Saturday, August 30, 2008

Fannie, Freddie, the National Debt, and the Federal Loan Office (FLO)

In an article entitled "Fire the bazooka," The Economist, that unbelievably witty British weekly news mag, says it is "time to nationalise [i.e., nationalize] America's mortgage giants," namely Fannie Mae and Freddie Mac. The mag realizes that a government takeover would "technically add huge liabilities to the government's balance sheet" but quickly notes that "these would be offset by mortgage assets that are almost as large." What it doesn't say is that nobody wants those assets and that is why ole Freddie and Fannie are in such a pickle in the first place.

It IS possible for a government to run a mortgage office successfully. Before the American Revolution, several colonies, most notably Pennsylvania, sponsored "loan offices" or "land banks" that lent what were then large sums for long periods on the collateral of improved land and other hard assets. The loan offices were far from perfect. They usually lent for less than the going market rate so the quantity of mortgages demanded exceeded the quantity the government was willing to supply. In some places, like Massachusetts, some nasty political non-price rationing closed the gap. (Read corruption.) Also, if times were tough the government did not foreclose as vigorously as private lenders did. But maybe that was a virtue and that interest on the loans made other forms of taxation almost completely unnecessary in colonial Pennsylvania certainly was a good thing!

The Fed has always lent to member banks. Recently, in response to the subprime mess, it began lending to other types of financial institutions as well, in the name of financial system stability. The message it has sent is loud and clear and consistent with earlier pronouncements: get as big and risky as you want because we have your back. And so Fannie, Freddie, Indy, Bear, and many others did, and we and our kids are going to be asked to pay for it. Some people consider this arrangement unfair and it is difficult to argue with them.

Perhaps what we need is a Federal Loan Office (FLO) that will make mortgage loans to any bona fide American citizen for any 1 to 4 unit residential building that s/he can afford. (The IRS can help out with that one.)* The government's cost of funds is zero so it can set the interest rate where it pleases, higher to slow the economy down and lower to speed it up. The Fed would still control monetary policy, sterilizing mortgage flows with open market purchases or sales of Treasury bonds when necessary. All interest payments would be credited to the Treasury and the mortgage interest tax deduction would be eliminated. Like the Fed, the FLO would be a quasi-independent government "profit center" rather than an additional burden on the federal budget.

It could also be used to provide effective fiscal stimulus. Instead of sending out stimulus checks 6 times too small and 6 months too late, the government could use the mortgage loans to stimulate the economy quickly by telling borrowers, to wit most American families, that they need pay only half or some other fraction of their usual payments for the next x months. It could even pass a moratorium on all payments to combat particularly large shocks, postpone payments in disaster areas, and so forth. We'll have to think carefully, however, about how to spot and stop potential political abuses of these powers and there will be some tricky issues during the transition period.

*Mortgage loans should have two bases, the value of the mortgaged property and the borrower's income. The IRS knows Americans' income history better than anyone; perhaps people will think twice about cheating on their taxes if it affects their ability to obtain a mortgage. Assessments should be done by at least three randomly chosen local assessors.

Thursday, August 14, 2008

Fixing healthcare with pay for performance

Even if our national government somehow gets its fiscal act together and pays the funded national debt down, or at least slows its rate of increase below that of real economic growth, the American people will still face two other daunting financial problems, Social Security and healthcare entitlements. I'll tackle S.S. in a future post and concentrate on healthcare in today's installment.

The debate over healthcare tends to revolve around insurance. I think that emphasis is misplaced. Insurance is an issue only because healthcare has become so expensive. In the 19th and early 20th centuries, people wanted reimbursement for lost wages due to illness, not for healthcare costs. That changed as the cost of doctor visits, surgery, hospitalization, and medication soared faster than inflation year after year in the last three quarters of the 20th century.

But the real problem is not simply the cost of healthcare, it is the value proposition. People would happily pay high prices for medical treatment if they actually worked to alleviate suffering, stop further damage, and so forth. Modern medicine does some things very well and the doctors, nurses, and other specialists who provide those services ought to be well compensated for them.

Unfortunately, however, modern medicine is far from flawless. Many diseases and disorders continue to flummox it. My parents, brother, and wife, as well as several colleagues, suffer from chronic medical problems that doctors can't, or won't, fix. Here is where the value proposition comes in. Why do we pay doctors (etc.) even when they don't make us better? Would we pay an auto mechanic who looked at our car, maybe changed out a part, but didn't fix the rattle? Would an accountant expect payment for just looking at your taxes? Why should we pay our doctors just for seeing us?

I recently suffered from a viral infection in my throat that led to acute pharyngitis. I couldn't even swallow my own spit. The ER staff got the swelling down but sent me home without trying to ascertain the cause. Unsurprisingly, I ended up going back to the ER two days later. This time the docs did not even alleviate my pain, sending me home with a concoction I suspect was a placebo. Whatever it was, it didn't work. A week later, I recovered thanks to my own immune system but the ENT insisted that I pay him an office visit anyway. He actually had the nerve to request that I come back 2 weeks later, even though he admitted he could do nothing to help me or to prevent another bout of this nasty ailment. All told, I shelled out almost $200 in co-pays for this "treatment." Lord knows how much my insurer will pay, and all for nothing.

If the government said patients only had to pay when doctors actually helped them our national healthcare bill would be slashed, perhaps by as much as half. That would go a long way toward alleviating the entitlement burden and decreasing health insurance premiums. Some smart egg would have to create a system that would minimize abuse (doctors claiming to do more than they did; patients claiming that they were not helped when in fact they were); entry into the healthcare professions would have to be opened to more people (which in and of itself would be ameliorative); our tort/medmal system would need to be revamped (it needs it anyway).

Imagine, though, how differently doctors would behave if they only got paid based on proven results. Unnecessary office visits and long waits would vanish, doctors would specialize around symptoms/diseases rather than body systems, and referrals to doctors better equipped to handle particular problems would come more rapidly. As long as the rewards matched the risks, doctors could be found who would take on any medical problem, including gunshot wounds and advanced cancer. Overall, doctors would have to work harder and smarter.

Healthcare professionals will therefore come up with all sorts of reasons why this proposal is dumb. As they mumble and bumble, just ask yourself if you would believe the same sort of story from any other professional services provider.