intial claims for fraud and then paid them! (This is one observation implicitly at the heart of the "Universal Coverage / Single Payer" model.)
But, as my Senior Medical Director was fond of pointing out, "every misspent dollar in our health care system goes into someone's paycheck."
"16% OF GDP"
And soon to rise to 20% and beyond, it is asserted -- lest we find the political will to rein in the nationally and personally eviscerating cost of "health care" in the U.S.
Question: in my foregoing Clark County Health Plan anecdote, beyond the two denied employee claims I cited that totaled about $350, is the extra thousand or so administrative outlay also placed on the "health care" expenditure ledger? So that what should have cost $350 (plus minimal initial clerical claim processing overhead) ended up as ~$1,350? (Note that the ~$350, while denied by Clark County, still had to be paid by the respective employees.)
We really have no clear picture regarding episodes such as this. And, we have no clear picture as to how prevalent are such ongoing wheel-spinning, sand-in-the-gears activities, and to what expense ledger they get posted.
By several measures, health care spending continues to rise at a rapid rate and forcing businesses and families to cut back on operations and household expenses respectively.
In 2008, total national health expenditures were expected to rise 6.9 percent -- two times the rate of inflation. Total spending was $2.4 TRILLION in 2007, or $7900 per person. Total health care spending represented 17 percent of the gross domestic product (GDP).
U.S. health care spending is expected to increase at similar levels for the next decade reaching $4.3 TRILLION in 2017, or 20 percent of GDP.
In 2008, employer health insurance premiums increased by 5.0 percent – two times the rate of inflation. The annual premium for an employer health plan covering a family of four averaged nearly $12,700. The annual premium for single coverage averaged over $4,700.
Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families.
National Health Care Spending
In 2008, health care spending in the United States reached $2.4 trillion, and was projected to reach $3.1 trillion in 2012.1 Health care spending is projected to reach $4.3 trillion by 2016.
Health care spending is 4.3 times the amount spent on national defense.
In 2008, the United States will spend 17 percent of its gross domestic product (GDP) on health care. It is projected that the percentage will reach 20 percent by 2017.
Although nearly 46 million Americans are uninsured, the United States spends more on health care than other industrialized nations, and those countries provide health insurance to all their citizens.
Health care spending accounted for 10.9 percent of the GDP in Switzerland, 10.7 percent in Germany, 9.7 percent in Canada and 9.5 percent in France, according to the Organization for Economic Cooperation and Development.
Irrespective of your preferred data source, suffice it to observe for the purposes of this essay that Americans undeniably spend approximately twice per capita on health care than do their comparable industrial nation "consumer"/patient counterparts. I suppose that such would be defensible were we getting twice the "bang for the buck" (in terms of clinical outcomes quality and concomitant public and personal health) but, sadly, the aggregate data suggest significantly otherwise. Consider observations proffered in Malcolm Gladwell's 2005 New Yorker essay "The Moral Hazard Myth."
Americans spend $5,267 per capita on health care every year, almost two and half times the industrialized world's median of $2,193; the extra spending comes to hundreds of billions of dollars a year. What does that extra spending buy us? Americans have fewer doctors per capita than most Western countries. We go to the doctor less than people in other Western countries. We get admitted to the hospital less frequently than people in other Western countries. We are less satisfied with our health care than our counterparts in other countries. American life expectancy is lower than the Western average. Childhood-immunization rates in the United States are lower than average. Infant-mortality rates are in the nineteenth percentile of industrialized nations. Doctors here perform more high-end medical procedures, such as coronary angioplasties, than in other countries, but most of the wealthier Western countries have more CT scanners than the United States does, and Switzerland, Japan, Austria, and Finland all have more MRI machines per capita. Nor is our system more efficient. The United States spends more than a thousand dollars per capita per year—or close to four hundred billion dollars—on health-care-related paperwork and administration, whereas Canada, for example, spends only about three hundred dollars per capita. And, of course, every other country in the industrialized world insures all its citizens; despite those extra hundreds of billions of dollars we spend each year, we leave forty-five million people without any insurance. A country that displays an almost ruthless commitment to efficiency and performance in every aspect of its economy—a country that switched to Japanese cars the moment they were more reliable, and to Chinese T-shirts the moment they were five cents cheaper—has loyally stuck with a health-care system that leaves its citizenry pulling out their teeth with pliers. _
And that was four years ago. The numbers continue to worsen.
Coming shortly, a look at some representative recent top level Health Care CEO compensation. While not exactly Wall Street level oligarchic excess, it'll make your head spin.
Recall:
...as my Senior Medical Director was fond of pointing out, "every misspent dollar in our health care system goes into someone's paycheck."
___
JAMA 1994 SINGLE PAYER ARGUMENT
My first graduate school paper ("Argument Analysis") comprised a required analysis and evaluation of a peer-reviewed journal article. I chose the JAMA article cited and linked above. "Argument analysis" consists of two phases: [1] the "analytical," wherein you work to honestly, fully, and accurately describe the argument at hand as intended by the proponents, followed by [2] the "evaluative," segment within which you detail your forthright logically critical assessments of the relative strengths and weaknesses of the proffers advanced by the author(s) ostensibly buttressing of their aggregate conclusion.
My method was to number every paragraph and sentence therein (and sub-sentence clause where warranted), depicting the textual "if/then/therefore" sub-arguments with flow charts illustrating the premise/assumption/objection/conclusion flow. e.g.,
[dotted lines indicate "objection/counter" clauses such as "notwithstanding" or "despite".]
I tediously slogged through the often dense, heavily footnoted 49 paragraphs of the article, assertion by assertion.
My analytical phase summary-
Argument synopsis:
Notwithstanding public misgivings about making significant public policy driven changes in the U.S. health care industry, there is extensive and persuasive empirical evidence of costly inadequacies in the system-such as lack of access/coverage, uneven levels of quality of service and outcomes, market-driven rather clinical priorities, waste and duplication, etc.-that can best be corrected by a unified approach to improvement driven by a scientific focus on quality issues (broadly defined) rather than those of short-term cost-control, competition, and piecemeal regulatory strategies and tactics. A single-payer health care system reformed by implementation of the ten principles detailed herein would at once extend medical access to all, reduce costs, improve clinical outcomes of the sick and injured, and elevate the overall health status of the nation, resulting in win-win consequences for providers and citizens alike.
The foregoing was simply my assessment of what the authors were driving at. I would subsequently have to critically evaluate the myriad merits and liabilities of every sub-argument (along with evaluating how well they all fit together in fortifying the overall case). My final, aggregate conclusions follow: ___
Overall Evaluation:
The following alternative courses of action are generally advanced in the health care debate:
Status quo: the system works fine, and normal incremental quality improvements at the provider level will suffice. Get a job.
Insurance reform: prohibit exclusion and enforce community rating to reduce the insurance premium stratification characteristic of the present system.
Expand existing public payer programs such as Medicare to cover the working poor and otherwise uninsurable.
Capitated managed competition, with “employer mandates” to provide choices and beneficiary of alliances for pooled coverage buying power, administered through the workplace.
Tax inducement programs such as the “Medi-Save” approach in which workers use pretax dollars to purchase catastrophic coverage and pay for routine health expenses themselves.
The public single payer system based more or less on the Canadian model.
No one can dispute that the healthcare industry can be improved. Any system can be improved. Problems such as lack of access, arbitrary and often wildly excessive pricing, inexplicable variations in clinical practice and outcomes are well documented and cry out for solution. That tends to rule out Option 1. The question is one of extent; has the case been made that the healthcare industry requires comprehensive national reform?
Option 2: many see the problem as an insurance reform issue rather than a health-care reform issue per se. The debate brings us face to face with fundamental questions about the nature of private insurance. Where do we draw the line on the freedom to assess and underwrite risk? Is health care insurance ethically different from ensuring cargo? Part of the image problem health insurers have is self-inflicted; arbitrary, unscientific risk assessment, payment denials and delays, and the financial imperative to “cherry pick” (attempting to only contract with those posing minimal risk” have made insurers objects of suspicion and resentment). Insurers uniformly bemoan their meager financial returns, yet even a cursory examination of their real estate furnishings portfolios and executive salaries (not to mention their highly visible and aggressive “Harry and Louise” lobbying against reform this past year) tends to discredit their apologies.
Option 3: US Representative Pete Stark proposed exactly this: it was called “Medicare, Part C” and would via Medicare expansion ensure the working poor who are neither eligible for Medicaid nor otherwise insurable. This option would extend more nearly universal coverage but would do nothing about the chronic cost shifting that is prevalent in healthcare financing. It would also fail to address the cost containment problems seen in the existing program. This proposal was seen by the insurance industry as a “Trojan Horse” for an eventual single-payer system, and, as such was successfully lobbied down.
Option 4 is exactly what comprised the Clinton legislative proposal for reform. It proved inscrutably complex. Having seen the 1,400-odd page text of the proposal I am skeptical of its Byzantine complexity. Those 1,400+ pages would have necessitated something on the order of millions of pages of implementing policy regulations, with all the potential for bureaucratic gridlock they might effect.
Option 5: “Medical IRAs” are a favorite of conservatives, and have considerable theoretical merit. The central idea is that, when people directly spend their own money, they tend to be smarter shoppers, and this would control prices. Third-party payment for health services tends to reduce the incentive to ride herd on costs. But healthcare encounters are not the psychological equivalent of shopping for a new VCR, and becoming an informed healthcare consumer is not at all easy. And finally, these may be saved accounts would do nothing for those without jobs (if they are to be funded via pretax employment compensation), or for those whose taxable incomes are so low as to nullify the tax incentive. The Medi-Save approach would have to be supplanted by additional programs or those it would not touch.
Option 6, single-payer: using the Canadian example as a model for US reform has a couple of liabilities. First the US population is roughly 10 times the size of Canada’s; we would be engineering and vastly larger institution, and there may well be unforeseen dis-economies of scale. Our record in the operation of large public bureaucracies is considerably less than stellar. Secondly, there is considerable reputable disagreement with respect to the relative virtues of the Canadian system. Many Canadians (and not only wealthy ones) routinely come to the US for treatment, and there are additional documented signals of increasing dissatisfaction in Canada. It is a more humane system in that it covers everyone by entitlement, but it does significantly impact the cost of living in Canada. There is reason to believe that same or worse would be the case here, at least in the relatively near term.
The envisioned unified computerized data system such an institution would require could well be a development nightmare that might be in many respects obsolete before it went online. The documented in adequacies of both the IRS and FAA computer systems stand as a warning. The sheer volume of health care data proposed for online storage and access is daunting. An article in the byte magazine earlier this year detailed the CPR system (computerized patient record) under development at Brigham and Women’s Hospital in Boston, and revealed that the daily data storage requirement was approximately 3.5 GB! (3.5 billion bytes) Remember, this is for one institution. Constructing a single national healthcare data system would be fraught with a breadth of imposing technical and policy difficulties. It would require the latest hardware, the finest software development teams, and an unprecedented level of policy agreement and guidance.
In sum, the authors’ argument has many strengths, particularly in their exhaustively documented enumeration of the shortcomings of our present health care system – to the extent to which it can be characterized as a “system.” There is, however, a plausible alternative to a public national single-payer system that would meet many of the goals sought by these advocates, and it is not a theoretical one. Utah’s IHC (Intermountain Healthcare) organization is a private, vertically integrated healthcare Corporation serving Utah in western Wyoming residents. It is a large network of hospitals, clinics, physicians, and related operations such as home health services. IHC is essentially a managed care system with subscribers who pay set fees and minimal copayments. Unlike other HMO type operations in the state that typically experience subscriber turnover rates of approximately 15% per year, IHC’s turnover rate is less than 0.5% (that’s 0.005), at competitive prices. They accomplish this by an organization wide, enthusiastic, almost religious commitment to the very CQI principles outlined above. IHC quality improvement programs are directed by Dr. Brent James, a surgeon and nationally respected leader in health care CQI education. Having myself undergone their healthcare CQI training course over the period of the past six months as part of my work, I can attest that IHC, while not yet perfect, effectively applies nearly all of the recommendations cited in this article, albeit on a smaller scale (and that may indeed be a significant virtue). They are in essence a microcosmic single-payer system, but one successful in the private sector, driven not by publicly impose mandates, but by their own thorough knowledge of and dedication to CQI. It is difficult to see at this point whether the asserted advantages of a national public system would add net value beyond the type of operation that IHC represents.
To be fair, IHC operates in a fairly prosperous, culturally homogeneous region enjoying a great deal of social and political unity. Here in Nevada, by contrast, though we share a common border and similar population size and geography with Utah, the social mileau could not be more different. IHC might not encounter the same level of success in other regions, and their successes do not impact those who cannot obtain coverage – and the central issue of this article has been about the significant negative impact of such a deficit. The IHC example does, however, stand in stark relief to both the inadequate business-as-usual attitude, and the proposition advanced above that a national single-payer system is the best path to effective health care reform. Other examples exist around the nation also; one that comes to mind is Northwest Hospital in Seattle, whose presentation at the Annual Quality Congress of the American Society for Quality control this year reveals yet another organization deriving significant cost savings and quality improvement from diligent application of CQI methods.
Rule number one of CQI is “listen to the customer,” and thus far the customers are prohibitively wary of the idea of creating a huge new national program, and political reality that is unlikely to shift anytime soon. The argument provided by shift at Al takes into account an enormous amount of evidence and theory generated from within healthcare and the wider quality sciences, but serious questions remain unresolved with respect to the needs and concerns of health care consumers, whose overwhelming support would be needed to implement a single-payer health care system. ___
Some of that now seems a bit quaint (in particular my data systems concern; and, what is a "VCR"?). It was, after all, composed 15 years ago, written at a time when health care issues had only been on my cognitive radar for about a year and a half. But, in other respects it continues to resonate well, and reflects to a significant degree how little things have changed for the better.
UPDATE: I just finished scanning, and then uploading the entire 56 page paper here (2.7 meg PDF file). I no longer have the original MS Word document available. Though, I think it's on a 3.5" floppy disk somewhere in a box out in my garage, LOL.
Most visibly of late, "Harry & Louise" have now been exhumed reincarnate in the person of one Rick Scott ("Conservatives for Patients' Rights"), blanketing the airwaves to exhort us to repudiate the putative life-threatening terrors of "government-controlled" "socialized medicine."
My snarky reaction to Mr. Scott's transparent status quo corporate shilling was published by the Las Vegas Sun on May 11th, 2009:
"Regarding any proposed health care reform, I, for one, am not about to allow some federal bureaucrat to interfere with my current CEO-patient relationship."
LOL!
MAY 29TH UPDATE
My latest issue of The New Yorker arrived in my mailbox yesterday, and contains an excellent, lengthy, and timely article on health care policy issues, "THE COST CONUNDRUM" -
Highly recommended. To quote, in summation:
"We will need to do in-depth research on what makes the best systems successful—the peer-review committees? recruiting more primary-care doctors and nurses? putting doctors on salary?—and disseminate what we learn. Congress has provided vital funding for research that compares the effectiveness of different treatments, and this should help reduce uncertainty about which treatments are best. But we also need to fund research that compares the effectiveness of different systems of care—to reduce our uncertainty about which systems work best for communities. These are empirical, not ideological, questions. And we would do well to form a national institute for health-care delivery, bringing together clinicians, hospitals, insurers, employers, and citizens to assess, regularly, the quality and the cost of our care, review the strategies that produce good results, and make clear recommendations for local systems.
Dramatic improvements and savings will take at least a decade. But a choice must be made. Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can’t do it. Or we can turn to the local medical communities, which have proved that they can. But we have to choose someone—because, in much of the country, no one is in charge. And the result is the most wasteful and the least sustainable health-care system in the world."
Indeed. The author cites the cost-and-clinically-effective examples of of both the Mayo Clinic and Grand Junction, Colorado medical communities. I find a striking and gratifying similarity to my 1994 IHC example. ___
HEALTH CARE: A "RIGHT," OR A "RESPONSIBILITY"?
Rewind back to the fall Presidential debate in Nashville, October 7th 2008:
MODERATOR TOM BROKAW: Quick discussion. Is health care in America a privilege, a right, or a responsibility?
Senator McCain?
SENATOR MCCAIN: I think it's a responsibility, in this respect, in that we should have available and affordable health care to every American citizen, to every family member. And with the plan that -- that I have, that will do that.But government mandates I -- I'm always a little nervous about. But it is certainly my responsibility. It is certainly small-business people and others, and they understand that responsibility. American citizens understand that. Employers understand that.But they certainly are a little nervous when Senator Obama says, if you don't get the health care policy that I think you should have, then you're going to get fined. And, by the way, Senator Obama has never mentioned how much that fine might be. Perhaps we might find that out tonight.
SENATOR OBAMA: Well, why don't -- why don't -- let's talk about this, Tom, because there was just a lot of stuff out there.
TOM BROKAW: Privilege, right or responsibility. Let's start with that.
SENATOR OBAMA: Well, I think it should be a right for every American. In a country as wealthy as ours, for us to have people who are going bankrupt because they can't pay their medical bills -- for my mother to die of cancer at the age of 53 and have to spend the last months of her life in the hospital room arguing with insurance companies because they're saying that this may be a pre-existing condition and they don't have to pay her treatment, there's something fundamentally wrong about that.
Mr. McCain's muddled response was clearly an attempt to avoid the clear, direct question and appear to have it all ways. It remained unclear regarding "whose responsibility?" The responsibility of all individuals to fend for themselves and maintain either adequate insurance coverage or sufficient assets via which to pay retail? Or, the responsibility of a society to provide coverage for all, as both a utilitarian and moral matter?
Mr. Obama's response could have been more on point. Access to health care is in fact a "right," but at present it is a qualified right, a "right of last resort" (rather than a presumptive "inalienable" right). It is the right accorded my daughter when she was medically bankrupted on day one of her fatal cancer illness. It the the right (as of now) to Medicaid-funded long-term facility care that will be accorded my currently bedridden / wheelchair-bound nursing home resident Mother should she outlive her finances (now attriting at a "private payer" commercial rate of approximately $6,300 a month).
It is beyond dispute that, should you show up at the hospital ER in life-threatening condition and documentably lacking material resources, you must be treated in the same clinical manner accorded the billionaire. So, in this quite limited sense, health care is a "right." But, beyond such narrow circumstances, access to health care is overwhelmingly a function of your ability to pay, unlike your "rights" to police and fire protection, or to military defense.
There are in fact communities where enforcement of the latter, more fundamental rights are contingent on your ability to pay.
"The issue about what to do with the health-care system is sometimes presented as a technical argument about the merits of one kind of coverage over another or as an ideological argument about socialized versus private medicine. It is, instead, about a few very simple questions. Do you think that this kind of redistribution of risk is a good idea? Do you think that people whose genes predispose them to depression or cancer, or whose poverty complicates asthma or diabetes, or who get hit by a drunk driver, or who have to keep their mouths closed because their teeth are rotting ought to bear a greater share of the costs of their health care than those of us who are lucky enough to escape such misfortunes? In the rest of the industrialized world, it is assumed that the more equally and widely the burdens of illness are shared, the better off the population as a whole is likely to be. The reason the United States has forty-five million people without coverage is that its health-care policy is in the hands of people who disagree, and who regard health insurance not as the solution but as the problem."
Quick recap:
"...health-care policy is in the hands of people who disagree, and who regard health insurance not as the solution but as the problem." Well, it might be more accurate to say that large-scale changes to U.S. health policy status quo would be a problem. Say, for people like
Ronald A Williams, CEO of Aetna (AET) for 3 years. Mr. Williams has been with the company for 8 years. The 60 year old executive ranks 1 within Health Care Equipment & Services. TOTAL COMPENSATION $38.125 mil, 5-YEAR COMPENSATION TOTAL $77.863 mil
Timothy E Guertin, CEO of Varian Medical Systems (VAR) for 3 years. Mr. Guertin has been with the company for 34 years. The 60 year old executive ranks 10 within Health Care Equipment & Services. TOTAL COMPENSATION $9.56 mil, 5-YEAR COMPENSATION TOTAL $23.533 mil
Stephen J Hemsley, CEO of UnitedHealth Group (UNH) for 2 years. Mr. Hemsley has been with the company for 12 years. The 56 year old executive ranks 17 within Health Care Equipment & Services. TOTAL COMPENSATION $5.035 mil, 5-YEAR COMPENSATION TOTAL, N/A
Michael B McCallister, CEO of Humana (HUM) for 9 years. Mr. McCallister has been with the company for 35 years. The 56 year old executive ranks 25 within Health Care Equipment & Services. TOTAL COMPENSATION $2.39 mil,5-YEAR COMPENSATION TOTAL $56.91 mil
John H Hammergren, CEO of McKesson (MCK) for 10 years. Mr. Hammergren has been with the company for 13 years. The 50 year old executive ranks 1 within Drugs & Biotechnology. TOTAL COMPENSATION $51.29 mil, 5-YEAR COMPENSATION TOTAL $137.78 mil.
You could also peruse the "Insurance" Sector for some equivalently stratospheric numbers.
Median Salary by Years Experience - Job: Cardiac Surgeon (United States)
Those we train with the most demanding rigor in excruciating detail for years, and subsequently entrust to cut us open, fix our hearts, sew us back together, and extend our lives. This comparative disparity is ethically justified exactly how? Well, corporate "shareholder value," of course.
Regarding which, I heartily recommend an important and illuminating read, Dr. John Abramson's expose of Big Pharma.
This is the mother of all sleights of hand: the transformation of medical science from a public good whose purpose is to improve health into a commodity whose primary function is to maximize financial returns. As a result of this sleight of hand, the gap is widening between the scientific evidence that impartial experts (not paid or threatened by the medical industry, not biased by other personal concerns, and granted unrestricted access to all of the evidence) would agree upon and the perceptions that actually drive American health care. This growing gap is at the core of the crisis in American medicine. And why are we surprised? The drug companies have no more responsibility to oversee the public's health than the fast-food industry has to oversee the public's diet.
The substitution of narrow corporate interests for medical progress has produced some dramatic excesses. When the manufacturer of Paxil performs nine clinical studies on the treatment of adolescents for depression and finds that Paxil is no more effective than placebos and, in fact, significantly increases the frequency of "emotional lability" (including suicidal thoughts and attempts), it's no problem. The company publishes one study that shows a benefit, fails to publish the other eight, and markets away. When British drug authorities spill the beans? No problem. A task force of the American College of Neuropsychopharmacolgy is convened, and concludes that the new antidepressants are safe for adolescents after all. Too bad the task force didn't have access to some of the information that was available to the British drug authorities. But perhaps that didn't seem like so much of a problem, because, according to the New York Times, "Critics of the medicines noted that 9 of the 10 task force members had significant financial ties to the pharmaceutical industry..." (However, the task force insisted that no industry money financed their report.) What to do when the FDA epidemiologist in charge of analyzing all the antidepressant studies involving children concludes, just like the British drug authorities, that twice as many children treated with the new drugs (except Prozac, which is available as an inexpensive generic) became suicidal, and that the FDA should therefore discourage doctors from treating children with these drugs? Just bar the expert from testifying at the FDA's public hearing. Then don't make him available for an interview with the New York Times, which reported the story on April 16, 2004
You don't like the way the study of an expensive drug for blood pressure is going? A nonissue -- just stop the study before the results reach statistical significance.
Endovascular Technologies (a wholly owned subsidiary of Guidant, the company that manufactures implantable defibrillators) manufactured a $10,000 device to repair aortic aneurysms that dangerously malfunctioned in a third of the 7600 patients in whom it had been used. Did this frequency of malfunction stop Endovascular Technologies? No. The company reported 7 percent of these events to the FDA and sold on. According to a plea agreement entered into with the United States government in 2003, the company belatedly disclosed another 2628 serious malfunctions and 12 deaths. No problem. It agreed to pay $92 million to cover criminal and civil penalties and then picked up with business as usual on other products.
Your drug company just received an official warning letter from the FDA for the "false and misleading" marketing of Celebrex, Vioxx, Pravachol, or OxyContin? No problem. The FDA's corrective action is unlikely to displace the false information already firmly planted in the public's mind.
And the list goes on. Controlling medical costs in this near free-for all commercial grab is not just impossible, it is a contradiction in terms. Does it make sense to talk about reducing national expenditures for cars or clothes or beer? Medical care, by far the largest consumer commodity in the United States, is now no different.
Again, as my Senior Medical Director was fond of pointing out, "every misspent dollar in our health care system goes into someone's paycheck." MORE ON "MORAL HAZARD"
I wrote on my prior post that "It has been fashionable among some "conservative" policy commentators of late to assert that the "problem" with U.S. health care is that we are "overinsured," i.e., that health care insurance induces "moral hazard" by making us sloppy, excessive "consumers" of health care services..."
...in the past few decades a particular idea has taken hold among prominent American economists which has also been a powerful impediment to the expansion of health insurance. The idea is known as “moral hazard.” Health economists in other Western nations do not share this obsession. Nor do most Americans. But moral hazard has profoundly shaped the way think tanks formulate policy and the way experts argue and the way health insurers structure their plans and the way legislation and regulations have been written...
...“Moral hazard” is the term economists use to describe the fact that insurance can change the behavior of the person being insured...
...If you think of insurance as producing wasteful consumption of medical services, then the fact that there are forty-five million Americans without health insurance is no longer an immediate cause for alarm. After all, it’s not as if the uninsured never go to the doctor. They spend, on average, $934 a year on medical care. A moral-hazard theorist would say that they go to the doctor when they really have to. Those of us with private insurance, by contrast, consume $2,347 worth of health care a year. If a lot of that extra $1,413 is waste, then maybe the uninsured person is the truly efficient consumer of health care.
The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd. We go to the doctor grudgingly, only because we’re sick. “Moral hazard is overblown,” the Princeton economist Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”...
To which I observed:
Exactly. I wouldn't go the the doctor were it "free," absent some compelling need. To be sure, you can always come up with the iconic ("anecdotalism fallacy") examples of people who engage health care services irrationally, either simply out of a mundane neurotic social need for "attention," or impelled by the more serious psychiatric clinical condition known as acute "Münchausen syndrome."...
...yes, of course, there will always be people who abuse any type of "entitlement" or "indemnity" system. Whether their sorry, isolated examples should drive policy is quite another matter, at least with respect to health care.
There is another, potentially more troublesome aspect to the otherwise predominantly abstract "moral hazard" issue, one having to do with putative "doctor-patient confidentiality" vis a vis the 3rd party intermediary payor. If you feel that utter candor with your doctor might cost you your insurance coverage, you have an economic incentive to be less than totally forthcoming, i.e., that perhaps you need to "keep your powder dry" until you really need to disclose the extent your clinical problem(s), lest your coverage be arbitrarily dropped by some faceless corporate actuarial designee.
It is a fact that where there is a 3rd party payor in an actuarial-based indemnity arrangement, there will be overriding 3rd party oversight that trumps "doctor-patient confidentiality," the breathless, slickly-produced "concern troll" corporate shill Straw Man / Red Herring disinformation of a Rick Scott notwithstanding.
Your only confidentiality- (and choice) preserving recourse is to pay in cash.
Unless, of course, you are a Medicare beneficiary. The simple reason for that is that Medicare is "social insurance" rather than an actuarial construct. It is a political "entitlement" obligation rather than a means-tested (i.e., welfare, such as Medicaid) or risk-based system (i.e., for-profit insurance).
...insurance is meant to help equalize financial risk between the healthy and the sick. In the insurance business, this model of coverage is known as "social insurance," and historically it was the way health coverage was conceived. If you were sixty and had heart disease and diabetes, you didn't pay substantially more for coverage than a perfectly healthy twenty-five-year-old. Under social insurance, the twenty-five-year-old agrees to pay thousands of dollars in premiums even though he didn't go to the doctor at all in the previous year, because he wants to make sure that someone else will subsidize his health care if he ever comes down with heart disease or diabetes. Canada and Germany and Japan and all the other industrialized nations with universal health care follow the social-insurance model. Medicare, too, is based on the social-insurance model, and, when Americans with Medicare report themselves to be happier with virtually every aspect of their insurance coverage than people with private insurance (as they do, repeatedly and overwhelmingly), they are referring to the social aspect of their insurance. They aren't getting better care. But they are getting something just as valuable: the security of being insulated against the financial shock of serious illness.
Gladwell on the actuarial model:
There is another way to organize insurance, however, and that is to make it actuarial. Car insurance, for instance, is actuarial. How much you pay is in large part a function of your individual situation and history: someone who drives a sports car and has received twenty speeding tickets in the past two years pays a much higher annual premium than a soccer mom with a minivan. In recent years, the private insurance industry in the United States has been moving toward the actuarial model, with profound consequences. The triumph of the actuarial model over the social-insurance model is the reason that companies unlucky enough to employ older, high-cost employees—like United Airlines—have run into such financial difficulty. It's the reason that automakers are increasingly moving their operations to Canada. It's the reason that small businesses that have one or two employees with serious illnesses suddenly face unmanageably high health-insurance premiums, and it's the reason that, in many states, people suffering from a potentially high-cost medical condition can't get anyone to insure them at all.
The salient difference here is that your policy cost rating for car insurance is to a significant degree dictated by your own behavior, relative to that of your lifetime health condition and experience. While there are undeniable "lifestyle" contributory risk factors with respect to health, we are all at risk of injury and disease to a much higher degree by factors beyond our control.
Ponder that for a second. How much worse could it be? For our current financially ruinous expenditures, we get
woefully low comparative clinical and public health outcomes rankings vis a vis the rest of the developed world;
close to 50 million citizens with no coverage whatsoever;
millions more continually at risk of losing their coverage at the profit-motive-driven whim of some anonymous corporate bureaucrat;
and/or living in fear of being bankrupted by merely one serious accident or illness, existing "coverage" notwithstanding. [**]
[**]From The American Journal of Medicine, Himmelstein, MD, et al,Medical Bankruptcy in the United States, 2007:Results of a National Study: "Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income. The rest met criteria for medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance. Using identical definitions in 2001 and 2007, the share of bankruptcies attributable to medical problems rose by 49.6%. In logistic regression analysis controlling for demographic factors, the odds that a bankruptcy had a medical cause was 2.38-fold higher in 2007 than in 2001."
Another salient point: it must be emphatically emphasized that our counterpart nations that manage to provide adequate health care for all with [1] significantly more nominal "government involvement," at roughly [2] half our cost, do so while also [3] purchasing the very same goods and services overwhelmingly provided by the very same multinational for-profit health care industry corporations from which we buy. The EU countries, for example, don't maintain "socialist" government "Ministries" through which to develop, manufacture, and distribute durable medical goods, hospital and outpatient clinic supplies, and pharmaceuticals. They overwhelmingly buy them from the private sector. I have a difficult time believing that these companies regard the rest of the developed world as "loss leader" markets; that, absent the handsome profits continually accruing from the U.S. market, they would simply all go out of business, leaving the world to clinical destitution.
THE ANECDOTALISM FALLACY
Mr. Scott has been blanketing the network and cable TV channels of late with his faux-poignant anecdotes portraying the cautionary travails of (randomly?) selected patients who ostensibly encountered serious, frequently life-threatening difficulties in obtaining health care within the Canadian and British systems -- putatively owing to the "government-run" nature of their medical infrastructures. Well, anecdotes do not an empirical policy case make, and in poker parlance, I (like many others) can "call and raise" -
It is the soggy and crushingly sad el Nino L.A. winter of 1998. My now- brain-met stroke-addled daughter is painfully traversing the final months of her life. While admitted to acute care facilities (she has been an acute care patient in seven across the two years of her horrific cancer struggle), she gets the best clinical attention available, no strings attached, courtesy of Medi-Cal (the California Medicaid agency for the poor and otherwise medically indigent). But, outpatient care is another matter. Sissy has ongoing need of follow-up physical and occupational therapy, regarding which Medi-Cal will not authorize reimbursement.
Her therapy team from Brotman Medical Center -- at great individual and aggregate personal and professional risk to themselves -- arrange to have her routinely come in incognito off the books to an outpatient rehab clinic in Beverly Hills where they work on the side, to continue her therapy -- notwithstanding that we all know by that time that she will not likely survive much longer.
That is an utterly unembellished true story. There are numerous unsung heroes within our health care industry, people whose unrelenting focus is "patients first."
Multimillionaire Mergers and Acquisitions Attorney Rick Scott is not among them.
JUNE 2009 HEALTH CARE REFORM HOT BUTTONS
As of today (June 5th), "public option" federal legislative proposals are abuzz, with Republicans predictably loudly decrying them as "price setting" that will impinge on free market competition. "Public option" is that of giving citizens the option of buying health care coverage from a government administered system in lieu of purchasing private sector policies.
Direct universal "Single Payer" coverage seems to be off the table, with a leading legislative policy model now being that of the Ted Kennedy effort -- basically the Massachusetts model writ large (where everyone would be required to buy coverage, but the poor would be accorded tax rebates with which to purchase insurance).
Earlier this year, proposals to expand Medicare surfaced:
The 5.1 million Americans between 55 and 64 who do not have health insurance will likely be intently watching the outcome of a proposed bill for early buy-in to Medicare. The idea is to permit early enrollment and for these younger participants to pay a higher monthly premium than seniors do, yet be eligible for the same services.
That such a program is much needed is not in dispute. The number of Americans age 55 to 64 will reach 36.2 million by 2010, and an increasing number of them will be without health insurance given the current recession, job losses, and the fact that many employers have cut back on health insurance.
Medicare Early Access Act
This is not the first time that lawmakers have proposed a bill known as the Medicare Early Access Act. John D. Rockefeller IV introduced a bill on July 27, 2006, under Senate bill 3747 (S.3747). Then on November 20, 2008, Rockefeller tried again, and the bill was designated as S.3710.
Senate bill 3710 would amend title XVIII of the Social Security Act and the Employee Retirement Income Security Act of 1974 to allow people age 55 to 65 to access Medicare benefits.In order to be eligible to participate in this program, individuals would have to meet all of the following requirements:
Be at least 55 years old
Be eligible to receive Medicare benefits if they were 65 years old
Currently be ineligible for health insurance under a group health plan or other federal health program
A Medicare Early Access program would be financed by the monthly premiums individuals would have to pay. These premiums would be greater than what people on Medicare pay, but less than they would pay through a private insurance company or their former employer. People could purchase Medicare coverage even if they were in poor health...
Again, such an idea will likely be lobbied down -- as was Pete Stark's "Medicare Part C" idea 15 years ago -- as a camel's-nose-under-the-tent proxy for Single Payer.
Interestingly, the Supreme Court recently ruled that employers could reduce (or eliminate?) health care coverage for older workers once employees reach age 65:
Supreme Court Allows Employers to Coordinate Retiree Benefits With Medicare [AP, 03-24-2008]
The Supreme Court on Monday let stand a federal policy that allows employers to reduce their health insurance expenses for retired workers once they turn 65 and qualify for Medicare.
The justices turned down an appeal by the 35-million-member AARP to undo a rule that essentially allows employers to treat retirees differently depending on their age.
The rules were put into place by the federal Equal Employment Opportunity Commission, with the support of labor unions and other groups. They worried that employers would greatly reduce or eliminate health benefits for millions of retirees if they could not take Medicare into account when structuring the health benefit packages they voluntarily provide their retired workers.
The EEOC rule makes clear that employers can spend more on retirees under 65 years of age than those over 65 without running afoul of age discrimination laws.
The EEOC said it proposed the rule in response to a decision in 2000 by the 3rd U.S. Circuit Court of Appeals in Philadelphia that held that the Age Discrimination in Employment Act requires employers to spend the same amount on health insurance benefits provided Medicare-eligible retirees as those received by younger retirees.
AARP said EEOC violated the intent of Congress when it proposed the rule. But the EEOC said the same age discrimination law allows it to carve out an exemption to preserve the long-standing practice that allows employers to coordinate benefits with Medicare.
The same appeals court upheld the EEOC policy last year and the new rule took effect in December.
The case is AARP v. EEOC, 07-662.
Gotta love the "coordinate" euphemism. It remains to be seen whether employers will attempt the wholesale "dumping" of older workers onto Medicare in order to eliminate the health care component of their compensation packages. You would think that employers would have an economic incentive to support the idea of a "Medicare Early Access" plan (S.3710), thereby washing their hands of health care benefits for the considerable 55-64 age employee demographic. But, again, "conservatives" are likely to oppose this as yet another incremental stalking horse for Single Payer.
...The very point of a federal public plan, as Mr. Obama explained in a letter to Senate leaders, would be to take advantage of an enormous risk pool and efficiencies of scale “to make the health care market more competitive and keep insurance companies honest.” But in projecting how such competition might actually affect the market, the devil is clearly in the details of who Congress would make eligible for coverage, what benefits would be granted and, perhaps most important, how much providers would be paid...
...But critics argue that with low administrative costs and no need to produce profits, a public plan will start with an unfair pricing advantage. They say that if a public plan is allowed to pay doctors and hospitals at levels comparable to Medicare’s, which are substantially below commercial insurance rates, it could set premiums so low it would quickly consume the market...
You see, what's of primary importance (politically), is not adequate, affordable health care coverage and access for everyone, it's competitive "fairness" for the extremely lucrative private intermediary insurance industry.
June 8, 2009 | I poked around Washington Friday, talking with friends on the Hill who confirmed the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging healthcare bill.
You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. They argue that would be unfair. Unfair? Unfair to give more people better healthcare at lower cost? To Pharma and Insurance, "unfair" is anything that undermines their profits...
Yeah, I know, he's one of those Clinton-era "Statist Liberals." Read the whole argument. Decide for yourself.
MORE THOUGHTS ON FOR-PROFIT HEALTH CARE
Enduringly apropos of the current policy struggle, as I asked in my 1994 JAMA paper analysis:
The debate brings us face to face with fundamental questions about the nature of private insurance. Where do we draw the line on the freedom to assess and underwrite risk? Is health care insurance ethically different from ensuring cargo?
A huge component of health care accessibility has to do with Rx affordability issues. In that regard Dr. Abramson's heretofore-cited book "Overdo$ed America" is a compelling read (I will soon quote more of it), focused in particular on the issues of proprietary pharmaceuticals. He ruminates on the development of the Salk polio vaccine:
There was a time not so long ago when breakthroughs in medical science were driven more by health needs than by the search for corporate profits. Perhaps the best example is the research that produced the polio vaccine, one of the truly great breakthroughs of modern medicine. In 1955, amid the great fanfare that accompanied the initial release of the vaccine, Dr. Jonas Salk was asked who own the patent. He replied, “well, the people, I would say. Could you patent the sun?” [Pg 241]
I would take the observation back even decades from there. Consider, for a moment, the increasing clinical scourge of diabetes, an incurable chronic disease responsible for a host of dangerous, even lethal additional illnesses. During my last tenure with the Medicare QIO, I did some studies on its prevalence and impact for the Nevada State Department of Health. We were mostly interested in evidence of disparate treatment impacts regarding "underserved populations" (the poor, and ethnic minority groups), but I also encountered an interesting, worrisome Medicare population trend.
(click the graph to enlarge)
Mining data we'd obtained from the UNLV Center for Health Care Information Analysis, I found a disturbing and steadily elevating proportion ("prevalence") of Medicare patients admitted to a NV acute care hospital for any reason that had a diagnosis code ("dx") for diabetes (ICD-9 250.nn) somewhere in their claims file records -- a trend that, unchecked, will soon grow to more than 30% (probably later this year).
Uncontrolled diabetes can be a macroeconomically ruinous disease, given the life-threatening additional maladies it can cause. Now, beyond sustained lifestyle countermeasures (e.g., regular exercise and proper diet), a core therapeutic component of successful diabetic management is frequently insulin injection therapy. OK, for a moment, consider the seemingly ad infinitum TV and print ads we encounter for a host of maintenance meds. Again, Dr. Abramson admonishes:
Most of all, immunize yourself from the drug companies efforts to convince you that you desperately need their advertised products. If you really needed the product, it is unlikely that the drug companies would be spending money on advertising. Remember, there aren’t many ads for insulin on TV.
"Many"? I would challenge anyone to show me a TV, radio, or consumer print publication ad for insulin. You cannot. Neither can you show any shortages of it. Hell, I even buy it at the vet, for Max, my 16 yr old diabetic cat.
Insulin was discovered and developed in the early 1920's by a Canadian physician and his medical student (the work subsequently won a Nobel Prize). The University of Toronto was granted the patent for one dollar. It was then licensed to Eli Lilly & Co, which went on to mass-produce it. It continues to be universally available -- I have to assume, at a profit.
Health Law policy suffers from an identifiable pathology. The pathology is not that it employs four different paradigms for how decisions to allocate resources should be made: the market paradigm, the professional paradigm, the moral paradigm, and the political paradigm. The pathology is that, rather than coordinate these decision-making paradigms, health law policy and employs them inconsistently, such that the combination operates at cross purposes.
This inconsistency results in part because, intellectually, healthcare law borrows haphazardly from other fields of law, each of which has its own internally coherent conceptual logic, but which in combination results in an incoherent legal framework and perverse incentive structures. In other words, health care law has not – at least not yet – established its self to be a field a law with its own coherent conceptual logic, as opposed to a collection of issues and cases from other legal fields connected only by the happenstance that they all involve patients and healthcare providers. [pg 1452]
...To ground my analysis let me assert upfront a concrete proposal, one toward which I believe the national healthcare systems of the world are (from different directions) slowly converging. The analysis of the moral paradigm offered here supports, when coupled with the strengths and weaknesses of the other paradigms, and health-care system having the following elements.
A politically set annual health-care budget with an associated tax not linked to employment.
Free access for all individuals to a care allocating plan.
Individual choice about which plan they wish to join for some significant. (I suggest three years).
Competition among care allocating plants that each receive a share of the government budget based on the number of individuals they enroll, adjusted for each person’s health risk, and that cannot retain profits from their budget (other than a possible bonus linked to total number of enrollees) but must instead spend it on those enrollees. Plans must accept all who wish to enroll.
Management of those care allocating plans by professionals who have a range of diagnostic expertise to evaluate the healthcare needs of plan enrollees, who have salaries unaffected by spending decisions (other then a possible bonus for an role he), and who have a duty to decide how to allocate each plans budget to purchase those health services that maximize health benefit for the unit’s enrollees. Their sole incentive should thus be to do a good enough job at ration Inc. to keep and attract enrollees.
Maintenance of the vast majority of healthcare providers as private suppliers of procedures, tests, and technologies that compete with each other to sell to the care allocating plans. This should create incentives for cost-effective innovation because suppliers will now face purchasers who have both the knowledge and incentives to trade off the costs and benefits of care.
A politically appointed agency, the members of which are insulated from removal, that has only two tasks: setting risk adjustments and licensing care allocating plans by verifying their diagnostic expertise and fiscal soundness. In particular, this agency would not dictate a uniform schedule of covered services because that would be up to each care allocating plan.
The individual right to purchase additional care outside these plans on the open market. [pg 1453]
CONCLUDING REMARKS
The potential role ascribed to the moral paradigm in this article is large. But it’s far from suffices to guide all health-care decisions that any system must make. It is, after all, of no help in encouraging productive efficiency or in assessing scientific issues about what benefits (if any) of various treatments have. Nor should it have escaped attention that the moral paradigm has still left us with no answer to the question of how precisely to make trade-offs between health care and other social goods. That matter remains largely “incorrigible to moral reasoning.”
To address those issues, we must rely on market, professional, and/or political paradigms for making resource allocation decisions. But why should we have any more faith in those decision-making processes, and what role should we ascribe to which process? Clearly, a full justification for the healthcare system I advocate requires more than an assessment of the strengths and weaknesses of the moral paradigm, which is all this article offers. It requires a comparative assessment of the strengths and weaknesses of the other paradigms. The details of a full comparative paradigm analysis will have to await another day, but a sketch of the argument is probably necessary to provide context to this article’s analysis of the moral paradigm.
As I see it, the strength of the market paradigm are the standard ones: if consumers are knowledgeable, have similar resources, and have incentives to trade off the benefits and costs of each product, then market competition promotes productive efficiency, accommodates varying consumer preferences, and achieves allocative efficiency. The problem of unequal resources is largely external to the market paradigm and potentially remediable through vouchers. But the more fundamental problem of the healthcare market flows from an inherent division between knowledge and incentives. Unlike other markets no decisionmaker exists who has both the knowledge and the incentives to decide when the costs of supplying a particular good or service exceed its social value. Patients lack the knowledge and, even the fact that others (such as insurers or employers) cover much of the social costs, also generally lack the necessary incentives. Physicians and other healthcare providers are knowledgeable about medicine but not about social benefits and costs. Moreover, under current American market systems they either have incentives to provide too much care (if paid on a fee-for-service basis) or incentives to provide too little care (if paid on a capitation basis). Insurance plans generally lack the information to make case-by-case cost than if it decisions and have incentives to provide two little care, or to select for low-risk enrollees unlikely to need much care, because the insurers pay the cost of health care but do not enjoy its benefits…
… Where markets and self-regulation fail, it is natural to turn to the political process. The main advantages of the political paradigm are (1) that it can make the open-ended trade-offs between healthcare and other social goods that do not lend themselves to objective scientific analysis and (2) that, unlike decision-makers under market and professional paradigms, political decision-makers have incentives to weigh benefits against costs because both are experienced by the polity. The disadvantages are that the political process is inevitably too centralized to effectively trade off the benefits and costs of health care in individual cases, and is susceptible to problems of majoritarian bias, intransitive choices, an interest group politics. These weaknesses counsel for limiting the political process to one global issue: how high to set a national (or state) level of health care spending and associated tax. This avoids the political processes in ability to make operational decisions, and lessens the concern of majoritarian bias because funding levels are more likely to affect everyone equally and decisions about which treatments to fund. This way of framing the political decision is also more likely to produce both “single peaked” preferences resistant to intransitivity problems and, more important, Lowell political information costs that render the process less susceptible to interest group dominance. [pp 1542-4] ___
Yeah, light bedtime reading. (There may be some "typos" in the foregoing; I used MacSpeech Dictate to read it in, given that the PDF file is not text-convertible. I've yet to proofread it.)
I will get to some comments on the foregoing ASAP. My point in posting it is that lot of intelligent people have been giving a lot of serious thought to this issue for a long time, yet we seem to not make much progress, so powerful are the major entrenched private interests.
In the wake of the Elhauge observations immediately foregoing, this might be a good place to focus a bit more on Dr. Gawande's New Yorker article.
Activists and policymakers spend an inordinate amount of time arguing about whether the solution to high medical costs is to have government or private insurance companies write the checks. Here’s how this whole debate goes. Advocates of a public option say government financing would save the most money by having leaner administrative costs and forcing doctors and hospitals to take lower payments than they get from private insurance. Opponents say doctors would skimp, quit, or game the system, and make us wait in line for our care; they maintain that private insurers are better at policing doctors. No, the skeptics say: all insurance companies do is reject applicants who need health care and stall on paying their bills. Then we have the economists who say that the people who should pay the doctors are the ones who use them. Have consumers pay with their own dollars, make sure that they have some “skin in the game,” and then they’ll get the care they deserve. These arguments miss the main issue. ..
...As America struggles to extend health-care coverage while curbing health-care costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions...
Again, citing Dr. Gawande:
Americans like to believe that, with most things, more is better. But research suggests that where medicine is concerned it may actually be worse. For example, Rochester, Minnesota, where the Mayo Clinic dominates the scene, has fantastically high levels of technological capability and quality, but its Medicare spending is in the lowest fifteen per cent of the country—$6,688 per enrollee in 2006, which is eight thousand dollars less than the figure for McAllen. Two economists working at Dartmouth, Katherine Baicker and Amitabh Chandra, found that the more money Medicare spent per person in a given state the lower that state’s quality ranking tended to be. In fact, the four states with the highest levels of spending—Louisiana, Texas, California, and Florida—were near the bottom of the national rankings on the quality of patient care...
...that’s because nothing in medicine is without risks. Complications can arise from hospital stays, medications, procedures, and tests, and when these things are of marginal value the harm can be greater than the benefits. In recent years, we doctors have markedly increased the number of operations we do, for instance. In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens. Are we better off for it? No one knows for sure, but it seems highly unlikely. After all, some hundred thousand people die each year from complications of surgery—far more than die in car crashes...
...In an odd way, this news is reassuring. Universal coverage won’t be feasible unless we can control costs. Policymakers have worried that doing so would require rationing, which the public would never go along with. So the idea that there’s plenty of fat in the system is proving deeply attractive. “Nearly thirty per cent of Medicare’s costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas,” Peter Orszag, the President’s budget director, has stated.
Most Americans would be delighted to have the quality of care found in places like Rochester, Minnesota, or Seattle, Washington, or Durham, North Carolina—all of which have world-class hospitals and costs that fall below the national average. If we brought the cost curve in the expensive places down to their level, Medicare’s problems (indeed, almost all the federal government’s budget problems for the next fifty years) would be solved. The difficulty is how to go about it...
...The Mayo Clinic is not an aberration. One of the lowest-cost markets in the country is Grand Junction, Colorado, a community of a hundred and twenty thousand that nonetheless has achieved some of Medicare’s highest quality-of-care scores. Michael Pramenko is a family physician and a local medical leader there. Unlike doctors at the Mayo Clinic, he told me, those in Grand Junction get piecework fees from insurers. But years ago the doctors agreed among themselves to a system that paid them a similar fee whether they saw Medicare, Medicaid, or private-insurance patients, so that there would be little incentive to cherry-pick patients. They also agreed, at the behest of the main health plan in town, an H.M.O., to meet regularly on small peer-review committees to go over their patient charts together. They focussed on rooting out problems like poor prevention practices, unnecessary back operations, and unusual hospital-complication rates. Problems went down. Quality went up. Then, in 2004, the doctors’ group and the local H.M.O. jointly created a regional information network—a community-wide electronic-record system that shared office notes, test results, and hospital data for patients across the area. Again, problems went down. Quality went up. And costs ended up lower than just about anywhere else in the United States.
Grand Junction’s medical community was not following anyone else’s recipe. But, like Mayo, it created what Elliott Fisher, of Dartmouth, calls an accountable-care organization. The leading doctors and the hospital system adopted measures to blunt harmful financial incentives, and they took collective responsibility for improving the sum total of patient care...
I find that all very interesting; it resonates quite well with my 1994 observations above regarding Utah's InterMountain Healthcare (IHC). I continue to waffle in my own mind regarding "Single Payer" in the U.S. Maybe we just don't do bureaucracy nearly as well as other nations, particularly those comprising our EU brethren who don't take being called "socialist" as personal and national insults.
Again, Dr. Gawande:
Dramatic improvements and savings will take at least a decade. But a choice must be made. Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can’t do it. Or we can turn to the local medical communities, which have proved that they can. But we have to choose someone—because, in much of the country, no one is in charge. And the result is the most wasteful and the least sustainable health-care system in the world.
Health Care Reform FAQ What we argue about when we argue about health care policy.
Should the plan include a public option?
How do we pay for it?
Should it include an individual mandate?
Should we model it on the Massachusetts plan?
Will health reform actually help the economy in the long run?
Should the Senate use "budget reconciliation"?
Does it really matter if reform happens this summer?
Well worth your time.
In addition to a proposed "individual mandate," there is trial-balloon talk of an "employer mandate" (requiring by law that all employers provide health care plans), as well as talk of making some existing employer-provided coverage "taxable income" (both of which I would view as politically radioactive). ___
UPDATE: I'm sitting here at the moment writing while the President is speaking about health care reform to a "town hall meeting" in Green Bay. He's declaring his support for a "public option" component. Yesterday I listened to Speaker Pelosi on the MSNBC Ed Schultz Show declare that "single payer" was not going to happen. Indeed, as reported today by Dana Milbank in the Washington Post:
Socialism is not dead. It has, however, been confined to a House subcommittee.
Congressional Democratic leaders, as they search for a way to revamp the nation's health-care system, have ruled out a "single-payer" model -- the sort of government-run program that opponents ridicule as socialized medicine. President Obama said it would be a "huge disruption." Democratic lawmakers ignored the single-payer crowd so completely that 13 activists got themselves arrested last month protesting at Senate Finance Committee hearings...
"LIVEBLOGGING" UPDATE: The President is now taking questions from the Green Bay audience, and it's clear that he must have read the New Yorker article I cited above -- "The Cost Conundrum" -- , as he offered up the differential examples of The Mayo Clinic vis a vis McAllen Texas (the latter being the 2nd most expensive health care setting in the nation). Interesting. ___
AS THE HEALTH REFORM DEBATE HEADS INTO PLAYOFF SEASON
A quick review of the All-Star fallacies that will likely dominate political discourse:
The Slippery Slope: e.g., "Public Option is the first step toward inexorable government takeover of health care";
The Perfectionism Fallacy: That your proposal has any arguable downsides means it not even need be debated, it's a non-starter;
Line Drawing Fallacy: e.g., "Given that we will never be able to decide where to draw the line on "basic health care" to be publicly funded means we should not even try, it's hopeless. Let the market decide";
False Dichotomy (a.k.a. False Dilemma): "The choice, the only choice, is yours: free-market capitalism or socialist totalitarianism";
The Straw Man: e.g., this decade's Gold Medalist, the 50 ft tall, world-menacing, nuclear armed Saddam Hussein ready and eager to obliterate the West. Basically, you dishonestly frame a debate with a hyperbolic caricature of the opposition, whom/which you then knock down (in Saddam's case, with lethal force). With respect to health care, it's the omnipresent, always interfering, steely-eyed and stingy Federal Medical Review Board of Rick Scott's fevered imagination, ever at the ready to veto your doctor's decisions;
The Red Herring: Any rhetorical device used to lead you away from the true objective evidence and logic at issue. In 'net-speak, this is commonly called the "Bright, Shiny Thing." Corporate shill "conservatives" posing as defenders of "patient-doctor inviolability" are being disingenuous, classic Red Herring. As I stated before, unless you pay in cash, you currently have non-clinical intermediaries interfering with your medical decisions;
and, of course the venerable Ad Hominem: "Obama is a Radical Communist who wants to rule every aspect of your life." Attacking the person rather than the proffer.
Many of these overlap conceptually, and in concert comprise the favorite tools of those who feel their factual arguments may not suffice in advancing their ends. ___
Single-payer national health insurance is a system in which a single public or quasi-public agency organizes health financing, but delivery of care remains largely private.
Currently, the U.S. health care system is outrageously expensive, yet inadequate. Despite spending more than twice as much as the rest of the industrialized nations ($7,129 per capita), the United States performs poorly in comparison on major health indicators such as life expectancy, infant mortality and immunization rates. Moreover, the other advanced nations provide comprehensive coverage to their entire populations, while the U.S. leaves 45.7 million completely uninsured and millions more inadequately covered.
The reason we spend more and get less than the rest of the world is because we have a patchwork system of for-profit payers. Private insurers necessarily waste health dollars on things that have nothing to do with care: overhead, underwriting, billing, sales and marketing departments as well as huge profits and exorbitant executive pay. Doctors and hospitals must maintain costly administrative staffs to deal with the bureaucracy. Combined, this needless administration consumes one-third (31 percent) of Americans’ health dollars.
Single-payer financing is the only way to recapture this wasted money. The potential savings on paperwork, more than $350 billion per year, are enough to provide comprehensive coverage to everyone without paying any more than we already do.
Under a single-payer system, all Americans would be covered for all medically necessary services, including: doctor, hospital, preventive, long-term care, mental health, reproductive health care, dental, vision, prescription drug and medical supply costs. Patients would regain free choice of doctor and hospital, and doctors would regain autonomy over patient care.
Physicians would be paid fee-for-service according to a negotiated formulary or receive salary from a hospital or nonprofit HMO / group practice. Hospitals would receive a global budget for operating expenses. Health facilities and expensive equipment purchases would be managed by regional health planning boards.
A single-payer system would be financed by eliminating private insurers and recapturing their administrative waste. Modest new taxes would replace premiums and out-of-pocket payments currently paid by individuals and business. Costs would be controlled through negotiated fees, global budgeting and bulk purchasing.
I've emailed every member I could find to ask for commentary.
UPDATE: NEW HARPER'S ARTICLE
My July 2009 Harper's came in the mail today. I'm excerpting a portion of the cover article (again via my Godsend MacSpeech Dictate, as it's not yet online) "Barack Hoover Obama: The Best and the brightest blow it again" by Kevin Baker -
"A plan for universal health care that is not universal and doesn’t cut costs will not work."
Three months into his presidency, Barack Obama has proven to be every bit as charismatic and intelligent as his most ardent supporters could have hoped. At home or abroad, he invariably appears to be the only adult in the room, The first American president in at least 40 years to convey any gravitas. Even the most liberal of voters are finding it hard to believe they managed to elect this man to be their president.
It is impossible not to wish desperately for his success as he tries to grapple with all that confronts him: a worldwide depression, catastrophic climate change, and unjust and inadequate health care system, wars in Afghanistan and Iraq, the ongoing disgrace of Guantánamo, a floundering education system.
Barack Obama’s failure would be unthinkable. And yet the best indications now are that he will fail, because he will be unable – indeed he will refuse – to seize the radical moment at hand.
Every instinct the president has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, if any significant changes to be brought about. The trouble is that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster. The question is not what can be done, but what must be done…
… Much like Herbert Hoover, Barack Obama is a man attempting to realize a stirring new vision of his society without cutting himself free of the dogmas of the past – without accepting the inevitable conflict. Like Hoover, he is bound to fail.
President Obama, to be fair, seems to be even more alone than Hoover was in facing the emergency at hand. The most appalling aspect of the present crisis has been the utter fecklessness of the American elite in failing to confront it. From both the private and public sectors, across the entire political spectrum, the lack of both wheeled and new ideas has been stunning…Obama…has had to contend with a knee-jerk rejectionist Republican Party.
More frustrating has been the torpor among Obama’s fellow Democrats. One might have assumed that the adrenaline rush of regaining power after decades of conservative hegemony, not to mention relief at surviving the depredations of the Bush years, or losing the vestigial tail of the white southern branch of the party, would have liberated congressional Democrats to loose a burst of pent up, and imaginative liberal initiatives.
Instead, we have seen a parade of aged satraps from vast, windy places stepping forward to tell us what is off the table. Every week, there is another Max Baucus of Montana, another Kent Conrad of North Dakota, and other Ben Nelson of Nebraska, huffing and puffing and harrumphing that we had better forget about single-payer health care, a carbon tax, nationalizing the banks, funding for mass transit, closing tax loopholes for the rich. These are men with tiny constituencies who sat for decades in the Senate without doing or saying anything of note, who acquiesced shamelessly to the worst abuses of the Bush administration and whom come forward now to chide the president for not concentrating enough on reducing the budget deficit, or for “trying to do too much,” as if he were as old and indolent as they are…
… President Obama, with a laudable respect for the separation of powers, has left the details and even the main tenets of his agenda to be worked out by the same congressional Democrats. This approach looks like an exercise in democracy drawn from his days as a community organizer, the sort of strategy that helps the neighborhood to decide whether it wants, say, a health clinic or a youth center period. What he doesn’t care to acknowledge is that, in the case of the U.S. Congress, he’s dealing with a neighborhood where maybe half want a health clinic and the rest are holding out for grenade launchers and crystal meth...
…In his masterful February speech before the joint houses of Congress, Obama explained to the country why we cannot afford to continue with a tottering healthcare system that has left 46 million Americans uninsured and that impedes our efforts by adding, for instance, $1,500 to the cost of every GM car…
… we are back in Evan Bayh territory here, espousing a “pragmatism” that is not really pragmatism at all, just surrender to the usual corporate interests. The common thread running through all of Bobby’s major proposals right now is that they are labyrinthine solutions designed mainly to avoid conflict. The bank bailout, And trade on carbon emissions, healthcare pools – all of these ideas are, like Hillary Clinton’s ill-fated 1993 health plan, simultaneously too complicated to draw a constituency and to threatening for Congress to shape and pass as Bobby would like. They bear the seeds of their own defeat.
Obama will have to directly attack the fortified bastions of the newest “new class” – the makers of the paper economy in which he came of age – if he is to accomplish anything. These interests did not spend 50 years shipping the greatest industrial economy in the history of the world oversees only to be challenged by a newly empowered, green economy working class. They did not spend much of the past two decades gobbling up previously public sectors such as healthcare, education, and transportation only to have to compete with a reinvigorated public sector. They mean, even now, to use the bailout to make the government their helpless junior partners, and if they can they will devour every federal dollar available to recoup their own losses, and thereby preclude the use of any monies for the rest of Obama’s splendid vision…
… Barack Obama should not deceive himself into thinking that such interest group politics can be banished any more than can the cycles of Wall Street. It is not too late for him to change direction and seize the radical moment at hand. But for the moment, just like another very good man, Barack Obama is moving prudently, carefully, reasonably toward disaster.
Buy a newstand copy and read it, if you're not a subscriber. It speaks painfully to my concerns. Were I to have to place a sizable bet today, it would be that we are simply going to yet again rearrange the deck chairs, mostly for the continuing comfort of Big Insurance and Big Pharma. Recall: "Every misspent dollar in our health care system goes into someone's paycheck." NEW: PUBLIC OPTION LITE, HEALTH CARE "CO-OPS"
Debate on Public-Health Option Turns to Talk of Co-Op
President Obama says a public health-insurance option to compete with private insurers would help keep private insurers honest. Opponents say a public plan would eventually drive private insurers out of business. Could a member-run health-care cooperative bridge the divide?
Democrat Sen. Kent Conrad of North Dakota is proposing a plan where a co-op — which would be owned and organized by its members — would negotiate rates with providers and would meet the same licensing and regulatory requirements as private insurers, reports the Washington Post.
“I tried to come up with something that is not government-controlled, is a competitive delivery model, but nonprofit,” Conrad said. “It would be on a level playing field with everybody else with, with a different ownership structure.”...
Skeptics have been quick to return immediate and forceful critical fire, characterizing this as a red herring tactic via which to throw cold water on a federal "public option" program (the latter of which is itself viewed by many of the same people as a quarter-measure political distraction away from Single Payer). While it might be tempting to view/spin health care "co-ops" in the same light as, say, not-for-profit, member-owned credit unions, it would be a poor analogy. The vast majority of commercial health insurors exist on a corporate scale comparable to that of our large national banks. There is no credit union counterpart to the likes of a Bank of America or JP Morgan Chase or Wells Fargo. Consequently, the potential bargaining clout of health care co-ops would likely be nil. While financial credit unions certainly fill market niches, they are only marginally more competitive with respect to aggregate customer value relative to that of ordinary banks. My wife and I are members of two. Our deposit interest rates, credit card and HELOC APRs, and transaction fees, while somewhat more favorable, are only slightly moreso. A COMMENTER ASKS
'Can you or a reader provide a breakdown of just how we are spending the 17 percent of GDP on health care. How much to hospitals, how much on pharmaceuticals, how much on insurance, how much physician fees, how much caregiver wages, etc. There must be a pie chart somewhere, or one of those "for every dollar spent on health care, ten cents goes for..."...'
Well, yes, such summary data graphics are indeed out there, e.g., 2007 data ostensibly from HHS (US Health and Human Services Department)
Aside from the rounding error imprecision (the above sum to 99%, and, 1% of the $2 trillion+ U.S. annual expenditure is ~$20 billion), I find such data of only the most marginal policy advocacy utility, being insufficiently granular, both in terms of likely aggregate ledger accuracy, and lacking necessarily revealing "drill-down/drill out" stratification. For instance, good luck acquiring accurate comparative categorical expense data regarding the proprietary for-profit health care sector. They call such "business intelligence," and are typically not thrilled about sharing it openly, for what should be obvious reasons.
Now, I make no pretense of being a "health care economist." It suffices for purpose of my rumination here that we in the U.S. spend roughly twice the amount on "health care" than do our G7 nation counterparts -- again, for materially inferior overall outcomes -- and that much of that excess outlay has nothing whatever to do with "health care" per se, i.e., direct clinical costs and their concomitant, necessary support costs. But, of course,
"Every misspent dollar in our health care system goes into someone's paycheck."
I find it difficult to see how "Public Option" or "Health Care Co-ops" offer anything beyond the prospect of simply rearranging the paper-pusher intermediary furniture.
A QUICK RECAP PRIOR TO FINISHING THIS POST
Can we achieve
universal health care coverage and effective access,
broad, clinically measurable, significantly higher quality of care, and
materially reduced cost
concomitantly? Some people would say "no." The most charitable among them surely simply feeling that trade-offs are inevitable, that covering nearly 50 million more citizens while delivering higher quality care to all cannot but cost much more -- and we don't have "more" to spend.
The least charitable among them, including those with minimal health care needs (for now, anyway) and/or who have ample financial resources, might be likely to concur with former President George W. Bush's callous, flip observation to a carefully-screened "town hall meeting" on July 10th, 2007:
"The immediate goal is to make sure there are more people on private insurance plans. I mean, people have access to health care in America," he said. "After all, you just go to an emergency room."
This from a man whose every health care need will be fully covered by the U.S. taxpayers for the rest of what will likely be his utterly comfortable quarter-decade or so retirement.
JUNE 15TH UPDATE
HHS Secretary Kathleen Sebelius appeared today on MSNBC's "Hardball" to assert that the President would not accept health policy reform legislation that fails to [1] provide coverage for all Americans, [2] improve clinical quality, and [3] reduce costs. Single Payer advocates -- as I cited in the 1994 JAMA article -- have long argued that we can in fact have all three (coverage, quality, and savings):
"The health system must work better to extend access and to control costs. In this article, we argue that a single-payer national health program provides a better framework for improving quality. First, we briefly review requirements for quality care. Then, we propose 10 principles that should be integral to reform strategies to augment quality. We contrast our approach with the current managed competition strategy, showing how a single-payer system is more likely to facilitate these 10 interrelated quality features."
Blue Cross praised employees who dropped sick policyholders, lawmaker says Workers received high marks on performance reviews after policies were rescinded, documents show. The health insurer denies the practice is a factor in evaluations. By Lisa Girion 11:03 AM PDT, June 16, 2009
Blue Cross of California encouraged employees through performance evaluations to cancel the health insurance policies of individuals with expensive illnesses, Rep. Bart Stupak (D-Mich.) charged at the start of a congressional hearing today on the controversial practice known as rescission.
The state's largest for-profit health insurer told The Times 18 months ago that it did not tie employee performance evaluations to rescission activity. And executives with Blue Cross parent company WellPoint Inc. reiterated that position today.
But documents obtained by the House Committee on Energy and Commerce and released today show that the company's employee performance evaluation program did include a review of rescission activity.
The documents show, for instance, that one Blue Cross employee earned a perfect score of "5" for "exceptional performance" on an evaluation that noted the employee's role in dropping thousands of policyholders and avoiding nearly $10 million worth of medical care.
WellPoint's Blue Cross of California subsidiary and two other insurers saved more than $300 million in medical claims by canceling more than 20,000 sick policyholders over a five-year period, the House committee said.
"When times are good, the insurance company is happy to sign you up and take your money in the form of premiums," Stupak said. "But when times are bad, and you are afflicted with cancer or some other life-threatening disease...
Such is the inexorable competitive business imperative of the for-profit actuarial model. ___ SOME THOUGHTS ON HEALTH CARE EXPENDITURE DATA
When I see a large "per capita" health care statistic such as "$7,900 per year on average in the U.S." the statistician in me wants to see the rest of the story, in terms of the range (minimum to maximum) and the "shape" of the distribution (e.g., bell-curved vs skewed or multi-modal "lumpy"). The following, while a bit dated (June, 2006, AHRQ.gov) are instructive in this regard.
How Are U.S. Health Care Expenses Distributed? A Small Proportion of the Total Population Accounts for Half of All U.S. Medical Spending
As policymakers consider various ways to contain the rising costs of health care, it is useful to examine the patterns of spending on health care throughout the United States. In 2004, the United States spent $1.9 trillion, or 16 percent of its gross domestic product (GDP), on health care. This averages out to about $6,280 for each man, woman, and child.
However, actual spending is distributed unevenly across individuals, different segments of the population, specific diseases, and payers. For example, analysis of health care spending shows that:
Five percent of the population accounts for almost half (49 percent) of total health care expenses.
The 15 most expensive health conditions account for 44 percent of total health care expenses.
Patients with multiple chronic conditions cost up to seven times as much as patients with only one chronic condition.
Further detailed analyses of these spending patterns, how they change over time, and how they affect different payers such as Medicare, Medicaid, private insurers, employers, and consumers shed important light on how to best target efforts to contain rapidly rising health care costs...
...Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount. In 2002, the 5 percent of the U.S. community (civilian noninstitutionalized) population that spent the most on health care accounted for 49 percent of overall U.S. health care spending (Chart 1, 40 KB). Among this group, annual medical expenses (exclusive of health insurance premiums) equaled or exceeded $11,487 per person.In contrast, the 50 percent of the population with the lowest expenses accounted for only 3 percent of overall U.S. medical spending, with annual medical spending below $664 per person. Thus, those in the top 5 percent spent, on average, more than 17 times as much per person as those in the bottom 50 percent of spenders.From 1977 to 1996, the overall distribution of health care expenses among the U.S. population remained remarkably stable (Table 1), according to data from MEPS and its predecessor surveys. In 1977, the 1 percent of the population with the highest expenses accounted for 27 percent of all expenses, the top 5 percent accounted for 55 percent, and the bottom 50 percent accounted for 3 percent.However, the concentration of expenses at the top has decreased in recent years. The total expenses accounted for by the top 1 percent of spenders declined from 28 percent in 1996 to 22 percent in 2002, and the amount for the top 5 percent dropped from 55 to 49 percent in the same time period. The lower 50 percent of spenders remained at 3 to 4 percent of total expenditures during this period...
While one would hope and expect that key legislative policy people would be aware of the implications of data such as the foregoing, you don't commonly find it discussed in the mainstream public media. Reviewing the data and narrative on the AHRQ link above is well worth your time. "Half of the population spends little or nothing on health care" Well, that assertion, if relatively accurate, points to a formidable political problem. But, first, a couple of questions pertaining to the "if relatively accurate" part: there are currently approximately 307 million people in this country. Does AHRQ mean half of that number, or half of the adult population overtly or potentially on the hook for payment for medical services (50% of the adult population would be perhaps ~120 million citizens rather than 153.5 million overall)? The "civilian noninstitutionalized" count is not enumerated.
Irrespective of that empirical quibble, for the sake of conservatism, let's assume that it's the paying/voting subset cohort. But, when we say "little or nothing," do we mean that literally, or do we mean that a significant portion of them may indeed have health insurance (paid for by some entity -- usually the employer), but file no claims (though, they do allude to "exclusive of health insurance premiums" with respect to the higher cost cohort). The "none-to-minimal health care" cohort remains healthy and go uninjured for "x" periods of time -- notwithstanding that the cost of their coverage is a legit "health care" ledger expense. So, the accounting is not entirely clear.
Either way, I suppose, this ~"50%" cohort currently "spends" next to nothing on health care individually ongoing (in their view). It will be a very tough political sell to persuade such a large demographic to explicitly, visibly now pay for coverage going forward, in order that all might be covered.
We don't want to buy it until after we need it, absent some legal requirement. An unsurprising attitude, to be sure, but one at the heart of proposals such as employer and/or individual "mandates."
Your taxes designated for the effective defense of your "rights" to, say, police, fire, and military protection are not voluntary (the rantings of anti-tax tinfoil hat-istas aside). They are simply a necessary cost of doing enlightened, secure civilization. Health care "social insurance model" advocates fail to see the difference -- on both utilitarian and moral grounds.
"CQI WON'T SOLVE THE HEALTH CARE PROBLEM"
It is April, 1994. I am sitting in a conference room in Snowbird, Utah for the opening session of what will be six months of intensive health care "Total Quality Management / Continuous Quality Improvement" training sessions provided by my employer and sponsored by Intermountain Healthcare. The keynote speaker is the highly regarded national authority on health care "CQI" (Continuous Quality Improvement), Brent C. James, MD, M.Stat. Dr. James opens with a cautionary admonishment; basically that fastidious devotion to CQI, while undeniably necessary and intrinsically worthy, will not of itself resolve the larger socioeconomic issues surrounding health care. "Delivering optimal, healing/curative treatment today only serves to ironically assure that you will likely face an older, sicker and much more expensive-to-treat patient in the future, and we will inevitably continue to face serious ethical social choices that go far beyond the clinical." Dr. James would go on to point out that perhaps 80% of a person's lifetime health care expenditure would, on average, occur during the last six months of life.
In this regard, the observations of Einer Elhauge [also circa 1994] also come to mind:
Moral absolutism has powerfully emotive appeal. Easy as it may be to reject in the abstract, moral absolutism remains difficult to reject in practice. Indeed, the persistent power of absolutist beliefs in the face of unending escalation of health care costs is the most striking moral phenomenon of health law policy in the past quarter-century.
Nonetheless, moral absolutism is wholly untenable as a societal system of resource allocation. Most knowledgeable observers believe we could today easily spend 100% of our GNP on health care without running out of services that would provide some positive health benefit to some patient. Surely, the most committed moralist must concede that, if these observers are empirically correct, some health care must be denied even though it has a beneficial effect. Otherwise, the extreme a moral vision would require that we fund health care even if that means starving ourselves to death. And once the moralist makes this concession, she acknowledges that at some point trade-offs must be made and that thus the moral principle is not in fact absolute. The moral question then becomes aware, rather than whether, trade-offs are appropriate. ["Allocating Health Care Morally," p. 1459]
I reflect on my own parents, who, like many other retirees, have dwelled in AHRQ's upper-tier of annual expenditures in recent years. Pop (age 80 at the time) was going down with heart valve failure in the fall of 1996. An aortic valve replacement and bypass saved his life, but he never fully recovered cognitively, and declined into increasingly serious dementia. On Sept 12th, 2001, he lurched into cardiac arrest at home, and EMTs, unable to locate a DNR (do-not-resuscitate order, which he did in fact have), paddled him back. After a stint at Melbourne, Florida's Holmes Regional Medical Center, he was transported to a nearby long-term care facility, where he languished in bewilderment until May of 2007, when I brought him to Las Vegas, to a nursing home here. He finally expired on May 6th, 2008, just shy of his 92nd birthday.
My mother started to crash and burn in the fall of 2004. She was found on the floor in her home, alone, in the wake of Hurricane Jeanne. She subsequently spent most of the fall in revolving door trips between Holmes Regional and a local rehab facility. She'd become increasingly cardiac unstable, and finally consented to a pacemaker implant. I moved her out of the house and into assisted living, and in late 2006 took her car keys (BTW- I found Pop's DNR while cleaning out and prepping their house for sale). In July of 2007 I moved Mother here to Vegas, intending to place her in a close-by assisted living facility. She'd spent most of early 2007 in and out of hospitals and rehab, at one point contracting the terrible chronic c-Diff infection.
But once in Vegas, she was not up to assisted living any more; nine days after we'd moved her in, she fell and had to be taken to St. Rose Hospital, where she would subsequently bounce around from hospitals to rehab units. She is now bedridden and wheelchair bound in long-term care, at age 87.
My folks have undoubtedly cost the health care system an aggregate "face amount" of well in excess of a million dollars across the past dozen years. I'm sure this is a quite common story.
Since 2004 I have served with power-of-attorney responsibilities (Mom) and legal guardianship (Dad), and have become quite familiar with the maddening Gordian Knot that comprises geriatric care adminstration and reimbursement. And, I have an acute appreciation for the ethical quandaries alluded to by Dr. James and Mr. Elhauge.
MEDICARE AGE POPULATION DATA
This morning (6-18) I grabbed some Census.gov data and assembled this quick table in Excel:
Note that the 80+ yr old cohort represents nearly 30% of the total. What if, you might ask, this more elderly stratum alone cost the health care system, say, an average of $20,000 year (about a quarter of my Mom's current outlay) per beneficiary? Do the math. You get $229,432,240,000 -- close to half the U.S. Defense Dept budget -- to care for less than 4% of the aggregate U.S. population.
Yes, we indeed face some vexing socioeconomic and ethical problems going forward on this front. Particularly when you consider that this 65+ demographic is growing rapidly as a proportion of the entire population. No, as Dr. James alluded, we will indeed not "CQI" our way out. It will require in addition both smart, broadly coherent, systemically aligned policy reform and searingly tough ethical choices.
Banal bumper sticker special-interest obstructionist sloganeering such as "Evil Government-Controlled Health Care" and "No To Socialism" will only serve to exacerbate the problem.
SOME CONCLUSIONS
I ran across an OpEd today by Marie Cocco that touches directly on many of the summary concerns I'd planned to air in conclusion:
Why Patch-And-Fill Won't Do June 18, 2009
WASHINGTON -- You can't get there from here.
Not if there is defined as health insurance coverage for everyone in the United States, lower costs for the millions of insured who are being crushed by its price, and relief for employers who are burdened by an expense many wish they could wipe off their books.
And not if here is where the health insurance political debate is stuck...
...the private insurance industry would continue to be the chief source of coverage -- and the only one, if the industry gets its way and Democrats produce legislation that does not create a public insurance plan as one purchase option.
Advocates of a single, national insurance system that would involve explicit cost controls and guidelines for care -- that might put an end to such wasteful practices as over-testing -- have been shunted aside. This is in part because Democrats quiver when Republicans call them "socialists." But Republicans cry "socialist" even when Democrats promote weak reforms that barely nick the vested interests. That's what's happening now.
No one has seriously proposed an overhaul that would achieve what a single-payer system has been shown to accomplish in most other countries: universal coverage with lower costs that delivers better results than we now get in the United States.
Instead, Democrats have all but abandoned the idea that everyone be covered without exception. They've so far avoided endorsing clear cost-containment measures that would pass the budget-scorers' test of legitimacy. The wished-for savings that Obama says he wants the private insurance industry to achieve are exactly that -- wishes.
The winners so far are health-industry lobbyists. They sense that their chances of protecting the interests of big insurers, drug companies, medical specialties, technology companies and the like are improving every day. They're probably right.
That is precisely my concern. This urgent hyper-contentious political push to get legislation through both houses of Congress and on the President's desk by October is likely to result in a mammoth and internally inconsistent bill that most legislators will not even read, and will likely be largely ghost-written by lobbyists out to preserve their lucrative industry interests.
RITORNELLO al CODA
Recall my opening observation: numerous serious, knowledgeable health care reform advocates have insisted for nearly two decades that we can indeed [1] provide health care for everyone in the U.S., with [2] consistently higher quality, while at the same time [3] reducing individual and aggregate expenditures.
Such a dramatic reform of the health care industry would necessarily involve widespread voluntary and involuntary reallocation of resources (via clinical consensus and legislation respectively), deploying them far more rationally -- with a primary focus on patients before profits. Dr. Abramson ("Overdo$ed America") alludes to Darmouth studies, the implications of which are subsequently confirmed in the Mayo Clinic and Grand Junction examples set forth by Dr. Gawande in "The Cost Conundrum" -
...Dartmouth medical school’s Center for evaluative clinical sciences, headed by Drs. John Whennberg and Elliott Fisher. Their research focuses on the impact of regional variations in the use of medical services on health outcomes and costs. Intuitively, we would expect Medicare patients who receive more care in the higher spending regions of the country to get better care and be healthier…
… Fischer and colleagues specifically studied Medicare patients admitted to the hospital with a first diagnosis of heart attack, broken hip, or cancer of the colon. The cost of caring for the patients was 60% more in the highest spending regions than in the lowest spending regions. The patients in the highest spending regions spent more days in the hospital and the ICU, and had more visits with specialists, more diagnostic tests, and more minor, but not major surgical procedures. The extra services provided to patients in the higher spending regions did not, however, translate into better outcomes. The patients in the lower spending regions had better access to care, higher quality care, and less chance of dying over the five years of the study. The bottom line appears to be that once an adequate amount of care is being provided, as in the lowest spending regions of the country for Medicare patients, more care is worse care. This seems to be particularly true for the kind of care that is pushed into service by supply side pressure. (pp. 180- 181)
If the crisis in American medicine were simply due to the rising cost of ever more effective care, there would be no choice but to cobble together the least noxious combination of increased spending and ration in. But the bad news about American medicine – and, paradoxically, the good news as well – is that the primary problem is not the escalating cost but the low quality of medical care that results when those went health insurance receive too much of the wrong kind of care and those without health insurance received too little of the care that is necessary (p. 248).
He continues on to note that
...the medical industries maximize profits by providing the most care possible to those who pay full or almost full price. As long as the definitions of “quality of care” and the price structure of drugs, devices, and procedures are determined largely by commercial interests, universal health care will continue to appear unrealistic and in some vague way “un – American.”
The prospect of expanding health care coverage to the uninsured would jeopardize the medical industry’s excess profits and almost certainly trigger a demand for accountability: Americans of all political stripes would demand evidence of the real value of that day (and the uninsured) were receiving for their tax dollars…
…The cost of this care, according to the best evidence currently unavailable, would be about one third less than the current cost of commercial insurance or Medicare. The privileged profiteering of the drug, medical device, medical equipment, and hospital industry would be sharply curtailed…
… All Americans would then be winners – the currently uninsured and the insured a light – as the quality of their health care improved and their costs declined as the result of objective standards of medical excellent replacing our current commercially-based standards of care (p. 254).
Notwithstanding Democratic control of the White House and the House and Senate, Congress is still not buying it. An 852 page draft Senate health care reform bill just issued (June 20th, 2009, as yet not numbered) begins this way:
DIVISION A—AFFORDABLE HEALTH CARE CHOICES
SEC. 100. PURPOSE; TABLE OF CONTENTS OF DIVISION;
GENERAL DEFINITIONS.
(a) PURPOSE.— (1) IN GENERAL.—The purpose of this division is to provide affordable, quality health care for all Americans and reduce the growth in health care spending. (2) BUILDING ON CURRENT SYSTEM.—This division achieves this purpose by building on what works in today’s health care system, while repairing the aspects that are broken. (3) INSURANCE REFORMS.—This division— (A) enacts strong insurance market reforms; (B) creates a new Health Insurance Exchange, with a public health insurance option alongside private plans; (C) includes sliding scale affordability credits; and (D) initiates shared responsibility among workers, employers, and the government;
To be fair, the bill proposes to deliver two out of three -- "affordable, quality health care for all Americans" -- but goes on to assume that health care reform costs will continue to rise, and that the best that can be done is to "reduce the growth in health care spending."
Assume for the moment -- just for the sake of argument -- that the best we might manage is the status quo in our annual ~$2 trillion "health care" outlay (alternatively and more stably stated as ~16% of GDP). Assume further that the goals of improved quality and universal access might be effected within that budgetary constraint. You then have the circumstance of the "Zero-Sum Game" within which the aggregate allocation is necessarily re-apportioned.
It should be immediately obvious that the multimillionaire CEOs of our major for-profit "health care industry" players are not about to sit idly by and see their respective slices of the pie diminished. Hence the intense lobbying now underway to delve out smaller slices elsewhere, e.g., by legislative tactics such as [1] raising the Medicare eligibility age from 65 to 70 or higher, [2] decreasing yet again Medicare payments to doctors and hospitals, [3] requiring that everyone buy private insurance, and [4] taxing employer-provided benefits. See (3)(D) above. Take the glaring hint.
More regarding the foregoing:
100(a)(2), "building on what works..." President Obama recently alluded to our U.S. "tradition of employer-based health coverage" in arguing that we cannot and should not "start from scratch." My father worked for AT&T/Bell Labs his entire adult life until retirement after mustering out of WWII service. My wife and I have 14 employers between us across our careers to date. Moreover, during my last tenure with the Medicare QIO, during the two years I served, my employer changed benefit providers three times. I had no say in the provider selections, nor the array of services provided. I just had to fill out the requisite lengthy re-enrollment paperwork iteratively. I have no doubt that this is increasingly common, as employers constantly look to reduce employee health care plan costs, jumping in response to one sales pitch after another. Moreover, employer-based coverage is subject to the whims of the job market -- as more than 6 million unemployed Americans are now acutely aware. It is also subject to the whims of bankruptcy courts, as hordes of U.S. retired auto and airline workers have learned to their dismay.
100(a)(3)(A), "...strong insurance market reforms." A for-profit insurance entity simply must have an actuarial business model. Risk-leveling "community rating" reforms, consequently, are likely to prove problematic. Expect the lobbying wrangling here to be especially severe.
An interesting irony obtains: the for-profit "actuarial/risk rating" model contains the seeds of its own eventual demise. As predictive diagnostic technologies inexorably improve (e.g., DNA), there will be fewer and fewer people left among whom to profitably "cherry-pick." We are mostly all at risk for some type of possibly expensive clinical malady over the course of our lives. Universal coverage eliminates all of the contention associated with the actuarial model.
100(a)(3)(B) and (C), "...a new Health Insurance Exchange...including sliding scale affordability credits..." Here we smell wafts of weasel-out "co-ops" along with means-testing for "affordability." "Means-testing" in one word? "Medicaid." I fail to see how this differs materially. At best, it augurs nothing beyond assuring more millions hours of of FTE expenditure on administrative eligibility paper-shuffling
When an initial version of this bill first tentatively surfaced some weeks ago, it numbered 615 pages. It is now at 852. By fall it may well rival Ira Magaziner's 1,400+ page Hillary-Care behemoth of the early 1990's. It will likely also rival it in inscrutable (but industry-friendly) cross-purpose, counterproductive complexity.
I intend to follow the legislative developments closely going forward. I am not at this time, however, optimistic about the outcome.
THE CANARDS IN THE COMMERCIAL HEALTH CARE COAL MINE
Profiteering industry status-quo apologists such as Rick Scott (and his congressional cheerleaders) are everywhere darkly and dishonestly bemoaning the incipient
End of The Doctor-Patient relationship: Again, it is simply a fact that, unless you have to resources to pay cash/retail, your medical encounters are subject to both external clinical and non-clinical review by 3rd parties, none of whom in the for-profit sector have your medical best interests at heart. Their allegiances lie with the bottom lines of their employers. Period.
Corollary to the foregoing is the recent MEGO assertion of GOP Chairman Michael Steele that reform will inevitably lead to the "Federal Health Police" showing up at your door to drag you off to the clinic for your required annual physical and preventive care -- without which you'd be ID'd as "costing the health care system too much." (I'm not making that up.)
Also corollary to this phony totalitarian spectre is the notion that calls for far more research and transparency concerning effective procedures and promulgation of more uniform clinical practice are really calls for the establishment of the "Federal Medical Review Board" of Rick Scott's fevered imagination -- those anonymous clinical bureaucrats who are ostensibly going to interfere with your doctors' every decision. That this survives the reflexive laugh test is not reassuring.
Inevitable rationing: We already have it, and will continue to. It is inescapable (see, e.g., Elhauge and Dr. James). The salient question is whether it should in the service of well-heeled CEOs and stockholders rather than that which promotes "the general welfare" underpinning the very legal (and utilitarian) rationale of our society. You have a say in the latter -- whether you realize it or not.
"Millions forced into a 'government-run' system, depriving them of 'choice'": First, Google "The Tyranny of Choice." Reflect at some length on what you find. Second, while I choose to not buy a large-screen HDTV at this time, and while I equally choose to forego caviar and prime rib, my health care needs are entirely another matter. "Choice," while undeniably a good thing, becomes increasingly less so as the smokescreen mantra of "choice" becomes the advertised end in itself. Moreover, in that regard, my wants are fairly mundane; just provide me the array of choices accorded members of Congress and other federal employees. I'll shut up and go away.
Another staple canard revolves around Medicare. It is noted that Medicare pays much less than private payors, and, given that a "public option" is likely to be a de facto "Medicare" model (should it not wind up being the chimerical "co-op"), providers will likely shun it en masse even as millions of Americans "choose" it, leaving those millions without any care.
I recently asked my own physician who his "favorite payor" was (among the 1,000+ 3rd party payors he routinely deals with in the back office). "Medicare" -- without the slightest pause. I'd asked the same question of my daughter's Attending more than a decade ago. "The Medi-Medi," he quickly replied. Meaning, a Medicare beneficiary also means-test eligible for that other "government-run" Medicaid program. "Medi-Medi's" provided the quickest net reimbursement return with the least hassle, he told me.
The other observation I would proffer for now with respect to putative "Medicare/Medicaid" disdain. It assumes that the relative reimbursement disparity is essentially fixed -- begging the policy reform pie-slicing question. I have to wonder; what if there were no more "uncompensated care" (i.e., for the bottom-of-the-barrel indigent) requiring "cost-shifting" to the privately insured; what if Medicare etc were able to pay realistic compensation for necessary care (with people still free to buy private boutique ancillary coverage)?
What if we could just cut the crap and fix the national problem? Nah...
The Republicans, with a few possible exceptions, have decided to do all they can to make the Obama administration a failure. Their role in the health care debate is purely that of spoilers who keep shouting the old slogans — Government-run health care! Socialism! Europe! — hoping that someone still cares.
The polls suggest that hardly anyone does. Voters, it seems, strongly favor a universal guarantee of coverage, and they mostly accept the idea that higher taxes may be needed to achieve that guarantee. What’s more, they overwhelmingly favor precisely the feature of Democratic plans that Republicans denounce most fiercely as “socialized medicine” — the creation of a public health insurance option that competes with private insurers...
BTW, for the record, notwithstanding the foregoing "Republican bashing," I am not a Democrat (notwithstanding my 2008 service as a precinct captain for and frequent contributor to the Obama campaign). My "ideology," to the extent I can be said to have one, is that of attention to facts and logic (and, while I try to do my studious best, I don't always get it right). I recently attended a local Democratic health care reform neighborhood meeting and got lambasted by one angry partisan (who's still obviously irate that Hillary is not President). He basically loudly told me to shut up, implying that my ideas were of no worth because, as he petulantly noted, "you're not even a Democrat."
Whatever. They can carry on without me. I will find other ways to serve.
I have to admit at this point to a net leaning toward the Single Payer concept, potential warts and all. I do not see that happening anytime soon, however -- certainly not this year. We seem to be headed toward an inscrutably hyper-complex re-jiggering of our no-value-adding "health care" paper-pushing industry. I hope I'm wrong. ___
---- APPENDIX ----
While this post is essentially complete, I will add useful external resources from time to time.
"Moral Hazard"? We've bludgeoned that phrase senseless of late, most recently in the wake of the 2008-09 financial meltdown. Is the current economic crisis causally reducible principally to a widespread epidemic of chronic "moral hazard"? Or, is something more serious at play?
The phrase "moral hazard" is typically defined indirectly, by examples, and some of them are too narrow or simply absurd. I reach for my hardcopy edition of Black's Law Dictionary quite a bit, but in this case what I found there was less than optimal. A bit narrow:
moral hazard. 1. The risk that an insured will destroy property or allow it to be destroyed (usu. by burning) in order to collect the insurance proceeds. 2. The insured's potential interest, if any, in the burning of the property.
Black's has no direct entry for "moral hazard," it simply says "see 'hazard'," which is where I found the foregoing, which seems to me to speak more directly to one type of "fraud."
Let me take a stab at this. More broadly, "moral hazard" refers to the risk that people will engage in imprudent/risky or otherwise excessive behaviors to the degree they are indemnified from the consequences of their actions. In other words, the extent of your being "insured" against loss tends to make you susceptible ("hazard") to making riskier ("immoral"?) decisions.
I said sometimes "too narrow or simply absurd." Really? Well, I don't know about you, but I'm not about to drive recklessly just because I have good car insurance and medical policies. I'm not about to leave my house unlocked, or leave the house with the front door wide open simply because I have homeowners' insurance that extends to my furnishings and other possessions, and neither will I be negligent with respect to fire safety simply because I have structure "replacement value" coverage. For any rational actor, there are a number of "risk/hassle factor" considerations that trump any nominal face value policy obligations.
Other absurdities come to mind, some of them banal, others with more serious policy import. I have heard it laughably argued, for example, that protective sports equipment induces "moral hazard," i.e., that athletes will tend to engage in behaviors posing greater risk of severe injury knowing that they are "protected" by helmets and other padding.
Right. By that logic, the "safest" form of NHL hockey would be played in uniforms solely consisting of insulated Speedos. And, the "safest" construction worker is the one who foregoes safety glasses, a hardhat, and steel-toed boots in favor of flip-flops, Bermuda shorts, and a Tommy Bahama t-shirt.
There is also an athletic converse increasingly evident to anyone who closely watches college and pro football, too. I am seeing more and more receivers, running backs, and defensive backs who wear no padding whatsoever below the shoulder pads, given the hyper-competitive quest for that fraction-of-a-second acceleration edge.
It has been fashionable among some "conservative" policy commentators of late to assert that the "problem" with U.S. health care is that we are "overinsured," i.e., that health care insurance induces "moral hazard" by making us sloppy, excessive "consumers" of health care services. Quoting from Malcolm Gladwell's New Yorker article:
...in the past few decades a particular idea has taken hold among prominent American economists which has also been a powerful impediment to the expansion of health insurance. The idea is known as “moral hazard.” Health economists in other Western nations do not share this obsession. Nor do most Americans. But moral hazard has profoundly shaped the way think tanks formulate policy and the way experts argue and the way health insurers structure their plans and the way legislation and regulations have been written. The health-care mess isn’t merely the unintentional result of political dysfunction, in other words. It is also the deliberate consequence of the way in which American policymakers have come to think about insurance.
“Moral hazard” is the term economists use to describe the fact that insurance can change the behavior of the person being insured. If your office gives you and your co-workers all the free Pepsi you want—if your employer, in effect, offers universal Pepsi insurance—you’ll drink more Pepsi than you would have otherwise. If you have a no-deductible fire-insurance policy, you may be a little less diligent in clearing the brush away from your house. The savings-and-loan crisis of the nineteen-eighties was created, in large part, by the fact that the federal government insured savings deposits of up to a hundred thousand dollars, and so the newly deregulated S. & L.s made far riskier investments than they would have otherwise. Insurance can have the paradoxical effect of producing risky and wasteful behavior. Economists spend a great deal of time thinking about such moral hazard for good reason. Insurance is an attempt to make human life safer and more secure. But, if those efforts can backfire and produce riskier behavior, providing insurance becomes a much more complicated and problematic endeavor.
In 1968, the economist Mark Pauly argued that moral hazard played an enormous role in medicine, and, as John Nyman writes in his book “The Theory of the Demand for Health Insurance,” Pauly’s paper has become the “single most influential article in the health economics literature.” Nyman, an economist at the University of Minnesota, says that the fear of moral hazard lies behind the thicket of co-payments and deductibles and utilization reviews which characterizes the American health-insurance system. Fear of moral hazard, Nyman writes, also explains “the general lack of enthusiasm by U.S. health economists for the expansion of health insurance coverage (for example, national health insurance or expanded Medicare benefits) in the U.S.”
What Nyman is saying is that when your insurance company requires that you make a twenty-dollar co-payment for a visit to the doctor, or when your plan includes an annual five-hundred-dollar or thousand-dollar deductible, it’s not simply an attempt to get you to pick up a larger share of your health costs. It is an attempt to make your use of the health-care system more efficient. Making you responsible for a share of the costs, the argument runs, will reduce moral hazard: you’ll no longer grab one of those free Pepsis when you aren’t really thirsty. That’s also why Nyman says that the notion of moral hazard is behind the “lack of enthusiasm” for expansion of health insurance. If you think of insurance as producing wasteful consumption of medical services, then the fact that there are forty-five million Americans without health insurance is no longer an immediate cause for alarm. After all, it’s not as if the uninsured never go to the doctor. They spend, on average, $934 a year on medical care. A moral-hazard theorist would say that they go to the doctor when they really have to. Those of us with private insurance, by contrast, consume $2,347 worth of health care a year. If a lot of that extra $1,413 is waste, then maybe the uninsured person is the truly efficient consumer of health care.
The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd. We go to the doctor grudgingly, only because we’re sick. “Moral hazard is overblown,” the Princeton economist Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”...
___
Exactly. I wouldn't go the the doctor were it "free," absent some compelling need. To be sure, you can always come up with the iconic ("anecdotalism fallacy") examples of people who engage health care services irrationally, either simply out of a mundane neurotic social need for "attention," or impelled by the more serious psychiatric clinical condition known as acute "Münchausen syndrome." For example, during my first tenure with the Nevada Medicare QIO in the early 1990's, my Sup and I tracked the acute care hospitalization travels of a Medicare beneficiary who cleary suffered from Münchausen, showing up in Admitting at a different hospital every few days, frequently in far-flung states. We tracked this patient through close to 500 admissions across several years before the patient finally died (we suspected there was a good bit of chronic "drug-seeking behavior" going on in this patient's M.O.).
So, yes, of course, there will always be people who abuse any type of "entitlement" or "indemnity" system. Whether their sorry, isolated examples should drive policy is quite another matter, at least with respect to health care. But, that (rational health care policy) will be the topic of another in-depth post on another day.
BACK TO THE FINANCIAL WORLD
You might recall my citation of the Michael Milken quote in my prior "Tranche Warfare" post:
"In the gap between perception and reality,
there's money to be made."
An exemplar of true "moral hazard" (and worse) if ever there were one. Key to this idea is that of information asymmetry. If I am privy to critical relevant bargaining information and you are not, I can shape a deal to my advantage. Perhaps criminally so, in the extreme case (as Mr. Milken himself subsequently went on to learn up-close-and-personally via arrest, conviction, and incarceration).
The fundamental canon of classical free-market capitalism, we do well to recall, is that of asserting the optimal economic and moral utility wrought by the aggregation of individual actors operating in pursuit of rational, focused self-interest -- abetted in this aim by the availability of universal, relevant information transparency. All cards on the table, with best-case "win-win" outcomes consequently expressed by and objectively evident in the choices made by the participants thusly expressing their value preferences. Done. How's that for encompassingly succinct?
Right. Were it only the case.
Beyond the requisite implications of the views of one-time Junk Bond King-of-Decision-Data-Asymmetry Michael Milkin, I give you the considerable empirical works originating with and stemming from those of "behavioral economists" Kahneman and Tversky.
IRRATIONALITY, BORNE OF NAIVETE? OR PANDEMIC FRAUD?
Writer Daniel Gross, commenting on the current economic fiasco, recently asserted that "while there was plenty of alleged criminal activity—ahem, Mr. Madoff—law-abiding, respectable citizens who were operating well within the confines of laws and regulations racked up the overwhelming majority of losses. Everybody—individuals, companies, institutions, and governments—got caught up in the stupidity."
Really? "Overwhelming majority"? (Gimme a percentage: 80%? 83.47%? 90%?)
Consider a countervailing, and IMHO considerably more learned view:
Individual “control frauds” cause greater losses than all other forms of property crime combined. They are financial super-predators. Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away at trust. Endemic control fraud causes institutions and trust to become friable – to crumble – and produce economic stagnation.
White-collar criminology emphasizes incentive structures. A criminogenic environment is one that has strong positive incentives to engage in crime. While economists stress incentive structures, economics ignores criminogenic environments. The weakness comes from three sources. Economic theory about fraud is underdeveloped, core neo-classical theories imply that major frauds are trivial, economists are not taught about fraud and fraud mechanisms, and neo-classical economists minimize the incidence and importance of fraud for reasons of self-interest, class and ideology.
Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions, if adopted wholly, produce strongly criminogenic environments that cause waves of control fraud. Neo-classical policies simultaneously make control fraud easier and more lucrative, dramatically reduce the risk of detection and prosecution by maximizing “systems capacity” problems, and encourage crime by making it easier for fraudsters to “neutralize” the social and psychological constraints against deceit and fraud. Thus the paradox: neo-classical economic triumphs produce tragedy...
When Fragile becomes Friable: Endemic Control Fraud as a Cause of Economic Stagnation and Collapse,William K. Black, Executive Director, Institute for Fraud Prevention, IDEAS Workshop: Delhi, India, Financial Crime and Fragility under Financial Globalization, December 19-20, 2005 ______
Back to Poster Boy Bernie (Madoff) for a moment. Recall my observation in "Tranche Warfare" -
Consider this lament by best-selling author Geneen Roth, in her recent Salon.com article "I was fleeced by Madoff":
"I often asked Richard, the head of our feeder fund, how Madoff made such consistently good returns. Although Richard tried to explain it to me, it was clear he didn't know, either, because I'd leave our meetings still unable to explain to anyone else how it worked..."
To which I replied:
...maybe nobody understood things because there was nothing much rational to understand. I guess the one encapsulating and overarching operative word (extending far beyond the likes of Madoff) is "fraud." _____
[Dr. Black] was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and General Counsel of the Federal Home Loan Bank of San Francisco, and Senior Deputy Chief Counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Dr. Black has graciously sent me voluminous documentation detailing his views and those of equal industry cred and kindred viewpoint. I have gone through one yellow highlighter and a red pen by now on the printouts. I will cite his comprehensive work as this post continues.
It goes way beyond "mere" "moral hazard" and concomitant "stupidity." It goes to pandemic financial industry willful fraud.
______
Previously, citing an emblematic remark by Michael Milken, I alluded to "informational asymmetry" as a significant component of moral hazard. Returning to Dr. Black:
...Akerlof (1970) argued that lemons markets arose because of information asymmetry – the seller knew far more about the true quality of the goods than the buyer. Reading the article also makes clear that, though he does not stress this point, Akerlof knew that the seller in his examples was intentionally misrepresenting the quality of the goods in order to deceive (defraud) the buyer...
[op cit.]
Yes, but there is additional criminogenc inducement in the financial sector owing to "outcomes symmetry" -
Neo-classical economics had one additional theory about looting – but overwhelmingly interpreted it to exclude fraud. The theory was “moral hazard.” Moral hazard theory relies on asymmetry of outcomes [emphasis mine - BG]. Limited corporate liability is a common source of moral hazard. When a corporation is impaired the shareholders have a strong incentive for the firm to engage in control fraud and/or take high risks. The logic is that because of limited liability the creditors – not the shareholders – will bear the resultant losses should the fraud or excessive risks fail. Conversely, should the fraud or gamble succeed the shareholders will capture the great bulk of the financial gain. In 1993, however, virtually every economist assumed (typically, implicitly without any explanation) that S&Ls would engage only in ultra high-risk investments – not fraud. There was no basis for this assumption, as Akerlof & Romer note, fraud was a “sure thing” (1993: 5).
[op cit.]
I cannot but be with Dr. Black et al on this:
Because neo-classical theory is virulently hostile towards government and has no explicit theory of fraud and implicitly assumes that control fraud cannot be material, it repeatedly produces recommended praxis that, if adopted, would optimize the criminogenic environment for control fraud. When neo-classical thought triumphs societies adopt simultaneously many elements of this anti-governmental agenda. This produces waves of control fraud and crisis.
[op cit.]
Yes, and this is where we undeniably find ourselves today in the wake of more than a generation of overt, intellectually shallow, broad-brush Joe-The-Plumber hostility toward the sneering red-meat pejorative soundbite, "government regulation."
My personal ordinary-citizen take on all of this is that "moral hazard" comprises a perhaps necessary, but insufficient condition for for the execution of pandemic fraud. The tipping-point sufficient condition comprises the evisceration of financial law/regulatory enforcement. Again, Bill Black:
As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)
______
More than four years now. Not mere "moral hazard." Not mere "irrational exuberance." Not mere "stupidity." FRAUD. Unchallenged, until it was too late.
"No one was investigating Mr. Madoff at the end," Markopolos said.
"So he turned himself in before anybody, in a position of authority, began a serious investigation?" Kroft asked.
"That's typically how the SEC does it," Markopolos said. "They come in after the crime has been committed, they toe-tag the victims, count the bodies, and try to figure out who the crooks were after the fact, which does none of us any good. ["60 minutes"]
_____
Will we ever learn?
REKJAVIK RUMINATIONS: A "SHORT" STORY
Dr. Black posits widespread financial fraud as the driving force behind the now-global economic meltdown. The more I read, the more I have to agree. Consider the latest by Michael Lewis:
One of the hidden causes of the current global financial crisis is that the people who saw it coming had more to gain from it by taking short positions than they did by trying to publicize the problem. Plus, most of the people who could credibly charge Iceland—or, for that matter, Lehman Brothers—with financial crimes could be dismissed as crass profiteers, talking their own book.
"In the gap between perception and reality, there's money to be made."
Read the entire Lewis article. Yes, there has again been rampant stupidity, naivete, "irrational exuberance," susceptibility to "moral hazard." Without them, fraud cannot prevail.
Stupidity, naivete, and "irrational exuberance" are not criminal. Fraud is. And it should be dealt with promptly and firmly, irrespective of whether the perpetrators shower prior to or after the workday. ______
BILL BLACK UPDATE
February 24, 2009 (LPAC)--A senior regulator for the Resolution Trust Corp. during the 1980s savings-and-loan crisis demanded a "new Pecora investigation" and prompt bankruptcy receivership for U.S. banks, in a column on Huffingtonpost.com Feb. 23.
William K. Black, now a University of Missouri-Kansas City economics professor, forcefully laid down two principles for action in the column, entitled "Why Is Geithner Continuing Paulson's Policy of Violating the Law?" First, the S&L debacle of the 1980s established a financial regulatory system based on legal requirement of "prompt corrective action" by regulators to put insolvent banks into receivership quickly, before their drawn-out failure would explode the demands on the funds of the FDIC. U.S.-based banks, Black says, are collectively insolvent by a margin of at least $2 trillion, possibly much more. "Paulson's and Geithner's flouting of the law" will cost at least hundreds of billions in Federal credit, he says.
Black's second strong demand is for "a modern Pecora investigation.... If we were dealing with a crisis of airplane crashes and someone opposed studying the causes of the failures, we would (correctly) label him a lunatic.... It appears that only intense public pressure will suffice to overcome Congressional and Administration resistance to a Pecora investigation."
The collapse of the banking system explained, in just 59 minutes. Our crack economics team—the guys who explained the mortgage crisis, Alex Blumberg and NPR’s Adam Davidson—are back to help all of us understand the news. For instance, when we talk about an insolvent bank, what does it actually mean, and why are we giving hundreds of billions of dollars to rich bankers who screwed up their own businesses? Also, two guys go to New Jersey to look at a toxic asset.
Click the link to listen.
Nicely done, IMHO. Cuts past all the inscrutable jargon for a clear and fairly comprehensive lay-person-friendly survey of our 2009 economic circumstance. ______ CREDIT DEFAULT SWAPS UPDATE
The more I read, the more concerned and angry I become. Consider this:
Remember that the reason for shoring up AIG was its credit default swaps portfolio, in which it had written lots of unhedged guarantees on the cheery assumption that there was tantamount to no risk. Insurers are state-regulated in the US, and subject to a host country requirements overseas (and AIG has substantial foreign operations). Uncle Sam has no regulatory responsibility for AIG, but was hit up nevertheless as the most logical deep pocket that could prevent a financial train wreck...
___
The Fed’s moral hazard maximising strategy March 6, 2009 7:44pm
The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage. AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held. Of course the insurance was only as good as the creditworthiness of the party writing the CDS. When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down...
___
What are we to make of these "financial instruments"? The BBC aired a fairly clear and concise (and depressing) explanation back in October:
I found this AIG graphic online (click to enlarge):
"AIG Global Marine and Energy combines leading worldwide marine and energy insurance, risk management and loss control expertise with the unsurpassed financial capacity and global network of the AIG companies..."
Diff'rent day, diff'rent "ENRON," same egregiously reckless, fraudulent M.O., it would appear. Recall how Enron had all those myriad nominally "independent business units" eventually simply trading pieces of paper back and forth, booking each inter-subsid "sale" as "revenue"? Recall their self-congratulatory PR chest-beating regarding their unsurpassed financial/risk management acumen and "unsurpassed financial capacity," blah, blah, blah? Some eerie parallels here, I would think.
I return to my "Tranche Warfare" lament: We appear to have learned nothing.
We are being played for chumps. The Bush and Obama plans could only have been designed by failed bankers -- for their principal beneficiaries are failed bankers. We already know enough to confirm that the Bush administration made us the "fool" in the market by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee" program. The bankers that caused the crisis designed both programs. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation...
___
THE UNREGULATED CASINO
Credit Default Swaps Explained Posted Wed Sep 24, 02:14 pm ET
Posted By: Dirk van Dijk, CFA
"...If you buy a bond from, say, General Motors (GM), you are lending them money for a set interest rate for a specified length of time. You face two sets of risks in doing so. The first is that they go bankrupt and don't pay you back. The second is that interest rates rise and the bond falls in value (think of bond prices and interest rates as being on opposite sides of a see-saw).
With a CDS, you could go out and find someone who will insure against the default risk. For a given premium, the seller of the CDS will pay off on the GM bond if GM goes belly up. Now, if it was from a real insurance company, the insurance company would be regulated and would have to hold enough money in reserve to pay you off in case GM actually did go belly up. This is just like how a Life Insurance company has to have enough cash on had to pay off on your policy in case you die.
However, since this is an unregulated market, someone can sell you a CDS and blow the money in Las Vegas. In that case, if GM did go belly up, you would just plain be out of luck.
In the case of life insurance, there are strict limits on who can take out a policy on you. You can take out a policy on your own life, and on close family members. In some circumstances you can take out a policy on your business partner, but beyond that there are not many people you can take out a policy on. You have to have what is called an insurable interest; you can't just wander the halls of the hospital looking for people who are unlikely to make it and take out life insurance policies on them.
This is not true for the CDS market. You are perfectly free to take out a "life insurance policy" on GM, GE (GE) or any other firm that issues a bond, and you do not have to be holding the bond. You can even take out a "life insurance policy" on the synthetic garbage the Wall Street has been pumping out.
This ability to buy insurance on things that you have no insurable interest in transformed this market into a huge casino. It is totally unregulated...Regulation of this market was specifically prohibited under the Commodity Futures Modernization Act of 2001. That provision was slipped into the bill in the dead of night by our old friend Senator Phil Gramm of Texas -- now Vice Chairman of UBS (UBS).
People use this market to bet on the credit worthiness of companies, and often hedge funds will hold both long and short positions on the same underlying credit. For example (NOTE: figures are made up here, not a reflection of the actual creditworthiness of GE), the hedge fund might make a bet that it is worthwhile to get $200,000 up front and be on the hook for $10 million if GE defaults sometime in the next five years. Then after a few months, GE raises a bunch of capital which significantly strengthens its balance sheet and lowers the risk of default, so it can make a bet with someone else who would now be willing to take just $100,000 to bet that GE will not go belly up within then next five years. The hedge fund could have a perfectly matched book, so in theory they were totally indifferent if GE survives or not.
However, suppose that the person who they made the bet with goes bankrupt themselves and can't pay up. That hedge fund might then have a hard time paying its counter party. This is where the fear of "cascading cross defaults" comes in.
All this is to say that the CDS market has seen more growth than practically any market in the history of mankind. It is currently at over $62 TRILLION, up from under $1 Trillion a decade ago. It would not take a very big percentage of that market to fail to leave a very big mark on the world financial system..."
___
That is simply insane.
"COUNTERPARTY RISK"
Simply the risk that a signator to a contract will not be able to make good on a financial obligation imposed by the contract. AIG et al simply ignored the risk (recall from my "Tranche Warfare" post how AIG hubristically assumed it to be microscopically negligible, on the basis of their oh-so slick "proprietary quantitative risk model").
"Imagine walking down the street and finding a $100 bill. Wow, you say, this must be my lucky day. To take advantage of this good fortune you decide to go to the race track. After reading the racing sheet you place a bet in the 3rd race on the long shot 'Never Wins'. 'Never Wins' has finished last in every race that he has run. Also in the race is the favorite, 'Always Wins'. 'Always Wins' has finished in first place in every race that he has run. You still go ahead and make the bet because you strongly believe that today 'Never Wins' will win. The bet is made for $100 and the odds are 100 - 1, if he wins your payoff will be $10,000.
It turns out that on this day a number of other bettors feel the same way as you and they place the same identical $100 bet that you did. The track executives while monitoring the incoming bets notice the large size of 'Never Wins' bets but they do not change the odds as they are so confident that history is on their side. After all 'Never Wins' never wins and 'Always Wins' always wins.
At race time you take your seat. The bell rings and 12 horses bounce out of the gate but five of them run into each other and fall to the ground. Then four more horses fall into a puddle and stumble onto the ground. Out of the three horses remaining, one gets disqualified as his jockey falls off. There are now two horses left - your horse the 100 - 1 long shot 'Never Wins' and the great champion 'Always Wins'. 'Always Wins' is about 10 lengths ahead of 'Never Wins'. As they reach the final turn, a bird flies into 'Always Win's' eyes; he becomes temporarily blinded and stops running. About 10 seconds later, the long shot 'Never Wins' runs right by 'Always Wins' and crosses the finish line in first place. You jump up with excitement and are beaming with joy. Time to collect. You say to yourself, what were the chances of all of those things happening in one race?
As you approach the pay off window, you see a large crowd gathered around and they seem upset. They are yelling things and asking questions and pounding on the closed payoff window. As you get closer you find out that about 200 people placed identical $100 wagers that you had and they were looking to collect their $10,000. You quickly do the math in your head and realize that the total payoff the track has to pay is $2 million. You make your way to the window and see a sign that reads, 'No More Winning Tickets on 'Never Wins' Are Going to Be Paid.' You are angry, in shock and say to yourself what about my money? Who is going to pay off my winning bet? Why did the race track take so many long shot bets? What kind of risk controls did the track have in place? How can this happen? How can the track or the counterparty not pay up?
Something similar to this is going on in the financial markets today..."
___
Yep. Insane. No, criminal, actually. Now, Taleb might call "Never Wins'" victory a "Black Swan." Bill Black, OTOH, would probably say that the analogy falls a bit short, in failing to acknowledge the significant ongoing presence of outright, deliberate fraud. Dr. Black would say that the dangerously enervating global economic upshot was inevitable.
______
"WALL STREET'S WORST INVENTION EVER" The Market Oracle
I continue to try to fully wrap my brain around the Credit Default Swap. The following Martin Hutchinson article excerpt helps a good bit:
"...A $50 trillion credit derivatives market means there is $50 trillion of credit exposure on the dealer community, and no amount of collateral arrangements and fancy accounting can eliminate that fact. As for settlement, the dealers came up with an ingenious, but very un-foolproof scheme, whereby a mini-auction of the bankrupt credit would take place, so by buying a million or two in dodgy bonds you could corrupt the pricing of billions in credit default swaps that you held.
There are two other problems with credit default swaps CDS we didn't think of in the 1980s.
First, AIG stayed almost entirely on one side of the CDS market - selling credit protection - because it believed it could do so, book the premiums up-front as income, collect bonuses based on the total premiums each year and never account for the risks on the actual derivative contracts themselves. After all, the swaps were being AAA-rated mortgage backed bonds.
It would never have occurred to us in the 1980s that we could do this - we weren't sufficiently in control of our auditors!).
From the point of view of AIG, the company, this was extremely stupid, though it had its advantages from the traders' point of view. In the end, of course, it was all of us - the U.S. taxpayers - who were stuck paying the tab for a meal that others got to eat.
However, the second - and most serious - problem with credit default swaps is their potential use by short-sellers to cause bankruptcies.
Short-Sighted, Short-Selling In the so-called “rational markets” that are so beloved by the textbooks, this should theoretically be impossible. In the real world, however, it would be fairly easy to engineer - especially in a period of uncertainty, such as we have had since 2007 - for a large operator to spread rumors, push down share prices, and thus cause the market to panic.
Richard S. “Dick” Fuld Jr. , the former chief executive officer of Lehman Brothers Holdings Inc. (OTC: LEHMQ ), the former CEO of Lehman, is convinced this is what happened in Lehman's case , and it has undoubtedly been tried in several others.
Short-selling of shares was banned for several weeks after the Lehman bankruptcy , the reality is that neither short share sales nor share put options offer anything like the potential of credit default swaps to profit from a bankruptcy - particularly the bankruptcy of a financial institution whose debt is several times its share capital. Citigroup Inc. ( C ) and JPMorgan Chase & Co. ( JPM ), for example, each have around $1 billion in short positions outstanding in their shares. In the traded options market, Citigroup has a nominal $1.4 billion worth of put options outstanding while JP Morgan Chase has $2.1 billion - the cash value of those contracts will be a fraction of those figures.
What's more, there are undisclosed amounts of over-the-counter equity options written between dealers. However, the volumes of credit default swaps were recently $65.7 billion on Citigroup and $62.4 billion on JPMorgan.
Now think about the arithmetic. To sell a share short, you risk all your capital - there's no limit on how high a share of stock can rise. To buy puts, you deal only in a small market, and most puts are short-dated, so you would have to act quickly. With a CDS, however, you pay only an annual premium that is a small fraction of the principal amount involved, you acquire an asset that typically lasts several years, and you can deal in a market of over $60 billion - enough potential profit for even the greediest hedge fund.
Thus, credit default swaps make causing a “run” on a bank or investment bank enticingly profitable, with a profit potential that far outweighs the cost of undertaking the operation. Because the CDS market is much larger than the market for stock options - or even the share markets themselves - the product is a standing temptation to bad guys, and a danger to the banking system.
By now, it's easy to see why credit default swaps are Wall Street's worst invention.
Granted, these particular derivative securities are so far only second in total losses, behind subprime mortgages, but they lack the social purpose of the home loans for borrowers with poor credit, since those mortgages at least had the somewhat redeeming benefit of putting some folks in houses.
While there are a few CDS securities that genuinely hedge credit risk, almost all of them have no such benefit: They are gambling contracts, pure and simple.
For the taxpayer to bail out the victims with self-inflicted CDS wounds is as ludicrous as asking us to bail out the Las Vegas casinos..." ___
Yes, indeed, we have allowed our financial markets to become one huge global casino -- one essentially lacking any capital reserves with which to cover losses (thanks to increasing deregulation), one whose "card counters" were the insidious short sellers and kindred manipulators who wreaked utter havoc while lining their own pockets.
Fraud.
UPDATE: ANOTHER NICE VIDEO EXPLANATION: THE CRISIS OF CREDIT VISUALIZED
More to come. Back to some roots. Keynes saw the inherent problems in the "de-coupling" of the financial economy from the true production economy a long time ago.
EXECUTIVE SUMMARY, FOR THE SCROLL-KEY CHALLENGED OR OTHERWISE IMPATIENT
What productive, socioeconomically beneficial role might the venture capital industry play in the upcoming economic stimulus/recovery efforts? Read on... ______
It's 2009. You're laid off, furloughed, foreclosed on, or you know someone who is. You wonder where you'll fit into the grim new semi-socialistic post-post-industrial economy colloquially known as "this mess."You're astonished and possibly ashamed that mutant financial instruments dreamed up in your great country have spawned worldwide misery. You can't comprehend, much less trim, the amount of bailout money parachuting into the laps of incompetents, hoarders, and miscreants. It's been a tough century so far: 9/11, Iraq, and now this. At least we have a bright new president. He'll give you a job painting a bridge. You may need it to keep body and soul together...
Yes, and critics of all political stripes are slamming the perceived ad hoc, incoherent, shoot-aim-ready nature of the "federal bailout" to date (which, of course, largely predates the Obama administration, to be fair). The "TARP" program (Troubled Assets Relief Program) is increasingly viewed as the "WALP" program (Worthless Assets Lipstick Program), one seen as simply shoveling cover-your-ass taxpayer money, unrestrained, at many of the very financial industry miscreants responsible for the economic disaster within which we now struggle. Various of these entities are now deemed "too big to fail," and we simply must "socialize the losses" stemming from their aggregate venality and incompetence, lest we fall into a severe global economic depression.
As I write this, the salient details of President Obama's economic stimulus proposal are in heated flux, with liberals and conservatives alike sniping relentlessly from within their various ideological redoubts. Beyond respective partisan socioeconomic doctrines (e.g., ranging from the still widely disdained "socialist / command economy" position to that of the equally dubious "panacea of free enterprise"), much of the wrangling has a decidedly sophomoric "Perfectionism Fallacy" timbre (i.e., that your proposal appears to be in any way "imperfect" -- in my view -- renders it summarily nul and void; we need not even consider it).
All the predictable partisan sidelines sniping aside, it appears overwhelmingly likely that a significant quantity of (borrowed, of course) federal funds will in fact continue to be flushed forth into the economy in a frantic attempt to abate and reverse this extremely serious downturn. Will it simply comprise bailing out Wall Street and the bankers, along with iterative cash infusions into our geriatric rust belt industries? Or should we consider some additional alternatives?
A book I'm currently reading, Guy Kawasaki's "Reality Check," has triggered some thoughts in conjunction with a few other ideas that have crossed my mind recently. The other day I read this post by Ian Welsh at FireDogLake.com: "No Banks Means No Banking Crisis."
You don't need the current banks. If they won't lend, let them go under. If the Fed can lend to banks, why can't it lend directly to banks and consumers...
OK. But, there you run smack into the "socialist" de facto "nationalized banking" perceptual problem. Morever, much of the focus on bailout tactics for "unfreezing the credit markets" essentially assumes a ripple-effect return to more of status quo consumerism, however the funds get injected into the economy. Those on the right argue for even more tax cuts as the primary means of renewed economic stimulus, i.e., that "allowing taxpayers to keep more of their money will enable them to vote with their wallets and thereby reinvigorate the economy in the most efficient manner, as free markets respond to fill their needs." Newly installed Republican National Committee Chairman Michael Steele recently, on CNN:
STEELE: And first off the government doesn’t create jobs. Let’s get this notion out of our heads that the government creates jobs. Not in the history of mankind has the government ever created a job. Small business owners do, small enterprises do. Not the government. When the government contract runs out, that job goes away. That’s what we’re talking about here and those 2 to 4 million jobs that are projected? Won’t happen, trust me.
Well, putting aside the simplistic vapidity of that assertion (which, at its most naive, assumes that private sector jobs are permanent, notwithstanding voluminous recent evidence to the contrary), his observation does provide me an opening to proffer a potential "third way" as at least part of the recovery mix -- one that eschews both the tooth & claw Darwinian economic theories of the right and the We're-All-Victims-Who-Must-Be-Rescued silliness of the left.
I tend to agree that merely wheeling in truckloads of jump-start money anew to throw at the conventional economy simply amounts to papering over the problem and kicking the can yet again down the road. I am also dubious of the long-term viability of a "statist command economy wherein the government picks the winners and losers." However, the problem with the latter critical sentiment is that it ignores the reality of what has essentially become a megacorporate shadow government comprised of the "Too-Big-To-Fail" financial and industrial entities who've largely been "picking the winners and losers" (and overwhelmingly losers of late -- all while continuing to feather their own nests). The heartwarming Norman Rockwell-esqe notion of the lift-all-boats economic juice of entreprenurial small business Main Street -- with all due respect to RNC Chairman Steele -- seems to me vastly overblown, with regard to recent history anyway.
Is there a way out of this mess?
ENTER THE VC
So, how to spur the "New Economy" we will undoubtedly need for renewed and sustainable ecomomic growth? In a manner consistent with our "free market" values? In a manner that safely navigates the land mines buried in the mega-bureaucracy and equally bureaucratic megacorporate landscape?
Guy Kawasaki, author of the above-cited "Reality Check" and former Apple Macintosh "evangelist" (see "The Macintosh Way") is, among other things, an insightful and successful Silicon Valley "venture capitalist." Venture capital firms engage in "private equity" funding, taking stakes in companies they vet and fund. They are numerous; just a single cursory Google search yields 243 firms listed in a Google directory results page.
Perhaps the most reputable among them might be enlisted to serve a beneficial private sector role here (i.e., "public/private partnership") as federally contracted commercial recovery disbursement intermediaries, using their business model analytics and management expertise to evaluate, fund, and advise both promising startups and warranted expansion of existing companies. Some arguable upsides:
Direct (and secondary spin-off/multiplier effect) job creation, in contrast to the hoped-for but largely speculative, loosely-coupled flow-through effect of simply funding more "demand-pull" consumerism;
Much of the direct job creation will draw upon the depressingly vast and still rapidly growing pool of highly educated and experienced professionals of myriad stripes, for whom job searches have become largely problematic of late;
VC's have no interest in funding dubious entities (or bridges to nowhere). They prosper only by picking winners. Many of such potential "winners" will unfortunately remain unfunded should they have to rely on banks or personal resources, and traditional root sources of venture capital funds have been severely adversely impacted along with the rest of the economy.
Some arguable downsides:
Absent effective firewalls, this could end up being viewed as one more tangential avenue for de facto congressional "earmarks" and crony capitalism;
Relatedly, within the "service sector" of the economy, we have no need of new firms that do little beyond "churning paper" within a business model principally based on on fee income, irrespective of its ostensible ROI/ROE potential. Again, see "Tranche Warfare." We have by now beyond ample evidence of the dead-end upshot of that M.O.;
There is the potential chicken vs. egg / Catch-22 / bootstrapping problem, i.e., there actually has to be legitimate market demand, notwithstanding lingering residual romantic charms of the build-it-and-they-will-come aspect of "Supply Side" theory. Absent legit demand, you're wide open to political accusations of "make-work boondoggles" (painting bridges for Obama?) Still, smartly deployed pump-priming of sustainable, less environmentally adverse technologies and processes cannot be other than beneficial [**].
[**] To the final foregoing point, consider some of the findings in "The Weather Makers" by climate scientist Tim Flannery:
...the power and seduction of fossil fuels will be hard to leave behind. If humans were to look to biomass (all living things, but in this case particularly plants) as a replacement, we would need to increase our consumption of all primary production on land by 50 percent. We're already using 20 percent more than the planet can sustainably provide, so this is not an option...
In 1961 there was still room to maneuver. In that seemingly distant age, there were just 3 billion people, and they were using only half of the total resources that our global ecosystem could sustainably provide. A short twenty-five years later, in 1986, we had reached a watershed, for that year our population topped 5 billion, and such was our thirst for resources that we were using all of Earth's sustainable production.
In effect, 1986 marks the year that humans reached Earth's carrying capacity, and ever since we have been running the environmental equivalent of a budget deficit, which is sustained only by plundering our capital base. The plundering takes the form of overexploiting fisheries, overgrazing pasture until it becomes desert, destroying forests, and polluting our oceans and atmosphere, which in turn leads to the large number of environmental issues we face. In the end, though, the environmental budget is the only one that really counts...
...By 2001 humanity's deficit had ballooned to 20 percent, and our population to over 6 billion. By 2050, when the population is expected to level out at around 9 billion, the burden of human existence will be such that we will be using -- if they can still be found -- nearly two planets' worth of resources." [pp. 78-79]
We can choose to continue to drill, mine, cut down, and grind up the planet in pursuit of short-term business-as-usual, unevenly distributed consumerist comforts, but the day of tragically harsh mass reckoning draws ever closer. The lessons to be drawn from Jared Diamond's "Collapse" are compelling in this regard. There is no shortage whatsoever of constructive and remediative work to be done in support of a sustainable and broadly prosperous future for all of humanity. But, let's not kid ourselves that an unregulated "invisible hand free market" alone will suffice to insure its emergence. Recent economic history alone refutes that assertion.
To be sure, the U.S. comprises only ~5% of world population, and the responsibility of our federal government is constitutionally bound as a priority to address the "general welfare" of our own citizenry. However, we consume about 25% of the world's resources in the aggregate, and, given that our politicians never pass up an opportunity to extol the U.S. as "the greatest nation on earth," perhaps we might start acting like it in the area of sustainability leadership, for, in the end, humanity will survive or perish as a planet-wide species. ______
The foregoing comprise just a few of the obvious pluses and minuses. To be sure, the Devil would be in the details. A rational and transparent VC firm contracting process, along with a just, "win-win" compensatory structure would be critical. Moreover, policy questions would extend to issues such as
"U.S. firms, and U.S. citizen employees only?" (The public would simply not stand for taxpayer money used to further send jobs overseas);
VC firms typically take equity positions in their client firms, but VC underwriting that used taxpayer money would beg a significant question regarding equity stakes and compensation (although, some concerns might be mitigated by "skin-in-the-game" provisions, i.e., I'm not necessarily advocating using VC's to deploy 100% federal money. Perhaps VC equity/compensation incentives could be a function of the level of their relative proportions of federal and private core fund monies allocated to client firms.).
There is much more to think about, and to learn. This is simply one quick idea.
While I cannot claim any in-depth knowledge of the VC field, I am now periphatically acquainted with a couple of the Principals and Associates in the VC firm Weston Presido. A perusal of their "Portfolio page, Companies by Sector" reveals a breadth businesses wherein people actually make things and provide real services. I don't see anything that smacks of paper-flipping. Venture capital firms like this might well provide one constructive avenue for economic recovery and reorientation. I'm sure there are numerous other VC firm examples beyond this one company with whom I am marginally familiar.
New, productive economic "golden eggs" (at the risk again reaching for the worn-out metaphor) await discovery, and are sorely needed. The question, then, is how best to establish and nurture them.
Hundreds of promising UK technology companies are expected to fail this year because of a lack of funding, venture capitalists are warning, as they press the government to finance a £1bn ($1.4bn) fund of funds to support the sector.
The financial crisis has caused investment in venture capital funds to dry up since the collapse of Lehman Brothers.This leaves many venture capital-backed technology companies facing a cash crunch this year.
Richard Anton, partner at Amadeus Capital, one of the UK’s biggest venture capital investors said: “Starved of capital, companies will go to the wall or they will be forced to cut back too far, reducing jobs and losing competitiveness.
“This question is of great importance to the UK, as these are the fast-growing companies that will create jobs.”...
I've been mulling writing this post for a long time, watching with increasing -- but hardly surprised -- dismay all year as the economic tailspin has accelerated, its increasingly debilitating effects impacting the lives of more and more ordinary citizens worldwide who had no part in its creation. Now, the Bernie Madoff Ponzi scheme scandal seems as though it might represent the final nail in the coffin of financial system trust.
We seem to never learn.
I first learned the precise meaning of the "SDO" (Securitized Debt Obligation) during my 2000 - 2005 tenure as a subprime credit card risk management analyst (more on that shortly). Today, in addition to the SDO, we witness the additional dismal overlappingly-related acronym litany of the inscrutable and increasingly failed CDO ("Collateralized Debt Obligation"), ABS ("Asset Backed Security"), MBS ("Mortgage Backed Security"), SIV ("Structured Investment Vehicle") arrangements, many of which simply comprise the bundling and re-bundling of thousands upon thousands of debt contracts, sold to the various "Holders in Due Course" (i.e., referring to the staple fine print down in any loan agreement), and emergent as aggregate bonds subequently yet again chopped up into "tranches" paying dividends correlated with their respective maturities and risk-associated "agency ratings" (and all of these pseudo-sophisticated, inscrutable "instruments" increasingly "insured" by unregulated "Credit Default Swaps," the now largely unreedemable indemnity contracts responsible for the demise of the company that invented them, AIG). Today we find that all manner of these aggregated bonds, nothwithstanding even "AAA" ratings, are in fact either of distressingly indeterminate value or are in fact simply worthless. What I call "tranche warfare" has commenced, and will likely continue for 10 - 20 years as the circular firing squads of "unwind litigation" rage on.
No, we indeed seem to never learn. Enron? The "DotCom" crash? Long Term Capital Management? The Savings & Loan Meltdown? United American Bank? Drexel Burnham Lambert? Equity Funding Life? Just to cite a few.
"THE BEST THINGS IN LIFE ARE 'FEE'"
That was the oft-repeated sarcastic and cynical joke in executive circles at the privately held subprime VISA/MC issuer where I worked in risk management. My own initial supervisor, the hastily installed VP of Risk who'd been brought over from Collections, would candidly say in private that according our customers credit was like giving whiskey to alcoholics.
But, hey, it's legal. And, if we don't do it, someone else will.
"Churn & Burn"
I was hired initially in March of 2000 as a temp tech writer brought in to compose documentation for a pending OCC examination, and subsequently offered a permanent position as a "risk analyst" once they learned of my applied stats background and SAS programming fluency. When I arrived the operation was classic subprime "churn & burn," bordering on the "predatory" (some would say they'd crossed far over that border). Huge upfront and ongoing transaction fees charged to the financially desperate made it nearly impossible to lose money, heavy charge-off losses notwithstanding. Burn 'em up and churn new accounts.
At the outset of my tenure, the "Risk Department" was one effectively in name only, consisting of two holdovers of the prior risk manager's pro forma regime, one a quite saavy statistician, the other an econometrician -- both of whom had their eyes on the door.
There wasn't much "risk" to manage beyond those posed by nagging class-action litigation and pending consent decrees that were a familiar feature of the subprime domain (and cynically viewed simply as a manageable cost of doing business).
The new VP of Risk, though, set about to build an effective, "best practices" risk department, one eventually staffed by a platoon of astute MBAs and statisticians recruited from far and wide, one whose subprime credit risk modeling and portfolio management and operations analytics became the envy of the sector. The bank's portfolio and profits grew steadily and impressively, and charge-off losses declined impressively. We sailed through our regulatory examinations. The OCC eventually characterized us as "Best-in-Class." While most other subprime players crashed and burned during this period (including the largest issuers such as Providian and NextCard), our little bank had moved away from the reckless and predatory and into "near-prime" marketing territory.
2004: CHURN & BURN REDUX
A large Wall Street "Bad Paper" firm with whom we'd been doing business on our charged-off accounts bought majority control of the bank in 2004.
"Bad Paper" companies traffick in debt that has been deemed uncollectible by its current owners and is written off their balance sheets -- hence "charged off." You may default on a loan, but down in the fine print is the staple loan contract provision that the account still represents an "asset" which can be sold to a "holder in due course" to whom you are subsequently legally accountable. Bad paper typically trades at between a fraction of a cent to several cents on the nominal dollar, depending on the buyers' assessed "quality" of its eventual collectibility.
My subsequent VP of Risk (my original Sup went back to Collections) explained the prospective M.O. expected by the new owners. In a word, "securitization."
Some E-Z round numbers readily illustrate the concept. Assume 100,000 new VISA accounts booked, each with a credit line of $1,000 (remember, this is subprime; a thousand dollar unsecured credit line was considered radical). My own portfolio studies had shown that our credit-hungry customers typically maxed out their cards within four to five months. So, in short order you have a pool of accounts representing a nominal "asset" present value of one hundred million dollars (100,000 accounts x $1,000 each). Now, some of these accounts will eventually go bad and charge-off, while others will perform acceptably ongoing (providing continuing fee and APR income), with many "graduating" to even higher lines (every dollar of which will get used). Securities traders, then, bid on the estimated blended risk-adjusted future value of blocks of such accounts bundled up into "SDOs" -- our "Securitized Debt Obligations."
You take the proceeds from the SDO sale and plow it back into booking another 100,000 accounts, etc, etc, etc. Lather, Rinse, Repeat. Once you've sold the accounts, you, the issuing bank, no longer have to "reserve" (with set-aside capital) against future losses stemming from any of them that subsequently charge off. Someone else now owns that risk (and, the retail customer is typically clueless; they get the same billing statement month after month, and are simply unaware that your bank is now simply administering the account that someone else owns. For a recurring fee, of course.).
You see where this is going?
THE WHOLESALE, INCREASINGLY UNREGULATED COMMODITIZATION OF RISK
Bothered by the entire dubious ethic of subprime lending and this incipient new M.O. of feverishly shoveling risk out the door and onto the markets, I quit in February of 2005 to move on to more socially meaningful work (electronic medical records consulting for the Medicare QIO).
Whereas the market bid/sale values of my bank's SDOs would in large measure be a function of the astuteness of our proprietary credit risk scorecard and portfolio risk management models (these were, after all, aggregate financial products secured solely by the signatures of the individual "obligors," the credit card holders), such fastidious diligence would not be the case as the securitization frenzy metastasized to other lending domains -- most notable and obvious among them (now!) the mortgage arena. By now the exemplar stories of the "instant approval, no income half million dollar loan" are legion.
The Best Thing In Life Are FEE! Writ large; with the myriad origination et al fees, of course, written into -- and paid immediately right back out of (to the profiteers) -- the loans going right out the door.
...By 2004, Wall Street investment banks were discovering how to turn consumer debt into a moneymaker, churning out bond-like securities backed by mortgages and other assets. Credit-default swaps helped attract institutional investors to these mind-bendingly complex deals, known in Wall Street jargon as collateralized debt obligations, or CDOs.
CDOs defined a revolution in corporate finance called "securitization." Wall Street saw any income stream as a candidate for securitizing: mortgages, credit card payments, car loans, even student loans. The investment banks would bundle these loans, and the monthly payments that came with them, into a new security for investors looking for steady but higher yields than Treasurys or corporate bonds.
CDOs had been around for years, but the real estate boom suddenly made mortgages one of the hottest investments on Wall Street. The mortgage industry turned into the equivalent of a giant assembly line, lubricated by fees from one end to the other. New lenders sprung up by the month, offering loans to first-time buyers as well as existing homeowners who wanted to move up to more square footage. For people with shaky credit, the industry provided subprime loans, with higher rates that some homebuyers now cannot repay.
Banks packaged and resold the mortgages in pools, which became the basis for mortgage-backed securities. Wall Street scooped them up. The CDO market took off, ballooning to $551 billion issued in 2006 from $157 billion in 2004.
The CDO structure depended on the concept of layered risk. The securities in the "super senior" top tier were considered low risk and attracted the highest ratings. In return for their safety, these bonds paid the lowest interest rate. The reverse was true at the other end: The lower tiers absorbed the first losses in the case of loan defaults. For accepting extra risk, investors in these tiers earned a higher interest rate.
Financial Products made its money by selling credit-default swaps only on the super-senior tier. It seemed a safe bet: [AIG Financial Products President Joeseph] Cassano once defined super senior as the portion of the deal that was safe even "under worst-case stresses and worst-case stress" assumptions.
The mortgage-backed CDOs were also thought to be safe because of the geographic diversity of the underlying loans. Surely, investment bankers reasoned, people in different parts of the country would not default on their home loans at the same time. The real estate market was strong and showed no sign of faltering.
Financial Products executives said the swaps contracts were like catastrophe insurance for events that would never happen...
...The current subprime crisis has been doing wonders for the reception of any ideas about probability-driven claims in science, particularly in social science, economics, and "econometrics" (quantitative economics). Clearly, with current International Monetary Fund estimates of the costs of the 2007-2008 subprime crisis, the banking system seems to have lost more on risk taking (from the failures of quantitative risk management) than every penny banks ever earned taking risks. But it was easy to see from the past that the pilot did not have the qualifications to fly the plane and was using the wrong navigation tools: The same happened in 1983 with money center banks losing cumulatively every penny ever made, and in 1991-1992 when the Savings and Loans industry became history.
It appears that financial institutions earn money on transactions (say fees on your mother-in-law's checking account) and lose everything taking risks they don't understand. I want this to stop, and stop now— the current patching by the banking establishment worldwide is akin to using the same doctor to cure the patient when the doctor has a track record of systematically killing them. And this is not limited to banking—I generalize to an entire class of random variables that do not have the structure we thing they have, in which we can be suckers.
And we are beyond suckers: not only, for socio-economic and other nonlinear, complicated variables, we are riding in a bus driven a blindfolded driver, but we refuse to acknowledge it in spite of the evidence, which to me is a pathological problem with academia. After 1998, when a "Nobel-crowned" collection of people (and the crème de la crème of the financial economics establishment) blew up Long Term Capital Management, a hedge fund, because the "scientific" methods they used misestimated the role of the rare event, such methodologies and such claims on understanding risks of rare events should have been discredited. Yet the Fed helped their bailout and exposure to rare events (and model error) patently increased exponentially (as we can see from banks' swelling portfolios of derivatives that we do not understand).
Are we using models of uncertainty to produce certainties?...
"Free money...Just put it on your books and enjoy the money."
For months, several executives at AIG Financial Products had pulled apart the data, looking for flaws in the logic. In phone calls and e-mails, at meetings and on their trading floor, they kept asking themselves in early 1998: Could this be right? What are we missing?
Their debate centered on a consultant's computer model and a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company's corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.
The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations. As AIG's top executives and Tom Savage, the 48-year-old Financial Products president, understood the model's projections, the U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events that would require Financial Products to cover defaults.
If that happened, the holders of swaps would almost certainly be wiped out, so how could they even collect? Financial Products would receive millions of dollars in fees for taking on infinitesimal risk.
The firm's chief operating officer, Joseph Cassano, had studied the model and urged Savage to give the swaps a green light.
"The models suggested that the risk was so remote that the fees were almost free money," Savage said in a recent interview. "Just put it on your books and enjoy the money."
Initially, the credit-default swaps business would amount to a fraction of the half-billion dollars in Financial Products' revenue that year. It didn't seem to them like a major decision and certainly not a turning point.
They were wrong. The firm's entry into credit-default swaps would evolve into insuring more volatile forms of debt, including the mortgage-backed securities that helped fuel the real estate boom now gone bust. It would expose AIG to more than $500 billion in liabilities and entangle dozens of financial institutions on Wall Street and around the world.
When the housing market tanked, a statistically improbable chain of events began to unfold. Provisions in the contracts kicked in, spurring collateral calls on swaps linked to $80 billion in questionable assets, requiring the firm and AIG to come up with billions of dollars in cash. They scrambled for almost a year to stave off the calls, but there were too many deals with too many counterparties.
In September, the Bush administration concluded that AIG's position at the nexus of the deals meant that it could not be allowed to fail, triggering the most expensive rescue of a private company in U.S. history. So far, the government has invested $152 billion in its efforts to save AIG. Federal investigators are sifting the carnage.
Credit-default swaps exemplify the contradictions of modern finance. At a basic level, they serve as insurance, but they aren't regulated as such. They have allowed companies to free up untold amounts of capital that otherwise would be tied up as collateral for loans. They were sold both to reduce risk and, in some cases, to give clients room to take on more risk -- a key component to making money on Wall Street.
But in the end, neither the buyers nor sellers truly understood the enormous risks they were creating. Anyone could sell such a swap, and anyone could buy one, even if he had no stake in the transaction. Some buyers used them to bet against failing companies, prompting a debate among state regulators about whether this type of swap was a form of gambling...
I have a couple of observations. First any empirically-based model purporting to assure "a 99.85 percent chance of never having to pay out" (or any "probability of x") is [1] an estimate (containing a variance component too often ignored or otherwise dismissed), and [2] is beholden to a host of implicit assumptions, chief among them -- beyond the overtly mathematical/statistical -- that "past remains prologue." That the "computer model was based on years of historical data about the ups and downs of corporate debt" could in fact turn out to be irrelevant, for an econometric/risk-cost/benefit model may well be significantly adversely impacted (perhaps fatally so) by both unexamined or poorly understood evolving structural changes in the aggregate economy and (relatedly) large-scale policy changes within the financial regulatory environment.
Another note regarding the "99.85 percent chance" assertion. I cut my professional teeth in the 1980's in a forensic environmental laboratory in Oak Ridge. In that world, if you put down for the record a quantity such as "99.85," you had better be able to demonstrate to regulators, auditors, and attorneys your empirical ability to distinguish between the bracketing "0.84" and "0.86." Otherwise, you're just naive or blowing smoke. This is known in science as "significant figures rounding," the specs of which were typically written into our contracts, for every analytical parameter.
Unless you've been living in a cave on a South Seas Island for the past decade, you cannot but know what has been the "conservative" political attitude regarding all manner of "regulation" of late. The unfolding upshot of this most recent, pandemic de-regulatory frenzy seems to worsen by the day. The M. Wuerker cartoon below from Politico sums our current debacle up nicely (click the image to enlarge if you wish).
"IT'S ALL JIMMY CARTER'S FAULT"
Depending on your ideological perch location along the political fence line, you can fill in the blank with your favorite whipping boy: "It's all _______________'s fault." (Jimmy Carter, Ronald Reagan, Bill Clinton, Phil Gramm, Alan Greenspan, George W. Bush, etc)
...While the punch bowl -- Alan Greenspan's extremely low post-Sept. 11 interest rates -- was being held out, few complained about cheap loans and doubling home values. Now all of a sudden everything is the fault of Wall Street malfeasance.
I have little doubt that some, if not many, cases of malfeasance will emerge. But what we conveniently neglect is the fact that much of this crisis was brought upon us by the good intentions of good people.
For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac -- which in turn pressured banks and other lenders -- to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity...
While there can indeed be many necessary yet insufficient conditions that can contribute to an eventual conflagration, to be fair, it must be pointed out that Carter's CRA was enacted more than 30 years ago, and, given that, it begs the question to Mr. Krauthammer of just how things could have remained so manageable for so long?
Critics on the left flew all over this type of finger-pointing by the right: 'yeah, if only those undeserving poor hadn't been accorded opportunities for home ownership, we wouldn't now be dealing with this mess.'
The simple truth is that our current mess is not "all" or even primarily any one person's fault, but rather the creeping cumulative result of an increasingly widespread series of deregulatory policy changes, mostly across the past decade, and, if there can be said to be the match that lit the blaze, it has to be the now-infamous 2004 SEC "Net Capital Rule Change."
...Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”...
...The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves [emphasis mine- BG].
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly...
This was an incendiary two-fer: essentially taking the cuffs off of "leveraging" by allowing the Wall Street investment firms to self-report their own modeling estimates of their risk exposure! All part of the GW Bush-era deregulation-uber-alles policy religion. Well, we've seen how well internal, proprietary risk modeling worked for AIG. ______
THE OPIUM ECONOMY (Originally posted back in September on my music blog)
Below, NASA satellite image just taken of the U.S. economy.
Other Peoples' Irresistibly Undervalued Money.
My main 401k account netted about a 16% return in 2006 (16.2% to be exact). Not bad, 'eh, A 16% ROI? ("Return On Investment") Can't complain about that, really, given that my fund allocation was relatively conservative in the aggregate.
Well, consider that, also at the time, assuming you had a decent FICO score, you could borrow OPM (Other Peoples' Money) at around 8%.
So, hmmm, lessee, I take $100,000 of my direct liquid asset money and invest it in a fund or stock that returns $16,000 in a year (16%), I'm pretty pleased, if naively so.
But -- what if I borrowed $90,000 at a cost of 8% APR interest and threw in only $10,000 of my own cash? The OPM cost me $7,200 (90 grand at 8%), which I have to deduct from my $16,000 gross return. So, my net return after paying off the loan is $8,800.
Well, effectively, my ROI is my $8,800 net profit divided by the ten thousand of my own dough that I put at risk, or 88% -- 5 and a half times the ROI I'd have gotten using my own cash (and, during the period, I still had unrestricted use of my remaining 90 grand for other things).
Hell, why not borrow it all, (hey, while that might be illegal, nobody's apparently paying attention) and make a clean $8,000 for having put zero of my own dollars at risk? My lender gets a mundane ROI of 8%, while my "net" return is truly off-the-scale, given that I've incurred no risk whatsoever. Free money.
It's called "leverage." By astutely "working the spread" between what you pay for OPM and what you can earn from OPM, you can accrue up to infinite multiples of profit relative to the prospects of the prudent chump risking solely his or her own cash in search of maximal return.
Now, at the macroeconomic level, when the absolute OPM sums tossed about get really large -- e.g., in the multiple nine figures range or larger -- the spread can be much, much thinner and still provide acceptable nominal net profits, replete with those dizzying brokerage and bank CEO compensation packages.
It all works wonderfully well.
Until it no longer does (i.e., once the ROI goes negative, as it eventually must, just as is the inevitable case of one slavishly habituated to real opium).
The latter is essentially where we are in the fall of 2008. The OPIUM supply is gone, and is unlikely to return for quite some time.
"My lender gets a mundane ROI of 8%"?
Why, you ask, would a lender even do that? Well, [1] the lenders are pretty much recursively using OPM as well, so they got no substantive skin in the game, and [2] as soon as the ink is on the downside of damp on your loan contract, they're gonna sell the loan to someone else! Break off some nice little setup and transaction fees for your trouble, cha-ching, and wash your hands of the long-term risk. The phrase is "securitization pooling," i.e., take a bunch of loan contracts, bundle 'em all up as a "security," and push 'em out on to Wall Street.
Someone else then becomes (for a little while) the proud owner of an "asset." Against which -- guess -- they too can borrow. Lather, Rinse, Repeat.
And so it goes.
Until it no longer can. Music stops, someone is left without a chair. Well, actually, many, many people are left without chairs.
A circumstance explicitly extant as of September 22nd, 2008. The logical, inexorable upshot of the "de-regulation uber alles" mentality of the past decade. ______
And that's just assuming a 2% cost of borrowed money. I know a young investment speculator -- a former co-worker and an otherwise bright analyst -- who has routinely taken credit card cash advances (which typically have APRs ranging from 18% to 30%) to help leverage his real estate and stock deals!
To repeat: "The thing that made leverage so seductive to the investment banks, though, is what you can see on the right-hand side of that table. Even a small gain can be magnified, many times over, to turn a modest return on investment into a substantial return on equity. And at the end of the day, it was the return on equity that paid the investment bankers' obscene bonuses..."
The article continues:
"With those perverse incentives, it starts to get pretty obvious why we've floated from bubble (tech stocks) to bubble (housing) to bubble (commodities) over the past decade. When even small real gains can be translated into gargantuan paydays through leverage, what an asset is really worth matters far less than what direction it is moving."
"Thanks to that effect, investment bankers were willing to pay too much for assets because they could leverage their way to tremendous personal gains. That was a neat trick while it worked. When the credit bubble itself burst, however, it forced them to unwind the bets they had made with all that cheap leveraged cash..."
Yep. No more OPIUM.
For now anyway -- until the next bout of financial regulatory amnesia sets in to spur the next bubble/fraud frenzy. Will we ever learn?
"The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."
"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."
That was 2007. Boy was he ever right. ______ A PARTING THOUGHT ON 'LEVERAGE'
If I put down $10,000 cash on the purchase of a $200,000 home, I am "leveraged" at a ratio of 19:1. Similarly, if my wife's cousin Scotty plops down five grand on the purchase of a new $100,000 John Deere tractor for the family farm in northern Alabama, he too is equivalently leveraged. Yes, of course, without both short and long-term credit leveraging, our economy simply could not function.
But, prudently leveraged purchases of tangible hard assets such as housing and productive capital business equipment (rationally vetted and priced for the risk of loan default) are a far cry from the wholesale unsecured and increasingly unregulated leveraging of inscrutable (and ultimately intangible) iteratively aggregated-disaggregated-reaggregated debt instruments such as the built-for-flipping-and-fees securities that have now put our economy in the ditch.
ONE INTERESTING IDEA
Obviously, coherent financial system "regulation" is going to have to come back in vogue. One intriguing tax policy tactic as part of the regulatory mix may well have merit. As proffered recently by NY Times Columnist Bob Herbert:
...The economy is in a precipitous downturn and no one, on the left or right, is advocating tax increases that would jeopardize a recovery...
...At some point, however, someone is going to have to talk about raising revenue. The dreaded T-word is going to come up: taxes.
Well, there’s a good idea floating around that takes its cue from the legendary Willie Sutton. Why not go where the money is?
The economist Dean Baker is a strong advocate of a financial transactions tax. This would impose a small fee — ranging up to, say, 0.25 percent — on the sale or transfer of stocks, bonds and other financial assets, including the seemingly endless variety of exotic financial instruments that have been in the news so much lately.
According to Mr. Baker, the co-director of the Center for Economic and Policy Research in Washington, the fees would raise a ton of money, perhaps $100 billion or more annually — money that the government sorely needs.
But there’s another intriguing element to the proposal. While the fees would be a trivial expense for what the general public tends to think of as ordinary traders — people investing in stocks, bonds or other assets for some reasonable period of time — they would amount to a much heavier lift for speculators, the folks who bring a manic quality to the markets, who treat it like a casino.
“It raises money in a way that comes primarily at the expense of speculation,” said Mr. Baker. “The fees would be a considerable expense for someone who is buying futures, or a stock, or any asset at 2 o’clock and then selling it at 3. The more you trade, the more you pay.
“For the typical person holding stock, who is planning to hold it for a long period of time, paying the quarter of one percent on a trade is just not that big a deal.”
The fees, though small, could amount to a big deal for speculators because in addition to the volume of their trades they often make their money on very small margins. Someone who buys an asset and then sells it an hour later at a one percent appreciation might feel quite pleased. He or she would be less pleased at having to pay a quarter-percent fee to purchase the asset in the first place and then another quarter percent to sell it.
This, according to Mr. Baker, is part of the beauty of the transfer tax; it tends to curb at least some speculation. “It’s a very progressive tax,” he said, “that discourages nonproductive activity.”...
I like it. Don't call it a "tax," simply call it a "fee." After all -- recall? -- "the best things in life are FEE!" ______
"UNWIND" PROBLEMS: WHO ACTUALLY NOW OWNS THIS CRAP DEBT?
Last May (2008), CBS "60 Minutes" ran a segment entitled "House Of Cards: The Mortgage Mess" illustrating some of the problems emerging in the wake of the securitized-mortgages meltdown. Well worth watching.
Salient transcript excerpt:
...The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them [emphasis mine -BG].
"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.
The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.
"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says [Jim Grant, the editor of "Grant's Interest Rate Observer" -BG].
"How much on the dollar, do ya think?" Kroft asks.
"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.
Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."
Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."...
Yep: "Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them."Exactly. Who can be determined to be the sole, clear-titled "holder in due course" regarding any single debt contract bundled within these pooled "securities" in such circumstances?
More recently, the seemingly intractable legal "unwind" problem is further highlighted in an MSNBC article:
'Angel' of foreclosure defense bedevils lenders Florida attorney trains hundreds of others to help troubled borrowers By Mike Stuckey Senior news editor updated 3:39 a.m. PT, Fri., Dec. 19, 2008
[April] Charney, a lawyer with the Jacksonville Area Legal Aid agency, is quickly developing a national reputation as a champion of homeowners facing foreclosure and a serious adversary for those attempting to take possession of those homes. Her encyclopedic knowledge of contract law, debt-collection practice, securitized mortgages, the trusts that hold them and the agreements that govern the trusts have put her at the forefront of the rapidly expanding specialty of foreclosure defense...
...Charney said her crusade was born out of experience. Over and over again, she said, in her cases and those of other attorneys she met, she found sloppiness, fraud and outright criminality in the nation’s mortgage lending industry. Regardless of why her clients have been unable to pay their mortgages, she maintains that nobody deserves to lose a home to the unethical and illegal foreclosure procedures that she claims are now being used by many banks and loan servicers...
...A University of Miami law school graduate who spent years in private practice in Arkansas and worked in other legal aid offices before coming to Jacksonville four years ago, Charney said she became an expert on lending law when her caseload of foreclosures increased and she began to notice a number of disturbing trends that have yielded her key defense strategies.
First, because of the way mortgages have been securitized, it’s often unclear who actually owns the debt, she said. “What we see is that systematically, the originating lenders only pledged these loans and didn’t actually transfer them” to the trusts that are supposed to hold them and issue the securities, she explained.
But only the true debt owner has the legal standing to be a plaintiff in a foreclosure, she continued. “That’s first-year law school stuff. If you’re Joe and the debt doesn’t belong to you, it belongs to Marjorie, then Marjorie better be in court, not Joe. Don’t come in as Joe and tell me you have the right to be there when you know full well you don’t.”
Sketchy documentation Yet, time and again, loan servicers and others have sought plaintiff status, often by using affidavits stating that the actual notes had been lost, she said. “I’ve seen paperwork filed by lawyers saying, ‘We anticipate assignment’” of the debt, she said with a scoff.
And the loan originators can’t appear in court and claim the right to foreclose because they would be in violation of securities laws for not transferring the loan to the trust when they were supposed to, she said.
Making an issue out of the actual ownership of the securitized title might strike some as a shameless stalling tactic aimed at abetting a debtor who, after all, owes the money. But Charney said that if such basic legalities aren’t adhered to, a homeowner could pay his or her way out of a foreclosure jam only to wind up in another when a new plaintiff emerges claiming to own the debt. She described cases in which homeowners have been sued for foreclosure by two different trusts, each claiming they owned their house, and cases where trusts have been sent documents on the same case by two different servicers...
It should be (but apparently is still largely not) A Blinding Glimpse Of The Obvious that financial and market affairs have to be intelligently regulated. Such regulation can take (peaceably) only either the form of [1] rational and coherent proactive laws and their extensible administrative regulations, or, [2] years of en masse retroactive litigation (that usually does little more than provide decades of continuing employment for tort laywers). ______
REWIND: AN '80'S RUMINATION
I am acutely reminded of the Reagan-era S&L debacle. President Reagan also famously hated government regulation, and his administration did its best to unleash unfettered "free market" forces across the entire economy, including especially the financial domain. Savings and Loan institutions ("S&L's") previously comprising a relatively sleepy segment of the financial sector, had once been known as "The 3-6-3 Club" -- i.e., buy money at 3% (deposits), rent it back out at 6% (mostly residential mortgage loans), and hit the first tee at the country club golf course by 3 pm.
This changed dramatically under deregulation. First, S&L ownership rules changed to permit self-interested parties such as residential and commercial real estate developers to gain control of S&L's. Second, S&L's were permitted to traffick in "brokered deposits" -- basically bundles of deposits traded back and forth in search of the highest short-term return. It wasn't long before the phrase "$100k hot blocks" became a financial commonplace.
In essence, "hot blocks" were in many ways similar to today's bundled debt securities (despite being "liabilities" rather than "assets"). The "$100k" part of the moniker referred to the $100,000 federal deposit insurance ceiling backed by the now-defunct FSLIC (Federal Savings and Loan Insurance Corporation, similar in government deposit insuror function to that of the FDIC that subsequently inherited it).
Freed from regulatory oversight, S&L's funded all manner of dubious lending and development using monies ultimately backed by the unwitting taxpayers in the event of default.
In the end, it did not matter if egregiously unneeded housing tracts, shopping malls, and office parks got built by S&L owner/developers and their cronies. Everyone dined euphorically on massive buffett feasts of deal and fee money while it lasted. And, then the government finally had to step in to bail things out once the wheels came off.
Sound familiar?
A PERSONAL S&L CODA
Living in Knoxville at the time, I was periphatically personally acquainted with the Tennessee banking brothers Jake and Cecil H. Butcher, Jr. Jake was the President of United America Bank (UAB), whose breathtakingly rapid collapse was at the time the largest bank failure in the nation (among other things, he'd "bet the farm" on the 1982 Knoxville World's Fair. It was a really bad bet).
Brother Cecil parlayed his initially tiny Savings & Loan "City & County Bank" (C&C Bank) into a highly leveraged (and short-lived) financial empire using a classic Reagan era no-regulation M.O. -- buy voting control of an S&L with borrowed money, use your new Board control to authorize buying yet another institution, disperse loans from the newly acquired entity... Lather, Rinse, Repeat.
Beyond the recursive funding of S&L takeovers and sweetheart conflict-of-interest developer loans was, to me, anyway, an interesting and telling aside.
In the late 1970's I had founded two Tennessee private corporations, one a Sub-S, the other a "C-Corp," filing all of the setup paperwork myself with the IRS and the Corporate Filings Office of the TN Secretary of State in Nashville. Among the TN attestation requirements was that your corporation had at least the minimum requisite $1,000 of tangible startup assets (no subjective, nebulous, and overstated-value "Goodwill" or other malarkey). I was scrupulous with respect to adherence to the startup asset requirements
In the wake of the UAB and C&C failures, it came to light that more than two hundred TN corporations, all of whose principals were Butcher kin, all had the same West Kingston Pike address in W. Knoxville -- that of a C&C Bank building. Moreover, all of these no-capital-asset paper shell corporations had been accorded -- guess -- six and seven-figure unsecured loans from the various C&C banks.
NO ONE in the TN Secretary of State's office found this curious at the outset?
I'm not sure how much of any of these fraudulently dispersed funds were ever recovered, but it's likely that a good bit of the money disappeared forever into the financial ether.
And, here we are today, almost 30 years later, and we seem to have learned nothing.
CURRENT DAY MICRO-MICRO MADOFF CASE IN POINT
While Google-searching "Madoff" news developments the other day I ran across this story by Keriann Lynch of The Flathead Beacon:
An Oregon-based firm specializing in tax-deferred land deals collapsed last month after using customers’ money to fund its owners’ endeavors, leaving at least one local man out more than $1 million and affecting untold more here.
Summit 1031 Exchange closed its doors and filed for Chapter 11 bankruptcy in late December after announcing it has only about $13 million on hand of the $27 million it owes its clients. Summit had branch offices in eight western cities, including Kalispell.
The shortage, according to a posting on the company’s Web site, is the result of loans Summit made to Inland Capital Corporation, a company owned by the same people who own and run Summit. Inland, in turn, loaned the money to various individuals and companies that were involved in real estate investments located primarily in central Oregon.
“They’re supposed to be a trustee and they lent themselves money, which is not kosher, and now they don’t have it available for depositors,” Rolland Andrews, a local real estate professional, said. Andrews is one of Summit’s largest creditors; the company owes him about $1.1 million.
“It’s basically the same thing the guy (Bernard Madoff) they just handcuffed and had all over the front pages did,” he added...
Yeah. I rest this part of my case. We've learned nothing. Maybe things will change for the better with a new administration. Maybe. ______
"IN THE GAP BETWEEN PERCEPTION AND REALITY, THERE'S MONEY TO BE MADE"
"I often asked Richard, the head of our feeder fund, how Madoff made such consistently good returns. Although Richard tried to explain it to me, it was clear he didn't know, either, because I'd leave our meetings still unable to explain to anyone else how it worked..."
Well, consider this little excerpt of recent MEGO financial jargon pertaining to the post-crash doings of the now-infamously bailed out AIG:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): November 25, 2008 AMERICAN INTERNATIONAL GROUP, INC.
Item 1.01. Entry into a Material Definitive Agreement
On November 25, 2008, American International Group, Inc. (“AIG”) entered into a Master Investment and Credit Agreement (the “Agreement”) with the Federal Reserve Bank of New York (the “NY Fed”), Maiden Lane III LLC (“ML III”), and The Bank of New York Mellon, to establish financing arrangements, through ML III, to fund the purchase of multi-sector collateralized debt obligations (“Multi-Sector CDOs”) underlying or related to credit default swaps and similar derivative instruments (“CDS”) written by AIG Financial Products Corp. (“AIGFP”) in connection with the termination of such CDS.
Pursuant to the Agreement, the NY Fed, as senior lender, has made available to ML III a term loan facility (the “Senior Loan”) in an aggregate amount up to approximately $30.0 billion. The Senior Loan bears interest at one-month LIBOR plus 1.00 percent and has a six-year expected term, subject to extension by the NY Fed at its sole discretion.
AIG has contributed $5.0 billion for an equity interest in ML III. The equity interest will accrue distributions at a rate per annum equal to one-month LIBOR plus 3.00 percent. Accrued but unpaid distributions on the equity interest will be compounded monthly. AIG’s rights to payment from ML III are fully subordinated and junior in right of payment to all principal of, and interest on, the Senior Loan. The creditors of ML III will not have recourse to AIG for ML III’s obligations, although AIG will be exposed to losses on the portfolio of Multi-Sector CDOs held by ML III up to the full amount of AIG’s equity interest in ML III.
Upon payment in full of the Senior Loan and AIG’s equity interest in ML III, all remaining amounts received by ML III will be paid 67 percent to the NY Fed as contingent interest and 33 percent to AIG as contingent distributions on its equity interest.
The NY Fed is the controlling party and managing member of ML III under the transaction documents for so long as the NY Fed is owed any amounts under the transaction documents, and AIG will not have any control rights over ML III or under the transaction documents.
AIGFP, ML III and the NY Fed have entered into agreements with AIGFP’s CDS counterparties to terminate approximately $53.5 billion notional amount of CDS and purchase the related Multi-Sector CDOs. Of these, CDOs with a principal amount of approximately $46.1 billion settled on November 25, 2008 and a corresponding notional amount of CDS were terminated. Settlement on the remaining $7.4 billion notional amount of CDS is contingent upon the ability of the related counterparty to obtain the related Multi-Sector CDOs and thereby settle with ML III and terminate such CDS with AIGFP. Pending such settlement, which AIG expects to occur by year-end, the collateral posting provisions relating to these CDS have been suspended such that additional collateral will not be required of AIGFP nor will posted collateral be returned to AIGFP. If a given counterparty is ultimately unable to obtain the related Multi-Sector CDOs, the related CDS will not terminate and the relevant collateral posting provisions will resume. In such a case, AIG will continue to bear market risk and the risk of adverse changes in collateral posting requirements relating to these CDS that do not terminate and could incur additional unrealized market valuation losses.
With respect to the approximately $11.2 billion of exposure to Multi-Sector CDOs as to which AIGFP, ML III and the NY Fed have not executed agreements, AIG and the NY Fed are working to structure the termination of the related CDS and/or the purchase by ML III of the related Multi-Sector CDOs. Unless this exposure is terminated, AIG will continue to bear market risk and the risk of adverse changes in collateral posting requirements relating to these CDS and could incur additional unrealized market valuation losses with respect to these CDS.
On November 25, 2008, ML III bought approximately $46.1 billion in par amount of Multi-Sector CDOs through a net payment to CDS counterparties of approximately $20.1 billion, and AIGFP terminated the related CDS with the same notional amount. The aggregate cost of the purchases and terminations was funded through approximately $15.1 billion of borrowings under the Senior Loan, the surrender by AIGFP of approximately $25.9 billion of collateral previously posted by AIGFP to CDS counterparties in respect of the terminated CDS and AIG’s equity investment in ML III of $5.0 billion.
AIGFP has entered into a Shortfall Agreement, dated November 25, 2008 (the “Shortfall Agreement”), with ML III relating to the approximately $53.5 billion of Multi-Sector CDO exposure covered by agreements with CDS counterparties under which (i) AIGFP must make a payment to ML III to the extent the excess of the notional amount of the CDS being terminated over the market value as of October 31, 2008 of the related Multi-Sector CDOs is greater than the collateral previously posted by AIGFP with respect to such CDS, and (ii) ML III must make a payment to AIGFP to the extent the amount of such posted collateral exceeds such excess. AIGFP was not required to make any payments under the Shortfall Agreement with respect to ML III’s initial purchase of the approximately $46.1 billion of Multi-Sector CDOs.
The summary of the terms of the Agreement and the Shortfall Agreement are qualified in their entirety by reference to the terms of the Agreement and the Shortfall Agreement, which are filed as exhibits 10.1 and 10.2 to this Form 8-K and incorporated by reference into this Item 1.01. _____
Well, I'm a reasonably intelligent person with a Master's degree and more than 20 years' experience spanning a variety of business domains (including credit risk modeling), but this kind stuff leaves me bamboozled.
That's what they 'bank' on. We among The Great Unwashed (including, um, the regulators) can never hope to fathom such financial "sophistication," better to simply leave these things to the "experts."
Part of a short email note I sent to Ms. Roth in the wake of reading her lament:
Part of the problem I see (in agreement with Taleb) is that nobody really understood much of any of this, but once you get to a certain level of "expertise" in the financial world, you simply cannot admit to being clueless. So, it becomes a mileau of ongoing mutual bullshit (ever read the book "On Bullshit"?), a world of org-chart climbing pseudo-erudite, jargon-spewing poseurs. And, maybe nobody understood things because there was nothing much rational to understand. I guess the one encapsulating and overarching operative word (extending far beyond the likes of Madoff) is "fraud."
Best regards,
Bobby Gladd
While at the credit card bank, I once interviewed a pleasant young hire prospect (playing house "liberal-arts-guy" dumb), a woman with a Master's degree in Statistics. Offhandedly, I asked her to explain to me, in plain plebian English, the concept of "Standard Deviation."
She couldn't do it. She haltingly gave me all the Stats textbook jargon: "Root Mean Squared (RMS) Deviation," the "Square Root of The Mean Squared Deviation, corrected for degrees of freedom" blah, blah, blah...
I dropped the line of questioning.
OK. The Standard Deviation is simply the "average" or "expected" variation around an "average." You calculate an arithmetic average. Unless each value is identical, there is variability. The Standard Deviation -- beneath the hood of all the Scary Greek Shit -- is simply the amount of variation to "expect," "on average."
We hired her anyway. It wasn't my call. She lasted about 3 months, did a few banal yet aesthetically pleasing Excel sheet graphs and Powerpoint assemblages, and then moved on to inflict her thoroughly academically pedigree'd ignorance elsewhere.
Read Taleb. Closely. Both of his bracing books ("Fooled by Randomness" and "The Black Swan"), and all of his essays and OpEds. I am squarely a "Talebist." ______
CLOSING THOUGHTS
We've witnessed some (depressingly) amazing things during 2008 (and now 2009) as our economy has corkscrewed into the ground. The collapse, closure, and sale of WAMU (Washington Mutual) to JP Morgan Chase back in September stands out emblematically to me (among a rogue's gallery of salient others). Subtract their deposits ("liabilities") from their nominal "assets" at the time, divide the remainder into the reported sale price of $1.9 billion, and you get ~1.6 cents on the dollar: classic "Bad Paper," roughly a net-wash estimate of the true par value of WAMU's net assets to the buyer. We have been living in a financial dream world for quite some time now. It is by no means clear at this point as to how all of this will play out.
On "regulation": I have worked throughout my entire white collar career life within highly regulated environments: [1] environmental radiation analytical science (DOE, EPA et al); [2] industrial diagnostics (OSHA et al); [2] health care (mainly HHS/CMMS); and finance (OCC, FDIC). While I cannot but agree to a great extent with many of the the observations of long-standing regulatory critics such as Philip K. Howard ("The Death of Common Sense: How Law is Suffocating America"), notwithstanding, a valid criticism of mindless regulatory excess does not constitute a cogent argument axiomatically favoring its "perfectionism fallacy" reciprocal -- that all regulation is beyond the utilitarian and ethical pale. I return to a fundamental assertion. Assuming you do not favor a might-makes-right / oligarchic / gated community / tribal warlord social structure, you have a choice:
proactive, coherent, commonsensical law and regulation, or;
reactive (and mostly problematic) post-hoc attempts to secure remediative justice via a court system.
I take it as a given that the difficult work of a free, self-regulating society is never done -- Eternal Vigilance being the ongoing price of liberty and the pursuit of happiness. We have much work to do.
One question we would do well to clarify in political consensus: What, indeed, is the proper ethical function of a "market"? Simply that of an end to itself, a bare-knuckles arena inexorably favoring the rapaciously fleet of mind in winner-take-all, zero sum game acquisitive fashion? Or, is it properly simply a means to the end of economic and social justice (however imperfectly and transiently defined) for all, to the extent practicable? I find it unreflectively naive in the extreme that so many self-described "law-and-order conservatives" reflexively rail against ordinary street crime and call for the most draconian punishments while in the next breath decrying all manner of commercial regulation. We have by now seen in the most glaring detail what mutual "enlightened self-interest" has gotten us in the past decade's overwhelmingly unregulated financial markets. Envision the likely upshot of similarly deregulated food, pharmaceutical, transportation, and product safety. Can you really argue with a straight face that the mere threat of post hoc judicial sanction will suffice to rein in negligence and outright venal criminality?
The very notion is absurd a priori.
POSTSCRIPT
"The firm made money, and the broker made money. Two outa three ain't bad." - Michael Lewis
One of my long-time favorite writers on financial markets is Michael Lewis, author of -- most notably -- the hilariously revealing, self-deprecating, and bracingly cynical Inside-Wall-Street-Baseball book "Liar's Poker."
I highly recommend his recent lengthy Portfolio.com market crash post-mortem article "The End."
...In the two decades since [the publication of Liar's Poker], I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?...
...There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman...
...the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater. The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”
And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.
More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”
In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.)...
Read the entire article, carefully. "Tranche Warfare" succinctly explained indeed. The mopping-up operations will go on for years, perhaps decades.
I almost feel sorry for John McCain at this point. His anguished and halting attempt to walk back the increasingly hateful personal attacks directed at Barack seem to simply be causing more dissension in his own ranks As I observed on my Obama support web page:
"You reap what you sow" is the operative admonition here, one has to think. I have to believe John McCain now honestly regrets having permitted the unleashing of this counterproductive and dangerous tactical vitriol. His running mate has by now openly and repeatedly insinuated that Barack Obama is all of the foregoing "un-American" things, egging on her fawning crowds and ramping up their irrational ire. Which is it? Is he the non-scary "decent person" whom John McCain now belatedly "admires" notwithstanding their policy differences, or is he Sarah Palin's treasonous "terrorist pal"? What does this say about wise, presidential calibre "judgment"? (Which, in my view, was rendered distressingly suspect by the very choice of Mrs. Palin in the first place. She is, by any rational measures, simply not qualified to be a heartbeat away from our Presidency.)
Been a tough week for John McCain.
OCTOBER 20TH UPDATE
We just got back from early voting. Very quick and convenient. Electronic voting machines, but they have paper trail printouts, which I wish were mandated by law everywhere.
BTW: Interesting interactive/predictive Electoral Vote map I just ran across:
OCTOBER 21st UPDATE
Sarah Palin tells an interviewer that the Vice President is "in charge of" the Senate, that the VP can "can really get in there with the senators and make a lot of good policy changes that will make life better..."
Someone needs to slip Mrs. Palin a copy of the Constitution. Specifically Article I, Section 3:
The Vice President of the United States shall be President of the Senate, but shall have no vote, unless they be equally divided.
That is all the Constitution says about the VP role. And, being "president" of the Senate in no way implies being "in charge of" it. If anyone can be said to be "in charge" in both constitutional and daily operational senses, it is the Majority Leader, normally in give-and-take cooperation with the Minority Leader and other senior senators. As noted on the Senate website:
Our Constitution's framers created the vice-presidency almost as an afterthought. In setting up a system for electing presidents, they devised an electoral college and provided that each of its members was to vote for two persons, "of whom one at least shall not be an Inhabitant of the same State with themselves." In those days when loyalty to one's state was stronger than to the new nation, the framers recognized that individual electors might be inclined to choose a leader from their own immediate political circle, creating the danger of a crippling deadlock, as no one candidate would win a plurality of all votes cast. By being required to select one candidate from outside their own states, electors would be compelled to look for individuals of national stature. Under the system the framers created, the candidate receiving the most electoral votes would be president. The one coming in second would be vice president...
...The framers also devoted scant attention to the vice president's duties, providing only that he "shall be President of the Senate, but shall have no Vote, unless they be evenly divided" (Article I, section 3)...
...the role of the vice president has evolved into more of an executive branch position. Now, the vice president is usually seen as an integral part of a president's administration and presides over the Senate only on ceremonial occasions or when a tie-breaking vote may be needed.
A woman arguing that she is qualified to be a heartbeat away from the Presidency really ought have at least a middle school civics class understanding of the actual functions of the top federal executive offices.
"In the animal kingdom, the rule is eat or be eaten; in the human kingdom, define or be defined."
__- Dr. Thomas Szasz, "The Second Sin"
"Obama still refuses to admit that The Surge has succeeded."
This is a central John McCain (and campaign surrogates) talking point, one with which Bill O'Reilly has now fairly successfully hammered Barack Obama during their "O'Reilly Factor" interview (first aired Sept 4th, 2008 on Fox).
Many liberal political blog commenters have recently voiced concerns regarding the Obama decision to submit to a one-on-one Fox TV interview with the partisan, always-combative Bill O'Reilly. For example:
Of course, I watched the interview. And CNN just played a snippet. So? I still think it was a mistake and can guarantee you that the Right will be doing some careful, selective, manipulative editing on it. Expect to see a Republican ad with Obama saying "Yes, the surge worked…beyond our wildest dreams…"
How can that be helpful? _____
It is not. You never let an adversary frame the debate.
My response would have been:
"Bill, let me stop you right there. Arguing about the relative merits of this surge is irrelevant to the fundamental judgment issue, i.e., had we not invaded Iraq, had we kept our eyes on the prize in Afghanistan, we might well have largely wrapped things up by now, at a cost/benefit of many thousand of tragic deaths and maimings fewer and hundreds of billions of dollars less. We'd not have had the morally eviscerating infamy of Abu Ghraib, and bin Laden might well now be dead or in custody.
We might now be focused on electing a President, rather than simply a "Commander-in-Chief" — a blindered focus that assumes that our all-consuming national priority is now, and will indefinitely and inevitably comprise nothing more than threatening, starting, and managing wars at every turn, to the effective exclusion of every other substantive presidential leadership obligation, foreign and domestic.
So, I stand by the correctness of my original Iraq judgment. Senator McCain, recall, has taken pains of late to distinguish between the breadth and length of my experience and the cogency of my judgment -- finding mostly abstract fault with the latter, -- but the current ostensible reactive necessity and short-term arguable efficacy of the surge does nothing whatsoever to refute the soundness of my initial judgment with respect to Iraq. It only reinforces it. This surge is a tactical tourniquet applied to a festering wound that ought never have been inflicted.
Moreover, I might add the following point for the sake of charity and clarity: Let's assume the political inevitability of the U.S. invasion of Iraq, exclusive of its relative merits on threat-intelligence grounds at the time (and ignoring here the intel facts that have become utterly clear by now). What about the judgments of senior military commanders at the time who argued forcefully for a ground force size roughly three to four times larger than the Bush adminstration opted for? What became of them?
We know what happened, Bill. They were shouted down by Bush civilian neocon advisors -- none of whom had ever served in uniform -- and then cashiered out.
The prevailing "Shock and Awe" Bush administration "judgment" was that the world at large and our immediate adversaries would be so thoroughy cowed by our unparalleled technological military might as to fall in line forthwith and comply. The words of the belligerent neocon Michael Ledeen come to mind: 'Every ten years or so, the U.S. needs to pick up some crappy little country and throw it against the wall, just to show the world we mean business.'
Well, five years later the seemingly intractable, egregiously debilitating human and financial carnage are plain for all to see. Our Middle Eastern adversaries appear to have not gotten the Memo. Today, the Afghan Taliban (and their Pakistani tribal region allies), Iran, and Vladimir Putin all see relatively free rein to take advantage of the enervating upshot of Bush administration military and geopolitical naivete.
So, I don't think I have to listen to any lectures about the viability of my 'judgment' with respect to Iraq in particular and the threats posed by the larger world in general. I made the right call on Iraq at the outset." _____
Obama is simply gonna have to do better. Define Or Be Defined. It's the Law.
I now get hit up multiple times a day in my email inbox by the Obama campaign, asking for even more of my money, for my volunteer pound-the-precincts-pavement time, and for use of my spare bedroom in which to house transient campaign staff. Sometimes I have to wonder, given the serious concern I just proffered, if Barack is really up to the fight. Time is short. I wonder and worry that perhaps I'm going to just re-live my Quixotic Kerry 2004 effort.
On July 9th, 2008, the U.S. Senate voted 69 - 28 to amend the old, 1978 FISA law by passing H.R. 6304, the "Foreign Intelligence Surveillance Act of 1978 Amendments Act of 2008." Critics of this legislation have been complaining long and loud that -- beyond the controversial granting of retroactive (and prospective) civil immunity to the telecommunications industry for their alleged lawbreaking at the behest of the Bush administration -- it represents the "death of the 4th Amendment," the "end of privacy" in the U.S. As Anthony Romero of the ACLU noted:
"The bottom line is that no president should have the power to monitor the phones and emails of Americans without a warrant. And no president should have the power to pardon companies that broke the law. This bill was not a "compromise," as some in Congress would like you to believe. The only thing they compromised was your freedom."
Really? Is my "freedom" now in fact compromised? How much of this is overwrought doom-is-upon-us hype, and how much is of legitimate concern? e.g., I routinely take the trouble to actually closely read legislative proposals and bills signed into law, and also listen/read carefully the views of respected constitutional law analysts. For example, here are some recent observations of noted constitutional law professor Jonathan Turley on MSNBC on June 19th, 2008:
"This is a very frightening bill. What people have to understand is that FISA itself is controversial. This court issued tens of thousands of warrants granted applications for surveillance without turning down any. Only recently did they turn down two...What you're seeing in this bill is an evisceration of the Fourth Amendment of the Constitution. It is something that allows the president and the government to go in to law-abiding homes on their word alone, their suspicion alone, and to engage in warrantless surveillance. That's what the framers that drafted the Fourth Amendment wanted to prevent."
What is a concerned, studious, and patriotic lay person to rationally think?
NOTE: While I would tend to agree in principle with Mr. Romero that "no president should have the power to pardon companies that broke the law," the simple constitutional fact -- like it or not -- is that the president does in fact have such power. His pardon power is plenary"except in cases of impeachment." [Article II Section 2] I have not the slightest doubt that President Bush will have to order pardon pens by the carton for use in January 2009.
NOTE2: Moreover, Mr. Romero's assertion that "no president should have the power to monitor the phones and emails of Americans without a warrant" will remain just that -- an assertion, however sensible and noble (and one with which I agree) -- unless and until SCOTUS rules otherwise. I have long simply assumed that my emails were the digital equivalent of postcards. My phone calls? That's another matter, but one apparently in (mostly behind-the-scenes) flux absent some unequivocal ruling one way or the other.
A QUICK EXECUTIVE SUMMARY OF THE H.R. 6304 AREAS OF CONCERN
I see perhaps minimally three, two of which overlappingly map to 4th Amendment "Framers' intent" principles:
General Warrants: FISA warrants are to be granted for a period "up to a year," and it is not completely clear at this point regarding whether they will each have to focus on a single "suspect" (or conspiratorial group of them), or whether they may be granted as bulk "dragnet" authorizations. The 4th Amendment requires warrant-related individual "probable cause" and search/seizure specificity;
Writs of Assistance: The widely hated 18th century British Crown colonial practice with roots in the medieval clamorem et uthesium tradition ("Hue and Cry"), Writs of Assistance were used to command the assistance of the private sector in the search for miscreants, malcontents and contraband, typically in concert with the "General Warrants" commonly issued by the Crown. Section 702(h)(1) - (4) and (5)(A) - (E) of the new law seem to constitute such orders directed specifically at the telecoms, the very type of orders that constitutional historians regard as a prime motivator for the American revolution and subsequent codification of our 4th Amendment;
Legislative usurpation of Article III: Retroactively and prospectively immunizing the telecommunications industry from violations of federal and state criminal laws, as well as preemptively abrogating the contractual/tort claims of consumers, seems to violate the Judicial Clause of the Constitution. Moreover, H.R. 6304 Section 803(a)(1) - (4) ["Preemption"] posits that "no state shall have authority to" investigate, regulate, sue, or otherwise sanction the telecoms over anything related to FISA cooperation.
Obviously, beyond the blanket immunity provision, a major concern among civil libertarians is that of "mission creep," which is what led the 1978 enactment of FISA in the first place 30 years ago, in the wake of revelations of the Nixon administration's egregious misuse of intelligence agencies for domestic political spying.
Today, beyond the potential for renewed domestic political surveillance (arguably in violation of the First Amendment as well as the 4th; see below), we see the post-9/11 "War on Terror" bandied about as justification for blurring the lines with respect to "ordinary" law enforcement, weakening or even eliminating Due Process constraints that have long been fundamental to our constitutional system.
For example, in the name of "combating terrorism," Boston police proposed a couple of years ago that anyone riding on any sort of public transit be subject to random searches, absent any cause, at any time during their travels. A similar thing happened in New York City in which the transit police announced a plan to randomly search the bags of anyone entering subway terminals. Of course, the authorities insisted on their "right" to use any "conventional crime" fruits of such examinations (e.g., illegal drugs being the most likely) for subsequent arrests and prosecutions.
Here in Nevada, a particularly agitated state legislator even proposed post- 9/11 that "terrorism" be defined by statute as "any attempt to interfere with the activities of law enforcement." That the initiative got no traction only partially serves as evidence for lack of public support for the mindless sentiment.
While I'm no advocate of any Straw-Man-spurious 4th Amendment "privacy right to lawbreaking," neither am I willing to concede the necessity of such overt Police State tactics in deference to their putative (and equally spurious) "effectiveness" value.
"But, If we just had all of the hay, we'd know exactly where the needles are. They're right there in the hay!" Lead H.R. 6304 sponsor Senator Kit Bond said during final debate this week that"[T]here is nothing to fear in the [new FISA] bill, unless you have Al Qaeda on your speed dial."
Is that so? Absent truly independent legislative and judicial oversight and regulation, how can we verify such a claim? We're supposed to simply "trust" the government that they'll only be after the "Bad Guys"? That they would never abuse their unfettered power?
Color me empirically skeptical.
________
As one who did quite a bit of historical and constitutional case law research into the salient social and legal aspects of "privacy" and 4th Amendment issues a decade ago in the course of my graduate studies (and subsequently in opposition to the federal government's proposed post-9/11 "Total Information Awareness" initiative), I thought it useful to revisit the topic in additional depth in order to attempt to resolve many of my own troubling continuing questions and perhaps shed some rational new light on the topic.
There will be much to investigate and discuss. There remains much that seems intractably unclear. My words of 1998 resonate equally well today:
"Privacy" is a term with multiple connotations. We mandate by law and social norms that certain activities be conducted "in private." The privacy synonyms "secluded" and "exclusive" are positive keywords in real estate advertising. A media microphone rudely thrust in the face of a grieving parent who has just lost a child to an accident is disdainfully viewed as an egregious "invasion of privacy." Similarly, celebrities bemoan (and frequently litigate against) their losses of privacy at the hands of their tabloid pursuers. In some major public policy contexts, however, privacy seems to be what we value most for ourselves, and what we would most like to deny others by casting aspersions on their privacy claims.
If you doubt, for instance, that we 'mandate by law...that certain activities be conducted "in private",' try urinating in public in front of a police officer sometime (say, maybe after attending that Jimmy Buffett concert you now only dimly remember in the wake of all that tequila). Under Nevada law, after trial and conviction you will subsequently be permanently in the system as -- minimally -- a "Tier I Sex Offender" ("flashing," "streaking," and, yes, peeing in public are considered "sex crimes" here -- only the first of which might truly be regarded as one worthy of the subsequent moniker "Sex Offender"). THE PANOPTICON "The Panopticon was proposed as a model prison by Jeremy Bentham (1748-1832), a Utilitarian philosopher and theorist of British legal reform."
"The Panopticon ("all-seeing") functioned as a round-the-clock surveillance machine. Its design ensured that no prisoner could ever see the 'inspector' who conducted surveillance from the privileged central location within the radial configuration. The prisoner could never know when he was being surveilled -- mental uncertainty that in itself would prove to be a crucial instrument of discipline..."
"Hence the major effect of the Panopticon: to induce in the inmate a state of conscious and permanent visibility that assures the automatic functioning of power. So to arrange things that the surveillance is permanent in its effects, even if it is discontinuous in its action; that the perfection of power should tend to render its actual exercise unnecessary..."
- Michel Foucault
Are we all inexorably becoming "inmates" of a Brave New Techno-Panoptic World, left with but a facade of "freedom," a dessicated faux freedom enervated by the chronic suspicion that authority is increasingly monitoring our every action -- "all claws for now withdrawn" perhaps -- but able to pounce without warning should we get "too far out of line"?
For in fact, it is already far too late to prevent the invasion of cameras and databases. The djinn cannot be crammed back into its bottle. No matter how many laws are passed, it will prove quite impossible to legislate away the new surveillance tools and databases. They are here to stay.
Light is going to shine into nearly every corner of our lives.
The real issue facing citizens of a new century will be how mature adults choose to live -- how they might compete, cooperate and thrive -- in such a world. A transparent society.
Regarding those cameras for instance -- the ones topping every lamp post in both City One and City Two -- we can see that very different styles of urban life resulted from just one decision. From how people in each town answered the following question.
Will average citizens share, along with the mighty, the right to access these universal monitors? Will common folk have, and exercise, a sovereign power to watch the watchers? ______
The troubling rub is in his last question above: "Will average citizens share, along with the mighty, the right to access these universal monitors?"
Not if the mighty have their say, in all likelihood. The reflexive invocation of "National Security" has become a deafening daily commonplace since 2001. There can be no independent judicial or regulatory oversight with respect to FISA type operations, it is argued, because such might "reveal sources and methods." (A similar argument is made in support of denying due process to "War on Terror" detainees held at Gitmo and CIA "black sites" around the world.) The President routinely invokes "Executive Privilege" to stymie any inquiry into the Executive Branch he wishes to quash. Favored sole-source military contractors now brazenly claim that their contract cost/performance records constitute "proprietary business data" beyond the oversight purview of regulatory departments and agencies.
Recent case in point:
WASHINGTON [AP, July 11, 2008] - A federal appeals court on Friday set back the White House's efforts to keep the names of its visitors secret.
The three-member panel of judges threw out the government's appeal in a case brought by a watchdog group trying to find out how often prominent religious conservatives visited the White House and Vice President Dick Cheney's residence.
The Bush administration was appealing a federal judge's decision last December that the government should gather the records the watchdog group wants.
Despite the ruling against the White House, public disclosure of visitor logs is by no means assured.
The Bush administration can still raise a variety of legal arguments in an attempt to keep the identities of White House visitors secret... ______
So, it would seem that the mighty will continue to buy or politically bully or otherwise stonewall their way into their own thoroughly protected "privacy," while the rest of us will be left to wonder to what extent our emails are being surveilled, our internet viewing habits logged and archived (along with our telephone records), our movements and locations tracked via GPS triangulation of our cell phones, and so on.
Maybe "constitutional privacy" is a goner (to the extent it ever fully existed). Or soon to be. With it, though, may go the rest of the constitutional self-government we still take pains to laud.
JULY 11th UPDATE
Interesting, this, by Washington Monthly writer Kevin Drum. Beyond the 4th Amendment, there's a direct 1st Amendment implication:
"This law will cripple the work of those of us who as reporters communicate regularly with people overseas, especially those in the Middle East. It will intimidate dissidents, human rights activists and courageous officials who seek to expose the lies of our government or governments allied with ours.
....The reach of such surveillance has already hampered my work. I was once told about a showdown between a U.S. warship and the Iranian navy that had the potential to escalate into a military conflict. I contacted someone who was on the ship at the time of the alleged incident and who reportedly had photos. His first question was whether my phone and e-mails were being monitored.
What could I say? How could I know? I offered to travel to see him but, frightened of retribution, he refused. I do not know if the man's story is true. I only know that the fear of surveillance made it impossible for me to determine its veracity."
There are (at least) two issues here. First, under the old law there were ways for reporters to be relatively sure that they could evade surveillance. Use random pay phones, anonymous email accounts, etc. After all, the government can't listen to every conversation, can they? Well, now they can, and reporters' sources know it. It's going to be a lot harder to convince them that it's safe to talk.
Second, reporters who cover terrorism and the Middle East are pretty obvious targets for NSA surveillance since they talk to lots of bad guys. This surveillance is illegal, of course, and under the old FISA law it was hard to get around this because the FISA court had to issue a warrant if NSA wanted to tap the phone of an American citizen. But now? They don't need to directly tap reporters' phones. They're listening to every piece of traffic that goes through American switches and NSA computer software is picking out everything that seems interesting — and no matter what they say, doesn't it seem likely that their algorithms are going to be tweaked to (accidentally! unintentionally!) pick up an awful lot of reporter chatter? It'll eventually be "minimized," but algorithms are infinitely malleable, they're hard for laymen to understand, and they can almost certainly be changed to accomplish the same thing if a judge happens to order modifications. What's more, it hardly matters: the new law allows NSA to hold on to all those minimized conversations forever even if a judge eventually decides the surveillance was illegal.
Welcome to the wholesale surveillance state. Enjoy it. ______
So, it's not just about the 4th Amendment. There's an inextricable 1st Amendment concern to boot. You simply cannot have a free press within the "asymmetric" Panopticon currently under construction.
"UNDER CONSTRUCTION? HELL, IT'S ALREADY IN PLACE."
I read a thoroughly depressing article today from the April 2006 issue of The Atlantic Monthly entitled "Big Brother is Listening," by James Bamford. Read it in its entirety carefully.
"The NSA has the ability to eavesdrop on your communications—landlines, cell phones, e-mails, BlackBerry messages, Internet searches, and more—with ease. What happens when the technology of espionage outstrips the law’s ability to protect ordinary citizens from it?"
[click the image to enlarge]
The history recounted in this article goes to the very heart of today's FISA re-authorization controversy [excerpts below, emphases mine]:
...the requirement that the government show "probable cause" that the American whose communications they are seeking to target is connected in some way to a terrorist group—induced the administration to begin circumventing the court. Concerned about preventing future 9/11-style attacks, President Bush secretly decided in the fall of 2001 that the NSA would no longer be bound by FISA...
...Contrary to popular perception, the NSA does not engage in "wiretapping"; it collects signals intelligence, or "sigint." In contrast to the image we have from movies and television of an FBI agent placing a listening device on a target's phone line, the NSA intercepts entire streams of electronic communications containing millions of telephone calls and e-mails. It runs the intercepts through very powerful computers that screen them for particular names, telephone numbers, Internet addresses, and trigger words or phrases. Any communications containing flagged information are forwarded by the computer for further analysis...
...It used to be that before the NSA could place the name of an American on its watch list, it had to go before a FISA-court judge and show that it had probable cause—that the facts and circumstances were such that a prudent person would think the individual was somehow connected to terrorism—in order to get a warrant. But under the new procedures put into effect by Bush’s 2001 order, warrants do not always have to be obtained, and the critical decision about whether to put an American on a watch list is left to the vague and subjective "reasonable belief" of an NSA shift supervisor...
More than seventy-five years ago, Supreme Court Justice Louis Brandeis envisioned a day when technology would overtake the law. He wrote:
Subtler and more far-reaching means of invading privacy have become available to the government … The progress of science in furnishing the government with means of espionage is not likely to stop with wiretapping. Ways may some day be developed by which the Government, without removing papers from secret drawers, can reproduce them in court, and by which it will be enabled to expose to a jury the most intimate occurrences of the home … Can it be that the Constitution affords no protection against such invasions of individual security?
Brandeis went on to answer his own question, quoting from an earlier Supreme Court decision, Boyd v. U.S. (1886): "It is not the breaking of his doors, and the rummaging of his drawers that constitutes the essence of the offence; but it is the invasion of his indefeasible right of personal security, personal liberty, and private property."
...Today, the NSA has access to more information than ever before. People express their most intimate thoughts in e-mails, send their tax returns over the Internet, satisfy their curiosity and desires with Google searches, let their hair down in chat rooms, discuss every event over cell phones, make appointments with their BlackBerrys, and do business by computer in WiFi hot spots.
NSA personnel, the customs inspectors of the information superhighway, have the ultimate goal of intercepting and reviewing every syllable and murmur zapping into, out of, or through the United States. They are close to achieving it...
Frank Church, the Idaho Democrat who led the first probe into the National Security Agency, warned in 1975 that the agency’s capabilities
"could be turned around on the American people, and no American would have any privacy left, such [is] the capability to monitor everything: telephone conversations, telegrams, it doesn’t matter. There would be no place to hide. If this government ever became a tyranny, if a dictator ever took charge in this country, the technological capacity that the intelligence community has given the government could enable it to impose total tyranny, and there would be no way to fight back, because the most careful effort to combine together in resistance to the government, no matter how privately it is done, is within the reach of the government to know. Such is the capacity of this technology."
It was those fears that caused Congress to enact the Foreign Intelligence Surveillance Act three years later. "I don't want to see this country ever go across the bridge," Senator Church said. "I know the capacity that is there to make tyranny total in America, and we must see to it that [the National Security Agency] and all agencies that possess this technology operate within the law and under proper supervision, so that we never cross over that abyss. That is the abyss from which there is no return." ______
Read it. All of it. Again, carefully. Think about the ramifications. All of them.
One thing that just jumped out at me: 'Oh, so this is why President Bush has been so petulantly, intransigently adamant about getting total telecom immunity -- repeatedly threatening to veto any bill not containing it, even if he got everything else he asked for. He could not risk the documented judicial exposure of the sheer extent of the lawbreaking, evidence that might well publicly emerge via the civil "discovery" process.'
The other disquieting question is 'how could a President so unpopular at this stage, a lame duck faced with a democratic majority in Congress, manage to prevail on this?'
Well, good question. ______
CONSTITUTIONAL ISSUES: "THE WORD 'PRIVACY' APPEARS NOWHERE IN THE CONSTITUTION"
True -- albeit a banal and irrelevant, if commonplace disavowal. Neither do the words "homosexual" nor "marriage" nor "fetus/foetus," nor "abortion," nor most of the estimated half-million words comprising the English language appear in the Constitution. The only pertinent question here is whether the phrase "right of the people to be secure in their persons, papers, houses, and effects" is the semantic equivalent, intended to confer a presumptive right to privacy (not "absolute," simply "presumptive"), one breachable by authority only upon independently confirmable objective showing of exigent, necessary, and proper "cause" (be it the requisite "probable" standard for issuance of valid, narrowly focused warrants, or the more hazy, seemingly lesser "reasonable").
BTW/FYI- the word "privacy" appears only once (irrelevantly) in the 85-essay totality of The Federalist Papers. The word "private" appears therein 44 times, though 41 or so of those are by no means germane to espousing the cause of personal privacy. More on this later, especially concerning the nexus between the word "liberty" (136 times in The Federalist Papers) and the subsequently ratified "right of the people to be secure in the persons, papers, houses, and effects..."
The core question: Is "liberty" possible absent lawful, rational deference to "privacy"?
"PROBABLE CAUSE"
The common lexical definition of the word "probable" often unhelpfully employs the somewhat circular exemplar referent term "likely" (which, in turn invariably alludes reciprocally to that which is "probable"). Minimally, as an empirical matter, "probable" connotes that which is/was "more likely than not" to occur or to have occurred -- i.e., greater than a 50% chance (or recorded outcome).
Well, also as an empirical matter we could review Judge X's entire record of his/her issuance of search warrants to determine post hoc whether the judge acted in the aggregate within the confines of legal "probable cause" -- i.e., did the warrants lead to subsequent arrests and and at least some sort of convictions (including pleas down to lesser offenses) more than half of the time. Were, for example, Judge X only "batting .300" or less when stepping up to the warrants plate, you could justifiably accuse such a jurist of being clueless with respect to any commonsensical notion of "probable cause."
I am unaware of any such studies. They may well have been done. Relatively recent DOJ statistics reveal a better than 90% conviction rate among those charged federally, though the stats are silent with respect to search warrants issued prior to arrests and dispositions. Again, as a retrospective empirical matter, a quantitative definition of hewing to search warrant "probable cause" would rightfully work out to the number of successful dispositions (findings of "guilt") divided by the number of search warrants issued. In the real world of law enforcement, though, things are not so clear.
Black's Law Dictionary, 7th Edition
probable cause. A reasonable ground to suspect that a person has committed or is committing a crime or that a place contains specific items associated with a crime. Under the Fourth Amendment, probable cause -- which amounts to more than a bare suspicion but less than evidence that would justify a conviction -- must be shown before an arrest warrant or search warrant may be issued. -- Also termed reasonable cause; sufficient cause; reasonable grounds. Cf. REASONABLE SUSPICION.
"Probable cause may not be established simply by showing that the officer who made the challenged arrest or search subjectively believed he had grounds for his action. As emphasized in Beck v. Ohio [379 U.S. 89, 85 S.Ct, 223 (19640]: 'If subjective good faith alone were the test, the protection of the Fourth Amendment would evaporate, and the people would be "secure in their persons, houses, papers, and effects" only in the discretion of the police.' The probable cause test, then, is an objective one; for there to be probable cause the facts must be such as would warrant a belief held by a reasonable man." Wayne R. LaFave & Jerold Israel, Criminal Procedure 3.3 at 140 (2nd ed. 1992).
An attorney of my acquaintence once wryly remarked "we spend $100,000 to go to law school for three years to try to learn the meaning of the word 'reasonable'."
BTW- What (for those of you wondering about 4th Amendment "Original Intent") sufficed as "probable cause" circa the birth of our nation? Consider this, from William Cuddihy's 1,800+ page, four volume "Origins and Original Meaning of the Fourth Amendment" (Claremont College, 1990; widely regarded as the seminal text on the topic):
Not all elements of search and seizure evolved rapidly in the 1780's. The belief that arrests, searches, and seizures required adequate cause, which a disinterested magistrate had found to be so, existed long before the revolution. Only a few statutes of 1776-87, however, guarded against caprice as the basis of arrest or search warrants by allowing magistrates to evaluate the requests for those warrants. In most cases, judges issued warrants automatically on a person's sworn complaint that he suspected, rather than believed, that a place or person was connected to a crime. [pg 1351, emphasis mine]
In other words, someone with some color of authority said so. Many times simply subjectively, absent any sort of independently confirmable objective evidence.
"CONJUNCTIVE SEVERABILITY"
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated,
and
no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
Are warrants always required? Notwithstanding such a widely held belief, the answer is "no." Jurisprudential scholars generally parse the 4th Amendment into [1] the "reasonableness clause" and, [2] the "warrants clause," separated not just lexically, but operationally by the conjunctive "and." Settled case law has long established warrant requirement exemptions such as the "plain view exception," "exigent circumstances exception," "search pursuant to a lawful arrest," and the recent "administrative departures exception" -- the latter being progeny of suspicionlesss drug testing cases, wherein it has been ruled that, because a positive drug test result is not used as evidence for prosecution of criminal drug possession and use, warrantless drug testing is simply "administrative" in nature, not prosecutorial, and consequently does not implicate the 4th Amendment. As I wrote in 1998:
Following a trend developed in the lower courts over the last generation, the Supreme Court has allowed "administrative" or "special needs" exceptions to the "probable cause" and "warrant" requirements of the Fourth Amendment. In short, since positive drug test results are supposedly "confidential" and not referred for prosecution—despite the fact that they constitute "scientific evidence" of recent criminal conduct—the Court majority finds them acceptable as mere non-discretionary and "evenhanded" administrative functions for which the probable-cause evaluating function of the magistrate is rendered unnecessary. In Skinner v. Railway, Justice Kennedy sings the praises of this curious nuance of evenhandedness, arguing that "arbitrary" would be his (hallucinatory) spectre of magistrates abusing their power by opting to "arbitrarily" issue warrants without cause against targeted individuals. Better to trade in this type of speculative (and preposterous) arbitrariness for the operational evenhandedness of indiscriminate investigation. Consider for a moment, however, Justice O’Conner’s dissenting rejoinder in the Vernonia high school drug testing case:
"Perhaps most telling of all, as reflected in the text of the Warrant Clause, the particular way the Framers chose to curb the abuses of general warrants—and by implication, all general searches—was not to impose a novel 'evenhandedness' requirement; it was to retain the individualized suspicion requirement contained in the typical general warrant, but to make that requirement meaningful and enforceable, for instance, by raising the required level of individualized suspicion to objective probable cause...While the plain language of the Amendment does not mandate individualized suspicion as a necessary component of all searches and seizures, the historical record demonstrates that the Framers believed that individualized suspicion was an inherent quality of reasonable searches and seizures... Protection of privacy, not evenhandedness, was then and is now the touchstone of the Fourth Amendment."
It is a complex and frequently contradictory history here, this contentious 4th Amendment.
An interesting side note regarding the aforementioned "severability" issue obtains in Leonard W. Levy's "Original Intent and the Framers' Constitution." Below is James Madison's last 4th Amendment draft recommendation. Note how it differs from the final adopted text.
The rights of the people to be secured in their persons, their houses, and their other property, from all searches and seizures, shall not be violated by warrants issued without probable cause, supported by oath or affirmation, or not particularly describing the places to be searched, or the persons or things to be seized.[Levy, pg 243]
This clearly implied that warrants were always to be required, but that wording was subsequently altered "during the debate by the House acting as the Committee of the Whole...The entire provision was split into two parts separated by a semicolon. The first part laid down the standard against unreasonable searches and seizures. The second part required probable cause for the issue of a specific warrant." [Levy, op cit., 244]
Which, of course, opened the door for the ensuing endless wrangling over the proper constitutional extent of searches conducted without warrants, which continues to this day -- most recently exemplified by the controversial "warrants exceptions" aspect 2008 FISA legislative renewal.
"Do as we say..."
While quoting Levy at length here in defense of moral and constitutional due process (which I will continue to do), it seems also fair to cite his words pertaining to expedient 18th century colonial hypocrisy:
The war years were the worst possible for testing whether American practices matched American ideals or constitutional provisions. Search and seizure was a method of fighting the enemy and those suspected of adhering to his cause. Perhaps the grossest violation of a constitutional provision occurred in Pennsylvania in 1777. Three years earlier Congress had complained about customs officials breaking and entering without authority. In 1777, though, Congress urged Pennsylvania's executive council to search the homes of Philadelphians, mostly Quakers, whose loyalty to the American cause was suspect. Congress wanted to disarm such persons and to seize their political papers Pennsylvania's executive council authorized a search of anyone who had not taken an oath of allegiance to the United States. The searches of at least six Quaker homes were conducted cruelly and violently, and all sorts of books, papers, and records, were confiscated; over forty people were arrested and deported without trial, let alone conviction, to Virginia, where they were detained until the next year. Nothing that the British had done equaled the violation of privacy rights inflicted by Pennsylvania on its "Virginia Exiles," in defiance of the state constitution and a writ of habeas corpus by the state chief justice, but with the support of Congress.
American adherence to professed principles stands up far better and more fairly tested after the shooting stops... [Levy, op cit., 239-40]
That petulant, exasperated retort was a riff that Judge Robert Bork proffered during his unsuccessful Supreme Court confirmation hearings, a motif also he espoused in his book"The Tempting of America: The Political Seduction of the Law":
[On Griswold v. Connecticut] "...Douglas did not explain how it was that the Framers created five or six specific rights that could, with considerable stretching, be called 'privacy,' and, though the Framers chose not to create more, the Court could nevertheless invent a general right of privacy that the Framers had, inexplicably, left out. It really does not matter to the decision what the Bill of Rights covers or does not cover...The Court majority said there was now a right of privacy but did not even intimate an answer to the question, 'Privacy to do what?' [emphasis mine - BG] People often take addictive drugs in private, executives conspire to fix prices in private, Mafiosi confer with their button men in private. If these sound bizarre, one professor at a prominent law school has suggested that the right of privacy may create a right to engage in prostitution..." [pp. 98-9]
In the undergrad "Critical Thinking" curriculum, this is known as the "fallacy of misplaced burden of proof." It goes to the heart of the very concept of a "presumptive" right. Authority properly has the burden of setting forth minimally justifiable evidence ("reasonable/probable cause") when seeking to breach an individual's private sphere. Just as it is subsequently authority's task to surmount your Constitutional "presumption of innocence" by presenting factual "proof beyond a reasonable doubt" to convict you of a charged crime. It is not the other way around.
Yes, Judge Bork, there is no Constitutional protection for the violating of laws. Neither is there, Judge Bork, proper Constitutional authority for the arbitrary abrogation of the privacy rights of all in mindless pursuit of the miscreant. Were we simply to search and seize everyone, we would in fact catch all of the criminals.
At the utter, unacceptable cost of the very freedom of the law-abiding we espouse as a founding principle. That inconvenient little "liberty" thing.
At this point, more of the observations of Leonard Levy seem instructive:
If much of contemporary constitutional law is about rights, the reason is that as government gets larger, more complex, more powerful, and more intrusive, the need to stay Caesar's hand increases. If government exists to protect the individual, as the preamble to the Declaration of Independence suggests, and as the provisions of the Constitution suggest as strongly, then the Court must fortify our rights. Rehnquist and Bork mislead when they insist that because particular rights are not specified they have no constitutional existence. The Constitution exists to describe and limit the government, not to describe and limit rights. Government power must be exercised in subordination to the right of the individual, as much as possible. The fact that nothing in the Constitution refers to the rights of homosexuals or a woman's right to abortion is of considerably less importance than the fact that nothing in the Constitution militates against those rights (so long as the fetus is not regarded as a person). Chief Justice John Marshall's rule of construction was that if the Constitution does not prohibit, it can permit and protect. The burden of proof should always be on the government to show that rights claimed must be denied lest legitimate ends go unfulfilled because no alternative means are possible and the needs of government are compelling.
The historic mission of judicial review is supposed to be the vindication of individual freedoms...the Ninth Amendment put the Framers' thumbs down on the "rights" side of the scales that weigh rights against powers. Those who measure individual rights against the rights of society forget that society has a profound stake in the rights of the individual; we possess rights as individuals not only because they inhere in us and serve to fulfill us as individuals but because we function as a free society and maintain its openness by respecting personal differences. The Framers were deeply concerned about the humanity that the fundamental law should show even to the criminal offender not because they wanted to coddle criminals but because they were tough-minded enough to understand that the enduring interests of society require justice to be done as fairly as possible...
The Constitution of the United States is our national covenant, and the Supreme Court is its special keeper. The Constitution;s power of survival derives in part from the fact that it incorporates and symbolizes the political values of a free people. It creates a representative, responsible government empowered to serve the great objectives specified in the Preamble, while at the same time it keeps government bitted and bridled...
The Court should have no choice but to err on the side of constitutional liberty and equality of the individual, whenever doubt exists as to which side requires endorsement. Ours is so secure a system, precisely because it is free and dedicated to the principles of justice, that it can afford to prefer the individual over the state.[Levy, op cit., pp 392 -5] ______
BTW, I have yet to find any published material wherein the anti-privacy Judge Bork subsequently railed against the enactment of 8 U.S.C § 2710, 1988:
During the 1988 Senate confirmation hearings on Robert Bork's nomination to the U.S. Supreme Court, "Washington City Paper," a Washington, DC weekly, received from a videotape rental store a list of titles showing Bork's videotape rentals. The newspaper published the story, including the list, while the hearings were going on.
Bork had testified that the U.S. Constitution affords no protection of privacy. It was in that spirit, said Jack Shafer, editor of Washington City Paper, that the video store volunteered the list to a reporter, and in the same spirit the newspaper published it.
The thinking at the paper was that, given his views on the Constitution and privacy, surely Bork would not mind publication of this arguably private information. There was nothing shocking about the titles he had rented, and editors had no doubt about the authenticity of the information or of its source.
Several senators denounced the paper for publishing the story, and Congress soon passed what is often referred to as the "Bork Bill" ( The Video Privacy Protection Act, 18 U.S.C § 2710, 1988), a law designed to prevent unauthorized release of specific titles rented by identifiable individuals. ______
"IF YOU HAVE NOTHING TO HIDE, HOW CAN YOU OBJECT?" Yeah, what about that loaded question (i.e., the snide insinuation that your asserting your right to privacy means you have something embarrassing or worse to hide)?
Beyond the problematic "it's none of your business" retort, one of my most succinct rejoinders is this:
Given that I have nothing to hide, the probability of your truly finding actionable wrongdoing within my private life is exactly zero. The possibility of error on your part that might cause me significant harm, on the other hand, is -- however mathematically slight -- infinite by comparison. Where, precisely, is the value proposition in this for me?
Beyond that, we all do in fact have things to legitimately "hide" from those having no legitimate need of access to them, e.g., our Social Security and financial account numbers for patently obvious starters.
I was once served with divorce papers by a process server in the employ of a NY attorney retained by a woman I'd never met. My wife once spent more than a year trying to expunge a past due $27 medical lab bill incurred by her stepdaughter (my daughter), an egregiously errant, recursive "90+ day derog" that held up both a car loan and a subsequent mortgage application. Several years ago we awoke to find that someone had begun a Christmas season shopping spree in Paris, France using our debit card number.
Nearly everyone has his or her pet data screwup/filching horror stories.
APROPOS, A POST FROM MY MUSIC BLOG LAST YEAR
A pet "privacy" peeve of mine concerns the too-casual treatment of peoples' personal data. Below: one of my more effusive and loose-styed rants I posted on my music blog last year: __________
Sometimes ya just gotta laugh. So, I've been diligently fillin' out all these job apps every week since I got laid off. Well, a local company (DataX LTD) responded and asked me to come in for an interview for an analyst position ('cuz'a my SAS and regression modeling chops). They sent me an additional application to fill out, along with a background investigation authorization form. Now, this company touts themselves as being this saavy hi-tech outfit that does verification/authentication research and analysis for businesses, claiming that their "extensive and comprehensive analytics process of data verification and authentication identifies a unique individual with unique DNA."
Fair enough. We all want the fraudsters and other miscreants effectively uncovered and neutralized. And, fair enough to expect to be subjected to a background check (which I've already been through several times). But, this just cracked me up:
I hereby authorize DataX LTD and its designated agents and representatives to conduct a comprehensive review of my background causing a consumer report and/or an investigative consumer report to be generated for employment purposes.
I understand that the scope of the consumer report/investigative consumer report may include, but is not limited to, the following areas:
Verification of social security number; current and previous residences; employment history including all personnel files; education including transcripts; criminal history records from any criminal justice agency in any or all federal, state, county jurisdictions; and any other public records.
I further authorize any individual, company, firm, corporation, or public agency (including the Social Security Administration and law enforcement agencies) to divulge any and all information, verbal or written, pertaining to me to the Company or its agents. I further authorize the complete release of any records or data pertaining to me which the individual, company, firm, corporation, or public agency may have, to include information or data received from other sources.
I hereby release the Company, the Social Security Administration, and its agents, officials, representatives, or assigned agencies, including officers, employees, or related personnel both individually and collectively, from any and all liability for damages of whatever kind, which may, at any time, result to me, my heirs, family, or associates because of compliance with this authorization and request to release...[emphases mine]
"verbal"? In other words, they arrogate to themselves the right to collect any unverifiable hearsay about me from any anonymous source they wish through their gumshoe proxies, and, if any of the stuff is untrue and gets out of their control and causes me grief, well, boo-hoo-for-BobbyG (and, BTW, "consumer report" means they'd do a credit bureau pull on me as part of the rap sheet).
Am I the only cat around with an acute sense of irony? These people employ the "DNA" metaphor in extolling themselves to the business world, i.e., exactitude, man; finely-chiseled accuracy and precision in the assessment of those that come under their scrutiny for their clients. Sorry, I gotta have the same standard when it comes to vetting me.
I'm probably not gonna get this particular gig. _____
WEDNESDAY MAY 9th UPDATE:
Yep, just like I figured. Email exchange with the recruiter today:
Bobby~
I hope everything went well with the extraction of your wisdom tooth. I fowarded your email to the hiring managers, and because of our company’s compliance process, it is "mandatory" that all candidates sign the background authorization form for potential employment with our companies. Due to your personal principles concerning the background check authorization, I will need to cancel Friday’s interview (5/11/07 at 2:00 pm). Should your thoughts change in the near future please get a hold of the company’s Corporate Recruiter, [Name deleted]. She will be more than happy to speak with you.
Thank you and have a wonderful day,
[ Name deleted]
My response:
Thank you. Mouth full of bloody cotton at the moment, but, it went fine.
I regret to insist that I will not sign that authorization as presented, solely on the basis of the objectionable clause I cited. The rest of it is acceptable overall.
I find it both ironic and hypocritical that a company touting itself as one that conducts verifications and authorizations of people to an accuracy level they characterize as "DNA" also demands that job applicants agree to permitting anything and everything to be collected about them, whether germane or not, whether accurate or not, and insists on being indemnified for doing so as well. My view is simple, and utterly rational: You collect personal data about me to be used for lawful decisionmaking, you are responsible for [1] its accuracy, [2] its relevance to the employment vetting, and [3] its subsequent confidentiality. I realize such a stance makes me "difficult," that most people simply passively go along with such legal boilerplate, seeing it as inevitable. I do not. And will not.
Sorry.
Best regards -
Bobby Gladd
Stupid. "Compliance," my 'face.' Of course, the Suits in HR will construe it as my being afraid to submit to a BKG investigation. Duh: I already have an FBI file, complete with fingerprints, from my days as a bank officer.
I'm being asked to believe that, in order for this company to be "in compliance" with, say, federal, state, and local governmental regulatory agencies (and that's simply what "compliance" means in this context), they are required to collect anything and everything thing they care to about me (via any unnamed surrogates of their choosing), whether job-relevant or not, whether true or not, and that, further, such regulatory compliance dictates that they be excused from any liability pertaining to the consequences of any cavalier treatment of such information should it cause me personal or economic harm were it to be subsequently released (either willfully or negligently) to others without my knowledge or consent. (Also: what if I submitted to their background investigation terms, and then asked to see the dossier collected about me? "Oh, no. Sorry, that information is proprietary and confidential." How much you wanna bet?)
I may have been born at night, but it wasn't last night, LOL! ______
Someone has to say "no!" to this kind of stuff. I am one of them.
Maybe that's why I can't seem to find a job now. ______
My new Harpers came today, the August 2008 subscription issue. Since they don't post current articles online, I manually excerpted the following, apropos of the overall discussion and my of own sense of the ironies with respect to the topic -- e.g., here I am, this indefatigable defender of "privacy" who is also, voluntarily, so readily and widely visible on the internet.
My latest joke on the Vegas saying is that "What Happens in Vegas Stays on YouTube." Meaning that, nothwithstanding that we often angrily demand in the aggregate our "right to privacy," our culture is increasingly one enthralled in the lurid grip of an ongoing and growing voyeurism-exhibitionism minuet. Garret Keizer puts it better than could I:
Requiem for the private word by Garret Keizer Harper's, August 2008
Robert Gensburg has practiced law in my community since 1967. His wife, Leslie, hangs out with our friend Ellen, who used to own the bookstore in town. According to local usage the Gensburgs count as my neighbors, though they live some miles from my house and I'm not sure I would recognize them on the street.
Last spring Leslie Gensurg complained to Verizon about problems with her phone service -- peculiar clicks, inaudible dial tone -- but the company was slow to respond, even after Leslie took the extraordinary step of summoning a lineman down from a telephone pole to demand satisfaction. About a month later Lelsie picked up her home phone and was startles to hear her husband speaking to another party from his office, fifteen miles away. It so happens that one of Robert's clients is a thirty-six year old Afghan man who has been held at Guantanamo since 2002. Naturally, the Gensburgs began to wonder if their phones had been tapped. Their suspicions grew with the discovery that massive amounts of confidential information had been moved around on Robert's office computer. A forensic computer expert later determined that the machine had been hacked. Oddities in the Gensurgs' phone service have continued throughout the past year; they have yet to hear a credible explanation from the phone company or the courts. Robert described these experiences recently in a talk entitled "The Rule of Law is Dead."
Well, we sort of knew that, but the point has a way of hitting home when it manifests so close to home. One wants to make a proper neighborly response. It occurred to me that some of us might declare our solidarity with the Gensburgs by inviting the national intelligence services to tap our phones as well.
But such a course has obvious drawback, not the least of which is redundancy. In essence we have been proffering that invitation, to our government, and to one another, for about as many years as Robert Gensburg has been practicing law...
...I grew up in an era of defining moments...Here is mine: it was the moment when Alan Funt first said, "Smile, you're on Candid Camera." More precisely, it was the moment when someone first decided that the appropriate response to being tricked, ridiculed, and photographed into the bargain was to smile. Especially if you were going to be on TV...
...otherwise intelligent people still assert that the Kinsey Report "revealed the sex lives of Americans" when all it revealed was the sex lives of Americans willing to submit to sex surveys -- a submission infinitely more significant than any datum it produced. That there are people who copulate with sheep neither surprises nor interests me; that there are people sheep-like enough to surrender that information on demand is a perversion I find altogether baffling...
...Ironists can also gather good material in the ever more elaborate protestations of confidentiality that attend medical treatment. Your auntie now has a harder time learning the location of your recovery room, but a cancer researcher you've never met (and for whose benefit you've never signed a waiver) has little trouble finding your first and last names in a tumor registry...
...The Luddite in me wants to lay this at the feet of cybertechnology...but the writing was on the wall long before it popped up on anyone's screen. What it said was that by surrendering ourselves to the imperatives of gratuitous curiosity we were not only being better sports; we were building a better world...
...Central to the deterioration of our right to privacy is a metastasizing obsession with the privilege of access. We like to say that this privilege extends to all of us and that it is fundamental to the workings of a democratic society, but who are we kidding? "Access" for the majority applies less and less to the information required for self-governance and more and more to the prurient trivial desire for self-abuse.
It also has less and less to do with consent...
...And finally, and most perniciously...the means of access are in and of themselves a right of access. That the mere ability to record, store, and transmit is fundamentally the license to record, store, and transmit. To suggest otherwise is to be a spoilsport and a control freak, the type who fails to produce the obligatory smile when the shutterbug leaps from the shrubbery...
...It is also to feel the frisson to access, of being made privy to confidences that are, quite obviously, not confidences for long. "Don't tell a soul," someone whispers, and rare is the auditor who whispers back, "Then why are you telling me?" You don't need a weatherman to know which way the wind blows, or up whose skirt, or toward what consequences for the private parts of the average citizen's life.
Of course it wold be silly to claim that our cultural elites, be they liberal or illiberal, are to blame or equally to blame for what is happening to Attorney Gensburg. The official push to reduce our privacy, or "redefine" it, as Principal Deputy Director of National Intelligence Donald Kerr insists we must do, has come overwhelmingly from the Rebublican right. And yet one keeps hearing the emerging conceit that a truly progressive person no longer needs such obsolete encumbrances as confidentiality, copyright, or clothes...
...My late father-in-law, who lived in much closer proximity to his neighbors than I do to mine, awarded his highest accolade to the couple residing in the house across from his garage." The thing I like about the Greenways," he used to say, "is that they mind their own goddamn business."...
...The business of taking back our government and minding our own goddamn business are not contradictory either. Increasingly I believe they come down to the same task, to the fullest possible incarnation of what Justice Louis Brandeis called (in Olmstead v. United States, 1928) "the most comprehensive of rights and the right most valued by civilized men," namely, "the right to be let alone." Of course, that right is meaningful only in a society that ensures liberty and justice, including economic justice, for all But if the defining act of tyranny is making somebody talk, and an early symptom of tyranny is listening in when somebody talks, then the avant-garde of tyranny are those people who, far from caring if somebody listens in when they talk, will actually talk louder for the eavesdropper's benefit.
With that in mind I have made several resolutions. One is to be quicker to as, "Why do you need to know this?" Another is to be quicker to say, "I don't need to know this." The last is to spend more time getting to know people like the Gensburgs...more time with the likes of them and less at those orgies of shallow candor, where everybody gets a hug and nothing is embraced. ______
OK, we can perhaps reflect on the contexual implications of some of that in light of my foregoing David Brin "Transparent Society" excerpt (scroll back up). Also, we might ruminate on recent assertions of someone Mr. Keizer alludes to in the essay -- Principal Deputy Directory of National Intelligence Donald M. Kerr on October 23rd, 2007:
"Too often, privacy has been equated with anonymity; and it’s an idea that is deeply rooted in American culture. The Lone Ranger wore a mask but Tonto didn’t seem to need one even though he did the dirty work for free. You’d think he would probably need one even more. But in our interconnected and wireless world, anonymity – or the appearance of anonymity – is quickly becoming a thing of the past.
"Anonymity results from a lack of identifying features. Nowadays, when so much correlated data is collected and available – and I’m just talking about profiles on MySpace, Facebook, YouTube here – the set of identifiable features has grown beyond where most of us can comprehend. We need to move beyond the construct that equates anonymity with privacy and focus more on how we can protect essential privacy in this interconnected environment.
"Protecting anonymity isn’t a fight that can be won. Anyone that’s typed in their name on Google understands that. Instead, privacy, I would offer, is a system of laws, rules, and customs with an infrastructure of Inspectors General, oversight committees, and privacy boards on which our intelligence community commitment is based and measured. And it is that framework that we need to grow and nourish and adjust as our cultures change.
"I think people here, at least people close to my age, recognize that those two generations younger than we are have a very different idea of what is essential privacy, what they would wish to protect about their lives and affairs. And so, it’s not for us to inflict one size fits all. It’s a need to have it be adjustable to the needs of local societies as they evolve in our country. Eventually, we can only hope that people’s perceptions – in Hollywood and elsewhere – will catch up." ______
"Too often, privacy has been equated with anonymity"?
I bristled when I first read that. Beyond the concerns related to online "anonymity," it conjured to me the spectre of brownshirt neo-Nazi officers accosting people in the streets with the random, armed demand "show your Papez, herr citizen! State your business!"
Truth is, though, it wil not likely be that rude, crude, and in-your-face brazen -- for the most part. A Kinder, Gentler, sub-rosa Fascism. National Security contractors are working tirelessly on techno-apps such as biometric, facial, and gait recognition ID to complement things such as cell phone/GPS and RFID tracking (including implants embedded in U.S. passports).
"TRACKING ME VIA MY CELL PHONE? C'MON, GET SERIOUS"
Well, while it's long been an assertion met with widespread "take off your tinfoil hat" skeptical derision, consider this news item just in:
When the Phone Goes With You, Everyone Else Can Tag Along By Ellen Nakashima Washington Post Staff Writer Saturday, July 12, 2008; A01
...Consumers for years have been able to carry portable electronic devices that can pinpoint where they are on a map or a mountain trail. But yesterday's launch of the iPhone 3G signals the growing sophistication of an industry -- demonstrating the power of marrying precise location technology with the reach of the Internet on mobile devices.
Merchants can use this information to target ads, malls to entice shoppers, insurance adjusters to calibrate premiums, employers to catch moonlighters and parents to keep an eye on children. But what many users may not realize is that by sharing this information, they are creating often permanent records that can tell not only wireless providers, but also social networking sites, other users, and potentially law enforcement and civil attorneys every place they are and have been, as long as their phone and tracking device are on.
"There's a disconnect between our expectations of when we will be observed and who will be observing us and how that information will be used and what the technology is allowing companies to do," said Jennifer Urban, a University of Southern California law professor...
...Mark Rasch, a security consultant and former federal prosecutor, said the social network aspect of location technologies poses risks. "As these things integrate into Facebook and buddies lists, suddenly I'm not sharing information with five or six people, but maybe with 200 or 300 people," he said. "If the cops want to find me, they don't have to find out where I am; they can go to somebody on my buddies list."...
...The big issues are transparency and user control, said James X. Dempsey of the Center for Democracy and Technology.
"How easy is it for the user to turn the location function on and off, and how easy it is for the user to delete past location information?" he said. "What are the companies collecting? Who are they sharing it with? How long do they store it? And what control does the consumer have over the information? These are the fundamental questions."
The wireless industry, through CTIA The Wireless Association, has issued guidelines for location-based services that stress consumer notice and consent and data security. But, Dempsey said, self-regulation is only part of the solution. What is needed, he said, is baseline federal legislation covering all firms that collect personal electronic data... ______
You can safely predict that all of the competing next-generation iPhone-ish "me-too" cellular products will embed such tracking capability. The driving imperative will be that of the wishes of marketers, but the surveillance utility will extend far beyond the merely commercial. Count on it.
TOTAL INFORMATION AWARENESS: GONE?
(Scientia est Potentia = "Knowledge is Power")
The Defense Advanced Research Projects Agency (DARPA) hastily took down the the above TIA website logo and conceptual workflow diagram in the wake of an angry public uproar after its plans hit the news. But while the name associated with that specific stillborn initiative has gone away, the momentum to engage in the same sort of secret surveillance remains. Close on the heels of TIA came CAPPS II in 2003, another boneheaded idea subequently scuttled. As the watchdog organization Electronic Frontier Foundation characterized it:
CAPPS II: Government Surveillance via Passenger Profiling
What Is CAPPS II? The "Computer Assisted Passenger Pre-Screening System" (CAPPS II) is a controversial program proposed by the Transportation Security Administration (TSA) to combat terrorism and prevent another hijacking of U.S. flights.
CAPPS II would allow TSA to access personal information about you available in both government and commercial databases, and to use this information to "tag" you according to how much of a threat you appear to pose to the safety of those aboard the airplane.
How Does CAPPS II Work? CAPPS II uses the information in government and commercial databases to assign each passenger a color-coded score. "Green" means that you do not appear to pose a threat to safety and are free to board the plane. "Yellow" means that you appear to pose a potential threat and must undergo further security checks before being allowed to board. "Red" means that you are likely to pose an "imminent threat" to the physical safety of the people on the plane and will not be allowed to board the flight.
How many people will be classified as yellow or red is unclear; early reports indicated that the figure might be as high as 8 percent, but Admiral James M. Loy, Under Secretary of Transportation Security, later told the Associated Press (Wednesday, September 16, 2003) that the figure would more likely be 3-4 percent. If you are flagged as red you may not only be denied boarding, but also undergo police questioning and possible arrest... ______
Not too many years ago I walked into an Office Depot store near my house, showed them my Nevada driver's license and answered a couple of basic questions. The clerk then entered this information into a terminal, and I was "green-lighted" in about 30 seconds for about $3,000 worth of PC hardware and software on "0% interest for 18 months" credit. I promptly loaded up my new toys into a shopping cart and took them home.
CAPPS II was to employ a similar "methodology" as an E-Z Terrorist Risk Air Traveler ID system. They wasted approximately $100 million on this baby before throwing in the towel. ______
A couple of of other noteworthy post- 9/11 surveillance and analysis initiatives below:
TALON (Threat and Local Observation Notice), is a database maintained by the Air Force after the September 11th terrorist attacks. It was created in 2002 by Deputy Defense Secretary Paul D. Wolfowitz, in order to collect and evaluate information about possible threats to U.S. servicemembers and civilian workers in the US and at overseas military installations. The database included lists of anti-war groups and people who have attended anti-war rallies. TALON reports are collected by various US Defense Department agencies including law enforcement, intelligence, counterintelligence and security, and are analyzed by a Pentagon agency, the Counterintelligence Field Activity. CIFA has existed since 2004, and its size and budget are secret.
On August 21, 2007, the US Defense Department announced that it would shut down the database, as the database had been criticized for gathering information on peace activists and other political activists who posed no credible threat, but who had been one topic of this database due to their political views... ______
ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement) is a research and development program within the United States Department of Homeland Security Threat and Vulnerability Testing and Assessment (TVTA) portfolio. It is reported to be a massive data mining system with the ability to store one quadrillion data entities. The data can be everything from financial records, phone records, emails, blog entries, website searches, and any other electronic information that can be put into a computer system. This information then would be connected to any given American citizen and assess the probability that he or she is a terrorist.
The exact scope and degree of completion of the program is unclear. ADVISE is in the 2004-2006 Federal DHS Budget as a component of the $47 million TVTA program.
The program was officially scrapped in September 2007 after the agency's internal Inspector General found that pilot testing of the system had been performed using data on real people without required privacy safeguards in place. ______
Returning to the vision set forth by DARPA "Office of Information Analysis" (OIA) and subesquent "Homeland Security" legislation passed in the wake of the 9/11 attacks, as I wrote in my original anti-TIA essay:
The explicit OIA goal is to place all recorded private and public personal transactions and histories within ongoing computerized reach of investigative authorities for more effective suppression of terrorist acts. The recently passed Homeland Security Act of 2002 (H.R. 5710, hereinafter referred to as HSA) under TITLE II—INFORMATION ANALYSIS AND INFRASTRUCTURE PROTECTION, mandates exactly this sort of initiative, as it directs the government to centrally
"...access, receive, and analyze law enforcement information, intelligence information, and other information from agencies of the Federal Government, State and local government agencies (including law enforcement agencies), and private sector entities (emphasis mine), and to integrate such information..."
"...To integrate relevant information, analyses, and vulnerability assessments (whether such information, analyses, or assessments are provided or produced by the Department or others) in order to identify priorities for protective and support measures by the Department, other agencies of the Federal Government, State and local government agencies and authorities, the private sector, and other entities..." (pages 23 and 24) ______
"INTELLIGENT MAIL"?
I had to laugh when I found out about this one. Amid the recommendations of President Bush's Postal Reform Commission was one advocating the implementation of what they called "intelligent mail" as yet another "tool" for combatting terrorism. Ostensibly driven by anxieties regarding toxic "anthrax letter" incidents, the idea was to require verified sender and recipient ID for every piece of USPS mail.
Postal Service Researches 'Smarter' Mail Security cited, but some are wary of proposed tracking system Dan Verton, Computerworld Aug 7, 2003 4:00 pm
WASHINGTON, D.C. -- A presidential commission charged with studying ways to make the U.S. Postal Service more efficient has recommended that the agency work with the Department of Homeland Security to develop sender identification technology for all U.S. mail.
In a final report released last week, the President's Commission on the U.S. Postal Service says sender identification technologies such as "personalized stamps" that embed digital identification information would not only improve mail tracking and delivery operations but would also enhance the security of the entire mail system.
But civil-liberties groups and some private-sector technologists fear that requiring intelligent mail for all users of the Postal Service is overreacting to the threat of terrorism.
Privacy Worries Lee Tien, a senior staff attorney at the privacy watchdog group Electronic Frontier Foundation, says intelligent mail raises serious First Amendment issues.
"It's a free-speech and anonymity problem," Tien says.
Making intelligent mail mandatory would likely require congressional approval, Tien says, adding that "right now there is no legal requirement for anybody to scribble a return address on an envelope."
Tien also notes it's difficult to imagine how the privacy rights of ordinary citizens and whistle-blowers could be guaranteed if the use of intelligent mail were required by law... ______
Uh, "show two forms of photo ID" to send a letter or postcard, maybe? Your mail then gets bar-coded and logged in a database?
Well, red herring analogies flew fast and furious, e.g., proponents citing the long-accepted existence and commercial viability of FedX, DHL, UPS, and similar express document and package delivery services. Of course, the naive sentiment ignored [1] the very high relative cost of such voluntary premium services, and [2] the fact that criminals and/or "terrorists" could easily use such services using fake IDs.
Well, given my chronic and tedious inclination for looking under the hood, I reviewed transcripts and supporting documentation of the Postal Commission hearings. Therein I found a document supporting "intelligent mail" proffered by Pitney-Bowes, one of the vendors salivating over the prospect of getting the contract to implement such a system.
Well, guess, what? The section of the Postal Commission's final report advocating implementation of "intelligent mail" was lifted nearly verbatim from the Pitney-Bowes proffer. No one found that odd (or incestuous)?
I certainly did. And I found it telling; it's a major problem with many of these ideas. Supplicants eager to garner government contracts invariably trot out their impressive, august (many times academic consultant) PhD's to soothingly and persuasively promote techno-fixes that are often simply methodologically untenable -- but which will generate a lot of profitable make-work once funded.
It gets particularly troublesome where it concerns applications such as data mining and statistical modeling -- an area in which I have just a bit of experience. Exploratory data analysis and predictive risk modeling appropriate for all manner of business applications simply cannot be effectively deployed against "terrorists" -- myriad bedazzling pitchman proposals aimed at naive, anxious legislators notwithstanding. Misidentification/error rates perfectly "acceptable" in the commercial sector (including normal clinical science) have no place in law enforcement or intel work. Beyond the "false positive" risks they pose to the innocent directly [a], such initiatives frequently constitute a grossly diversionary waste of resources, ultimately exposing society to greater risk from terrorism.
Some necessary basic arithmetic
A big problem. 
