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The Wrong Prescription By: Joseph Klein
FrontPageMagazine.com | Monday, September 22, 2008


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 long ago:

 

"And, guess 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 realized.

 

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 redistribution.  

 

Other 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.



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