The Covert Rationing Blog

Enjoying the Financial Crisis So Far?

September 23rd, 2008 by DrRich

For a while last week, apparently, the American financial system bordered on a complete collapse, one that threatened not only to bankrupt the remaining major investment banks, but that also threatened to freeze all lending and borrowing across the entire American economy. According to some, we were within a day or two of seeing major brand-name non-financial corporations being unable to operate, and all American commerce essentially coming to a grinding halt. Apparently we were about to go, in very short order, from a global economy that functions at Internet speed, to one that works instead on the principle of bartering, if not hunting and gathering.  (At last Mr. McCain’s choice of a running mate becomes clearer.)

And so, on Wednesday evening, stunned congressional leaders listened to Mr. Paulson and Mr. Bernacke tell them that, unless they rapidly passed a massive federal bailout for all the bad loans, then “Heaven help us all.”

The subsequent announcement of the proposed government bailout package has stabilized things for the time being, and has injected sufficient confidence into the financial markets to allow normal commerce (of a sort) to continue. But however this whole mess turns out, whether it leads to another Great Depression, or whether it turns out to be just a really bad quarter, when it’s all over the American taxpayer is going to be saddled with a new debt burden of at least $700 billion, and that some say may reach $2 trillion.  That’s a sizable increase to our total national debt, which today is “only” about $9.7 trillion.  Once they’re old enough to figure out what we’ve just done to them, our children and grandchildren will be pissed.

Even before we reach any kind of resolution of this current fiscal crisis, the blame game has commenced.  It’s too much de-regulation by Republicans vs. too much social engineering by Democrats.  This blame game is potentially a good thing, because unless we objectively assess how this financial crisis happened, we will (as is our habit) devise “solutions” that will just make the next financial meltdown even worse. Unfortunately, the likelihood that we can be objective about assigning blame, especially in an election year, seems slight.

DrRich’s take is that there is plenty of blame to go around. As he sees it, the root of the problem is fourfold:

1)    Our government decided that for purposes of fairness and diversity, mortgage firms should be “encouraged” (and to the government, this means “forced”) to make loans to individuals who, by any reasonable risk standards, simply did not qualify for loans.
2)    The federal reserve made money very cheap, and borrowing relatively easy.
3)    Fannie Mae and Freddie Mac, companies created by government and not subject to normal market forces, bought up the risky mortgages in huge amounts, then repackaged them in complex instruments which it sold to investors all over the world.  Investors (such as the big-name brokerage houses, huge conglomerates like AIG, and the Chinese) bought up the risk-laden instruments, and from them they assembled even more convoluted high-risk investment instruments, which they traded back and forth until nobody knew who owned what, or how much worthless debt everybody had on their books.  This, of course, is where the “free market” went wild, magnifying a very bad problem into an astoundingly dangerous one. The unrestrained wildness was at least partly encouraged by the assumption that, since Freddie and Fannie were quasi-government entities, ultimately the whole mess would be backed up by the U.S. government. (Turns out they were right.)
4)    Mortgage firms, fully realizing that the government really wanted them to lend to unqualified individuals and was happy to buy up all the bad loans they wrote in the process of doing so, nearly killed themselves inventing new and creative ways to entice anybody who could sign a name (and in recent years, not necessarily even their real name, what with the introduction of Alt-A loans - the so-called “liars’ loans”) to take on exotic new mortgages.

So there’s plenty of blame to go around, from the well-meaning but naïve government policymakers who apparently will never “get” the law of unintended consequences; to the Congresspersons of both parties who fought against tighter oversight of Fannie and Freddie (in exchange for major contributions and other perks given to them by F & F) and insisted against all evidence to the contrary that these agencies were fiscally solid; to the arrogant Wall Street magnates who dived head-first into the great feeding trough (whether they were lipsticked-up or not) and allowed their firms to become highly leveraged with disturbingly questionable instruments; to avaricious local mortgage companies who ended up giving houses away and sending the bill to Freddie and Fanny; to the delusional individuals themselves who inexplicably took on hundreds of thousands of mortgages they had absolutely no chance of paying off. All these players should have understood that you can repeal laws of man but you cannot repeal laws of economics, that sooner or later the tipping point would be reached, that the bubble would burst, and that all the players who thought they were winners would suddenly be revealed as major losers.

That tipping point, it appears, came last week.  And so, the American taxpayers, many of whom take great pains to live within their means and don’t borrow money they cannot pay back, are the only ones left to rescue the greedy and the stupid and the craven.

Assuming our economy does not actually collapse over the next few months, and thus does not wipe out our entire social contract (to the extent that we will have to start all over, and thus render moot any concerns over any future fiscal crises our current social contract promises to bring us), DrRich would like to point out that, compared to what is coming, the economic crisis we are now experiencing is merely a trifle.

The current crisis, DrRich repeats, was brought about by well-meaning government policies that attempted to repeal laws of economics in order to achieve a social good, backed up by government programs that strongly encouraged private companies to behave as if economic laws did not apply.  And now, with the inevitable dénouement, the private companies are being variably liquidated or absorbed or socialized, top executives are being variably rewarded or (one can only hope) jailed, and the taxpayer is being invariably screwed.

Regular readers will recognize in the previous paragraph a description of our current healthcare system - and a description of where it is headed.  Our government has striven to devise policies that will provide unlimited healthcare to all Americans whenever they need it, a policy that requires the repeal of basic economic laws, and one that has resulted in a convoluted system of partly governmental and partly private healthcare that rations healthcare covertly (since the unavoidable limits on healthcare cannot be acknowledged), that eschews transparency, that systematically multiplies waste and inefficiency - and that is inevitably building to a dénouement.

There is one big difference, however. Whereas the newly-burst mortgage bubble has left us with an unfunded liability of merely (we think) something less than $2 trillion, our unfunded liability for Medicare alone, over the next several decades, is estimated to be between $25 trillion and $55 trillion.  Considering the fatal damage our current, relatively trivial financial crisis apparently came within a few hours of triggering, this sounds like a lot of money.

When this massive bubble bursts, not even the stolid American taxpayer will be able to backstop the crash. Unfortunately, heading off this coming healthcare tsunami will require us to acknowledge that healthcare rationing is unavoidable, and to come up with an equitable and efficient way to do it. Since our leaders were unable to make themselves publicly recognize, and take steps to deflate, the equally obvious and much more tractable housing bubble when they had the chance to do so, it is difficult to be optimistic.

So try to enjoy our current fiscal crisis, because some day we’ll look back at it with as much nostalgia as we now do the so-called “crash” of 1987.

Posted in General Rationing Issues, Healthcare economics

8 Responses to “Enjoying the Financial Crisis So Far?”

1. The Happy Hospitalist wrote on 09/23/08 at 4:00 pm :

   I agree with everything you said. Yes I do.

2. L-E wrote on 09/24/08 at 10:51 am :

   I have been thinking along the same lines. The long-term results of the Medicare Prescription Drug, Improvement and Modernization Act have the potential to tragically dwarf even those of the Dream Down Payment Assistance Act.

3. pcb wrote on 09/24/08 at 2:49 pm :

   that was a great post.

4. Red Baron wrote on 09/26/08 at 1:34 am :

   Rich, you have a wonderfully intuitive grasp of non-linear issues, but I actually think the origins of this are much larger than your analysis suggests, which (imo) may be a little too “America” centric- I won’t get into a Niall Ferguson analysis of credit “super cycles” and the shifting balance of economic power from North America to Asia- but I think all these factors played a much larger role that you suggest.

   What we do agree on however that debt is the big issue right now, but I sense even you do not see how large an issue it is CURRENTLY. You seem to be making the classic mistake everyone else is making: differentiating between household debt, corporate debt, city-county debt, state debt and federal debt. Federal debt is bad but it is NOTHING compared to TOTAL US debt, which stands currently at almost 370% GDP. So in a $20 Trillion dollar economy, America has today almost $75 Trillion in debt- check the numbers out yourself if you were not aware. The Medicare $55 Trillion time bomb is a big issue, but it is not ‘the big’ issue.

   And while I realize that the purpose of your blog is to get a dialogue on rationing going (which I completely agree with you on), I do think it is still our responsibility as physicians to look at ways we can improve the productivity of the system we live and work in and understand so much better than others, even when those recommendations run against our own personal economic self interests at times.

   And the truth is there are a lot of ways we can improve our healthcare system’s productivity.

   We can improve medical educational productivity tremendously (we should not accept the educational establishment at its word that it costs $300,000 to $500,000/year to educate a US medical student). We can change the credentialing -licensing issues that prevent “non-physicians” from performing a variety of things currently ONLY physicians are permitted to perform today: we could allow mid-levels to perform angioplasties of colonoscopies, we could train non-radiologists to read particular classes of radiographs (say ONLY head CTs, etc…) such that even were the sensitivity-specificity-outcome rates of these ‘non-physicians’ slightly below physicians, still the overall cost-benefit ratios of using much cheaper non-physicians might greatly outweigh using highly trained and very expensive physicians, etc…

   But where I think where you miss the real obstacle to a rationing dialogue in America is how we do it in the setting of such national diversity (I warmly embrace our diversity FYI). For it seems clear to me that diversity IS a double edge sword, and that it can cause social trust issues between groups sub-groups within the broader society. And in the setting of literally a life and death discussion, lack of trust is a real issue.

   How does America ration in the setting of income inequality? Social inequality? Racial inequality? And perhaps the most difficult issue of all: economic productivity inequality.

   For I ask you to solve the following problem (I often ask people to solve it according to their own personal values). I suspect you will see that the ‘reality’ of the problem makes many people very uncomfortable—so much so they either reject it or switch to an new topic.

   The model goes like this:

   If you have a society that has a total output of 10, is growing at 1 per year and is comprised of 4 citizens (A,B,C and D) who individually contribute the following amounts to the overall economic output of the society: A=5, B=3, C=2 and D=0. Let’s assume that everyone is growing equally at 10% a year.

   Then how should you spend your wealth to care for one of your citizens when they become sick?

   If you spend more than 1 on D, the ENTIRE economy will contract. Will A, B and C let that happen? Imagine this happens forever and not just once?

   You can spend up to 2 on C and the economy will still grow, etc… But if you spend more it will contract. Again, what if this is forever?

   Should we spend more on C than D or on any other member?

   How do A, B, C and D trust each other in this model?

   I am not pretending that I have the solution to this problem; I can only solve it according to my own personal moral values. And I do not claim that my values are any better than anyone else’s. But if others have different values than me and vice versa and we are to cooperate on rationing, how do we bridge this divide?

   And for people that deny the truth of this model at all (say those who disagree with the conservation of energy?), how do we bridge that divide?

   These are not ‘academic’ issues either.

5. Gary Levin MD wrote on 09/26/08 at 12:19 pm :

   I am pleased to see that a fellow healthcare blogger has related this financial crisis to healthcare. This will effect our entire economy. It has been in the making for at least two years, or more. Congress is not going to be able to create a solution in one week or one month. Their is obvious disagreement as to how much congress and the people want to pay for a fix. There are a lot of people to blame….first look in the mirror.
   Yes, a good nummber of us are very responsible.
   Go out to your garage…how many of you have a Lexus, Mercedes, SUV that was purchased with a loan, a lease? Your home even if you bought it with conventional and not subprime loan was most likely overpriced at the time by rapid inflation of housing prices caused by ‘easy financing’….
   Do we buy what we need? or what we want?
   This morass runs deeply through our modern American Culture…the time after the great depression when Americans were thrifty ended several decades ago.
   Where do you think all that money was printed to fight the Iraqi conflict…….Al Qaeda has accomplished what it set out to accomplish without their firing a shot after their attack on the World Trade Center and the Pentagon.
   As my late mother used to say “The bigger they are, the harder they fall”.. So much for Harvard Economists. Don’t look to our leaders or congress for the solution….it’s in the mirror.

6. brian carty wrote on 09/27/08 at 12:49 am :

   Having truly educated colleagues like Dr. Rich is one of the rewards of being a physician. He knows economics and his analysis is excellent.

   I would like to add that the combination of Medicare price controls and high inflation may cause the Medicare system to stop functioning, at least for some specialties. If inflation is high enough, this could occur within a year or two. The public and our hopelessly corrupt and incompetent government assume that as long as doctors are seeing patients, everything is fine. But physicians know that a crisis is coming, and they should think about how they will deal with it.

7. DrRich wrote on 09/29/08 at 8:34 am :

   Red Baron,

   I agree that any equitable rationing plan needs to begin with a clear and well established statement of the principles by which rationing decisions will be made. I have discussed this at length in my book, and have even proposed a fundamental statement of ethics for rationing. If you don’t want to read my book, I have posted a reasonably complete outline of my proposal on my other website. Her’s a direct link to the relevant page: http://guthealthcare.com/fixing-it/how_to_ration_healthcare.html

   Rich

8. Red Baron wrote on 09/29/08 at 11:40 am :

   I read your ethics statement. I agree with it.

TrackBack URI

Leave a Reply