Hope & History Rhyme

Blue Dog Democrats are impressed with nothing more than innovation.  Oh, and money; lots and lots of smelly money.

Unfortunately, innovation can be very complicated.  Just like in the capital markets, Congress needs help from lobbyists to understand all the awesomely complicated innovations the health insurance industry brings to reform.

CHAD TERHUNE and KEITH EPSTEIN in Business Week highlight the relationship between UnitedHealth and Democratic “moderates”.  UnitedHealth, according to the report, is low-balling the profits they expect to make from expanding coverage and the amounts they expect customers to pay out of pocket, as they work to weaken the reimbursement mandates a reform law would include.  By showing Congress how they should be reformed, the health insurance companies have already won.

UnitedHealth has traveled an unlikely path to becoming a Washington powerhouse. Its last chairman and chief executive, William W. McGuire, cultivated a corporate profile as an industry insurgent little concerned with goings-on in the capital. From its Minnetonka (Minn.) headquarters, the company grew swiftly by acquisition. McGuire absorbed both rival carriers and companies that analyze data and write software. Diversification turned UnitedHealth into the largest U.S. health insurer in terms of revenue. In 2008 it reported operating profit of $5.3 billion on revenue of $81.2 billion. It employs more than 75,000 people.

In 2006, McGuire lost his job after getting caught up in the manipulation, or “backdating,” of company stock options. UnitedHealth was forced to restate earnings over a 12-year period to reflect the extra compensation it had granted McGuire and other executives. McGuire’s chief lieutenant, Stephen Hemsley, took over as CEO in December 2006. Two independent inquiries concluded that Hemsley wasn’t involved with the backdating. Nevertheless he forfeited $190 million in past stock compensation and unrealized gains to resolve the matter.

Hemsley, a former chief financial officer of the now-defunct Arthur Andersen accounting firm, generally shuns the spotlight. But when health reform became a central issue in the runup to the last Presidential election, company executives say they realized UnitedHealth needed to go on the offensive. Hemsley met with White House officials on May 15 and May 22 to promote his company’s prescription for cutting federal health spending.

In August 2007, the company hired Sommer, who previously headed global lobbying for Goldman Sachs (GS). He quickly built a new Washington team of former congressional aides and other K Street operatives. One key acquisition: Cory Alexander, former chief of staff for House Majority Leader Steny Hoyer (D-Md.), an influential moderate Democrat. Alexander had been lobbying for the huge mortgage financier Fannie Mae (FNM). Today, Sommer directs a team of nearly 50 people from UnitedHealth’s spacious Washington office on Pennsylvania Avenue, equidistant between the Capitol and White House. The company spent more than $3.4 million on in-house and outside lobbying in the first half of 2009.

Sommer has retained such influential outsiders as Tom Daschle, the former Democratic Senate Leader who now works for the large law and lobbying firm Alston & Bird. Daschle, a liberal from South Dakota, dropped out of the running to be Obama’s Secretary of Health & Human Services after disclosures that he failed to pay taxes on perks given to him by a private client. He advised UnitedHealth in 2007 and 2008 and resumed that role this year. Daschle personally advocates a government-run competitor to private insurers. But he sells his expertise to UnitedHealth, which opposes any such public insurance plan. Among the services Daschle offers are tips on the personalities and policy proclivities of members of Congress he has known for decades.

Japan has outsted it’s longstanding ruling party in parlimentary elections over the weekend.   The new leadership in Japan campaigned on a more independent relationship with the United States, including a break from the Washington Consensus view of market driven globalization.

Japan’s Democratic party is now expected to begin negotiating with Charles Grassley (R-Iowa) to move towards consensus.  MARTIN FACKLER reports for the New York Times:

“This has been a revolutionary election,” Yukio Hatoyama, the party leader and presumptive new prime minister, told reporters. “The people have shown the courage to take politics into their own hands.”

Mr. Hatoyama, who is expected to assemble a government in two to three weeks, has spoken of the end of American-dominated globalization and of the need to reorient Japan toward Asia. His party’s campaign manifesto calls for an “equal partnership” with the United States and a “reconsidering” of the 50,000-strong American military presence here.

One change on the horizon may be the renegotiation of a deal with Washington to relocate the United States Marine Corps’ Futenma airfield, on the island of Okinawa. Many island residents want to evict the base altogether.

The Democrats, who opposed the American-led war in Iraq, have also said they may end the Japanese Navy’s refueling of American and allied warships in the Indian Ocean.

The White House issued a statement on Sunday saying it was “confident that the strong U.S.-Japan alliance and the close partnership between our two countries will continue to flourish” under the new government. “President Obama looks forward to working closely with the new Japanese prime minister on a broad range of global, regional and bilateral issues,” the statement said.

Political analysts expect Japan to remain a close American ally, but one that is more assertive and less willing to follow Washington’s lead automatically.

People aren’t spending like they used to and may not again. 

The Obama Administration has based it’s economic policy on a post-consumer recovery.  The President has emphasized the need to spread demand globally so Americans can reduce debt to sustainable levels and build community infrastructure.

PETER S. GOODMAN has a piece in today’s New York Times relating how individual consumers’ reactions to the recession broadly demonstrate how the Administration’s view is based in current reality.

Given that consumer spending has in recent years accounted for 70 percent of the nation’s economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from hiring more workers.

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

“We’re at an inflection point with respect to the American consumer,” said Mark Zandi, chief economist at Moody’s Economy .com, who correctly forecast a dip in spending heading into the recession, and who provided data supporting sustained weakness.

“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”

Two stories stand out amidst the Ted Kennedy dominated news cycle.  First, DAVID CHO reports in the Washington Post on how the biggest winners in the banking bailout are getting even bigger. 

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

“It is at the top of the list of things that need to be fixed,” said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. “It fed the crisis, and it has gotten worse because of the crisis.”

Regulators’ concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government’s backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.

This problem, known as “moral hazard,” is partly why government officials are keeping a tight rein on bailed-out banks — monitoring executive pay, reviewing sales of major divisions — and it is driving the Obama administration’s efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way.

With the Administration’s plan still a plan and trillions of dollars already committed, the question hanging in the air is if the federal government has done too much or not enough? 

The preliminary answer in today’s Gallop tracking poll is “yes”.  Our second story is that the President’s approval ratings have fallen to 50%.

Much of the drop in the President’s approval rating can be attributed to the health care debate.  Obama has spent 20 percentage points on an initiative that is still cloudy and ill defined.

 The Administration has also added trillions in debt with little to show for it and less in consequences for the malefactors who orchestrated the economic collapse and are positioning for the next bubble.

While the Moderates negotiate popular solutions away, THOMAS FRANK pointed out the only path through for the Democrats in yesterday’s Wall Street Journal:

So we have come full circle: The reformers shake hands with the special interests, while conservatives denounce the whole thing in the name of the common man and the Founding Fathers.

After I listened to a few angry town-hall meetings on the radio, the situation was clear to me. Democrats had to meet this pseudo-populist challenge by rolling out the real thing, the New Deal vision that is their party’s raison d’être.

So far, however, many in the party’s leadership haven’t been able to awaken from their bipartisan reverie. When Mr. Obama found his plans under attack, for example, he promptly began to downplay the “public option,” an obvious predicate to cutting a deal and placating the insurance industry. In other words, the prospect of a populist outburst from the right apparently moved him toward abandoning the most populist element of his party’s plans and toward an even more Beltwayist position—to move that much closer to the caricature of Democrats traditionally drawn by the right.

With a president, elected by inspiring a nation to change in line with Democratic themes sinking below political viability, another questions lingers.  Did the country change that much in one year or has Obama’s efforts to reform with the consent of the reformees squandered the trust needed for hope.

A review of health care reform news starts with NICHOLAS KRISTOF’s column in the New York Times.  KRISTOF interviews a former health insurance executive, Wendell Potter, who went native and testified before Congress on how his industry creates profits by denying care:

“I knew that once I did that my life would be different,” he said. “I wouldn’t be getting any more calls from recruiters for the health industry. It was the scariest thing I have done in my life. But it was the right thing to do.”

Mr. Potter says he liked his colleagues and bosses in the insurance industry, and respected them. They are not evil. But he adds that they are removed from the consequences of their decisions, as he was, and are obsessed with sustaining the company’s stock price — which means paying fewer medical bills.

One way to do that is to deny requests for expensive procedures. A second is “rescission” — seizing upon a technicality to cancel the policy of someone who has been paying premiums and finally gets cancer or some other expensive disease. A Congressional investigation into rescission found that three insurers, including Blue Cross of California, used this technique to cancel more than 20,000 policies over five years, saving the companies $300 million in claims.

As The Los Angeles Times has reported, insurers encourage this approach through performance evaluations. One Blue Cross employee earned a perfect evaluation score after dropping thousands of policyholders who faced nearly $10 million in medical expenses.

Mr. Potter notes that a third tactic is for insurers to raise premiums for a small business astronomically after an employee is found to have an illness that will be very expensive to treat. That forces the business to drop coverage for all its employees or go elsewhere.

All this is monstrous, and it negates the entire point of insurance, which is to spread risk.

Also in the Times is a story by CARL HULSE and CATHERINE D. SEELYE laying out how the death of Senator Ted Kennedy will change, or more likely will not change, the dynamics of the health care debate.

Whether the loss of health reform’s longtime champion will substantially alter the dynamic or the outcome of the Congressional fight will be determined only when Congress returns in September. Mr. Kennedy’s colleagues said they hoped his example would provide new inspiration.

“Maybe Teddy’s passing will remind people once again that we are there to get a job done as he would do,” said Senator Christopher J. Dodd, the Connecticut Democrat and close friend of Mr. Kennedy who filled in for him as chairman of the Health, Education, Labor and Pensions Committee.

Republicans said they did not ultimately expect much change in the health debate.

“Democrats will rally, but they still have to come up with a bill that works,” said one senior Republican official who did not want to be identified when talking about the delicate subject of how Mr. Kennedy’s death would play out in the policy fight. Another top Republican said the fight was already somewhat suspended with President Obama on vacation and would most likely “pick up right where we left off in a week or two.”

FAWN JOHNSON and LAURA MECKLER layout how the health care fight moves into abortion theater in the Wall Street Journal.

While it gets less attention than some other parts of the plan, abortion has often been raised by critics at town-hall meetings during the August congressional recess.

Abortion opponents are funding advertisements targeting key lawmakers. The Family Research Council is running television and radio ads in several states that are home to swing-vote Democratic senators, while the National Right to Life Committee is targeting pro-life Democrats in the House who likely will take the first vote on the measure in September.

Before they vote, “lawmakers will know this is a bill to set up a big federal abortion program,” said the right-to-life committee’s legislative director, Douglas Johnson.

Those who favor abortion rights say the bills aren’t giving any special treatment to abortions. National Organization for Women President Terry O’Neill said the conservatives’ proposals would deny many women their reproductive rights. “There is no constitutional basis for taking that away or for any politician to use reproductive health care as a political football,” she said.

Abortion opponents say they will be satisfied only if a health bill specifically bans all abortion coverage in any federally subsidized plan. They note that Congress has already established similar bans in other federally funded health programs, such as Medicaid, health insurance for federal workers and military plans. The only exceptions are for rape, incest or danger to the life of the mother.

News today of the passing of the Lion of the Senate.  PAUL KANE and DEBBI WILGOREN on the death of Senator Kennedy in the Washington Post: 

Washington and the world have begun to mourn the late  Edward M. Kennedy (D-Mass.), patriarch of both the U.S. Senate and the Democratic party, whose outsized personality and legislative and political skills impacted the nation’s capital even during his dying days.

President Obama was awoken by a top aide about 2 a.m. Wednesday and notified of Kennedy’s death hours earlier, a spokesman said. Obama phoned the senator’s widow, Victoria, and issued a statement that said he and first lady Michelle Obama were “heartbroken” at the loss of a political mentor and cherished friend.

“An important chapter in our history has come to an end,” said Obama, who is vacationing with his family at a rented compound in Martha’s Vineyard, Mass., a short ferry ride from the Kennedy compound where the ailing senator died. “Our country has lost a great leader, who picked up the torch of his fallen brothers and became the greatest United States Senator of our time.”

Kennedy, the Senate’s third-longest serving member, was a liberal guidepost in the chamber, spending almost 47 years advocating for national health care and civil rights in particular. But his friendships crossed the aisle, and his absence during the last 15 months while battling brain cancer had cast a pall on the chamber. Many lawmakers have wondered this summer how the ongoing negotiations over health-care reform would have been different if the man known as the lion of the Senate had been able to actively participate.

JOHN M. BRODER’s obit in the New York Times:

Senator Kennedy was at or near the center of much of American history in the latter part of the 20th century and the early years of the 21st. For much of his adult life, he veered from victory to catastrophe, winning every Senate election he entered but failing in his only try for the presidency; living through the sudden deaths of his brothers and three of his nephews; being responsible for the drowning death on Chappaquiddick Island of a young woman, Mary Jo Kopechne, a former aide to his brother Robert. One of the nephews, John F. Kennedy Jr., who the family hoped would one day seek political office and keep the Kennedy tradition alive, died in a plane crash in 1999 at age 38.

Mr. Kennedy himself was almost killed in 1964, in a plane crash that left him with permanent back and neck problems.

He was a Rabelaisian figure in the Senate and in life, instantly recognizable by his shock of white hair, his florid, oversize face, his booming Boston brogue, his powerful but pained stride. He was a celebrity, sometimes a self-parody, a hearty friend, an implacable foe, a man of large faith and large flaws, a melancholy character who persevered, drank deeply and sang loudly. He was a Kennedy.

PETER S. CANELLOS writes on Kennedy’s legislative impact in the Boston Globe: 

The fact that his tangible accomplishments transcended his mythic role in the Kennedy drama attests to the vast extent of his legislative impact. In each of four areas, he dominated legislative politics for more than four decades, spanning ten presidencies, and played a large role in transforming the government’s relationship to the people.

Bill by bill, provision by provision, he expanded government health support to millions of children and the elderly, helped millions more go to college, opened the immigration doors to millions of new Americans from continents other than Europe, and protected the civil rights bulwark of the ’60s through a long period of conservative domination.

And by the time his life ended yesterday, surrounded by loved ones in a gentle scene that contrasted sharply with the violent deaths of his brothers, Ted Kennedy had built a nuts-and-bolts legacy to stand beside that of his presidential brother as a figure of hope and his senatorial brother as a figure of compassion.

“He was always prepared, always worked hard, really managed to get things done,’’ said Michael Corgan, history professor at Boston University. “He’ll be remembered as the foremost senator of his day.’’

This is the socialism we voted for? 

President Obama announced his appointment of Ben S. Bernanke for a second term as Chairman of the Federal Reserve.  Bernanake is widely praised for watching while the global economy inched toward complete collapse, then asked Congress to give $1 trillion to the banks over a week end.

JEFF ZELENY and EDMUND L. ANDREWS’ lede from the New York Times:

OAK BLUFFS, Mass. — President Obama said Tuesday that he would nominate Ben S. Bernanke to a second term as chairman of the Federal Reserve, seeking to keep an air of stability in the financial markets as the nation inches toward an economic recovery.

Ben Bernanke, a Republican, was appointed by President George W. Bush almost four years ago.

“As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another,” Mr. Obama said. “But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve.”

MICHAEL D. SHEAR and NEIL IRWIN reports for the Washington Post:

When Obama was elected, Bernanke seemed a long shot to be reappointed. He is a Republican — appointed by George W. Bush to succeed Alan Greenspan — and had failed to prevent a deep recession. Many Fed watchers expected Obama to turn to his current chief economic adviser, Lawrence H. Summers, for the chairmanship of the Federal Reserve.

But in the past nine months, Bernanke has undertaken a slew of bold actions to contain the crisis and to try to limit its damage to the broader economy. Under his leadership, the Fed has cut short-term interest rates essentially to zero, deployed nearly $2 trillion to support mortgage lending and lower long-term interest rates, created innovative programs to support lending to consumers and businesses, and undertaken stress tests of large banks that helped instill confidence.

In part because of those steps, the economy seems to be stabilizing. The nation seemed to be at risk of a Great Depression-style collapse last winter, and now it merely seems to be experiencing a deeper-than-usual recession.

The decision to reappoint Bernanke is likely to soothe financial markets. Financial analysts have overwhelmingly preferred that Obama stick with Bernanke, given the fragile economy, rather than replace him.

White House chief of staff Rahm Emanuel, Treasury Secretary Timothy F. Geithner and Summers all recommended to the president that Bernanke be retained, according to the administration official.

HENRY J. PULIZZI and ELIZABETH WILLIAMSON in the Wall Street Journal touches on the criticism from Capitol Hill where most members of Congress none-the-less support Bernanake’s re-appointment:

The nomination comes amid criticism of Mr. Bernanke by some in Congress. The financial sector bailout he helped engineer last year has angered some Republicans who see it as a gamble of taxpayer money, and some Democrats see him as complicit in initial hasty efforts by the Bush administration to rescue banks without sufficient consideration for homeowners and smaller businesses hit by the financial crisis and shutdown in the credit markets.

Mr. Bernanke, a Republican, was appointed Fed chairman by President George W. Bush after a short stint as Chairman of the Council of Economic Advisers. His reappointment formally ends a drawn out guessing game over who will head the central bank as it unwinds the emergency measures implemented to confront the financial crisis. Mr. Bernanke, who must be confirmed by the Senate, also will have to determine when to begin raising interest rates from near-zero.

Mr. Obama also pledged to pass financial regulatory reforms that have caused friction on Capitol Hill, where some lawmakers have complained that the Fed will be given too many new powers.

“We have already seen how lax enforcement and weak regulation can lead to enormous wealth for a few and enormous pain for everyone else,” Mr. Obama said. And that’s why even though there is some resistance on Wall Street from those who prefer things the way they are, we will pass the reforms necessary to protect consumers, investors, and the entire financial system.”

Mr. Bernanke has been widely praised by economists and expected by Wall Street to keep his job. But some lawmakers have been critical of his response to the crisis and chastised him for not doing more to head off the meltdown before it arrived.

Reuters

Federal Chairman Ben Bernanke at hearing before the House Oversight and Government Reform Committee on June 25.

 

Early reaction to Mr. Obama’s decision was positive.

“The recession America is currently suffering through is the most severe since the Great Depression, but it is hard to dispute that it could have been considerably worse without Ben Bernanke’s strong and resolute action,” said Sen. Charles Schumer (D., N.Y.) “He is smart, thoughtful, and not an ideologue — the kind of person we need as we work to turn the economy around, get GDP rising and start creating jobs again. He is the right choice for these tough times.”

SIMON JOHNSON provides the take away at baselinescenario.com and essential reading:

The Fed will keep interest rates low for the foreseeable future.  This will make sense given continued high rates of unemployment in the US economy.  But unemployment indicates average economic outcomes – high unemployment is completely consistent with some parts of the financial sector expanding at record rates: this is part of the two-track story.

The big banks have access to large amounts of Fed-provided funding at very low rates.  We’ll see this reflected in speculative market activities (think oil).

We’ll also see this in global capital flows (i.e., gross flows, perhaps also net flows – but the new global imbalances may not be so obvious in the pattern of current account surpluses/deficits around the world).  The US is increasingly a cheap funding environment, if you are a big player (definition: anyone regarded as an important client by Goldman).  Rates now begin to rise in emerging markets, as their economies turn around.  The Asia story will be compelling fundamentals and a great carry trade (borrow cheaply in dollars, lend at higher rates in Asian currencies) - and the exchange rate risk is for appreciation against the dollar.

Everyone involved knows this is unsustainable, but also that it can last for a while – and they can get out before everyone else.  Or, alternatively, that – as major financial players – they can’t afford to sit on the sidelines (talk to Chuck Prince: what has changed, in ideology, policies, and people at the top since his day?).

Presumably, commodity prices also get dragged up – or perhaps they jump up in anticipation of the Coming Asian Boom?  Now this might lead Asian central banks to tighten, but probably not if these economies can continue to keep wage costs under control.  And it might lead the Fed to tighten, but probably not as the mantra of focusing on “core inflation” (without food and energy prices) remains intact – however anachronistic it may seem to the rest of us.  It’s hard to see Bernanke #2 doing anything different, except perhaps at inconsequential margins. 

So then we really bubble – and perhaps we even mistake it for a boom.

When the Big Crash comes, there’ll be another moment of decision: “Collapse or Rescue.”  And we know what Bernanke #1 will do.  Which is, of course, why this administration is reappointing him – and not seriously reregulating big finance.

The Administration has taken a position that will please progressive economists.  Paul Krugman, for example, often speaks of the mistakes Roosevelt made in 1937 by cutting back on the New Deal as the nation began to see recovery.  The result was a second dip and a “W” shaped slump.

 PHILLIPS’ article posted yesterday on the Wall Street Journal cites both the Administration’s and Bernanke’s adversion to a repeat.

The economy was recovering briskly during Franklin D. Roosevelt’s first term in the White House. The jobless rate, which had peaked at 25% in 1933, fell to 14% in 1937 — not exactly cause for celebration but a relief nonetheless.

The comeback stalled in 1937. Banks, nervous about the fragile recovery, were holding huge amounts of cash in reserve at the Fed. Fearing an inflationary surge should the banks decide to lend that money out to businesses and individuals, the Fed — which had made the mistake of tightening monetary policy soon after the 1929 stock-market crash — miscalculated again. The Fed ratcheted up banks’ reserve requirements three times, starting in 1936. The banks reacted by cutting lending even further.

“There’s no doubt that [Fed Chairman Ben] Bernanke is heavily influenced by these two mistakes of the Fed during the Depression and is absolutely intent on not repeating them,” says Alex J. Pollock of the American Enterprise Institute, a free-market think tank in Washington.

Compounding the Fed’s errors, the federal government tightened fiscal policy. Congress approved a big bonus for World War I veterans in 1936, providing a spark of consumer spending. But lawmakers allowed the subsidy to lapse in 1937. At the same time, the government began collecting the first Social Security taxes, on top of income and capital-gains tax increases that Mr. Roosevelt approved in 1934-35.

Tightening the monetary and fiscal screws sent the economy into free fall again — the second trough of the W. Unemployment shot up to 19%, prolonging the nation’s suffering.

Fast-forward to 2009. Most economists surveyed by The Wall Street Journal this month believe that the recession is over. On average, they expect to see a 2.4% increase in output in the third quarter, at a seasonally adjusted annual rate. Construction of new single-family homes has started to climb. Auto sales are up.

But administration officials and their allies fear a second dip if the government pulls back the $787 billion stimulus or if the Fed clamps down too soon.

So, is the economy on its way toward recovery or preparing for a second, much deeper, dip?  Place your bets.