Drips from the Meltdown

Instability among private financial firms - that is, rampant opacity in asset vs. liability valuations - hasn't kept the guardians of middle-class economic propriety from continuing to bash the more-efficient public sector. The economist Dean Baker writes the following:

The Wall Street Journal did the standard "Social Security, Medicare, and Medicaid" trick to argue for the need to cut Social Security. As BTP readers know, the projected increase in Social Security spending is relatively modest. By contrast, Medicare and Medicaid spending are projected to soar, driven primarily by higher health care costs. This means that anyone seriously concerned about reducing the long-term deficit would focus on fixing the health care system rather than cutting Social Security.

While all the experts cited in the article seem to share the WSJ's desire to see Social Security cut, the WSJ was good enough to include a chart with the article. The chart shows clearly the contrast between the projected explosion in Medicare and Medicaid costs with the modest projected increase in Social Security spending. In effect, the chart contradicts the thrust of the article.

The article gets a few other important items wrong. For example, the article asserts that the Medicare drug benefits "costs almost $80 billion a year." According to the Congressional Budget Office, the benefit will cost $44 billion in the current fiscal year.

Also, when discussing plans to cut Social Security benefits, it would have been appropriate to mention that the Social Security trust fund is projected by the Congressional Budget Office to be fully funded for almost 40 years. Cutting benefits in this context effectively amounts to defaulting on the bonds held by the trust fund. If the government is going to default on bonds designated to fund workers' retirements, then the public may want to consider defaulting on other government bonds as well.

There was also a piece last week in the Financial Times on housing foreclosures. It was interesting because it's author clearly didn't know what his real theme was. Dean Baker thought it was that banks and securitizers of housing loans "did not take loan to value ratios into consideration. As a result, they are surprised that homeowners with negative equity are defaulting on their loans." If true, this is an amazing fact: lenders didn't care about lending more than the underlying asset was worth. That can be explained by the next item.

This was the little piece that caught my eye this morning. It sounds at first like it will bore your ass off: "The leveraged loan market begins the week in “disarray” following the collapse of efforts to syndicate $14bn of the debt used to finance the $30bn buy-out of Harrah’s Entertainment, bankers say." But there's not only a story of banker panic, which is always interesting. There's one of the huge stories of the whole crisis: banks are unwilling to loan money even to good companies unless they can simultaneously get rid of the liability. This means, in the case above, that banks didn't care that the house was worth less than the loan becuse they were going to sell the loan to somebody else. That somebody had no idea what house any loan was tied to - in fact, the security rolled all individual loans into one ureadable lump.

There's more. High returns correlated not with high risks taken by hairy-chested pirate-bankers giving the gift of liquidity to the global system. High returns correlated with no risks - dumped risks, dispersed and scattered risk, invisible risks, risks passed on to Somebody Else. Like me, and you.

We're not yet close to the bottom of that particular kind of unaccountability, or the corruption it has caused.