Nobody Plans The Path To Ruin

Another week, another Ponzi scheme. This time, it's a guy named William Parente, who as his investments started to unravel, shot his wife and two daughters in a Sheraton hotel. The scale's a lot smaller, but I'll submit that the end result does put Madoff into perspective: yes, there are far greater levels of evil out there.

One point this should underline is that the "Ponzi scheme" is not a distinct type of financial malfeasance. Hardly anyone sets out to create a "Ponzi scheme." Yes, Charles Ponzi himself is a rare exception. But in the main Ponzi schemes are merely investment vehicles of all sorts that have gone bad. The manager lies about the results, hoping that the next month or the next year he can turn things around. He can't, so he lies some more. The deeper in it, he is, the less likely things will ever turn around. Eventually some investors ask for their money back. The first ones get it back, and there is less and less money in the pot. Eventually the fund is broke and it all comes tumbling down. What keeps it going is not financial wizardy. It is merely desperation.

Still Hoping For Cheap Healthcare Reform

Timothy Noah, a writer whose work  I respect a lot, recently published a story arguing for a national single payer health plan that included among its arguments the idea key idea that Medicare has administrative costs that are one third that of private insurers. I found this number extremely suspicious, and have now tried to spend a while tracking it down. Noah attributes it to a study from the Lewin Group. According to that study, administrative costs for small group private insurance plans are 31.7% of claims, compared to what the plan estimates at 13.2% for public plans.

Even for small firm plans--costs for large companies will be much, much smaller--this is a stunning number. But it's impossible to trace back from the Lewin study where that number comes from (the footnotes don't tell you). A recent and much more wonky Lewin report detailing the assumptions used by their health care models, however, includes some similar numbers on administrative costs (look at table 49, on page 107), and those do get a footnote. That footnote lists the source as a Hay Group study that was presented to Congress in 1990. I've seen other links to that study with the date as 1988, and some questions about the methods. I can't find those now, but really it doesn't matter: the bottom line is that the numbers that the Lewin Group is relying on here are a full 20 years old.

There's no question in anybody's mind that insurance for individuals and small groups is overpriced. Part of any health care solution is bringing down those costs to the levels that large employers pay. But what I find mistaken in Noah's and the Lewin report is the underlying hope that health care reform can be accomplished at low cost merely by trimming the fat of insurance company profits and administrative costs. That's not true. There are still health insurers with way out of line administrative costs. But in most cases, they're not. Medicare has lower costs where it provides lower reimbursements (and, it should be noted, transfers a lot of the administrative costs to health care providers). And that's reflected in the number of doctors who won't take it. If doctors and hospitals were required to accept the rates of a single payer system, that would change. But I would question whether there is any political appetite to make doctors the only people in the country who have government mandated rates.

PS: Oddly, the Lewin Group itself, it's worth noting, is a subsidiary of a company called Ingenix, which is itself a subsidary of UnitedHealthcare. So whichever side you're on, you can at least credit the health insurers with providing the data to hang them with.

The Two Faces Of The Treasury

So does Timothy Geithner want banks to repay TARP funds or not? It seems to me that in Geithner's latest testimony you can find any answer you prefer. On the one hand, the stress tests are supposed to determine which banks have sufficient capital to return government money. On the other, whether the government will take it back will be determined not only by the tests, but whether it is in the national interest: in other words, Treasury would prefer that banks lent out the money than that they return it. The initial assumption that banks that didn't take money would be at a competitive disadvantage has been replaced by another idea (admittedly already present in Hank Paulson's initial pitch) that dividing banks into government supported, tottering ones and self supported stable ones would put the government supported banks at a disadvantage.

There's another, unspoken, assumption--or maybe hope--here, though, which may be even stranger. It is that adding more capital to the banks will make it feasible for them to increase lending to levels that will jump start the economy. To some extent, of course, that's true. Cheap money will be lent out. However, what's keeping the stronger banks from lending right now is not a lack of capital. It is rising losses on loans they've already made. Loans that were risky before are more so now in the midst of a recession, and there is no magic solution that will both increase lending and reduce risk. This ultimately is Treasuries dilemma: telling banks to lend more and do it more responsibly at the same time. On this, as with repayment, the government is speaking out of both sides of Geithner's mouth.