The Mob

An atrocious display of mob mentality occured at the final Rand Paul-Jack Conway U.S. Senate debate, when supporters of Republican candidate Rand Paul brutually attacked a protesting Conway supporter from MoveOn.org.  Such tyrannical behavior is unacceptable, without exception.  Disputes should be settled with words, not fists; this is something that was supposedly taught in the first grade.  Thankfully, the Paul team has immediately condemned the act with unambiguous language.

The Paul for Senate campaign is extremely disappointed in, and condemns the actions of a supporter last night outside the KET debate. Whatever the perceived provocation, any level of aggression or violence is deplorable, and will not be tolerated by our campaign. The Paul campaign has disassociated itself from the volunteer who took part in this incident, and once again urges all activists -- on both sides -- to remember that their political passions should never manifest themselves in physical altercations of any kind.

The Goldman Sachs Witch-Hunt

It is no shock that Goldman Sachs’s hearing before a Senate subcommittee yesterday was an episode in subterfuge and political posturing. However, the level of bipartisan vitriol and populist grandstanding was inexcusable.

The subcommittee, chaired by Senator Carl Levin (D-MI), hounded a number of Goldman Sachs executives for the better part of the day. This was no exercise in fact finding, but a brutal cross-examination by a biased plaintiff. Nearly every Senator (except at rare moments Tom Coburn (R-OK)) came with a pre-planned agenda to portray Goldman Sachs as an epitome of a rampant Wall Street-gone-bad that wrecked havoc on the poor innocent investor and America’s economy. The Senators repeatedly waved sensational, but otherwise meaningless, documents in the air, simplifying the extremely complex issues until they were a digestible, but un-nutritious mush ready to be consumed by the populist masses.

These politicians are not stupid. While their understanding of the financial markets is clearly limited, they obviously comprehend the intellectual dishonesty that they exhibited. It is hard to believe that such a display, coupled with the recent bogus charges brought against Goldman Sachs by the SEC (a decision which in relatively rare form was controversially split), was anything but motivated by the desire to force through a regulatory reform package. Even the Republicans, such as John McCain (R-AZ), who is in a tough reelection battle, walked to the ‘bash Wall Street’ drumbeat.

The fact of the matter is that there is little evidence that Goldman did anything wrong. While to the uninitiated it may be difficult to understand the market and readily easy to misconstrue it as misguided, this does not stand as evidence of wrongdoing.

To begin, Senator Levin attempted to cast Goldman as the bad guy for making a profit. It is ironic that those that realized the housing bubble was inflated (and thus helped to mitigate its wanton expansion), are now being chastised for being ahead of the curve. The Washington Post says it best,

[If Goldman did not bet against the market as early as it did t]he firm would have lost billions, and it might have wound up needing an even bigger bailout by U.S. taxpayers than it actually got. It could have ended up like Citigroup, which tried to ride the bubble until it was too late and had to be propped up with hundreds of billions of dollars in federal cash and credit guarantees.

There is nothing wrong with this behavior. It is done all the time and is, in fact, what keeps the markets going. Short sales are necessary and proper in markets – even if against a long-position controlled by the same entity. This sort of hedging protects institutions and the economy in the long-run. If the world of finance is too complicated in this regard, one only needs to look to that of farming or commodities to see the same practice. Farmers, for instance, will bet against agriculture to insure against the risk of crop failure.

Besides the criticism of profit-via-short, the committee also bashed Goldman for selling, what was termed in one of the infamous documents, a “shitty” product. Needless to say, the definition of “shitty” is subjective and quite unscientific, but even if a product could be objectively proven to be “shitty” is it wrong for a company to sell it? How many less-than-stellar consumer products are sold on a daily basis? It is up to the consumer – and in this case they were quite sophisticated investors – to evaluate their purchases. Ultimately, Goldman’s knowledge about how the product was constructed has no bearing on the ability of an individual investor to assess its quality.

Now to be clear, there were a myriad of mistakes made at all levels of the economy; however, the targeted witch-hunt is unfair. It misguides popular attention from the real issues. As a result simplistic solutions are proposed to solve non-existent problems, while the real issues are ignored. The characteristic problem is the desire to find the causation of bad outcomes in practices which only look odious with hindsight. This is poor logic. Fraud must be distinguished from both bad business and good business that had bad luck. Every decision relies upon an analysis of the probability of certain outcomes. Even if the analysis is done correctly sometimes that low-probability outcome will occur. Politicians inability to address this non-sound-bit ready fact and instead chose to bash Goldman Sachs is quite unfortunate.

The Right Medicine for Healthcare – Part I

With the Senate now beginning debate on a healthcare bill, it is time to step back and really think about where America could end up. The bills – and ideas – that are prevalent in Congress are devoid of commonsense. Under the current system of thinking, any bill, such as the current one on the Senate floor will be disastrous.

No one disagrees with the fact that American healthcare is in desperate need of reform. However, the current proposals do not offer good solutions. They attempt to patch a broken system without understanding what is not working. Like a charlatan doctor peddling a homemade cough syrup, they offer the wrong medicine.

The essential problem with America’s healthcare system is cost. Some may frame it in terms of accessibility – too many people do not have health insurance. However, accessibility is, in essence, an issue of cost. People that want, but do not have, insurance are precluded due to prohibitive prices. However, the present top-down approaches advocated by Congress do not address the fundamental cost issues. Instead, they attempt to make healthcare “more-affordable” by redistributing costs between different parties - whether taxpayers, the young, insurance companies, the poor, etc.

Not only is this a divisive and politically-charged (as we all know) approach, but it ultimately will fail to make substantial, lasting change. For instance, if insurance companies are simply forced to ignore pre-existing conditions, they will need to find ways to pay for these more expensive patients. This means either increasing premiums for everyone or lowering services across the board. In essence the current Congressional proposals create a zero-sum game, with clearly defined winners and losers.

What needs to be done is to develop a solid system of proposals that counter the inanity in Congress. America needs a reform that fixes the system and benefits all. The fundamentals of any successful reform rely on the mechanisms of the free market to create a cost efficient system. As Soviet Russia has shown us, centrally planned economies end in dismal failures. Regulatory bodies that determine maximum prices, public-options, individual mandates, and outrageous restrictions on private enterprise will not solve the problem, but exacerbate it.

Over the next few articles I will try to outline a few points that may serve as a rough skeleton for some detailed reform. In particular, (1) greater competition needs to be created between insurance companies by ending the employer based system, (2) medical costs need to be driven downward through tort reform, digitization of records, and realigning incentives, and (3) new financial instruments should be established to cover emergency room visits of the uninsured.

Ultimately, healthcare is a financial not a health-related issue. Insurance is one tool to make healthcare affordable. However, it is not the only, nor always the best way, to pay for healthcare costs. The desirability of health insurance is, and should be, an individual’s decision, based on relative risk and one’s financial situation. By failing to acknowledge and address these issues, Congress is suppressing true reform that could have a lasting impact on America’s future. The government should serve as an impartial referee, not a troublesome participant, in the realm of healthcare.

The discussion continues with Part II: A More Competitive Market.