Archive for August, 2009

The future of the dollar

Sunday, August 30th, 2009

UPDATE #2: The Chinese have noticed what the Fed is doing and are not happy about it. That is very bad news for the dollar.

UPDATE: There is also weirdness going on in the real estate market. Look at this piece on foreclosures and what is happening. Now the stock market began a swoon. Maybe this is the end of the bear market rally.

Several months ago I posted a chart of federal money creation. Where has this money been going ? This may explain it. Some went into the housing bubble, but much is going out of the country. Look at this:


Since 1995, capital has flowed into the US from other countries. Then came 2008.

Comparing this data with TIC releases, indicates that from January to May the total capital outflows from the U.S. amount to ($314) billion in assets, consisting of central bank purchases of $50 billion, however, matched with private investor dispositions of $364 billion.

Ignoring the implications of what this decline would mean for an economy that relies exclusively on credit growth in order to perpetuate the monetary Ponzi scheme that the US economy has been for years, the simple conclusion here is that a combination of declining consumer credit and foreign interest for US debt purchases has very negative implications for the credit bubble the Federal Reserve is trying to reflate. As for the consequences for the U.S. Dollar as a result of this activity, these have recently become all too clear.

The Treasury seems to be swapping bonds that are being repatriated and replacing them with Treasuries. This may make the foreign bond holders whole but what happens to us ?

It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that’s not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?

They sold them to the Treasury. If you do that on your tax return, it is called a “sham transaction.”

These are the three critical points to remember as you read further:
1. The US government has record amounts of Treasuries to sell.
2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
3. The Federal Reserve does not want to be seen directly buying US government debt at auctions (and in fact is not permitted to, but many rules have been ‘bent’ worse during this crisis), because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.

Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:

Shell #1: Foreign central banks sell agency debt out of the custody account.

Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.

What is the purpose of this shell game ?

The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.

This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.

The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.

When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.

This will not end well. I also still think the stock market rally is a bear market rally. Here is the full article.

Zimbabwe !

No excuse after all these years

Friday, August 28th, 2009

I don’t know how many have seen these photos. Here is what I think an appropriate comment from another blog.

Kennedy is directly responsible for the deaths of far, far more people than just one unfortunate young lady.

In 1974, Kennedy sponsored legislation in the senate which by law cut off all American military, financial, technical and even agricultural support for the non-communist peoples of Indochina. At the same time the Soviet Union and Mao in China poured vast resources into their proxy states and groups. As a result, the following year, South Vietnam fell to a massive invasion from North Vietnam and the Khmer Rouge took over Cambodia.

The low bound estimate for the number of Vietnamese murdered by Ho Chi Min in the period of 1975-1977 stands a 165,000 thousand people murdered outright. Possibly even more died trying to escape across the seas in rickety boats over the next five years. In Cambodia, the Khmer Rouge murdered as estimated 1.4 to 2.2 million people out of population of only 7 million. This made Cambodia the worst proportional democide in history.

Worse, our Kennedy engineered abandonment of the people of Indochina brought them no peace. Internal commuist warfare was constant from 1977-1992 and fall the Soviet Union.

One can also draw a line straight from Kennedy’s actions up through every major conflict we have fought including 911 up to the present day. Kennedy’s abandonment of the people of Indochina gave hope to every little despot with an AK-47 and a RPG that if they could just tie America down for a few years, Kennedy and his pals would grant them victory. Every anti-American group since 1975, including Al-Quada, publically based their strategy on the idea that Kennedy and friends would prevent the U.S. from striking back at them. Osama bin Laden in many of his writings and speeches repeatedly pointed to Kennedy’s legacy in Indochina as evidence that a small group like Al-Quada could defeat the might of the U.S.

So, we can lay 9/11 partially at Kennedy’s feet as well.

His life was one of egocentric narcissism and a staggering sense of entitlement and privilege. He pursued personal power and prestige at the cost of everything and everyone else. The good that he did was merely an accidental byproduct of his lust for power.

I think the death of Ms Kopechne is enough. It was simple and direct. A test of his integrity.

David Pryce-Jones, as usual, has the right slant on the matter:

Champagne Socialism

Senator Edward Kennedy was, and will remain, an outstanding example of a champagne socialist. Sociologically speaking, the type has been well recognized for quite some time. Indeed, in Turgenev’s great novel, Fathers and Sons, the hero Bazarov asks at one point if you can’t drink champagne just because you call yourself a socialist. The French similarly talk about those who vote on the Left but dine on the Right. Such people are exploiting their privileged position in society to curry favor with those less privileged, and so find the way to continue being privileged while also being applauded for it. Clever, or what?

The obituaries for Edward Kennedy have been more or less unmitigated eulogies. The general inference is that he was an outstanding and constructive politician with vast achievements to his credit. At most, there is an apologetic little insertion somewhere of the word “flawed” as though that excused and explained his failure to become president. In simple fact, he owed everything in his career, especially his position in the Senate, to the fact that he had been born who he was, too well-connected and too rich ever to have to work his passage on his own. If this isn’t privilege, what is? The years of good living and self-indulgence showed in his face, as once handsome features turned coarse and bloated. Physically, he could only waddle. As for morals, Chappaquiddick is only one incident among others when his behaviour proves him to have been a man of bad character.

Normally speaking, ordinary people would never tolerate someone like him as their elected representative. To present himself as a tribune of the people was the only possible protective covering available to him. That he was successful in this respect, and comes to be buried in Arlington with the president speaking at the graveside, is really the only arresting feature of his career. He has enjoyed the sort of lifelong allowance that once would have been made for a corrupt eighteenth-century English duke. It is hard to believe that he was ever sincere in the populist causes he took up, declaiming about righting wrongs only to go home and commit plenty more wrongs of his own without having to account for them. That’s champagne socialism for you, and it seems a taste everybody and anybody can get drunk on.

Medicare rationing

Thursday, August 27th, 2009


The chart above is a suggestion for allocation of medical resources by age. It make clear, as does this article, that rationing is at the bottom of Obama’s plans for health reform, at least those that involve cost savings. Ezekial Emmanuel, physician and brother of the White House Chief of Staff, puts it clearly in several journal articles on medical ethics.

True reform, he argues, must include redefining doctors’ ethical obligations. In the June 18, 2008, issue of JAMA, Dr. Emanuel blames the Hippocratic Oath for the “overuse” of medical care: “Medical school education and post graduate education emphasize thoroughness,” he writes. “This culture is further reinforced by a unique understanding of professional obligations, specifically the Hippocratic Oath’s admonition to ‘use my power to help the sick to the best of my ability and judgment’ as an imperative to do everything for the patient regardless of cost or effect on others.”

In numerous writings, Dr. Emanuel chastises physicians for thinking only about their own patient’s needs. He describes it as an intractable problem: “Patients were to receive whatever services they needed, regardless of its cost. Reasoning based on cost has been strenuously resisted; it violated the Hippocratic Oath, was associated with rationing, and derided as putting a price on life. . . . Indeed, many physicians were willing to lie to get patients what they needed from insurance companies that were trying to hold down costs.” (JAMA, May 16, 2007).

I agree that there is overuse, often the result of moral hazard secondary due to price distortions by insurance, including Medicare. What these people in this administration do not understand is that there is another way. Why not allow an accurate price for those interventions that are “optional?” John Wennberg has shown that variation is most pronounced in the utilization of those services about which there is the most uncertainty as to value. The incidence of hospital admission for acute MI or fractured hip varies little across the country. If we had an honest market mechanism in health care, that variation would be less of a problem, even as it declined. The statists in the administration are determined that they can control utilization of every medical intervention better than a simple marketplace based on price could do. The Soviet Union tried that for 70 years and collapsed.

A death of more consequence

Thursday, August 27th, 2009

Dominick Dunne died yesterday of bladder cancer. I enjoyed his articles in Vanity Fair about crime stories and celebrity gossip. Sometimes he went over the edge and his gossip got a bit tacky. Sometimes he was a bit too self congratulatory. Still, he provided entertainment and even a bit of wisdom. For years, I sent subscriptions to Vanity Fair to family members who enjoyed the Dunne pieces most of all. My mother was a devotee of his stories until she died in 2001. All in all, I think he contributed more to the store of human worth than another famous person who died this week. Sadly, Vanity Fair went off the rails during the Bush Administration and I have not subscribed for a few years. The loss of Dunne cuts the final tie I had with the magazine.

Here is the VF obituary and here is his final article for the magazine.

As for Ted Kennedy, Mark Steyn has it down cold.

As Kennedy flack Ted Sorensen put it in Time magazine: “Both a plane crash in Massachusetts in 1964 and the ugly automobile accident on Chappaquiddick Island in 1969 almost cost him his life.”

That’s the way to do it! An “accident,” “ugly” in some unspecified way, just happened to happen — and only to him, nobody else. Ted’s the star, and there’s no room to namecheck the bit players. What befell him was . . . a thing, a place. As Joan Vennochi wrote in the Boston Globe: “Like all figures in history — and like those in the Bible, for that matter — Kennedy came with flaws. Moses had a temper. Peter betrayed Jesus. Kennedy had Chappaquiddick, a moment of tremendous moral collapse.

Actually, Peter denied Jesus, rather than “betrayed” him, but close enough for Catholic-lite Massachusetts. And if Moses having a temper never led him to leave some gal at the bottom of the Red Sea, well, let’s face it, he doesn’t have Ted’s tremendous legislative legacy, does he? Perhaps it’s kinder simply to airbrush out of the record the name of the unfortunate complicating factor on the receiving end of that moment of “tremendous moral collapse.” When Kennedy cheerleaders do get around to mentioning her, it’s usually to add insult to fatal injury. As Teddy’s biographer Adam Clymer wrote, Edward Kennedy’s “achievements as a senator have towered over his time, changing the lives of far more Americans than remember the name Mary Jo Kopechne.”

The basic facts about the incident are here. There is simply no excuse for Ted Kennedy’s behavior. Even treason was not beneath him.

What the political left simply cannot understand is that this sort of enabling behavior toward their fatally flawed heroes leads the reasonable person to have no doubt that “death panels” will be invoked in the worthy cause of health “reform.” After all, if one life is expendable in the quest for Ted Kennedy’s legacy, why not thousands ?

The Prince of Darkness

Sunday, August 23rd, 2009

This weekend, I spent four days on my sailboat at Catalina Island, in Avalon Harbor. My son and his friends were celebrating his coming marriage. I spent most of the weekend reading a book I should have read several years ago when it came out. It is called The Prince of Darkness and is a memoir by Robert Novak who died last week. Novak was a reporter who spent 50 years reporting on politics from Washington, DC. He began as a young reporter for the Wall Street Journal after an apprenticeship as a local sports reporter and then as an AP writer, rewriting phone reports by AP stringers. He then was invited, much to his surprise, to a partnership with Rowland Evans, a well-connected Washington socialite and political reporter. They began with a column that emphasized political gossip but soon moved on to hard reporting mixed with opinion. They were probably the most effective and influential partnership in national political history. The best comparison would probably be Drew Pearson and Jack Anderson, who combined hard reporting and strong opinion for many years although they were not a partnership so much as a succession from Pearson to Anderson.

I disagreed with Novak on several issues, chiefly Israel and the Iraq War. On the Iraq War he was consistent and, unlike most Iraq War critics, he was also opposed to the 1991 Gulf War. My problem with most critics of the Iraq invasion of 2003 is that they have no realistic opinion on the alternatives Bush faced after the 2001 attack. Once we had been attacked, the alternative to an invasion was withdrawal from Saudi Arabia and a concession that Saddam should be allowed to continue his regime with the risk of nuclear weapons and further aggression. The usual critics try to say that we had Saddam “in a box” and sanctions would have been sufficient to prevent further adventurism on his part. This is ignoring the failure of sanctions, which were being attacked by the same leftists who attacked the invasion. Had we conceded that we could not prevail, radical Islam would have been empowered and we would face further attacks. Novak, almost unique among serious pundits, opposed the 1991 war and was willing to accept the Kuwait annexation and the potential for a second invasion of Saudi Arabia. Given that Saudi Arabia was the origin of most of the 2001 hijackers, and that they have continued funding of radical Islamic activity throughout the world, his position had consistency and a logic that, while I may oppose it, is far more compelling than the opportunism seen on the left wing since 1991.

I also disagree with him on Israel and he does not provide the same logic and consistent argument that he provides on Iraq. His book shows a seamy side of Washington that, no doubt, led to his cynical and skeptical view of the machinations of the federal government over the 50 years in which he wrote his column. The book is a real education on the workings of the federal government and a cause for concern that nothing seems to have changed except, perhaps, for a lessening on the quality of political leaders. He is very critical of Newt Gingrich, for example, and his reputation as a right wing critic should be discounted as his criticism is bipartisan and well founded. I have seen enough politics at close hand to be impressed that this is an account that will stand for many years. I highly recommend it.

The Democrats call for full speed ahead

Wednesday, August 19th, 2009

Today’s New York Times concludes, no doubt with input from the White House, that they will go it alone on health care. This was probably in the cards as the left will not accept compromise and the bill is so bad that Republicans would do better to defeat it and start over after the 2010 election.

Those who have analyzed the bill have concluded that it is a shell with no specifics. They will be filled in by the unelected bureaucrats that fill the 67 committees and commissions and boards established by the legislation.

The argument goes: Given that HR 3200 proposes to fundamentally transform our healthcare system – a vast system that influences the life and death of all American citizens, and that consumes 17 or 18% of our economy – then before our elected representatives vote yea or nay on such a vital bill, they should consider it their sacred obligation to read it first.

DrRich will admit to having originally shared this opinion. But then he spent a couple of days attempting to read selected sections of the bill himself, in order to answer specific questions he had about those sections. (For instance: Does Section 1233 actually mandate end-of-life consultations for old people, or merely arrange for the option? Does Section 122 allow DrRich to continue his self-pay, high-deductable, catastrophic health insurance plan, or does it declare such plans illegal?) Now that he has made this effort, DrRich’s advice to our legislators is – don’t waste your time. For, even if you spend months parsing the convoluted grammar, numererous cross-references, and ambiguous language of this bill, you will not be able to answer even the simplest of questions about what it “really” says.

This is not just because the bill is complex and difficult. The Federalist Papers, for instance, are complex and difficult, full of classical allusions, archaic constructions, and difficult concepts. But with a little time and effort one can readily discern their meaning, and one comes to appreciate the full depth and remarkable persuasiveness of the ideas Hamilton, Madison and Jay were espousing. This is because at their bottom, the Federalist Papers actually say something.

Not so HR 3200. It is complexity for complexity’s sake. When one parses out all the legalese, cross-references, and unnecessarily tortuous syntax, one is often (if not in each and every case) left with nothing concrete. To a great extent, the meanings of large sections of HR 3200 are not merely difficult to ascertain, but are fundamentally indeterminate. It has no definite meaning. It is designed for ambiguity.

There is no intention of disclosing what sort of system this bill (HR 3200) establishes because the provisions would never be accepted by the public.

This is legislation designed to create a legal framework under which huge cadres of unelected, politically-appointed policy mavens and bureaucrats will determine – by publishing hundreds of thousands of pages of regulations, rules, and guidelines – what our new healthcare system will look like. And until those regulations and guidelines are actually created – and this “creation” will be a never-ending process rather than an act – anybody claiming to know the precise nature of our new healthcare system under HR 3200 is engaging in one of the following: lying, projecting one’s own wishful thinking, or extrapolating on the perceived behaviors and beliefs of those who (one surmises) will finally get to make up all the rules.

If it is not voted down, it should be reversed by the new Congress after 2010. A likely strategy might be to pass the House bill, HR 3200, with the “public option” and the Senate bill (one of five) without it. This will take some of the heat off the Senators. Then, in the conference committee, the conference bill will restore the provisions thought too toxic for the Senate and they will pass the combined bill by reconciliation, if necessary.

I don’t think they can do it but that seems to be their strategy. I’m not sure I would call it evil but many will be very angry if this happens.

He doesn’t seem to be the only one worried about this.

I was not intimidated during J. Edgar Hoover’s FBI hunt for reporters like me who criticized him. I railed against the Bush-Cheney war on the Bill of Rights without blinking. But now I am finally scared of a White House administration. President Obama’s desired health care reform intends that a federal board (similar to the British model) — as in the Center for Health Outcomes Research and Evaluation in a current Democratic bill — decides whether your quality of life, regardless of your political party, merits government-controlled funds to keep you alive. Watch for that life-decider in the final bill. It’s already in the stimulus bill signed into law.

The members of that ultimate federal board will themselves not have examined or seen the patient in question. For another example of the growing, tumultuous resistance to “Dr. Obama,” particularly among seniors, there is a July 29 Washington Times editorial citing a line from a report written by a key adviser to Obama on cost-efficient health care, prominent bioethicist Dr. Ezekiel Emanuel (brother of White House Chief of Staff Rahm Emanuel).

Emanuel writes about rationing health care for older Americans that “allocation (of medical care) by age is not invidious discrimination.” (The Lancet, January 2009) He calls this form of rationing — which is fundamental to Obamacare goals — “the complete lives system.” You see, at 65 or older, you’ve had more life years than a 25-year-old. As such, the latter can be more deserving of cost-efficient health care than older folks.

I have already posted on this topic but it bears repeating.

No matter what Congress does when it returns from its recess, rationing is a basic part of Obama’s eventual master health care plan. Here is what Obama said in an April 28 New York Times interview (quoted in Washington Times July 9 editorial) in which he describes a government end-of-life services guide for the citizenry as we get to a certain age, or are in a certain grave condition. Our government will undertake, he says, a “very difficult democratic conversation” about how “the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care” costs.

This end-of-life consultation has been stripped from the Senate Finance Committee bill because of democracy-in-action town-hall outcries but remains in three House bills.

A specific end-of-life proposal is in draft Section 1233 of H.R. 3200, a House Democratic health care bill that is echoed in two others that also call for versions of “advance care planning consultation” every five years — or sooner if the patient is diagnosed with a progressive or terminal illness.

As the Washington Post’s Charles Lane penetratingly explains (Undue influence,” Aug. 8): the government would pay doctors to discuss with Medicare patients explanations of “living wills and durable powers of attorney … and (provide) a list of national and state-specific resources to assist consumers and their families” on making advance-care planning (read end-of-life) decisions.

Significantly, Lane adds that, “The doctor ‘shall’ (that’s an order) explain that Medicare pays for hospice care (hint, hint).”

But the Obama administration claims these fateful consultations are “purely voluntary.” In response, Lane — who learned a lot about reading between the lines while the Washington Post’s Supreme Court reporter — advises us:

“To me, ‘purely voluntary’ means ‘not unless the patient requests one.'”

But Obamas’ doctors will initiate these chats. “Patients,” notes Lane, “may refuse without penalty, but many will bow to white-coated authority.”

And who will these doctors be? What criteria will such Obama advisers as Dr. Ezekiel Emanuel set for conductors of end-of-life services?

I was alerted to Lanes’ crucial cautionary advice — for those of use who may be influenced to attend the Obamacare twilight consultations — by Wesley J. Smith, a continually invaluable reporter and analyst of, as he calls his most recent book, the “Culture of Death: The Assault on Medical Ethics in America” (Encounter Books).

As more Americans became increasingly troubled by this and other fearful elements of Dr. Obama’s cost-efficient health care regimen, Smith adds this vital advice, no matter what legislation Obama finally signs into law:

“Remember that legislation itself is only half the problem with Obamacare. Whatever bill passes, hundreds of bureaucrats in the federal agencies will have years to promulgate scores of regulations to govern the details of the law.

“This is where the real mischief could be done because most regulatory actions are effectuated beneath the public radar. It is thus essential, as just one example, that any end-of-life counseling provision in the final bill be specified to be purely voluntary … and that the counseling be required by law to be neutral as to outcome. Otherwise, even if the legislation doesn’t push in a specific direction — for instance, THE GOVERNMENT REFUSING TREATMENT — the regulations could.” (Emphasis added.)

The history of the “public option” is here in American Prospect and it has always been a sham and a Trojan horse for single payer.

The Dutch change their health care system

Tuesday, August 18th, 2009

The Dutch system of providing healthcare has been advocated by President Obama in one of his speeches. Maybe he is not up to date on new developments.

In the early 1990s, the government promoted efficiency through the introduction of market forces. In its role of orchestrator, the government reduced direct controls and increasingly left the running of the health care sector to sickness funds, private and public sector health insurers and care providers, opting for a system of managed competition. This competition applied primarily to the sickness funds that bought health care services on behalf of their members (‘demand control’).

Under the Health Insurance Act of 2006, the sickness insurance funds were abolished and Dutch citizens were required to purchase their health insurance from profit-making private health insurers, which prior to 2006 insured only the wealthiest third of the population. Private health insurers negotiate on behalf of their members with care providers such as hospitals, general practitioners and pharmacies the scale, quality and price of services charged their members. Consequently, the health insurers play a pivotal role in implementing the Health Insurance Act. Insured persons can now ‘vote with their feet’. They may change their health insurer once a year if the premium is too high, or the quality of care, bought on their behalf, is too low. This incentivizes both health care providers and health insurers to be efficient in the delivery (providers) and purchase (insurers) of health care.

Therefore, the Dutch health care system has converted from a centrally controlled, inefficient, and increasingly expensive government run system to a decentralized, private insurance based, competitive system.

Here is more from Health Affairs:

Since 1 January 2006, the Health Insurance Act has obliged each person who legally lives or works in the Netherlands to buy individual private health insurance, with a legally prescribed benefit package, from a private insurance company. Contrary to the previous private insurance scheme, insurers are legally obliged to accept each applicant for a basic insurance contract at a community-rated premium and without exclusion of coverage because of pre-existing conditions. In an international context, the Dutch health system reform is unique: this is the first country that is consistently implementing Alain Enthoven’s model of national health insurance based on managed competition in the private sector.

There are, of course, two major problems here. One is who decides the contents of a basic policy ? Two, how is the pre-existing condition coverage subsidized. Remember, Holland is a small country. I also wonder about the large Muslim population and how many of them are actually self supporting.

Financing. All individuals have to pay an income-related contribution (7.2 percent of the first 31,200 of annual income in 2008) to the tax collector, who transfers these contributions to a Risk Equalization Fund (REF). Employers are legally obliged to compensate their employees for these income-related contributions. These compensations are the same regardless of the chosen insurer and are taxable income for employees. In addition, all adults have to pay a premium directly to the chosen insurer. Each insurer sets its own community-rated premium. For high-risk insured people, insurers receive a high risk-adjusted equalization payment from the REF. For low-risk insured people, insurers have to pay an equalization payment to the REF. According to the Health Insurance Act, the sum of the income-related contributions equals 50 percent of the total insurers’ revenues for the mandatory basic insurance. In 2008 the average premium equals about 1,100 (about US$1,600) per adult (age eighteen and older) per year.

Average premiums are like the average age of a population. It doesn’t tell you much. My youngest daughter was cheap to insure until she reached 18, then her premium quadrupled, I’m sure because of the risk of pregnancy.

About two-thirds of Dutch households receive an income-related subsidy (“care allowance”) from the government, which is at most 1,464 (in 2008; about US$2,200) per household per year.5 Because the allowance is independent of the choice of insurers, consumers are fully price-sensitive at the margin. No premium is required for coverage of children (under age eighteen); government compensates the REF for their health care costs.

People are free to buy voluntary supplementary health insurance for benefits that are not included in the mandatory basic insurance, such as dental care for adults, physiotherapy, eyeglasses, alternative medicine, and cosmetic surgery. For such insurance, insurers may risk-rate premiums and refuse applicants. More than 90 percent of the population buys supplementary health insurance, almost always from the same insurer that provides their basic coverage.

Since 2006 health care is primarily financed through two mandatory universal schemes with different regulatory regimes: a scheme for curative health care services under a regime of managed competition (Health Insurance Act) and a scheme for long-term care services under a regime of price and supply regulation (Exceptional Medical Expenses Act). The rationale for this distinction is based on differences between the types of risks and the feasibility of risk equalization, and between types of care for which the managed competition model is considered to be (in)appropriate. In this paper we focus on the Health Insurance Act.

The universal mandate is something I support as long as the mandate does not force people to buy policies bloated with state and lobbyist devised baggage. It should be high deductible, basic catastrophic coverage which, for the young and healthy, should have a tiny premium, similar to term life insurance for 25 year olds.

Now for the 2006 reforms:

Insurers also have more tools for risk selection at their disposal than they had before 2006. First, they have more tools for managing care, which can also be used to select risks. Second, insurers have more room to define the precise entitlements of their insured groups, which can be used to select favorable risks. Third, insurers are allowed to sell mandatory health insurance together with any other type of non–life insurance (such as supplementary health insurance, sick leave insurance, and car insurance), which prior to 2006 was not allowed. In particular, supplementary health insurance can be an effective tool for risk selection, because insurers are allowed to reject applicants based on their health status. Fourth, insurers are free to give premium rebates to groups for the mandatory basic insurance, which prior to 2006 was not allowed. A group can have any risk composition, and the “organizer” of the group can selectively enroll preferred members only. Although the rebate for the basic insurance is at most 10 percent, insurers can give these groups any rebate on supplementary health insurance or other insurance products.

Groups are inherently selected by the requirements for the group. One reason why we still have employer-based health insurance is that the employed tend to be healthier. Mormons as a group would probably have much lower premiums.

Here is an interesting trend:

Since 2006, several insurers have advertised special supplementary group insurance policies for diabetes patients. These special policies were developed in close cooperation with the national diabetes patient organization. In addition, several insurers are now actively involved in setting up disease management programs for diabetes patients. These activities appear to be the direct effect of the extension of the risk-equalization system with a risk adjuster for type 2 diabetes since January 2006.19 (Type 1 diabetes was already included as a risk adjuster.) In 2007, almost forty patient organizations representing people with various chronic conditions had obtained group contracts with insurers. On the other hand, at least sixteen patient organizations were not able to obtain such a group contract because the risk-equalization payments for these groups were insufficient, according to insurers. Hence, in due course, the ability for patients with specific chronic conditions to negotiate favorable group contracts may provide a good indicator of the quality of the risk-equalization method.

Here is something from the book, The Innovator’s Prescription, which advocates a “solution shop” model for certain diseases. Here is an example where managed care and evidence based medicine can add significant value to a situation where most disease victims have trouble getting any insurance at all.

The Dutch reforms are interesting and seem to be going in the opposite direction from Obama’s agenda. I wonder if he knows ? Maybe he or his allies do know and don’t care. He was willing to lose revenue with a capital gains tax increase. Maybe ideology is driving this regardless of practical economics.

Thomas Sowell has some useful thoughts on this issue.

Bob Novak RIP

Tuesday, August 18th, 2009

Robert Novak, columnist and Washington powerhouse, has died of the brain tumor that appeared last year. His first warning was a car accident that resulted from a loss of consciousness.

His obituary might include this statement:

“Always love your country — but never trust your government!

“That should not be misunderstood. I certainly am not advocating civil disobedience, must less insurrection or rebellion. What I am advocating is to not expect too much from government and be wary of it power, even the power of a democratic government in a free country.

“Ours is one of the mildest, most benevolent governments in the world. But it too has the power to take your wealth and forfeit your life. … A government that can give you everything can take everything away.”

Now, I’ll have to get his book. I should have read it long ago.

Another obit from one of his political enemies. For example:

In recent years, Mr. Novak was best known for publicly identifying CIA operative Valerie Plame. His July 14, 2003, column was printed days after Plame’s husband, former U.S. ambassador Joseph C. Wilson IV, publicly claimed that the Bush White House had knowingly distorted intelligence that Iraq tried to obtain uranium from Africa.

The column triggered a lengthy federal investigation into the Plame leak and resulted in the 2007 conviction of a top vice presidential aide, I. Lewis “Scooter” Libby, for perjury and obstruction of justice. President George W. Bush later commuted Libby’s prison term.

Mr. Novak was accused by prominent journalists of being a pawn in a government retribution campaign against Wilson. Mr. Novak, who had called the U.S. invasion of Iraq “unjustified,” denied the allegation.

He wrote that his initial column was meant to ask why Wilson had been sent on a CIA fact-finding mission involving the uranium. Then-Deputy Secretary of State Richard L. Armitage mentioned Plame’s CIA position to Mr. Novak, and Bush aide Karl Rove confirmed it.

In a 2006 column, Mr. Novak wrote that Armitage “did not slip me this information as idle chitchat. . . . He made clear he considered it especially suited for my column.” Armitage told The Washington Post that his disclosure to Mr. Novak was made in an offhand manner and that he did not know why Plame’s husband was sent to Africa.

This of course is bullshit and the fact that Armitage sits free as a bird while Libby was ruined is an example of injustice, no matter what the WaPo says or thinks.

“Little in Washington is on the level” is another potential Novak epitaph.

An excellent suggestion about health insurance

Saturday, August 15th, 2009

This post on Powerline discusses the same issues I have been concerned with, namely the difference between insurance and what we call health insurance. He also links to an excellent piece on the issue of pre-existing conditions.

There are two basic problems:

First, if you get sick and then lose your job or get divorced, you lose your health insurance. With a pre-existing condition, new insurance will be ruinously expensive, if you can get it at all. This, the central defect of American health insurance, explains why most Americans are happy with their current coverage yet also support reform.

Second, health care costs too much. Yes, we get better treatment, but the cost-cutting revolution that has swept through manufacturing, retail, telecommunications and airlines has not touched health care.

I agree completely with both points.

A truly effective insurance policy would combine coverage for this year’s expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A “guaranteed renewable” individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.

This is a great idea and one that had not occurred to me before.

The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.

Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.

How do we know insurers will honor such contracts? What about the stories of insurers who drop customers when they get sick? A competitive market is the best consumer protection. A car insurer that doesn’t pay claims quickly loses customers and goes out of business. And courts do still enforce contracts.

The left will, of course, be uninterested in this sort of innovation because they, like the Jacobin Club in Paris 1789, are interested only in control. Any argument that reduces control will be rejected. Only they are entitled to be in charge. If you doubt this, read about Obama’s concept of medicine and doctors’ motives. From Obama, we are offered the IRS monitoring our insurance.

Read the rest of the article.

Here is an article about innovation in the care of the elderly. There is hope that Medicare may support this approach but, aside from the really poor, I doubt it will be worthwhile except as part of a retainer practice.
This Atlantic piece is pretty good and has some useful suggestions about how reform could work. The author describes himself as a Democrat but is refreshingly candid about the fact that Obama’s proposed legislation will not solve the problems the writer sees. It’s worth reading.

Where did Obama learn his economics ?

Saturday, August 15th, 2009

UPDATE: There is more to the story of Harvard’s losses here. MOre of the same but the amount seems to have been even greater.

Obama attended three universities in his mysterious academic career. The last was Harvard, specifically Harvard Law School. Some of us have wondered where he learned economics. For example, he was famously asked by Charlie Gibson in one of the Presidential Debates last year, would he still raise capital gains taxes if the result would less revenue from the tax ? He answered yes, he would, for “fairness.” Where would he get such an idea ?

From Harvard?

Only a year ago, Harvard had a $36.9 billion endowment, the largest in academia. Now that endowment has imploded, and the university faces the worst financial crisis in its 373-year history. Could the same lethal mix of uncurbed expansion, colossal debt, arrogance, and mismanagement that ravaged Wall Street bring down America’s most famous university?

How could this happen ?

Harvard, it seems, had no choice. Unwilling to sell its assets at fire-sale prices, it needed immediate cash to cover, among other things, what my sources say was approximately a $1 billion unrealized loss from interest-rate swaps. That’s a staggering figure: $1 billion, roughly a third of the university’s entire operating budget for last year.
Those swaps, put in place under Harvard’s then president, Lawrence “Larry” Summers, in the early 2000s, were intended to protect, or hedge, the university against rising interest rates on all the money it had borrowed. The idea was simple: if interest rates went up, the swaps would bring in enough money to cover Harvard’s higher debt payments.

Instead, interest rates went down. And for reasons no one can explain to me, even as interest rates were plunging in 2007 and 2008, the university simply forgot, or neglected, or chose not to cancel its swaps—with the result that Harvard wound up facing that $1 billion loss! Whose responsibility was that? Where were Harvard’s chief financial officer and treasurer while all this was going on?

He was advising candidate Barack Obama.

During the boom years, it was assumed without question that the value of Harvard’s endowment would keep rising. Trusting in that false certainty, the already profligate university went wild, increasing its annual operating budget by 67 percent, from an inflation-adjusted $2.1 billion in 1998 to $3.5 billion in 2008—this, even as the number of students remained constant.

Does that sound familiar ?

Officially, the university charges $48,868 a year for undergraduate tuition, room, and board—that’s an increase of 50 percent over the last 10 years—but only a small number of students actually pays that much. Back in 2004, under growing pressure from Washington, and in response to outsiders who accused the school of (a) elitism and (b) hoarding its immense wealth, Larry Summers shook up the world of higher education by announcing that students whose parents earned $40,000 a year or less would be able to attend Harvard gratis. Two years later, that cutoff was increased to $60,000, a figure well above the median U.S. household income.

Does that sound familiar ?

What really happened is that somewhere along the line, around the year 2000 by most accounts, Harvard Management Company, like the university itself, lost its way.

In droves, the best portfolio managers started to leave Harvard Management Company. For most of them, the issue was money, pure and simple. Under Meyer, what Harvard paid his people was based on performance—in most cases, about 10 percent of what they made for the university. As the endowment got bigger, their incentive bonuses got bigger, too. And before long, the (mostly) men at Harvard Management Company were by far out-earning any administrator or professor at the university they were working for.
Jon Jacobson, aged 34, was Harvard’s top earner in 1995. He made $6 million that year, roughly 25 times more than the university’s then president, Neil Rudenstine. Two years later, in 1997, Jacobson, a former trader at Shearson Lehman Brothers, made $7.6 million. By 1998, Jacobson was making $10.2 million.

Resentment followed. At first, articles criticizing Harvard’s well-paid or overpaid money managers were limited to The Harvard Crimson and The Boston Globe. Then The Wall Street Journal got its hands on the story. Soon after that, in 1998, and backed by $500 million of seed capital from Harvard’s endowment, Jacobson quit to start his own hedge fund; no one had to know how much money he was earning.

Complaints about excessive compensation at Harvard Management Company gathered force, like an avalanche or a mudslide. By the early 2000s, Harvard’s top moneymen were making as much as $30 million to $40 million a year. Finally, in 2003, seven members of Harvard’s class of 1969 wrote a strong letter of protest to the university’s president, Larry Summers. They spoke out loudly, publicly, informing any member of the media who would listen that compensation at Harvard Management Company was “obscene.”

This is sounding more and more like the Obama Administration.

In response to the growing protests about “obscene” compensation, Meyer tried to reason with the Harvard community. If Harvard were to outsource its portfolio to various hedge funds, instead of managing its money in-house, he argued, the fees would amount to at least twice what he paid his traders. The end justified the means: consider the billions of dollars that his team was earning for the university!

Meyer’s pragmatic line of reasoning was ignored. Meanwhile, more of his best people left in disgust. “You get to the point where you just don’t want the ugly calls or the press coverage,” I was told by one of Meyer’s former portfolio managers. “I just said enough’s enough.”

Yes, I think Harvard is where Obama learned economics.