The Left is exulting in the near melt-down of our free market
financial system. Socialists see the
housing credit catastrophe – and the role of the federal government in trying
to right what they consider to be the sinking capitalistic ship - as
vindication of their belief that all key industries in our economy should be
nationalized. The free market is dead,
they proclaim. Long live central
planning and control.
As Rep. Maxine Waters put it at a Congressional hearing not so
what this liberal will be all about? This
liberal will be about socializing... uh, will be about, basically taking over
and the government running all of your companies. "
As usual, the enemies of our free market capitalist system are
pushing the wrong prescription. Some are using the government bail-out of the
housing market, for example, to demonstrate that only government-run health
care will work. Their diagnosis of what
caused the housing ailment is an exercise in quackery. And their preventative ‘cure’ for other
industries is nothing more than snake oil.
Before we turn to the health care industry, let’s consider
some facts about the distress that beset the housing credit market. It was government tampering with the free
market system in the form of the two government sponsored entities, Fannie Mae
and Freddie Mac, that helped precipitate the distress in the first place.
The mission of Fannie Mae and Freddie Mac evolved from modest
support for mortgage credit into enabling as many people as possible to
exercise the ‘right’ to own their own home, whether or not they had any
realistic chance of making timely payments on their mortgages. This universal home ownership entitlement was
effectively underwritten for years by the government’s implicit line of credit
that backed up the mortgages originated or purchased by both Fannie Mae and
Freddie Mac, which they packaged into securities and sold to investors in a
process known as securitization. Existence
of this secondary market allowed Fannie Mae and Freddie Mac to pool mortgages,
resell them, and, therefore, disperse the risk of defaults. Between them they accounted for more than 50%
of all mortgage bonds sold. With this
prop-up of the mortgage credit market by the government sponsored entities as
the foundation, private firms expanded into this market and originated,
purchased and packaged mortgages into pools for securitization as well.
In return for not having to pay state and local income taxes
and being able to borrow money at a lower rate than anyone else except the
federal government itself, politicians pushed for Fannie Mae and Freddie Mac to
move aggressively into the sub-prime market where private lenders would not
have normally treaded alone. The goal
was to use these government-sponsored entities as the means to extend credit to
even the highest risk mortgage borrowers, furthering the socio-economic public
policy of universal home ownership. The risk
that these borrowers might default on repaying their loans was theoretically
spread out in the secondary market for the securities backed by these
questionable loans that were sold to investors.
These sales, in turn, provided more capital for Fannie Mae and Freddie
Mac to purchase more sub-prime mortgages for packaging into more bonds. Behind them stood the resources of the U.S.
Treasury. Borrowers who would have normally failed any credible
lending standards in a purely private financing market were approved at the
drop of a hat for mortgages way above their means to pay back. As long as housing prices continued to rise
and the government sponsored entities kept making cheap capital available,
nobody was worried about any major borrower defaults. The music played on.
However, as the saying goes, there is no such thing as a free
lunch. Housing prices started their steep
decline and the music suddenly came to a screeching halt. When sub-prime borrowers began to default at
an alarming rate, the house of cards undergirding Fannie Mae and Freddie Mac came
tumbling down. The government was there
to pick up the pieces and directly take over their obligations, which means
that American taxpayers will be footing the bill. Even
this bail-out will be dwarfed by the plan now in the works for the government
to buy up much of the toxic mortgage-backed securities now sitting on the books
of all of the nation’s banks.
We can debate whether these drastic remedial measures are the
right ones to deal with the massive financial crisis that threatened our
economic system. However, we should
certainly not repeat the same mistakes in another critical market that got us
to the present point in the housing market.
Yet that is exactly what the advocates of government-imposed universal health
care want to do.
These central planners want to completely re-engineer the
nation’s health care industry. They
reject a private market solution with tax incentives and with targeted
subsidies to needy individuals who are not already covered by Medicare or
Medicaid, approved by an up-and-down vote of Congress.
Some want to move towards a single-payer, one-size-fits-all
government run plan right away for all Americans. Others want to start gradually towards the
single-payer objective with some sort of private-public combination in which a government
sponsored insurance plan would be the insurer of last resort, with taxpayer
monies at risk in providing the necessary guarantees. Doesn’t
this sound eerily familiar?
Although the idea of the private-public combination is to set
up competition between a new government-sponsored insurance plan and private
insurance programs, this creation of government will not be a product of the
free market. With government backing, the premiums paid by
the insured in the government-sponsored plan will likely be significantly less
than private insurance plans. There will
undoubtedly be a larger pool to spread risks than would be the case with the
typical private insurance plan and there will be exemptions from the state
regulations that private plans must contend with. At the same time, the government plan will be
pushed by politicians to take over the coverage of all those at the greatest
medical risk who are likely to file the largest claims.
As the government plan balloons in size with more and more
plan participants, particularly those with greater health risks, the private
insurance firms that will try to compete against the government’s lower
insurance premiums will have to cherry-pick those with the lowest risk of
filing large claims in order to survive.
Meanwhile, needing to raise more money to cover the increasing
amount of insurance risk that the government insurance plan will be pressured
to take on and that will not be covered by insurance premiums alone, the
government sponsored plan will have essentially two financing
alternatives. The first alternative is
to convert into a tax revenue funded single-payer government program – no doubt
the ultimate goal of those central planners who had been willing to take the
more gradualist private-public combination approach to begin with. The
second alternative is to tap the financial markets with securities backed by
increasingly illiquid asset pools of premium receivables on the Fannie
Mae-Fannie Mac model, knowing that it too will receive a humungous taxpayer
bail-out if it runs into dire financial straits. Either way, American taxpayers will pick up virtually
the entire tab. The central planners’
dream of government control of a key sector of the American economy will be
In the interim, while we continue to operate under the current
private health insurance system that is largely employer-sponsored, the
would-be planners of centralized universal health insurance want to force most
Americans to increase the amount they pay out of their own pockets for medical
care before they can get a dime back from their insurance companies.
Under a self-styled ‘progressive’ plan authored by Senator
Barack Obama’s chief economic advisor Jason Furman when he was at the Brooking
Institute, for example, typical families would have to pay half of their health
costs until they reached 7.5 percent of their income. In order to more fully subsidize the health
costs of lower income families, the plan by design would force middle-income
families as well as high-income families to pay much more of their health costs
out of their own pockets before their health insurance reimbursements would
kick in. Furman’s own data indicates
that, while under a conventional health plan today an average family of four
with a total income of $80,000 has an out-of-pocket expenditure of $783, his ‘progressive’
plan would increase by two and a half
times that family’s out-of-pocket non-reimbursable expenditure to $2052.
This means, for example, that if two working parents making a
combined income of $80,000 decide to take the most conservative course in
anticipation of significant medical bills for their family of four and choose
to contribute more premiums to their employer-sponsored insurance programs in
return for lower deductibles, the ‘progressive plan’ would take the higher
premium contributions from these parents while reimbursing someone else at
their family’s expense. This is nothing but another form of income
radical ideas include something called the “Wellness Trust.” The idea behind this new bureaucracy would be
to set national priorities from the top down for preventive medicine. And, of course, it would be financed by new
taxes. The ultra-liberal Center for
American Progress, which is promoting this expensive idea, has recommended more
taxes not only on cigarettes and alcohol but also on sodas and foods condemned
by the Politically Correct Food Police.
To make sure that the Wellness Trust has enough resources to fulfill its
nanny state role, the Center for American Progress has also recommended a new
three to four percent value-added tax.
All of these steps are pre-cursors to socialized medicine - a
complete government take-over of the nation’s health care industry under a
single-payer system, where bureaucrats will be setting health priorities for
the rest of us rather than our own doctors.
The result will be healthcare offered with less innovation, less
efficiency and lower quality – a race to the lowest common denominator for all.
Let’s be vigilant in not allowing our politicians to succumb
to the siren song of those enemies of free enterprise who would exploit the
current financial crisis to further their socialistic objectives for the health
care industry and other key sectors of our economy.