Wednesday, September 24, 2008

Congress Twiddles While Wall Street Burns

Paulson's Panic: It is unfair but true Treasury Secretary Henry Paulson panicked when he realized the global economy was tanking as a result of the U.S. financial mortgage market bubble burst. His panacea is to use the full faith and credit of the U.S. government to buy the toxic bundled securities in an effort to unlock the credit freeze encouraging banks to lend to corporations and consumers so normal business can resume. The concept is the federal government coming to the rescue like the cavalry does in Western movies. The motive is to instill confidence in our financial systems and confidence at this stage of the crises is an essential psychological player in our complex economic system. Paulson's problem is a roll of the dice with no assurances his plan will work. Through no fault of his own, Paulson represents an administration which lacks credibility that began in 2002 when it told us we faced nuclear attack if we didn't invade Iraq pre-emptively. Despite misgivings, Paulson does have support in Congress to act immediately. It's a drill of working out the kinks in a bipartisan game of one-upmanship in efforts to get it done fast but right. Billionaire investor Warren Buffet added credence to Paulson's plan Wednesday by announcing he would spend $5 billion to purchase preferred stock from Goldman Sachs. For the government and private investors such as himself to do nothing, Buffet said the nation would suffer an economic disaster of "Pearl Harbor consequences."

Cautious Consequences: Newsweek's Robert J. Samuelson points out banks and hedge funds are de-leveraging to sell securities to gain better cash advantage, a symptom of a financial crises. But the heavy selling reduces prices. Lower prices deplete capital and production which in turn prompts more selling and heightens fear. At best, the Paulson plan may stall this spiral by unloading their least attractive securities. But it wouldn't automatically stimulate new lending, revitalize "securitization" or prevent more de-leveraging. The rescue is being constructed so quickly it may include flawed provisions only the passage of time will tell. If Congress continues to dawdle, Paulson's panic would be realized.

Health Coverage Boondoggle: Here's another personal example why health costs escalate unabated. Three years ago my pulmonary doctor authorized Medicare and Medi-Cal to purchase a CPAP, a breathing devise designed for patients suffering from sleep apnea. Coram, the Rancho Bernado, Calif., provider was responsible, helpful and efficient replacing and improving parts attached to the breathing machine. Several months ago the company was acquired by a large provider of pulmonary devises and its equipment distribution service turned over to one of its subsidiaries. In the meantime, I switched coverage to the HMO Health Net as the primary payer. Dialing the new guys on the block, I was told in no uncertain terms the only way I could receive the requested part was to have my primary physician fax them 1) the exact product description, 2) a copy of the original sleep apnea diagnosis, 3) the doctor's reason for the need for the part, 4) pre-authorization from Health Net and 5) the primary care physician's personal updated clinical evaluation of my condition. Fact is, my doctor has none of those records other than my word I use a CPAP. It occurred under my previous health coverage in San Diego before I moved to Temecula. I asked the new provider if I could pay cash for the part. Absolutely not. I needed doctor's approval. This irreplaceable part so crucial and protected by the new provider is none other than a simple air filter, a small swatch of clothe. The provider charges the insurance carrier $15 for a package of two. Having no part of this nonsense, I called my pharmacy and told him my story. He checked his order catalogue, found the filter and sent it to me shipping free. The retail cost: $4.95. There is no doubt the bureaucracy of the health providers contributes to price escalation of the system. In this case triples the retail cost. Multiply that example by the millions of similar cases. It adds up in a hurry.
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B. Remmers said...

As far as the medical industry, the prices these days are absurd. I went to the dermatologist, paid my 40 dollar copay, got a consultation on a wart on my finger and a mole on my back by an assistant to the doctor. They put liquid nitrogen on the finger and told me to come back in a month for surgery on the mole. The whole affair took about 15 minutes yet somehow they managed to bill 690 dollars to Anthem Blue Cross, of which I am to pay 80 bucks. How did they get 690 dollars out of a 15 minute visit? They charged 340 dollars for the consultation, 300 for the "surgery", and 50 for the "medical visit." Is there any hope for the health care in this country?

LJR said...

The federal bailout proposed by Secretary Paulson might appear to be another case of the fox in the hen house, but a bailout is needed or indeed there will be a financial melt down. The issue is one of liquidity and the risk that the system could run dry. Case in point are the money market funds that "break a buck." It only takes a few of these funds to post that their NAV is below $1.00 and a run on these funds commences. Cash reserves are limited. Were word to get out that a fund couldn't pay, panic would ensue. A run on the banks is what precipitated 1929 and the Depression. The bailout will help restore order by taking a lot of the current risk out of the market through purchases of underperforming assets. The purchases will help restore liquidity. The public has to get it's mind off the notion that the bailout is $700 BN out the door. As will happen, the agency purchasing the assets will sell them into the market, replenishing much of what was purchased and thereby reducing the burden on the tax payer. Meanwhile, the idea of tax reductions, whether espoused by the Demos or Republicans is fanciful. Tax increases are an inevitable consequence of this fallout from the deregulation of the financial markets. LJR