Friday, 29 August 2008

Is the FDIC another troubled monoline?

Reading Reggie Middleton’s latest blog on RGE (he looks much younger than I'd have guessed!) reminded me of a metric which is critical to assessing the velocity of a financial crisis as it affects a financial institution. In looking at American Express, he highlights (among a lot of other useful data) the extent to which charge-offs on credit cards are exceeding the growth of reserves. Both numbers are moving. Charge-offs are going up. Reserves are going up too to cover the losses from charge-offs, but are not growing as quickly.

As we all know, it is liquid reserves that enable a credit institution to cope with periods of uncertainty, underperformance and/or illiquidity. In the banking industry, the relationship between losses and reserves is referred to as the “coverage ratio” and it is a critical indicator of stress.

Those with too low reserves must borrow or recapitalise just at that point in the cycle when lenders and investors become wary sceptics as they contemplate the worsening business climate in general and deteriorating performance of the needy in particular. Those unable to secure credit or attract investment must look to official liquidity facilities, if available, and/or face forced asset liquidations and/or insolvency. Those who can secure credit or attract investment typically do so at a cost which impairs future profitability and so undermines future reserve growth (see From Capital-ist to Capital-less Economies).

It occurred to me to examine the coverage ratio in another context that I already planned to write about today: the FDIC.

For the past month or so, I haven’t been able to look at the FDIC without seeing a big, undercapitalised, monoline insurer. I didn’t want to see the FDIC that way, especially since Mervyn King, governor of the Bank of England and normally a very sensible bloke, is a huge admirer of the US deposit insurance system and wants to import FDIC principles here to the UK. If the FDIC is fundamentally flawed, then the UK may once again follow the US over yet another cliff with too little reflection of our inherent self-interest in avoiding yet another public policy disaster.

Facing my fears, as we all should if we aspire to be rational and make superior judgements, requires assessing the facts.

The following excerpt from Wikipedia describes the characteristics of a monoline insurer:

Monoline insurers (also referred to as "monoline insurance companies" or simply "monolines") guarantee the timely repayment of bond principal and interest when an issuer defaults. They are so named because they provide services to only one industry.

The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured.

So what is the FDIC then? The FDIC “guarantee[s] the timely repayment of [deposits] when a[n insured financial institution] defaults.” The FDIC “provide[s] services to only one industry. The economic value of [FDIC deposit insurance] to the [insured banks] offering [deposit accounts and certificates of deposit] is a saving in interest costs reflecting the difference in yield on an insured [deposit] from that on the same [deposit] if uninsured.”

The similarities are too great. The FDIC is a monoline insurer in all the ways that matter.

Taking that as a starting point then, what makes the FDIC better able to withstand the rigours of a financial crisis than its private sector monoline brethren? Let’s look at the advantages the FDIC has over lesser monolines.

Regulatory Powers: The FDIC has the power to compel banks to increase their capital, limit their riskier business activity, and otherwise intervene to curb management’s rush toward bank failure.

Mandatory Participation:
American banks have no choice but to buy their deposit insurance from the FDIC, and are obligated to do so. They have no choice but to pay the premia assessed by the FDIC when due if they want to remain in business. With more than 6,000 banks participating, the risks should be diversified (except, of course, that banks are herd animals so that risk outcomes are highly correlated for the sector as a whole). Risk-Weighted Premia: Theoretically, the FDIC’s risk-based CAMELS rating system should require riskier banks to pay more. It would be interesting to apply rigorous market backtesting methodologies to see whether CAMELS is performing as expected in this downturn, or whether like so much else, CAMELS has been distorted by forbearance and crony capitalism into another tool for industry concentration and selective competitive advantage favouring well-connected big banks during the M&A boom years.

Statutory Receiver of Failed Banks: When a bank fails, the FDIC takes over the assets and liabilities, and is able to rapidly arrange for bridge banks, purchase and assumption transactions to healthy banks, and otherwise realise value from failed banks while minimising systemic disruption to retail and commercial account holders. This is a critical function as the surest way to prevent draws of deposit insurance is to compel a work out that secures depositors unimpaired access to their accounts.

Treasury Credit as a Backstop: If it runs into trouble, the FDIC can borrow from the Treasury (just like everyone else in corporate America, it seems).

This is a formidable armory of powers and privileges. And we know the FDIC is experienced at using its powers to good effect, having proven itself several times through the past 75 years. Nonetheless, these powers may be insufficient if the scale of losses insured by the FDIC overwhelm the capitalisation of the insured banks and the resources of the FDIC.

This is where Reggie’s test of losses relative to reserve growth becomes a telling indicator of future problems.

Looking at the most recent Quarterly Banking Profile from the FDIC, we see an ugly picture:

Net Charge-Off Rate Rises to Highest Level Since 1991

Loan losses registered a sizable jump in the second quarter, as loss rates on real estate loans increased sharply at many large lenders. Net charge-offs of loans and leases totaled $26.4 billion in the second quarter, almost triple the $8.9 billion that was charged off in the second quarter of 2007. The annualized net charge-off rate in the second quarter was 1.32 percent, compared to 0.49 percent a year earlier. This is the highest quarterly charge-off rate for the industry since the fourth quarter of 1991. At institutions with more than $1 billion in assets, the average charge-off rate in the second quarter was 1.46 percent, more than three times the 0.44 percent average for institutions with less than $1 billion in assets.

Note that big banks – those presumably with favourable CAMELS ratings in years past, allowing them to gobble up their less favourably rated peers – have much worse charge-offs than smaller banks.

Large Boost in Reserves Does Not Quite Keep Pace with Noncurrent Loans

For the third consecutive quarter, insured institutions added almost twice as much in loan-loss provisions to their reserves for losses as they charged-off for bad loans. Provisions exceeded charge-offs by $23.8 billion in the second quarter, and industry reserves rose by $23.1 billion (19.1 percent). The industry's ratio of reserves to total loans and leases increased from 1.52 percent to 1.80 percent, its highest level since the middle of 1996. However, for the ninth consecutive quarter, increases in noncurrent loans surpassed growth in reserves, and the industry's "coverage ratio" fell very slightly, from 88.9 cents in reserves for every $1.00 in noncurrent loans, to 88.5 cents, a 15-year low for the ratio.

I had to smile at the heading. The clumsy phrasing of “Does Not Quite Keep Pace” has been carefully drafted in preference to the less wordy but more apt “Lags”.

The bottom line is that the “coverage ratio” is worsening for the FDIC flock, and the coverage ratio for the FDIC is not looking too healthy either. At the end of the second quarter, the FDIC reserve fund was down to a mere $45.2 billion after just 9 bank failures this year. While it does not publish a coverage ratio in respect of itself, IndyMac alone will require an estimated $8.9 billion of FDIC reserves to resolve, almost twenty percent of remaining reserves. The FDIC intends to raise reserves through a premium increase in October, but a lot can happen in two months in these febrile times.

So the FDIC may well become yet another troubled monoline insurer. Indeed, Sheila Bair, serial forbearance artiste chairman of the FDIC (formerly a Treasury official and Republican congressional aide), conceded as much when she raised the possibility this week that the FDIC might be joining the queue for a Treasury hand out to see it through short term liquidity problems.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses," Bair said in an interview.

The FDIC is too critical to the fabric of the US banking system to become another monoline casualty of the forbearance backlash crippling the banking industry. If there ever was a case for “systemic risk” deserving a bailout, the FDIC would get my vote (and presumably every Congressman’s too). But an FDIC bailout would be yet another signal to international creditors of America that the financial methods and models so widely exported and extolled over the past quarter century were fundamentally misguided and dangerous.

If the FDIC model fails, then what are the alternatives for deposit insurance? An intriguing idea floated in the Financial Times a couple weeks ago was to partially privatise deposit insurance through the excess liability reinsurance markets, allowing Warren Buffett to run his sliderule over the regulatory and risk management profile of banks to set a market price for insuring a failure.

Excess liability insurance would spread deposit insurance risk beyond the UK banking sector to global catastrophe insurance markets, reducing the pro-cyclical liquidity impact of any deposit insurance claim. In normal circumstances it should cover the risk of a large UK bank failure at a cost well below pre-funding, particularly in upswings of the economic cycle, while spreading the costs in a managed way if claims are sustained during downswings. Periodic tendering would ensure that market pricing reinforces discipline in the banking sector toward better management throughout the business cycle, co-operation on rescues of troubled banks and efficient resolution processes. The capital efficiency of these flexible arrangements should give UK banks a competitive edge.

In globalised markets, with globalised banks, perhaps globalised deposit insurance through excess liability insurance and/or catastrophe bond finance is not such a bad option. It may not be popular, however, with the crony capitalists and their political clientele who prefer the cheaper option of socialising losses via the Treasury to taxpayers and global public creditors, but at least it’s an alternative to the US model for the UK and others to consider.


Anonymous said...

Thanks for another great article.

A couple notes:
1. There are a lot of banks that are FDIC insured but haven't paid premiums since 1995. We'd have more funds if they did. See the following:
2. Can insurance ever cover the cost of a widespread meltdown? I think it will usually come up short, no matter what.

I'm Not POTUS said...

All of your concerns are solved by the printing press.

The real problem with the FDIC and the coming bank closures is the snowball effect it will have on business banking.

IndyMac was not a big player in business checking. But WaMu, Wells Fargo, and the monster BofA are the backbone of business transactions.

When the FDIC shutters a bank any transaction exceeding the $100,000 account limit is void.

There is no mechanism in place to allow a smooth functioning of business transactions if a large bank fails.

It was chaos for my business the week following the IndyMac closure. Instantaneously several major banks activated mysterious new holds or extended the length of normal holds for transactions almost at random.

The exchange of funds between businesses is primarily by check.

How much of the economy depends on the clearing of large checks? I think it is a large number. I doubt that there is even a single business with 50 or more employees that has an accounts payable account with less than $100,000 in transactions per month.

It used to be if you had problems with checks clearing, you could fall back on the line of credit. But the banks are cutting back on those.

BofA, Citi, Wells are so far past the point of too big to fail. It simply must be declared Never Allowed to Close.

yoyomo said...

Considering the fine mess the private sector has made of finance in the last decade, how could it be trusted to handle deposit insurance?

There is nothing complicated about the problem, it is nothing more than simple corruption on the part of govt allowing (& often enabling) unchecked fraud by the private sector. Elliot Spitzer tried, with the other AG's, to stop the abuse back in 2003 but Bush prevented him from taking any action by declaring federal jurisdiction and then refusing to exercise authority over the problem.

As long as voters don't pay attention to and punish the transgressions of their elected reps there will never be a workable solution, whether govt or market based.


In my amateur way, I have suggested that we give up on fractional reserve banking for home lending and simply lend (create) money without any base at all (but with, perhaps, some State budget for how fast they can inflate the money supply). We're nearly there, but the current system is complicated by the expensive mechanics of taking in and returning deposits, and the threat of runs on the banks.

Perhaps deposit takers could be like the old Swiss banks and charge you for holding your cash, while the lending banks rot its value. Any votes for a separation of functions?

Tiger Coach said...

London Banker,

I enjoy your articles and the follow-up comments of your readers.

In many ways, the current financial unraveling should be viewed under the auspices of two Founding Fathers, Alexander Hamilton and Thomas Jefferson.

Thomas Jefferson, an Anti-Federalist viewed big business in general, and financiers in particular as corrupt. He preferred the average man to be a farmer as opposed to a banker. Jefferson feared that big cities and big money would indeed corrupt the morals and values of the American people (as it did throughout history as in Rome).

The Federalist, Alexander Hamilton simply accepted the fact that the benefits of business, and a financier class far out-weighed the liabilities. If America was to be great, financial institutions would lead the way. Since when did a nation ever farm its way to greatness?

Most of us are aghast at the risk of impending financial crisis. But what seems to bother us more is the extent to which our government is manipulated by that class of individuals. It could well be that Alexander Hamilton's vision became corrupted by the greed of human nature. However, we would also conclude that the financier class will ALWAYS be bailed out by the government, even though it is at the expense of the masses... see discount windows, SEC trading policies, and Federal Backstops.

Independent Accountant said...

London Banker:
What a coincidence. Gary North writes about the "Federal Deception Illusion Corporation" at, 30 August 2008. Here's the link:
I agree with North.


TC: I don't think the greatness of America is centred on its wealth, but its democratic principles. Not much about cash in Lincoln's Gettysburg address. Maybe the shakeout in this Depression will stimulate the citizens to take stock of their Constitutional inheritance. My brother (in Ohio, coincidentally) has just taken American citizenship, so I hope so.

Tiger Coach said...

Dear Sackerson,

Right you are my British cousin. The Democratic principles are key! And those ideals have been the foundation of this great nation. That is what has separated us from an oligarchy.

However, I think we gain a better understanding of the economic principles set forth in the Washington Administration. Alexander Hamilton justified the National Bank under the "Necessary and Proper Clause" of the U.S. Constitution. Jefferson and the Anti-Federalists agreed to the bank as long as the U.S. Capital was moved from the North (NYC) to the South (D.C.). Jefferson's greatest concern was the concentration of power. Maybe the concern we should have as Americans is not the fact that the government has given business such a boost.. but more as how they have given big business the boost.

Knute Rife said...

The trouble with the FDIC is the same as with any other insurer that gets into trouble: its actuarial tables are screwed up. It took in premiums based on the assumption that its insureds were living a healthy lifestyle, when in fact the financials the banks were playing with were the equivalent of smoking three packs a day, eating bacon-wrapped sausage at every meal, and living with a half-dozen TB patients.

If the B of E wants to follow the FDIC model, it must remember this: As long as an insurer is honest to itself about its actuarials, it survives; the moment it starts lying to itself, it is circling the drain.

yoyomo said...

That is where govt accountability comes in. As long as the voters don't demand that officials live up to their fiduciary duty we will all keep getting screwed.

Actuarial calculations are very precise and only willful distortion of the modeling assumptions explains these so-called 'black swan' events. I read an article back in '02 in a LaRouche publication that predicted exactly the problems with Fannie&Freddie and the housing market. These problems were visible many miles away but ignored because it was profitable for them to be ignored.bfyrv

London Banker said...

@ Knute
We agree. The reason I keep harping on about forbearance is because the past twenty years have been about deregulation and forbearance - all in the name of trusting the free market to determine "efficient" outcomes.

The result is record levels of undercapitalisation of banks, the FDIC, the monolines, Fannie, Freddie, your pension fund and mine, and just about every investment bank and hedge fund out there. Every cent that should have been socked away as capital against the inevitable market downturn has been leveraged to keep the balls in the air as long as possible, and to keep escalating executive salaries, bonuses and dividends out of all proportion to realistic profits.

The liberalised accounting standards, capital standards, market regulation policies and other aspects of financial system health are going to come back and bite us hard. Unfortunately, as ever, it is the poor, those on fixed incomes, and the middle class taxpayers who will be stuck with the bill. The rich will move to Dubai, London and Monaco where they can live tax free (as they have effectively done through tax reforms anyway).

In these times, I am glad to live in a "socialist" country that takes care of housing, healthcare and basic needs for all. Social dislocation, violence and trauma will be less here than for the USA.

Knute Rife said...

Yoyomo: We agree, there must be a demand for accountability. The problem is that the tools we have been "allowed" for enforcing that accountability are far more cumbersome than the government's ability to act, leaving us to close the barn door after the livestock have fled over the hill.

LB: I figured we agreed. The citizenry has (I'm still in the States, you know, so the noun is singular. Stop rubbing my nose in your geographic advantage. Bugger.) allowed the oversight mechanisms to atrophy because it has been sold a load of Milton, namely that the market is self-regulating. It is no such thing; every mechanism in the economy selects for an ever smaller pool of plutocrats planning on an ever shorter term horizon. Expecting this structure to produce a healthy economy is like putting a fish in the deep ocean and expecting it to evolve air-breathing lungs.

Once upon a time we wanted an economy that was equitable so long as it was not too inefficient. In the 70s we switched to "efficient so long as not too inequitable." In the 80s we got rid of equitable considerations. We masked it in the 90s because we had a perfect storm that allowed all boats to rise with the tide. In the Double Nothings, though, the perfect storm is running the other way, and we see how broken the system is. It is a negative feedback loop that is consuming itself. Not only can it not produce equitable results; it can't even produce efficient results. Unless you're already at the top of the pile.

Thai said...

@LB and Knute--
I think you are close with Plato and honesty. Good decisions, integrity and luck are the real issues, they always have been.

When Knute says " As long as... is honest to itself"- "YES"! I do not know how much more I can agree with someone.

Yet we continue to be dishonest with ourselves.

Example-- I am not sure why LB can say with any conviction: "I am glad to live in a "socialist" country that takes care of... basic needs".

While I am in complete agreement with him that a free market system (though does America really have one?) is absolutely no guarantee of either an 'ideal' or 'efficient' outcome, I am not sure how this leads him to the idea that socialism will save him (A simply does not equal B here)

Every "socialist" system still needs to afford the resources it wants to use (like every capitalist system). History has at least a few examples where Socialist system made desicsions which lead to less than 'ideal' or 'efficient' outcomes than capitalist systems did (just as the inverse is also true).

(FYI LB, I would be in agreement with you that the English people are a wonderful group of people to share one's life with)

The problem with ideal or efficient outcomes is you have to get EVERYTHING right in order to achieve them: cooperation, research and development, healthcare and its rationing, intergenerational borrowing, energy efficiency, educational efficiency, entitlement progams which 'catch' people to enure trust in the system but do not encourage dependency and resource depletion, crime and punishment, civil rights, etc...

You need to get all these correct (and many others) in order for your economy/society to 'win'... and where each potentially conflicts with another, it too must be 'balanced' against each and every other priority, and balanced still against the greater interests of 'the collective'.

Where is the guarantee that a socialist system will be any wiser with its reource allocation and choices, with its rationing with compassion choices, with its leaders placing 'collective interests' above 'self interests'?

You can put your money in a bank run by Plato, and whether the bank exists in a free market unregulated system and is never once 'examined' or whether the bank is in the USSR, your money will be safe.

You can put your money in a bank run by Mozillo in ANY country in the world under ANY economic system under any system of regulation and you will lose your money guaranteed.

It is not the underlying system that ever mattered one bit. It never will be the underlying system.
This absurd Capitalism-Socialism debate is an illusion, it always will be.

If we have learned anything of late, it is that you cannot eliminate underyling Moral Hazard risk in a system by building more process to that system, it is simply impossible. And if you think it is, I know two little companyies called Freddie and Fannie that have a whole boat load of ABS they would like to sell you...

Knute Rife said...


I wouldn't think of eliminating moral hazard; I count on it. The elimination of moral hazard bankrupts any system in more ways than one. The selective elimination of moral hazard for a privileged for a privileged few leads the mob to the Bastille.

Not to speak out of turn, but I believe that by "socialist," LB means that the UK, in spite of Thatcher's best efforts, has not followed the US in eliminating equitability as an economic goal. The UK realizes, on some level, that an inequitable system can not remain efficient for any length of time because it will be increasingly circumvented and undermined by the growing numbers who have been marginalized and lost all stake in the system.

For a system to remain efficient, indeed for it to survive, it must have equatability built in. There is no such thing as an efficient revolution.

Thai said...

"The elimination of moral hazard bankrupts any system in more ways than one"... ???

Do you mean "SELECTIVE elimination" as you stated in your next sentence, or do you mean something else? If so, I am confused, would you help me understand?

As for inequality differences between America and England, I am not sure the difference are worth bragging about (though the small differences are real, I will grant you that).

But... were England combined with Europe and that combined Gini coefficient compared with America, the combined UK-European Gini would be MUCH MUCH worse than Americas. Europe only looks 'equal' when it is allowed to keep its small nation state identities (something I often feel seems a little unfair IF theeuropeans want to sling spit wads at Americans as a group and also want to have a combined Euro and a central European Parliment).

The Gini for the entire eurozone as a whole is really quite bad (again I understand the pound is not the Euro, but the UK is part of the European Union... it can be hard for us Yankees to figure out just how we should view the UK-Continent marriage or whatever it is???)

Or does LB mean something else?

Thai said...

Sorry, last point...

Knute said "For a system to remain efficient, indeed for it to survive, it must have equatability built in"

On this point I only partially agree. For IF the people I care most about in all the world (my family) die of cancer, or are killed while crossing the road by a drunk driver, and yours are not, does that entitle me to rebell against the system (flaws and all)?

The thing about agreement-disagreement on 'Tragedy of the Commons' issues is that it has really always been about whether we chose to be prisoner's of our own mind.

Your stipulated requirement seems something of a prison; life is rarely fair, even if we 'believe' our system tries to be.

For those of you who have had the honor of knowing the men and women who have 'given their life' in the service of their fellow countrymen (as unfortunately-fortunately I have), you know what I mean.

Jesse said...

One common theme we see over and over in this unfolding crisis is the erosion and ultimate failure of the regulatory processes and the legislative safeguards at the behest of the industry, otherwise known as regulatory capture.

There is no system that cannot be undone or conversely upheld by human ingenuity and adherence to principle.

yoyomo said...

Regulatory capture occurs because it is allowed to occur; it can be prevented by having strong revolving-door statutes to prohibit players from swapping their fox and chicken costumes, the citizenry simply have to demand it.

Many things in govt don't work because they are deliberately sabotaged by those who want to discredit them. Chomsky has written extensively about the need by TPTB to destroy the successful example of any program that restrains their power or helps the needy.

London Banker said...

@ Thai
Your data on income inequality are almost irrelevant to my point, but telling in distinguishing how differently Europeans and Americans view the world and society.

Here in the UK, whether you are rich or poor, you have access to the National Health Service. That makes us all equal in a way that doesn't get captured in your metrics - and is critical to a well functioning society in my view. If you are poor, you will be housed by the local authority or a charitable housing association at a cost you can afford. These basic rights and protections give each of us in this society a stake in a well functioning government that strengthens our democracy.

The difference I value in the systems of the UK is the respect for each person as a member of society, regardless of wealth or level of contribution.

The difference was made starkly clear to all Europeans in 2005 when Katrina hit New Orleans and the US and neighbouring authorities stood by pointing the guns toward the people trapped in the city instead of helping them out. Bush sent in Blackwater mercenaries instead of food, water, doctors and transport.
America's reputation was already taking hits because of Iraq, but that finished it for most Europeans.

We are hearing now that people are told that if they don't evacuate areas threatened by Gustav they are "on their own". There is no such concept of "on your own" in European politics - and that is a difference I cherish.

Regulatory capture is not just a matter of revolving doors, but also the income inequality between the regulators and the executives they must police. The massive escalation in executive incomes over the past quarter century put regulators at a much greater disadvantage, as well as making them more envious and ambitious.

When a banker makes 10 times a regulator, the regulator is comfortable telling the banker to exercise prudence. When the banker makes 10,000 times as much as the regulator, the regulator will be chilled and intimidated from exercising the same authority.

Thai said...

LB, I do not mean to argue with you, in fact quite the opposite, as you have a wonderful blog that I want to say "thanks" for.

I too admire the NHS!

But why degenerate your love of your system to an "Americans are doing it wrong"?

And to be fair, the NHS (for all its flaws, and there are many) is considered a jem by healthcare professionals everywhere. No other system anywhere in the world does so much for so many with so little.

I completely agree with you if you are suggesting the british people's collectivism/inherent trust is a big part of the NHS success story. But again to be fair, very few countries in the world have been able to generate such a level of trust amongst each other to hand as much power as they have to central bodies like NICE.

But the real success of the NHS has been a fundamental recognitin that healthcare spending follows non-linear/fractal patterns (i.e. 5% of people spend 50% of the resources).

The NHS (and its various iterations of central decision bodies like NICE) have for years applied their ideas of "Quality adjusted life years" to the recognition that saving money on the people who spend the most money saves far more to the entire system than saving money on the people who spend the least. But around this concept, NHS rations bigtime-- allowing it to do a lot for a lot with very little.

But almost no other country in the world has been able to achieve the NHS success, so why uniquely pick on mine?

And don't kid yourself that the 'you're on your own' mentality doesn't creep itself into the UK and the NHS from time to time. Examples:

Someone said "your on your own".

Yet another 'thrown out' by the collective.

And here is just an example of when NHS rationing decsions hit home hard.

But to make the leap from the fact that we have a different healthcare system and are not as collectivist-trusting as brits seem to be to the notion that Americans don't care about their fellow citizens it simply way too strong (heck, we spend a greater share of our income on healthcare than ANYONE-- and if you have ever looked at the budget of public hospitals, they are quite staggering. So staggering in fact that California is in real trouble over the issue right now if you have been following it).

Unfortunately, America just can't seem to move its political dialogue from the linear "how can you be so unfair and ration?" to the non-linear "only a few require rationing and we can follow the rules consistently within our values".

And as for Katrina, you lose credibility when you make such statements as they are simply wrong. As a supervising physician for my states local FEMA Urban Search and Rescue task force (we were at Oklahoma city, the Pentagon in 9-11 and 'yes' Katrina-- deployed to Mississippi, not NO), your facts are simply way way off. The govenor of LA lost her job over what happened, as well she should have. But I won't go into the details only to say don't believe all analysis you watch on television.

As for Bush bashing, bash him all you want as far as I am concerned, I not his spokesman.

Thai said...

One last link to help make my point, if you are having trouble seeing how non-linear spending in healthcare and rationing need to go hand in hand.

It uses a less 'emotionally charged' example-- oil.

To make a crass analogy, think of spending healthcare dollars on expensive patients as akin to fuel use in low mpg cars, while spending healthcare dollars on inexpensive patients as akin to fuel use in high mpg cars.

Again, my hat is off to you that you and your countrymen have been able to get signifcant agreement around these issues. I sure wish we could do the same.

But this is not the hand of 'socialism', unless by that you are using the term as a euphamism for social cooperation.

Jesse said...

This essay "Troubling Signs from the Fed's Jackson Hole Conference" is an excellent accompaniment to LB's musings on the FDIC.

Couldn't agree more with Yves really. Except to add that I think this is where Treasury begins to weigh in since technically by statute in the US it is they that own the keys to the printing presses.

London Banker said...

@ Thai

I take your point about healthcare rationing, but I have no problem with it myself. I don't want to be plugged in and kept going in some nursing home for a decade longer than my quality of life would justify. That may enrich the medical industry, but does nothing for me or my family really. In the UK we are allowed to remain in our homes, cared for by home assistants, for as long as we are viable. When we are no longer viable, we are allowed to die with dignity and sufficient palliative care to make it painless. That is just fine with me.

As for my criticism of America, well, sad to say, but history is repeating itself.

Blackwater advertising for personnel to respond to Gustav
< quote >"Intelligence blogger R.J. Hillhouse reported last week that Blackwater Worldwide has been advertising for “qualified security personnel for possible deployment into areas affected by Hurricane Gustav.”

Blackwater was seeking law enforcement officers with arrest powers, in addition to armed security officers. Among other qualifications, the officers were required to have “Armed status (must indicate Armed and/or Semi Auto. Revolver only not accepted)” and “Departmental credentials (not just a badge).”< end >

metatron said...

America is dysfunctional. If Britain is in fact less dysfunctional perhaps it is only because the population is smaller.

I will go insane if McCain wins in November. You see, McCain feared he was too reasonable for the mainstream Republicans so he had to pick a rabidly psychotic VP. One with a pregant teenage daughter who won't have an abortion. One who adores oil companies. One who kills animals with guns and proudly takes pictures.

Undoubtedly, she would like to kill me along with the caribou. Really, you can see how she'd be annoyed. The educated heathen are an abomination, but we pay the taxes to support the Republican's irresponsible lifestyles.

BTW, the FDIC is making promises that it can not keep. It can not deal with a systemic collapse.

Thai said...

LB my apologies, I did not understand it was a particular issue you had with the company Blackwater-- I have read some on their 'issues' in the press (though I am no expert and have never read about them in relation to katrina). I will say I have never heard them mentioned in any serious analysis of "what went wrong with Katrina" so I can't really comment, but I will look into it (my memory of where the big issues did seem to occur makes it hard to lay blame on them, but I will keep an open mind as I am curious).

Knute Rife said...


The elimination of moral hazard in general bankrupts a society. Concealing real costs breaks economic and ethical compasses, and when the day comes when the costs can't be hidden any more, everyone is shocked, and there is great wailing and gnashing of teeth. The selective elimination of moral hazard additionally shows that the society has been taken over by a kleptocratic class.

There is an inequality difference, even between the US and the UK, and even the Gini coefficients show it in spite of not being able to work well with negative net incomes, which has been reality for much of the US for several years now. The US has been systemically and systematically dismantling job security, access to education, access to healthcare, and retirement security for three decades. We are now the least upwardly mobile country in the industrialized West, even worse than the aristocratic UK.

Getting hit by a car or contracting cancer has little to do with the economy (unless you are relegated to living or working in hazardous environments, another of those externalized costs). In the US, though, what happens to you afterward has everything to do with the economy, because you won't get proper treatment without private insurance, and private insurance is an impossible dream for a significant and growing percentage of the population. Anyone who believes, as the McHeine Camp does, that there is not a problem because everyone has access to public hospital ERs has simply missed the last clue train.

Careful tossing Garrett Hardin in. The common lands, both in the UK and America, were generally in good shape, at least until they were enclosed. They were also the most heavily regulated pieces of land.

I'm not trying to make sure that life is fair (Ask my kids how far they've ever gotten arguing "It's not fair."). But an economy needs stakeholders, and democracies need large percentages of the population to be stakeholders. Marginalizing over half the population simply won't work, and anyone who thinks Blackwater can keep the bread riots out of their gated communities needs to think again.

Thai said...

Knute, thanks for the clarification. I think we agree on the Moral Hazard point, but are just coming to it from different starting places.

When you say: "Getting hit by a car or contracting cancer has little to do with the economy (unless you are relegated to living or working in hazardous environments, another of those externalized costs). In the US, though, what happens to you afterward has everything to do with the economy, because you won't get proper treatment without private insurance, and private insurance is an impossible dream for a significant and growing percentage of population", you sound a little “TV sound bite”.

I certainly agree with you that health insurance “is an impossible dream for a significant and growing percentage of population"-- though oddly enough it would make NO difference in the particular example you site (an auto accident), as healthcare funding for people in auto accidents in general come from auto insurance (not health insurance). And this is true regardless of whether the patients have health insurance or not. But the cause of this escalating private health insurance issue is for entirely different reasons than you suggest. A does not equal B here.

Americans spend more on healthcare as a % of GDP that any nation on earth. And from a funding standpoint, 55% of that spending comes from the public sources. US public healthcare spending now amounts to almost 9% of GDP (the numbers in this report from the Congressional Research Service use 2004 data for international comparisons). Yet public healthcare spending has continued to explode since 2004 (Which again is one of the reasons why California is in so much trouble… look up where their budget goes yourself if you do not believe me).

In fact, IF US public healthcare funding was considered ‘socialized’ medicine (last time I checked it tended to meet the definition), then the ‘socialized medicine’ part of the US healthcare system represents an even larger share of our GDP than most socialized nations in the world already spend on healthcare. It is a far larger share of our GDP than the UK’s was until very recently.

The issue you may be having is ‘HOW’ the public money is being spent??? (I know I certainly do—doctors have been saying for years other countries work because of rationing, yet still no one listens to them so people will only hear what they want to hear).

So if I read you correctly, what you are saying is ‘proper’ medicine can ONLY be delivered by private healthcare systems. And under this analogy, were America to become 100% socialized, it could NEVER deliver proper care (I would of course disagree with such a statement as socialization-privatization is irrelevant to the issue).

Or perhaps you are just recognizing that no matter what, inequality can NEVR be eliminated from a system, as neither can moral hazard? One person gets cancer, another does not? And whe this happens, how does the collective ‘support’ the sick? When are the sick simply asking "too much” and the collective is allowed to say “no more”? America refuses to have a national dialogue on these issues.

Some in the UK NHS seem willing to ‘kill’ a few ‘rich’ (a nurse who simply saved her money from working her entire life? I mean really...) when these ‘rich’ try to ‘top up’ on their care, all in the name of protect their illusions. Does this too describe your morality? Personally I need to wash myself with soap twice when I read stuff like this, but we are all allowed our own views.

And FYI-- the main inequality difference you suggest between our countries has much more to do with an inequality between young and old (did you notice that America’s elders yet again continue to ‘pull away’ from their younger fellow citizens?). At least in regards to healthcare, the UK’s elders seem less willing to ‘steal’ from their young in a way America’s elders have no compunction (but UK elders do like their borrowing, so they could overplay any ‘pro child’ stance).
But your more general notion-- that Americans care less than Europeans is just “bunk”. We are all the same on this regard..

And while I am not suggesting Backwater defend private gated communities (were you suggesting I was?). Yet the Blackwater-Katrina issue seems one of those ‘style vs. substance’ issues so popularly argued by both liberals and conservative and which I just roll my eyes when I hear them:

“Yes”, a private “paramilitary” company did their job and actually showed up to where they were supposed to be, when FEMA and state resources did not. Does that make Backwater bad? At fault?
No and Yes. They did do their job. But…

I would completely agree if you criticize them for the point that once they arrived and realized there was no significant need for security, but there was a big need to help evacuate people, they should have had a little ‘common sense’ and shifted gears to help evacuate people— like the British had common sense at Dunkirk. But they would have had to ‘break process’ to do it (something which almost every point I read on all of these blogs reminds us over and over that, at least from a financial standpoint, we should never allow).

Thai said...

And Knute, your statement "Getting hit by a car or contracting cancer has little to do with the economy" is simply wrong.

Every epidemiologist I know in the world would disagree with this statement.

yoyomo said...

If bank honchos were more closely watched by regulators they would never have been able to siphon 1,000X a regulator's salary from their clients' money. The only way to achieve those kind of results was with fraud or criminal negligence of the risks at best; with closer scrutiny they would have been stopped long before they reached that point.

Of course bribery of congress is a huge factor. During the 90's Arthur Levitt of the SEC made many attempts to rein in the abuse but Phil Gramm of Tx threatened to cut funding to the SEC if Levitt didn't back off. Same happened under Bush with Sec Donaldson; he was too pro-investor so he got axed.

For more on Blackwater and Katrina see Jeremy Scahill's book:

Blackwater: The Rise of the World's Most Powerful Mercenary Army

jp said...

Well, Yoyomo, it also helps that all financial CEOs are "above average" and deserve "above average" compensation compared to other finacial CEOs. I mean, could you become CEO if you were merely average, or, (gasp) below average? :)

Some CEO's know that they are "without peer" and deserve "without peer" salaires.

Once you start adding a lot of "without peer" salaries together, you get some mighty good looking average financial CEO salaries.

The sky's the limit.

Knute Rife said...

"Or perhaps you are just recognizing that no matter what, inequality can NEVR be eliminated from a system, as neither can moral hazard? One person gets cancer, another does not? And whe this happens, how does the collective ‘support’ the sick? When are the sick simply asking "too much” and the collective is allowed to say “no more”? America refuses to have a national dialogue on these issues."


"But your more general notion-- that Americans care less than Europeans is just “bunk”. We are all the same on this regard."

We don't care enough to address the issues.

"And while I am not suggesting Backwater defend private gated communities (were you suggesting I was?)."

No, I'm saying that at some point an inequitable system hits a tipping point where it generates riot and revolution, and that the wealthy can keep that in check with their private armies only temporarily, or at least that is what history indicates.

Thai said...

Knute, I agree with everything you are saying

yoyomo said...

Thirty-forty years ago boards of trustees had to be independent of management (unless they happened to own a big chunk of the co) and they maintained arm's-length relations with co executives. The rules have been changed to deliberately allow the exact kinds of abuses we've been seeing since the mid 80's.

It's going to keep getting worse until people decide to pay attention to what is important instead of what is entertaining. Maybe with more people living in their cars and not able to watch AmericanIdol they will have more time to read the paper beyond the sports section.

Thai said...

Knute and LB (sorry to remain off topic), I just came across this posting and thought you might find it interesting... even Maggie Mahar (liberal health policy analyst) is admitting universal coverage does not solve healthcare costs and that you still need to ration somehow.

Anonymous said...

The capital efficiency of the flexible arrangements should give UK banks a competitive edge.In globalised markets, with globalised banks, perhaps globalised deposit Insurancethrough excess liability insurance and/or catastrophe bond finance is not such a bad option. It may not be popular, however, with the crony capitalists and their political clientele who prefer the cheaper option of socializing losses via the Treasury to taxpayers and global public creditors, but at least it’s an alternative to the US model for the UK and others to consider. In normal circumstances it should cover the risk of a large UK bank failure at a cost well below pre-funding, particularly in upswings of the economic cycle, while spreading the costs in a managed way if claims are sustained during downswings. Periodic tendering would ensure that market pricing reinforces discipline in the banking sector toward better management throughout the business cycle.