Newspeak

This weekend I downloaded real page turner. (And the summary)

From the summary:

The Health Choices Commissioner specifies the benefits that must be made available in each year – including a requirement that each participating plan provide one basic plan in each service area in which they operate. It is then optional for the plan to offer one enhanced and one premium plan. The differences between the three main plans (i.e. basic, enhanced and premium) are the levels of cost‐sharing required, not the benefits covered. The Commissioner shall establish a permissible range of cost‐sharing variation that is not to exceed plus or minus 10% with regard to each benefit category.

The Health Choices Commissioner sounds like Newspeak to me. We'll get the choices that the allow for us to have, no more no less.

Since reading this is clearly too much of a task for one person if you're not being paid to do it, I would be open to any insights that readers of this blog happen to have.

The Public Option

I have a healthy degree of skepticism that the public option might not compete on a level playing field with private insurers. I found a publication from the American Academy of Actuaries that explains some criteria for a public plan that would compete on a level playing field.

I just can't be too surprised

If you liked the first stimulus, you'll love the second one. Politicians, particularly Obama and Congressional Democrats are nervous that the stimulus is not enough. First, look at some basic facts and reasonable judgments.

A Few Points

A small proportion of the stimulus has been spent - A $100 billion just isn't what it used to be. In addition, a majority of the $110.3 billion was spent in the month of June. Other articles, I've seen show that even less has been spent.

Economists say that only 10 percent of stimulus dollars have been spent and the president's plan has been criticized for not creating enough jobs.

Most agree that there is a lag - The economy is a complex system and nobody expected the stimulus to work instantaneously. Given that little spending out of the total has occurred and a majority was spent last month, it is too early to know what's working. Pushing the button again won't help in the near term.

States are using the money for short-term needs - People were promised grand projects to increase efficiency and build American infrastructure. However, much of the money has been used to close short-term budget gaps.

Cash-strapped states have used federal stimulus dollars to close short-term budget gaps and avert major tax increases but generally have not directed the money toward long-term expansion, according to a new report.

I had a few other observations, but these are the most important ones that I have for right now.

How else could it have been done?

Drop it from helicopters
If you remember the great economist Milton Friedman, he proposed that we "drop money from helicopters" in the event of a liquidity trap. This bypasses the slow and often inefficient process that we face in finding "shovel-ready projects" (or the latest phrase we want to use). If individuals receive money they are limited to a few broad options to dispose of the money.

• Spend or invest
• Save
• Pay down existing debt

If you believe that deficit funded fiscal stimulus can stimulate the economy, spending or investing the money obviously helps matters. In this particular economic downturn, there are serious issues with the banking system. If individuals don't spend or invest, they can save put their money into banks. The banks would have a larger deposit base and less issues with liquidity. However, the best result may be that individuals pay down their high debt levels. Finance author and perhaps philosopher, Nassim Taleb, argues that the global economy needs $40 to $70 trillion in deleveraging.

Grant it to the States on based upon a simple formula
Much of the money is being administered by states for projects or being used to prop up state budgets. If we want to have the States administer the funding for projects or simply prop up their short-term budgets, a simple approach would be to transfer an amount calculated in proportion to population, state product, taxes to the Federal government paid by its citizens, or some other available measure. The Congress does not have a tendency to be succinct, and a stimulus bill on one a sheet of paper is not likely to happen (or at least short enough to be read).

Some combination of individual stimulus and grants to the States
Combining these two approaches should not result in a stimulus bill so long that you would fall asleep reading it. The approach that Congress actually used has not been shown to actually focus on long-term, high return investments. A quickly enacted and carried out stimulus that simplistically dropped money from helicopters to the States and/or individuals would likely pack more of a punch. (If you grant the initial premise that deficit spending will stimulate the economy)


I will be continuing to research this issue with the following sites:
Stimulus Watch
Recovery.org

Thanks for reading, tell your friends.

California IOUs

The largest banks in California including Well Fargo and Bank of America have accepted the IOUs in the past. Now, some banks have said they will stop accepting the IOUs at the end of the week.

From this, a market is arising for California IOUs. If you look on Craigslist in San Francisco, there are dozens of ads for "IOUs Wanted."

This raises a few issues

1. Is this a state-issued currency? It is used just like a currency, except that there is an explicit interest bearing feature. If it is a currency, that runs into constitutional issues.

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

2. What are they worth if the state does go bankrupt? I have some idea about what happens with a corporation goes bankrupt, but I don't know much about the equivalent for a State.

3. Banks are accepting the IOUs and some may continue to accept them after this week. How do they impact the bank's capital and what does the US Treasury have to say about it?

Changes in regulations try to solve the last crisis rather than prevent a future crisis, and in large part it's the only thing that they can do. In this time of changing regulation, we should think about how difficult it is to gauge regulatory effectiveness in a complicated financial system. What I'm trying to say is that we know when something bad has happened, but how do we know when we've prevented something bad from happening through regulation?

Looking at the historical data as a guide to regulatory effectiveness is a poor guide. The structure of the economy, the financial system, and other regulations has changed substantially over the last couple hundred years and even the last 50 years in which we have data. Huge changes in communications, growth in financial products for consumers, changes in goals and execution of monetary policy, and changes in culture have left us with an system that is different than it was just a few decades ago. Using history as a guide for the regulation of today's financial institutions should be done with caution - we only have a very small sample.

Even if there are lots of regulation on financial services, people will still do things that do not make sense and recessions will still happen. We know that regulations can stifle innovation by making it more expensive or impossible to change. While the costs of regulatory compliance in terms of management time spent or legal compliance costs may be known or knowable, the cost of opportunities not pursued and chances not taken because of complicated or inflexible regulations will never be known.

On a final note, I do think there is a place for some regulation in financial markets. However, I also worry about regulations that are the equivalent of a 10mph speed limit on the interstate.

Nobody is above the law

It is easy to get the impression from many news stories and the reaction by Obama that the recent events in Honduras are something like a typical military coup. The circumstances of this case show that the military was merely enforcing the rule of law and providing force to other institutions that operate within the law.

President Manuel Zelaya brought this upon himself by his disregard for process and rule of law.
http://news.yahoo.com/s/ap/20090626/ap_on_re_la_am_ca/lt_honduras_constitution

http://blogs.tnr.com/tnr/blogs/the_plank/archive/2009/06/29/fetishizing-the-presidency.aspx
There were some particularly interesting quotes from the article above.

"Under Honduran law, soldiers are normally responsible for distributing ballots ahead of elections, but the military leadership has opposed the vote. Zelaya has fired the military chief for refusing to support the referendum and vows to ignore a Supreme Court ruling ordering him reinstated."

"Congress — led by members of Zelaya's own Liberal Party — has opened an investigation into his mental stability and could declare him unfit to govern."

"It followed a series of clearly unconstitutional moves on Zelaya's part, including his attempt to unilaterally remove the chief of the army, which, according to Honduras's Constitution, can only be done by a congressional super-majority. "

Zelaya broke the law and put himself above all other insitutions.

"Congress cannot investigate me, much less remove me or stage a technical coup against me because I am honest, I'm a free president and nobody scares me."

He believes himself above the law.

"The Supreme Court, Congress and the attorney general have all said the referendum he is sponsoring is illegal because the constitution says some of its clauses cannot be changed."

"The constitution, approved in 1982 as Honduras was throwing off two decades of nearly uninterrupted military rule, states that any politician who promotes presidential re-election will be barred from public service for 10 years."

The constitution prevents a strongman from developing at least through legal and constitutional means.

The other side of this matter is the complaints of a "rigged system" in Honduras. As in many third world countries, there are huge inequalities in power, wealth, and income. However, these moves by Zelaya do not move Honduras in the right direction. Zelaya was following the typical pattern of a dictator in the making. (much like his ally, Hugo Chavez) of undermining other institutions. This continues until arbitrary and unchecked power is vested in one man or a small group of people. The power of a charismatic leader to undermine institutions for some stated noble goal can be substantial. Sometimes this happens through the consent of an unwary people, while at other times substantial irregularities in electoral process do not reflect what the voters actually want. In either case, this power must be checked before it is too late and no other functioning institutions are left to contend with executive power. Term limits are one attempt to prevent the accumulation of power in one man or branch of government. It is inadvisable to entrust so much power to one man and one institution regardless of how noble he says his purposes are and how great some people think he is.

Leaving TARP

I'm catching up on my DealBook, and I caught this article on leaving TARP.

The repurchase of preferred stock is easy to price, but the warrants are more difficult to value. However, using Black-Scholes a reasonable approximation of the value can be made. Basically, there is enough leeway in the assumptions made about pricing and the conditions on the warrants, that the range could be very large for prices that are fair for both parties.