Posts Tagged 'government'

Is the Postal Service obsolete? And what does it mean for health care?

So apparently, the U.S. Postal Service is in a peck of trouble. Despite raising postage fees numerous times during the past couple of years, the USPS announced earlier this week that it had lost $2.4 billion between April and June and would be $7 billion in debt by the end of September.

Are you kidding me? $2.4 billion in losses in 3 months?? Are you sure the USPS isn’t making cars or selling subprime mortgages?

I know the economy is tough, and more and more people are communicating digitally nowadays, but there’s no excuse for this kind of performance. FedEx and UPS are still making money, after all.

If the USPS was a normal private company, changes would be made pronto to get its fiscal house in order. But because we’re talking about the government here, our lovely elected officials can seemingly do nothing but berate the Postmaster General John Potter for the agency’s performance while hemming and hawing over the implementation of some of the common sense changes he’s asking for – like the elimination of Saturday service, closure of hundreds of offices, and changes in retiree pay. Even certain Republicans – like Missouri congresswoman Jo Ann Emerson – are worried about cutting back too much. They’ve got constituents to think about, after all.

Of course, the union thinks Congress is already going too far and ‘declaring war’ on the postal workers. I’ve known a couple of people who work for the postal office and like most government workers, they have some of the most secure, cushy jobs out there. Anything that threatens the status quo is anathema to the postal union.

In the end, however, the union may have to accept certain changes, like the end of Saturday delivery. Meanwhile, I wonder if we even need residential 5-day delivery anymore? Why doesn’t the USPS do like the garbage folks and stop by two or three days a week. I know that 90-plus percent of the mail I get nowadays is either junk or not particularly time-sensitive. The rare items that I want to get as soon as possible – Netflix movies, magazines – could probably be delivered through one of the private couriers.

Don’t get me wrong. In many ways, I’m impressed by how well the postal service works. Sure, going to the post office and getting service is a nightmare, but when you think about the millions of pieces of mail that get delivered on time and to the right address every day, it’s a remarkable system.

In fact, when people have complained that a government-run health care plan would be a total disaster, the USPS was one of the examples I would give of government doing a big job pretty effectively.

Unfortunately, I’m not so sure anymore. Perhaps the naysayers have a point.

Obama’s Too Big to Fail Rules Too Late to Matter

The AP has posted an article detailing Obama’s new regulatory plan that would if enacted impose serious penalties on financial institutions when they get too large.

Although there aren’t many specifics in the article about what those disincentives would be or exactly how the government would define ‘too big’, this is a much-needed step back on the road to financial sobriety. We should never as an economy or a country be held hostage to the failings of one single entity.

As deeply as I hated all of the bailouts we’ve been throwing around to woefully (borderline criminally, in my opinion) mismanaged institutions like Citigroup and AIG, I do believe their balance sheets may have been so enormous, their footprints and obligations so intertwined in the world economy, that their failure could have crippled the entire foundation of our credit-based system and brought it to its knees.

Yet don’t be fooled – our problems didn’t lie with any one or two entities, but with the entire system. What we had instead was a complete failure by the market as a whole – and even more damning, by the regulators in charge of watching those markets – to recognize the emerging credit/debt/mortgage bubbles whose eventual bursting forced this country to its day of reckoning.

A law breaking up large financial institutions or disincentivizing them from forming in the first place will help make future problems easier to spot and solve, perhaps, but it won’t by itself save us from our own worst behavior.

And it will do very little if anything to impact our current situation and economic crisis.

In fact, the most ironic thing about the Obama plan is that the entity which may now be most accurately considered ‘too big to fail’ is our own U.S. government, which through actions taken by the Fed and the Treasury has taken on much of the bad debt and obligations (and added a bunch of new ones) that will be stifling our economy for years to come.

We can only hope that the Chinese and other foreign governments continue to agree that the U.S. government is indeed too big to fail and allow us the time to work through our issues and restore some amount of fiscal and monetary discipline without cutting off their support in one fell swoop.

Newspaper bailout? Please no … but we do need The Watchmen

What a shock. A reporter (fearing for his own job, perhaps?) asked White House Press Secretary Robert Gibbs if the potential imminent closure of the venerable Boston Globe calls for yet another government bailout, this time to save the flailing newspaper industry.

Gibbs was sympathetic to the plight of the industry but at best non-committal with his answer. Yet Clusterstock writer Joe Wiesenthal seems to think such a bailout is coming (although not in time to save the Globe), and that the Obama administration and Congress will justify such largess by carping “about how the lack of a thriving fourth estate posed (sic) ‘systemic risk’ to democracy.”

I don’t think Wiesenthal is right. The public appetite for more bailouts is basically nil, and if the auto industry is now getting the stiff arm from Congress then I can’t see how newspapers are going to be able to feed in any significant way at the public trough. The Obama administration has already rejected calls from house Speaker Nancy Pelosi asking for looser antitrust restrictions created under the Newspaper Preservation Act of 1970.

However, I’ve also seen our government do some stupid and surprising things over the past year, and it did after all once create a Newspaper Preservation Act, so perhaps we will see government intervention in the newspaper industry.

And make no mistake, a widespread newspaper bailout would be a stupid thing to do. No one under the age of 50 wants to read newspapers anymore. So what? Most of these people haven’t stopped staying up to date on current events, but are finding the news – at least the news they want – through other means, such as our beloved Internet and the emerging blogosphere.

As a former journalist, trained at one of our nation’s finest J-schools, I want to be sympathetic to the cry and hue I hear everyday from folks in the industry. But media companies should have to deal with the same technological creative destruction forces that numerous other industries have been forced to confront.

The newspaper industry will have to find a way to stay relevant amid emerging technological (perhaps the new large-screen Kindle will offer one answer) and societal changes, or die the slow death it deserves. I am confident a market will always exist – or at least eventually reemerge – for people who know how to effectively create and/or edit content.

However, I have one important caveat here. There is one function that newspapers perform that I do think is vital to our democratic society: Investigative journalism. I cannot begin to enumerate all of the political and business scandals that would likely never have seen the light of day had it not been for the fine investigative work funded by the newspaper industry.

Indeed, much of that investigative work is already disappearing as the industry adjusts to the new economic realities by paring their operations to the bone. Whether newspapers survive or not, the days are already numbered when editors would allow their best investigative journalists to go off the grid for months at a time pursuing a potential scoop that could net the publication a bunch of Pulitzer prizes.

Other media – like magazines and television – have occasionally shed some light on some very dark corners of American history, and certainly some in blogland would pick up the muckraking mantle of the newspaper industry, but it is possible that the private market will no longer be interested in supporting the important investigative work the newspaper industry has historically done.

If the newspaper industry does not survive, and no other privately funded source emerges to effectively replace the investigative work it once did, then the government should step in to create and fund an investigative agency that would perform that function.

A group of Watchmen, if you will (and Watchwomen, of course).

I haven’t given much thought about the organization or mandate such an agency would have – although it would have to have an extraordinary amount of independence from government interference and electoral politics, even more than the Fed and the Supreme Court currently enjoy – and certainly we’d need to figure out who would watch the watchmen. It could be that the creation of such an agency may be too complicated or costly for the federal government.

In any case, I can live easily in a world without newspapers. But a world without a functioning investigative journalism system would be scary indeed.

Government Debt: The Final Bubble

Could this be the beginning of the end for our markets’ last great bubble?

An auction yesterday of $34 billion in 5-year U.S. government bonds didn’t go over so well, fetching prices well under what analysts were expecting.

Ruh-roh.

Oh I know, it may not seem like that big of a deal. The debt still got sold, unlike an unsuccessful auction for 40-year bonds in the UK. The fact that our auction resulted in yields (which move in the opposite direction of the price of bonds) of 1.849% versus the expected 1.801% seems like rather unimportant, inside-baseball type of stuff.

And if it’s just one bad auction, then it may not be important (Edit: Demand for an auction of $40 billion in two-year U.S. notes Tuesday was quite strong). But if this weak demand is a signal of things to come, then we are in for a world of hurt.

In the past ten years, we have had a dot-com bubble, a housing bubble, a credit bubble and an oil bubble, but I have contended they will all pale in comparison to the government debt bubble we are now experiencing.

Think about it: The U.S. government, despite owing $10 trillion in debt, despite incurring an additional $1.3 trillion deficit in 2008 (a number which will certainly be crushed this year and likely for years to come if the Obama plan even gets partly realized), has been up until now able to sell almost as much of the debt as it wishes to at extremely low interest rates.

The Pollyannas will say that there’s a good reason for the low cost of our debt, and why that situation won’t change anytime soon. The big concern right now is deflation, not inflation. Other countries have at least as many problems as we do, and too much savings to boot. They need to put their money somewhere, and the U.S. markets are still the world’s best, safest place to invest money. They own too much of our debt to start selling now – it would only lead to mutually assured destruction.

“This time it’s different.” To me, there are no four more dangerous words. It defies the laws of economics and of logic to expect that a nation awash in debt with miles and miles of higher and higher deficits on the horizon will be able to lend more money at virtually zero interest for an extended period of time.

The only question is when do the floodgates open? We’ve heard rumblings of complaints – notably, on the record and not anonymous – from Chinese officials about our country’s economic situation and increasingly high levels of debt. We’ve seen budget deficit estimates from the CBO which far exceed the optimistic ones put together by the Obama team. And now we had a disappointing auction.

Of course, to a certain extent, debasing our currency is what the government wants. If we could control the pace of the move, some inflation would be a good thing since we’re so heavily in debt (as the value of the dollar falls, that means debtors owe less in ‘real’ terms). But it is highly likely that the transition would come too fast and too quick for our economy and our policies to adjust without experiencing significant dislocations and subsequent pain.

I can almost guarantee you that if government debt is a bubble and it does pop, you won’t see our foreign lenders gently exiting the market. It will be a stampede.

And what will be the implications of such a scenario? Believe it or not, they are likely far worse than anything we have seen so far. Interest rates will soar, as will inflation. Savers will be crushed. Investment will grind to a halt. An already weak economy on its knees would get weaker. We will be forced to renegotiate our obligations with foreign lenders, most notably the Chinese.

The end result could be no less than the end of U.S. hegemony.

Nationalize Now …

I am going to try and keep this as short as possible because I’m off on a biz trip tomorrow (expect a lot less blog activity from me for about a week) and have things I need to get done before then.

But I just had to comment on the statement released jointly this afternoon by the Treasury, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Fed.

In the statement, which discusses the upcoming ‘stress test’ process all large banks will be undergoing starting Wednesday, the government in essence reaffirmed its preference that the banking system remain in private hands, saying in part:

“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”

For the past several weeks, I have maintained that we need to address our financial crisis in a significant and comprehensive way if we expect the other aspects of our recovery plan, such as our stimulus package, to have any kind of lasting impact.

I have argued that the banking system is so poorly capitalized that we will eventually need to nationalize significant swaths of our banking system, and that I’d rather get there sooner than later before we throw away hundreds of billions of dollars trying to put band-aids on a mortal wound.

I have heard several objections to the idea of nationalizing our banking system over the past several weeks. I will go through them quickly.

1) Do you really expect the government to run a bank effectively?

No, I don’t. And the mandate will have to be for the government to clean up any nationalized institution and get it back into private hands as quickly as possible (though perhaps in a different, less unwieldy form, i.e. turning a conglomerate like BofA into a bunch of smaller institutions based on region or function).

However, it’s not like we’re going to be putting lifelong bureaucrats and politicians in charge of running the day-to-day operations of nationalized institutions. Except for maybe the top tier of management, the vast majority of bank personnel would remain in their current positions, and I assume that respected, qualified individuals who have always worked in finance would make most of the major decisions.

More importantly, I find it deliciously ironic when people pursue this line of argument, because as bad as government will likely be at running banks, how can they possibly do any worse than our vaunted private system, which obviously got us into the current mess in the first place.

2) Nationalizing the banks will throw the system into chaos.

The system is already in chaos. The question is would nationalization cause the kind of systemic collapse that some people argued almost happened when Lehman Bros. was allowed to fail. Opponents fear a situation where all lending would shut down and people would start running to their banks to pull out money, creating a financial panic that we’ve largely avoided so far.

I don’t think this would happen at all. Perhaps the automobile manufacturers can make a rational case that if they were forced to declare bankruptcy, consumers would be much less likely to buy their cars because of concerns about car quality, or warranties being honored. But I think if anything, when it comes to their finances, consumers would feel more confident knowing their money was in the hands of the government. Corporations and other healthier banks I think would also perhaps be more willing to do business with nationalized institutions.

After all, this would be a nationalization, not a bankruptcy where assets would have to be sold immediately and at any price; once the uncertainty of the banks’ survival was removed, the government could take its time in figuring out the best way to handle the toxic asset situation and eventual reprivatization process.

3) Nationalization would call into question the very essence of our capitalist system.

I think this could happen. Confidence in the integrity of the system is a key prerequisite for a healthy, functioning capitalist economy. It’s why large and widespread examples of fraud and abuse, like we’ve seen with Enron and Madoff, create so much long-term damage.

Equity and especially bond holders who see their investments, contracts and covenants basically voided by the federal government would no doubt wonder about the very essence of private markets and private property, and whether they could feel confident that they truly owned any of their other investments.

However, I think we can mitigate these concerns by structuring the process and the language we use to make it clear that any nationalization plan would be both limited in scope and temporary in nature.

Unfortunately, we are facing an emergency situation and extreme measures are sometimes needed at those times. We can deal with the economic philosophizing later.

There are other arguments people have made against nationalization. Some argue that while nationalization may have worked for Sweden and Norway, it will be too expensive here. Others say that if we just tried to value these toxic assets accurately and dropped arcane accounting techniques like mark-to-market, nationalization wouldn’t even be necessary.

I think the critics of nationalization are all swimming in denial. Nationalization won’t be easy and painless. Mistakes will undoubtedly be made throughout the process. Certain investors would obviously lose everything. It’s merely the best of a bunch of bad choices. And whether we like it or not, it’s already happening: We already have basically nationalized Fannie Mae and Freddie Mac and AIG, and could own 40% of Citigroup if a current capital infusion plan being negotiated is implemented.

The question is whether we continue to engage in a form of Chinese water torture by trying to fix the situation in a piecemeal, haphazard manner or finally come to grips with the magnitude of our current crisis by devising a plan that deals with the situation once and for all.

Questions: Stimulate Me

OK, so Obama’s tough talking apparently worked.

The administration got three moderate Republican senators to agree to support the stimulus package and prevent a filibuster. In return, some $100 billion in spending from the package was removed while some Republican proposals for tax cuts and credits were adopted (most notably a $15,000 credit for homebuyers).

Of course, the compromise has pissed off some politicians on the left, but likely not enough to jeopardize a Yea vote.  The bill will pass the Senate soon, and then move to a committee where the House and Senate will negotiate on the final bill.

I just spent about an hour or so scanning through the revised stimulus bill, all 736 pages, and there’s plenty of good news (assuming you like the idea of the government spending $827 billion to try and stimulate the economy).

Despite the compromises, this is still clearly a Democratic bill. While there is certainly a fair amount of money going to the military and national security, the biggest sums are reserved for the areas that most liberals care about – education, health care, environment and green technology development, public housing and the homeless, public transit and other infrastructure.

For me, the good news is that the bill is pretty explicit about how the government will track the effectiveness of the money being spent, including the creation of a consumer-facing Web site that will have great detail on every dollar (aside from potential national security issues).

This is all hugely important because if I were someone without scruples, I’d be reading through this bill and just thinking about all the ways I could get my share of what could easily become a fraud-ridden boondoggle.

So what’s the questions part of this column, you ask?

Well, I am going to list below two (or more) of the programs or projects that are currently slated to receive more than $1 billion in government money, and I want you to tell me which one you think is more important and why? Any you’d get rid of?? (This is not a comprehensive list of the billion-dollar initiatives, and there were literally dozens more falling just short of ten figures).

1) $1.2 billion for aviation security vs. $1.2 billion for youth activities (incl. summer employment, state grants) vs $1.5 bln for state and local law enforcement?

2) $9 billion for federal building funds (including $6 bln to make them green) vs $9 billion for broadband expansion initiatives vs $8.4 bln for public transit?

3) $1 billion for dislocated worker training vs $1 billion for Head Start?

4) $1,35 billion for the National institute of Health vs. $1.2 billion for research at the National Science Foundation?

5) $13.5 billion for special education programs vs $13.869 in student financial assistance vs. $13.0 bln for elementary and Secondary Act of 1965 (incl. school improvement)?

6) $17.5 billion for CDC screening and immunization vs. $14.398 for renewable energy development?

7) $2 billion for advanced battery grants (incl. vehicles) vs. $2 billion for high-speed rail corridor program?

8)$2.25 billion for redevelopment of abandoned/foreclosed housing vs. $1.5 bln for homeless prevention?

9) $4.5 bln for electricity delivery and energy reliability vs $5.5 for surface transportation (i.e. highway/bridges) vs. $5 billion for health information technology investments?

10) $1 bln for nuclear weapons program vs. $1 bln for prisons?

A Bill We’ll Be Paying Back For Generations …

Ok, so I’ve admitted that the government probably had to do something to stem the financial crisis.

Now I’m going to talk about all the ways this bailout could – and probably will – go wrong (with the caveat that all the details still haven’t been worked out).

  • Everyone talks about how this plan will be reminiscent of the government’s ultimately successful strategy to create the Resolution Trust Corp. (RTC) in 1989 to help resolve the Savings & Loan banking crisis.  Numerous difficulties arose during that bailout as more than 2900 institutions and $900 billion in assets ultimately had to be rescued, and yet the cost and complexity of this current crisis will easily dwarf anything seen in the S&L crisis. The bad loans in question are larger in scope, broader in reach, and more intricate in design. Deciding which assets to buy, how much to pay for those assets, and how to get rid of them will be extremely delicate matters, and if we have learned anything about government, mistakes will be made in the process.
  • The plan will certainly cost U.S. taxpayers a lot of money. Some optimists are talking about how the government could end up making money from this deal if they’re able to pick up these assets at very distressed levels and then sell them back at higher prices once things settle down. Such a scenario is possible but highly doubtful. What is much more likely is that the U.S. balance sheet, already drowning in foreign debt and facing enormous future liabilities caused by a troubling demographic shift (e.g. Social Security), will continue to deteriorate. This will lead to higher inflation, a higher deficit, higher taxes, a weaker dollar and ultimately, a large transfer of wealth to other nations.
  • This bailout, even if successful and profitable, will once again institutionalize the concept of moral hazard into our economy. This is something I’ve talked about before in this blog, but economic moral hazard basically means that people will take on too many risks if they believe they will be bailed out if things go bad. There are folks, including me, who feel that the S&L bailout is one reason why the financial system got so quickly back into trouble. The Glass-Steagall deregulation of the industry didn’t help, either. I hear a lot of people say our current predicament is too critical and dire to spend time philosophizing about moral hazard, but that’s a circular argument which will never lead to addressing the issue.
  • That’s why it’s so critical the government makes sure all institutions that need help suffer some kind of repercussion as it designs and implements its plan. And when the dust settles, government should begin modest re-regulation of the financial industry to try and ensure this level of risk-taking doesn’t happen again. Finally, the government should go hard after people who committed crimes during this period, and take back some of the billions in ill-gotten gains from those bad apples. No need to play the blame game immediately, and you’re never going to get back all that money (thinking about the multimillion-dollar bonuses many of these guys got over the past several years is a bit sickening), but people as well as institutions need to realize that overly risky behavior could lead to punishment down the road.
  • The one thing we do know about the current plan is that the SEC has declared all-out war on short sellers (investors who sell borrowed shares in hopes of buying the stock back at lower prices and pocketing the difference). The agency has banned short selling on 800 financial-related stocks and forced large short sellers to disclose their positions. I hate this. It frankly disgusts me. It’s something a country like China would do (and has done). I’m a long-only investor, but short sellers are an easy scapegoat – they provide liquidity in the market and often correctly point out flaws in companies and business models. However, I do understand that confidence can make or break our financial system, and plummeting stock prices caused by unchecked short selling certainly threatened to exacerbate the crisis. So, while this ban sets a very bad precedent, I suppose I can live with it as long as it is a very temporary measure. In the end, the ban will only work if time and some breathing room was the only thing the market needed to stabilize. If this bailout isn’t sufficient and we have even more serious systemic issues, then this market rally will be only a temporary reprieve – stocks will fall again and the problems will begin anew as soon as the ban is lifted.

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