Results for “private equity”
114 found

Invest in People with Income Contingent Loans

Three entrepreneurs are offering a share of their life’s income in exchange for cash upfront and have banded together to form the Thrust Fund, an online marketplace for such personal investments.

Kjerstin Erickson, a 26-year-old Stanford graduate who founded a non-profit called FORGE that rebuilds community services in Sub-Saharan African refugee camps, is offering 6 percent of her life’s income for $600,000.

(quoted here).  A closer look reveals that this is more of clever marketing play to interest donors in supporting a philanthropy.  What, for example, does Kjerstin want do with the money? She writes:

Some people may think that it's crazy to give up a percentage of your income for the sake of scaling a nonprofit venture. But to me, it makes perfect sense.

Well it does make perfect sense for Kjerstin but not so much for a profit-seeking investor (moreover any income would be taxed twice, a problem with equity financing in general but especially so here without corporate tax breaks.)  Investing in just one entrepreneur is also risky – why not subdivide the investment and invest in many?

Jeff at Cheap Talk raises a larger but closely related issue, "Why don’t we replace student loans with student shares?" In fact, Milton Friedman advocated income contingent loans in 1955. 

The counterpart for education would be to "buy" a share in an individual's earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful. There seems no legal obstacle to private contracts of this kind, even though they are economically equivalent to the purchase of a share in an individual's earning capacity and thus to partial slavery

…One way to do this is to have government engage in equity investment in human beings of the kind described above. …The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average–or perhaps modal–earnings without the specialized training; the fraction of earnings paid, x, should be calculated so as to make the whole project self-financing.

Another Nobelist of a more liberal stripe, James Tobin, helped to implement an income-contingent tuition program at Yale in the 1970s.  Alas, the program was terminated largely due to rent-seeking when many Yale graduates become so successful that the repayment amounts became substantial and the nouveau riche chose to default (also here).

Bill Clinton later tried to take the idea national but it didn't get very far in the United States.  (Not coincidentally Clinton had been a beneficiary of the Yale program.)

Australia, however, implemented an income contingent loan program in 1989. Australian students don't pay anything for university when they attend but once their
income reaches a certain threshold they are charged through the income tax system.  Many other countries are experimenting with income contingent loans.    

Hat tip to Alexander Ooms.

Are stock and bond markets contradicting each other?

Stocks are doing well yet interest rates remain low and flat.  What's up?  John De Palma sends along this very interesting analysis by Paul McCulley.  Excerpt:

Thus, as long as economic recovery appears underway, even if stoked primarily by (1) policy stimulus and (2) a turn in the inventory cycle, there is no urgent reason for investors to run from risk assets. Put differently, investors can be agnostic about (3) the strength of private demand growth until the one-off forces supporting growth exhaust themselves, as long as they don’t have fear of Fed tightening.

In turn, a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is so great that disinflationary forces in goods and services prices, and perhaps even more important, wages, will be in train, even if growth surprises on the upside. Accordingly, Treasury players, like their equity brethren, need not fear the Fed, as there is no economic rationale for an early turn to a tightening process.

Thus, both rich risk markets and the lofty Treasury market can be viewed as rational in their own spheres, even if they are seemingly irrational when compared to each other. The tie that binds them, that allows them to co-exist, need not be a common view regarding the prospective strength of the recovery, but rather a common view as to the Fed’s friendly intent and reaction function.

Is it a good thing when asset markets are so much about the Fed?  There is more to the short essayt, read the whole thing.  Here is his conclusion:

Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.

Addendum: Arnold Kling comments.

Betting your views, follow-up

My claims that you are not required to publicly bet your views have received enough denunciations (mostly commentators on other blogs) that I feel it is time to rub some salt into the open wounds. 

First, I have nothing against betting one's views and indeed I've done it with Bryan Caplan, though mostly for fun.  No one bets his or her views consistently, or that frequently relative to the number of views, so I am simply pointing out that a default of "no betting at all" is an OK point along that spectrum.  In fact it is a homage to the idea of division of labor.  Nor have I seen the critics publicly revealing their equity and other asset portfolios, the real bets which matter in financial terms.

More generally, we may wish that researchers express "real commitment" to their views.  I don't see betting as an essential part of such a commitment portfolio.  "Simply being a certain way" when it comes to inquiry is #1 on my list.  Having a good and deserved personal reputation for truth-seeking is another.  An emphasis on betting, in my view, represents an odd economistic view that commitments should be viewed essentially or primarily in monetary terms.  From a variety of other settings (try giving your wife "cash" for Valentine's Day) we know that signaling commitments through money can backfire.  Might that be the case here as well?

Doesn't the very offer to bet signal that your view is possibly based on private, not easily verified-in-public information?  Doesn't it signal a lack of confidence in the publicly available information itself?

If I think of the scientists who have influenced me most, or done the world the most good, very few of them were practitioners of public betting.  Furthermore that correlation is no accident (I would bet that most of them regarded, or would have regarded, the idea skeptically, or as a kind of public relations stunt).  You might think that is a market failure of some kind and maybe it is.  But in the meantime, if you do have a truly good idea, maybe the best course of action is to mimic the other holders of truly good ideas and that means not betting publicly on your idea.

I'm not suggesting that such a mimicry strategy is best with p = 1.0, only that it gives you one of a number of rationales for not betting at all.

Striking statements about the CDS market

From Simon Johnson:

The credit default swap market is a modern Delphic Oracle.  It speaks
loudly and profoundly – these days at regular intervals – albeit using somewhat arcane terminology.

…The most plausible interpretation - and here I’m willing to debate what
the Oracle meant exactly – is that people expect the government will
force the conversion of junior bank debt into equity.  The treatment of
private preferred shareholders at Citigroup, last week, is seen as the
harbinger of further losses for investors.

…The events of mid-September 2008 were traumatic and awful to behold.  I
saw that trailer and I don’t want to see the movie.  But it is exactly
into that scary future that we now head.

Addendum: An excellent follow-up.

Should bank dividends be banned?

New appointee Jeremy Stein says yes:

Simply put, the government should force the banks to suspend all dividend payments," he told The Wall Street Journal in October.  "It makes absolutely no sense for the government to put money into the banks, only to see a significant fraction of it flow out again as dividends to shareholders, and in many cases, bank executives with large equity stakes."

I haven't seen much discussion of this issue.  Dividends are in general poorly understood by economists, in part because they continue to be paid when they face a significant tax disadvantage.  Surely there are cheaper ways to signal the quality of the firm.  One way of thinking about dividends is as a way to take advantage of bondholders.  Start a new firm, borrow $50, issue $50 in equity, and on day one pay $100 in dividends and by 4 p.m. declare bankruptcy.  Not a bad business model but of course neither the government nor the bondholders will let you.  This same strategy is also a way to take advantage of government subsidies and recapitalizations, even if you can't get the dividend up to one hundred percent.  So yes, I do see a case for following Stein's suggestion, at least for banks receiving government assistance above some threshold measure.

Stein, by the way, also favors this:

He advocated aggressive government audits of banks, aimed at separating
solvent ones from insolvent ones. Once that was done, insolvent banks
would be forced into closure or sale while solvent ones would be pushed
to raise more private capital. In addition to dealing with the bad bank
problem, putting the plan in place would remove much of the uncertainty
in financial markets that the government’s ad hoc approach to banks
thus far has helped instill.

What caused the financial crisis?

Forget about particular details for a moment, in conceptual terms what led so many financial institutions to take so much excess risk?  Bob Frank addresses that question and here is my list of major factors:

1. Collective stupidity: A lot of Greeks believed in Zeus and a lot of people in 1938 thought Hitler would be good for Germany.  They were just plain, flat out wrong.  I’ll also put "model error" under this heading.  The relevant stupidity concerned both the fate of home prices and the degree of acceptable leverage.

2. Writing the naked put: This is Bob Frank’s main explanation, noting that he uses different terminology and adds a relative status dash to the argument.  If you don’t know options theory, just imagine betting against the Washington Wizards to win the NBA title every year.  For a lot of years you’ll earn super-normal returns, but one year (not anytime soon, I can assure you) you’ll be wiped out.  That is essentially the strategy the banks were playing.  They were going "short on volatility," so to speak.  In the meantime they reaped high returns and some amazing perks for private life.  It’s hard to just call the party to an end, even if you have a relatively long time horizon.

3. The neutering of debtors. This is the sophisticated form of the moral hazard argument.  Bailouts mean that debtors and depositors don’t have enough incentive to keep safe the firms they give their money to.  Note that #3, as a corollary, suggests that equity holders do not on their provide adequate safeguards against a crash.

Evaluation: You can pin most of the blame on #3 provided you think that a) our government really could let these firms default on their debts ex post and b) society is willing to live with significantly less liquidity transformation up front and also lower returns for depositors.  I reject this mix for reasons of time inconsistency, namely that ex post the bailout is always on its way so this is simply something we have to live with. 

You’re left with #1 and #2 but it is hard to assign relative weights because they work together.  The people earning money under #2 won’t work terribly hard to disillusion the fools and frauds operating under #1.

At times I am tempted to add #4 to the mix:

4. The increasing value of human capital: Bankruptcy is no longer so painful for the wealthy.  You can always get another high-paying job plus you have $10 million squirreled away somewhere in Switzerland.  You could end up working for the guv’ment for $130K a year and your life still is pretty good once you get over the shock of adjustment.  So why not take lots of risk and try to get ahead of the other guy?

The full story then involves additional resources being put on the table — for possible risky investment — as a result of easy monetary policy, pro-housing government policies, the global savings glut, and simple bad luck.  I’ll cover those factors in more detail soon.  And I’ll also have more to say about some of the details of mortgage-backed securities and accounting practices and regulation; those were factors too, although not at the level of generality I am covering here.

Addendum: Here’s Mark Thoma and Barry Ritzholz.  In the comments Robert Feinman is square on, read him.

Second addendum: Megan McArdle adds quite a bit.

The Economic Consensus v. Politics

The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization.  Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan and many others all advocate some form of recapitalization as do Tyler Cowen and myself.  Krugman would prefer a recapitalization in the form of nationalization.  In my view, there is still plenty of private money to buy banks at the right price and my preferred model is the FDIC leading a speed bankruptcy procedure, as was done brilliantly with Washington Mutual (Cochrane also supports this model.)  In the middle are most of the others who have a variety of good ideas to require the banks to raise equity in various ways. 

The consensus policy of economists would put most of the burden of adjustment on politically powerful holders of equity and bonds.

There is also a consensus among economists that the bailout bill is not the right policy.  None of the above economists, for example, is enthusiastic about the bailout.  My bet is that all of us think that the bailout has a substantial likelihood of failing.  The support that exists is born out of hope and fear not judgment and experience.  Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not.   

Addendum: Lynne Kiesling draws the Olsonian conclusion.

Is the Sweden plan so much better?

Paul Krugman, Brad DeLong, and Matt Yglesias are all endorsing the Swedish plan for partial bank nationalization.  Maybe it’s better than what we’ll get (I haven’t read through the latest draft), but I don’t think they are addressing the weaknesses of the idea.  Namely:

1. Solvent banks don’t need to be nationalized.  Insolvent banks should be shut down.  Maybe they’re mostly insolvent, but that is second-guessing market prices just as much as Paulson’s view that bank assets can be bought on the cheap.  The implicit view is that current equity markets are overvaluing these banks.  (It is complicated, however, because current equity prices are not independent of the government plan and there can also be hovering in the neighborhood of insolvency.)  An alternative proposal, of course, is to reveal which banks are solvent and which are not.

2. There is much talk about taxpayers participating in the upside.  First, bank ownership is probably not an efficient way of redistributing wealth (is it what you want for Christmas?).  Second, Greg Mankiw’s friend scored a telling point:

…we
would all be better off if high schools taught the Modigliani-Miller
theorem. MM implies that the price of the asset (again,assuming the
auction gets it right) will adjust to offset the value of any warrants
Treasury receives. In this case of a reverse auction, imagine that the
price is set at $10. If Treasury instead demands a warrant for future
gains of some sort, then the price will rise in the expected amount of
the warrant — say that’s $2. Then the price Treasury pays for the
asset will be $12. Some people might prefer to get $12 in cash and give
up a warrant worth $2 in expected value. Fine, that’s a choice to be
made. But the assertion that somehow warrants are needed is simply
wrong.

I haven’t seen a good response.

3. Swedish governance is in many ways of higher quality than American governance.  It involves lower transactions costs, more social unity, and it is more inclusive of many different interest groups.  For one thing, the concentration of wealth in Stockholm makes it harder to use policy to redistribute wealth across regions.  Instead they redistribute wealth across genders and age groups but those forms of redistribution don’t distort the banking system so much.  The Swedish banking system is also "small as a whole" compared to surrounding markets; you can’t say that about the USA.  Note also that Swedish banks, circa the early 1990s, were simpler creatures than today’s American banking firms.

4. The U.S. doesn’t have any tradition of successful nationalization.  We’ve had plenty of interventions, but for whatever reasons nationalization has not been the preferred model.  I don’t think it is just ideology.  The diffuse and highly federalistic American political system is lacking in accountability and thus it is poorly suited for such policy actions.

5. Nationalization makes it harder to raise private capital next time there is a crisis.  It is a high time preference solution.

6. Presumably the government wants to show it is doing a good managerial job, but in fact the sector needs to shrink.  And would a government-owned bank cut off the flow of credit to, say, Chrysler?

The Workhouse Test

The new Bailout plan has some interesting restrictions on CEO compensation and golden parachutes.  For example:

…a prohibition on the financial institution making any golden parachute payment to its senior executive officer during the period that the Secretary holds an equity or debt position in the financial institution.

This could either be a disaster or a saving grace.  If you think the situation is very dire and also that Wall Street is ruled by greed then it’s a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?).  Thus, those who think the situation is very dire must be gambling on CEO altruism!

On the other hand, if you think that there is still private capital out there ready to buy at the right price then this clause may mean a smaller public bailout than many are predicting.

It all reminds me of the workhouse test.   

Interest rate swaps

The Bank for International Settlements reports that interest rate swaps are the largest component of the global OTC derivative
market. The notional amount outstanding as of December 2006 in OTC
interest rate swaps was $229.8 trillion, up $60.7 trillion (35.9%) from
December 2005.

That’s from Wikipedia.
You’ll see other estimates as well, although they fall within a few
hundred trillion of this number.  If it makes you feel any better, swap
numbers usually measure the total liabilities in the market, not the
size of the swapped payments.  So you could argue that "the real
number" is maybe 1/20th of this or so, with error margins of only
trillions remaining.

Oddly economists don’t have a clear explanation for swaps.  In a
classic "plain vanilla" swap you trade a fixed rate interest payment
for a floating rate payment and of course the swaps occur across
currencies as well.  So here’s a typical story: Bank A takes out a
floating rate loan in terms of Swiss francs (from C) and Bank B takes
out a fixed rate loan in terms of Japanese yen (from D).  Bank A and
Bank B then decide they each would rather have each others’ liabilities
and so they swap interest payments.  That’s called the comparative
advantage theory.

But why didn’t Bank A borrow in yen from D to begin with?  And why
didn’t Bank B borrow in Swiss Francs from C to begin with?  OK, they
"changed their minds."  Is that how you get to all those trillions?

Or maybe lender D didn’t trust Bank borrower A in the first place
and would have charged an excess risk premium.  But then why does Bank
B trust Bank A so much? 

Is there a regulatory arbitrage argument here?  Under Basel I, a
bank might prefer to get a non-risky loan off its books to avoid the
associated capital requirements.  Clearly that drives some of the
market but regulators have been working on
remedying that problem and no one was expecting the swaps market to
disappear as a result.  Furthermore the interest rate swaps predated
the Basel agreements.  Another regulatory arbitrage argument cites the
difference between the U.S. and Eurodollar markets.

Here is one survey of explanations for interest rate swaps.  The explanations mostly seem lame and question-begging to me.  Here is another survey of potential explanations of interest rate swaps.  Good luck and I hope you have JSTOR access.  Here is a useful non-gated summary.

It is a shame that economists have devoted so little attention to
understanding interest rate swaps.  It’s hard to get the data for doing
first-rate quantitative finance work, so the topic tends to be
ignored.  Right now it would be nice to know how much of this market is
real gains from trade and how much is a zero- or even negative-sum game
of some kind.  I believe that practitioners have a better sense of this
than do the academics, myself included.

The bright side is that — as far as we’ve been told — this
massive, unregulated interest rate swaps market has not been a major
driver for troublesome counterparty risk.  The credit default swaps
have been the culprit there, in part because those latter markets are
based on large, discrete default events, which kick in quickly and
require very large surprise payments.

Paulson plan vs. Dodd plan: my email to Eric Posner

I thought the original Paulson plan was terrible with regard to rule of law, and in that sense I thought the equity stake idea of Dodd was better.  A modified Paulson plan might be as good, it is hard to say.

[Eric now blogs that the Dodd plan gives the Treasury more power than current versions of the Paulson plan.  His post is very important.]

In reality I expect that either the Paulson or the Dodd plan would have to move quickly to incorporate some aspects of the other.  We’ll likely get some version of both loan-buying and equity shares, in any case.

The key factor is what kind of institutions are set up for making the next round of decisions.  That’s not getting much attention but of course there is no reason to think this is the final step or the final change in conditions.

Think of a barrel of apples, some good, some less good.  To oversimplify, the Paulson plan has the government buy some of the bad apples.  The Dodd plan has the government buy a 20 percent share in the barrel.  In both cases government buys something.

My intuitive rule of thumb is to want the government to be doing its buying in the better organized, more liquid market.  They are less likely to screw that up.  That tends to favor the Dodd plan in my view.

I like one other feature of the Dodd plan.  Our government loves cash revenue.  Furthermore the U.S. economy is set up so the "public choice" advantage of the government owning banks for the long haul is not so obvious.  We don’t have "insider-based" capital markets, for instance, so owning a bank wouldn’t give a politician so much chance to dole out loan favors.  I believe our government would be in a hurry to reprivatize those banks in return for the cash.  The Paulson plan, as I understand it, does not have an equally clear end game.

I may put this email of mine, or an edited version of it, on MR, check there for reader comments…

Tyler

Night thoughts: How or whether do equity holdings give the government "upside" in eventual bank recovery?  Holding equity yields nothing if the banks never recover.  If the banks will recover, you would think a loan from the Fed would suffice.  But we’ve already tried that.  So what exactly are the assumptions here?  Somehow it is the Fed/Treasury actions which *cause* the banks to recover.  How does that happen?  They overpay for the loans at mysterious prices?  That just puts the Dodd plan back into all the problems of the Paulson plan.  If the government ends up overpaying for loans in the Dodd plan, and then someday gets 20 percent of that overpayment back through its equity share, is not a huge positive advertisement.  (Isn’t simply "knowing when to stop the subsidies" the best way to protect the taxpayers?)  And in the meantime, what kind of credit guarantees is the government offering these banks and their creditors?

Don’t forget Mark Thoma’s good analysis: "So, by having the government take a share of any upside, the result may
be less willingness of the private sector to participate in
recapitalization."

It is easy to say that the Paulson plan is worse.  (Oddly I think the Paulson plan makes most sense in Paul Krugman’s multiple equilibria model for asset values.)  But you shouldn’t think that the Dodd plan is very good.  Most of the Dodd plan boosterism I’ve seen doesn’t look very closely at how it actually going to work.  There’s lots of talk about justice and the taxpayers getting upside and then a reference to the RFC from the New Deal.

Finally, in my view the Paulson plan makes (partial) sense if a) the major banks are in much worse shape than anyone is letting on, and b) you believe in multiple equilibria confidence models for these underlying asset markets.  I’m not saying those assumptions are true, but it would be nice to start by confronting the exact assumptions under which each plan might prove better than the other.

The regulation of derivatives

Be wary when you hear talk of "derivatives" without further qualification.  They fall into three quite distinct categories: exchange-traded, over the counter (OTC), and swaps.  Here is the best overall paper I know on that division.  Wikipedia is useful as well.

I’ll cover swaps in a separate post soon, so for now let’s set those aside.

Exchange-traded derivatives include the instruments traded at the Chicago Mercantile Exchange and The New York Stock Exchange.  Their regulation has overall gone well and no one serious has alleged that they are responsible for our current financial problems.  That said, a single regulator is preferable to our current dual SEC-CFTC structure.

Most but not all OTC derivatives are interest rate derivatives.  Equity derivatives fit this category as well and so do credit default swaps (even though they are called "swaps" they do not here fit into the swaps category). 

These instruments are OTC because no clearinghouse in the middle guarantees the deal.  That means more credit risk and that no single middleman is tracking net positions on a more or less real time basis.  Ideally we would like to make OTC derivatives more like exchange-traded derivatives and we should consider regulation toward that end.  (Do note that private swaps regulators have already done quite a bit to
clear up the issue of hanging and unconfirmed transactions.)  At the margin the social benefits of such homogenization are higher than what the private swaps regulators will bring on their own accord.  In essence homogenization and trading through a clearinghouse limits the leverage issue to a single, easily-regulated institution and therefore it limits the problem of counterparty risk.

The cost of such additional regulation will be higher transactions costs for the trades themselves and also greater contract homogeneity, which is a requirement for exchange trading, netting, and clearing.  We need to make this move wisely and carefully, otherwise OTC derivatives could move to even wilder and less well regulated markets.  Simply trying to shut down the OTC markets, even if that were the economically ideal vision (unlikely), would in terms of risk prove counterproductive.  But the strong market positions of New York and London do make some effective regulatory action possible for OTC derivatives, especially if done in concert.

The lack of sufficient offset and netting and the inefficient spread of counterparty risk across a large number of institutions is an important issue behind current crises and it does not receive enough attention in most blogosphere discussions.

How about Europe?  The 2006 Markets in Financial Instruments Directive extends traditional European financial regulation to OTC derivatives.  Here is one source: "MiFID expands the definitions of financial instruments to include other frequently-traded instruments, including contracts for difference (CFDs) and other types of derivatives such as credit, commodity, weather and freight derivatives."  Here is one overview of MiFID

Implementation and enforcement is on a country-by-country basis and of course the UK is the big player.  Read pp.27-29 in the very first link above and you’ll see that overall the UK has a looser regulatory approach than does the United States, though not on every single matter.  For instance the UK is stricter on regulating hedge funds in OTC derivatives markets.

The more important point is that no country uses regulation of the derivatives market as its major line of defense against financial crises.  Rather countries regulate their financial institutions, their risk, their leverage, and their accounting directly, of course with more or less success.  Regulating the derivatives market, as opposed to regulating the institutions, and their possible participation in those markets, simply isn’t a very effective instrument.

To sum up: a) we should regulate OTC derivatives more, b) those regulations should aim toward establishing netting and well-capitalized clearinghouses, not micro-management of those markets, which would prove both impossible and counterproductive, and c) regulating OTC derivatives is only a weak substitute for regulating the institutions which trade in them.

The U.S. passed the Commodity Futures Modernization Act of 2000, which, among other things, limited the ability of the federal government to regulate OTC derivatives.  I’ll cover that Act in a separate post and yes I do think it should be amended.  But I’ll start by saying that most blogosphere critics of the act simply do not know or understand much of the above.

Luigi Zingales on the Paulson bailout — Kazow!

He doesn’t like it.  And he has another idea:

As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture.  But if it is so simple, why no expert has mentioned it?

The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain.  Forcing a debt-for-equity swap or a debt forgiveness would be no greater a violation of private property rights than a massive bailout, but it faces much stronger political opposition. The appeal of the Paulson solution is that it taxes the many and benefits the few.

And now come the real zingers:

It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.

Addendum: Here is further comment.

Sherry Glied’s new health care paper

It is one of the best health care papers in recent times, it is here, I cannot find an ungated version.  Glied reminds us that only about 1/3 of American health care spending comes from private insurance.  Moving to international comparisons, the more general point is that:

…there is no persistent and regular relationship between the structure of system financing and the rate of growth in per capita health expenditures in a health system…the efficiency of operation of the health care system itself appears to depend much more on how providers are paid and how the delivery of care is organized than on the method used to raise the funds.

In other words, as I’ve stressed before, the health care cost problem comes from immediate suppliers, namely doctors and hospitals, and not from health insurance companies.

The best parts of the paper concern equity.  It is GPs which help the poor, not additional spending on technology or surgery; see p.18 for other comparisons along these lines.  Furthermore, and this you should scream from the rooftops, consider this:

…patterns of health service utilization in developed countries suggest that the marginal dollar of health care spending — money used to purchase high tech equipment or specialist services — is less progressively spent than the average dollar.

In other words, egalitarians should not allocate marginal government spending to health care.  And there is evidence that the more a government spends on health care, the less it spends helping people in money ways.  That is, there is crowding out. 

Finally, Glied offers a summary comparison:

Putting $1 of tax funds into the public health insurance system
effectively channels between $0.23 and $0.26 toward the lowest income
quintile people, and about $0.50 to the bottom two income quintiles.
Finally, a review of the literature across the OECD suggests that the
progressivity of financing of the health insurance system has limited
implications for overall income inequality, particularly over time.

Highly recommended.

More utopian (dystopian?) health care plans

Your body is scanned and monitored by implanted bots; the fight against terrorism made that necessary anyway.  All insurance based on the idea of expense reimbursement is banned.  But if you get sick, they send you some money.  Plain ol’ cash, to spend as you please.  (Off-line we can debate whether this is the government, the private sector, or some mix.) 

This would address cost escalation, boost equity, and eliminate the risk of being bounced by an insurance company, the three core problems cited by Brad DeLong.

The monitors also help us pay wealth-maximizing bonuses for those who get their prostates checked every month.

Larry Kotlikoff has proposed some version of this, minus the scanners and the check-up bonuses.

Keep in mind that standard single-payer plans give the poor, by the standard of their own preferences, far too much health care.  Let’s say a pauper received the same standard of care as a rich man; he would rather have the value in cash instead.  I suspect many of these people would rather have 50 cents in cash than $1 in health care, so right there many of these plans are losing half of their value per dollar spent.