Putting terrorism in perspective

It has certainly been interesting over the past few days to observe all of the hyper-ventilating over the failed terrorist bombing on the Detroit-bound flight from Amsterdam. I just wanted to put it all into perspective, or at least express my perspetive on the incident, in the form of some key points to keep in mind going forward. I am going to list them in reverse priority order, lowest priority first:

• 6. Of course we saw a "systemic failure" and numerous improvements are needed in our counter-terrorism efforts. That should go without saying.
• 5. Simple fact that gets ignored: The terrorist bomber failed to bring down the plane or cause any significant damage or harm to human life. Sure, he did succeed at terrorizing the passengers for a brief time, but the over-reaction of law enforcement after the incident probably terrorized the passengers even worse than the terrorist incident itself.
• 4. Zero risk a great goal to aim for, but should never be used as our daily criteria for whether we have faith in our system. Incidents are bound to happen. Sure, we want to minimize their occurrence, but absolute zero risk is probably simply impossible, let alone affordable financially and in terms of loss of freedom of movement.
• 3. We should put risk of damage or harm from terrorism in the same perspective of comparable damage or harm from non-terrorist incidents such as accidents and negligence. Whether you die or are harmed from an act of terrorism or an act of negligence should not be material. It is mere political posturing to consider them as distinct. After all, both could be avoided. It is the fact that you were killed or harmed that matters, not how it happened. Terrorism may impact "air safety", but run the numbers of actual harm and lets see how safe or unsafe air travel is compared to past years or alternatives modes of transportation. If the absolute level of harm is very low, let's not obsess over it.
• 2. Public officials should be up-front about the simple fact that life is full of risk and that as much as we try to minimize risk, sometimes incidents will happen. The fact that an incident has happened (or almost happened in this case) should never be treated as some great horror. As long as the freuency of incidents is kept reasonably low and on average the impact of each incident is reasonably low, we should consider that overall, the system is working. And that is a good thing.
• 1. The media terrorized the American public far more than even the terrorist himself. I am not suggesting that there be a media "black out" for terrorist incidents, but the literal explosion of media coverage, with wave after wave of repetition and alarmism and alarmist rhetoric has been simply unconscionable. The media should simply report the news and move on. The media should not be in the business of making news or puffing up over-reaction. It should not be the function of the media to amplify the work of terrorists. That should be as illegal as the terrorism itself.

The short summary is that nothing happened last week that should overly-alarm any American. The hyper-ventilation and over-reaction by the media did more to aid and abet the cause of the terrorists than the actions or intentions of that one terrorist himself. That is the kind of perspetive we need to focus on.

So, our priorities should be:

1. Dampen media coverage of terrorist activities.
2. Public officials should focus on risk assessment and risk management and and present risks in perspective and remind citizens that they have a responsibility to accept that incidents of terrorism cannot be allowed to take over our public discourse.
3. Expect that most terrorist plots will fail. But most importantly, do not treat those failures as if they were successful terrorist actions.
4. Improve our technical measures and foreign policy efforts as feasible, but accept that they will never be foolproof.

-- Jack Krupansky

 

Lobbying by firms which are majority-owned by U.S. Treasury

Spurred by news that GM had hired lobbyists, someone asks if I "could explain how a company which is 63% owned by the US Government could justify spending money to hire lobbyists?" Here is my response...

Personally, I do not subscribe to the notion that  "lobbying" is some kind of social "evil" that is counter to the interest of citizens. Lobbying is primarily an informational process, with the lobbyist trying to "paint a picture" that is advantageous to their client, frequently in terms of how legislation or regulation may help or harm "jobs" and "businesses" in the politician's local district. Lobbying per se is not directly tied to illegal political "contributions" or bribes.

Whether the government owns 0% or 100% of a firm has no bearing on the business-value of engaging in lobbying of Congress and regulators. If the will of Congress and the regulators can affect your business, you have a right and fiduciary obligation to your owners (including Uncle Sam) to make sure that Congress and the regulators are informed of the business and economic ramifications of their actions.

The U.S. Treasury is the nominal owner of that 63% government ownership. They have a fiduciary duty to their "owners", the citizen taxpayers of the U.S., to get a "return" for that investment. Treasury certainly has an obligation to make sure that the firm acts in the best interests of the firm and assuring that Treasury gets its return.

That is not to say that every action of the firm is 100% aligned with Treasury's interests, but generally Treasury can "justify" the actions of the firm if those actions are likely to be in the best interests of the firm's survival and health and "return" of the investment money to Treasury.

Sometimes the interests of firms are way out of line with the interest of U.S. citizens (e.g., Wall Street "banks"), but that is more the exception than the rule.

The simple truth is that Congress and the regulators depend on the lobbyists because the lobbyists generally tend to have a better grasp of the facts and principles involved than the politicians and regulators and their staffs. The problem is weeding out the bad apples without throwing out the overwhelming majority of good apples.

Of course, political partisans who have a contrary interest to the legislative and regulatory priorities of the firm may not agree with the positions being "lobbied" by the firm, but that is all about politics and not about whether lobbying is "justified" or not.

I understand the negative popular image of lobbyists and the political "power" that accrues from attacking them, so maybe it is just another one of those "grimace and bear it" scenarios where you publicly deplore what you privately support. The old saying in Washington is "Never confuse public pronouncements with private intentions."

So, in short, Treasury should publicly decry and excoriate the use of any of the taxpayers' money for lobbying, but privately encourage them to lobby as aggressively as they need to and maybe even offer to help them do it.

But let me reiterate that this is all independent of any illegal financial "contributions" from any firm to any member or staff of Congress or any regulator.

I also understand that many naive individuals lump the legal forms of lobbying in with illegal activities and call the whole collection "lobbying" with no distinction, but that is a misuse of the term. Put more simply, not everyone who "lobbies" is necessarily a "lobbyist". True lobbyists must be registered and are regulated by the government.

In any case, I have no problem with GM lobbying Congress and the regulators. The (temporary) majority ownership by the U.S. Treasury should have no impact on what lobbying activities the firm can engage in.

Ditto for Fannie Mae and Freddie Mac.

-- Jack Krupansky

 

Government subsidy of catastrophic health care costs

Sure, maybe the proposed health insurance reform may finally be enacted early next year, but its not too soon to start thinking about how to address issues beyond the superficial issues addressed in this first phase of health insurance reform. The issue that seems most intractable to me is how to deal with the cost of catastrophic health crises. Private health insurance can easily cope with the full range of "normal" health contingences that most people run into during their daily lives, things like flu, broken bones, pregnancy, contagious disease, even heart attacks. Health insurance companies, just like life insurance companies, can gather and study detailed historical actuarial data and reasonably project potential expenses and set premiums to cover those projected expenses plus a moderate profit. The problem comes on three fronts: 1) catastrophic health crises, 2) severe chronic conditions, and 3) end of life care. The basic problem is that the costs of all three can be so high and so unpredictable that no mere mortal (let alone an insurance company) can forecast what the "reasonable" cost should be on average so that it can be fully funded from normal premiums without either a high risk of financial ruin for the insurance company or excessively high premiums for "normal" people - the latter being what most people are experiencing today. My solution is to put a reasonable upper-end cap on such expenses, with the federal government covering the excess costs, and insurance companies and insurees would pay a moderate premium amortized over all insurees of all insurance companies to cover a sizable portion of the excess costs, and to do it in a way that is predictable enough that insurance companies have no excuse for "fat" premiums simply to compensate them for the extra risk that were taking before. This also eliminates the motivation for insurance companies to refuse to insure high-risk individuals or those with pre-existing conditions, and to do it in a way that doesn't put upwards pressure on premiums or that encourages them to seek compensation elsewhere in the business in a way that has negative consequences for insurees.

In addition, the federal government might also contract out private reinsurance to cover a sizable fraction of excess catastrophic health care costs. Putting it simply, ask Warren Buffett what piece of that reinsurance business he would want (since that is a business he is already in) and use that as a guideline. The federal government and taxpayers would have to eat the rest. Congress and government health care agencies would be responsible for trying to keep such costs down, but at least insurees would no longer have to fight with the insurance companies over such costs.

End of life care can be extremely expensive, especially as people live longer and with more underlying chronic conditions, and as new medical technology and new treatments tend to add to costs by keeping people with chronic conditions alive even longer. There is no way to reasonably expect that private insurance companies can take on the totality of these costs without passing them along as dramatic increases in the health insurance premiums of  average and healthy individuals. Better to set an average end-of-life cost that insurance companies and health insurance premiums should cover, and then "lay off" the excess to the federal government, which would then amortize the cost over all taxpayers and then somehow proportion that amount between tax revenues and higher insurance premiums.

There is also the issue of "older" persons who are now within "striking distance" of end of life. There simply are not enough years left until the insurance company needs to expect that on average such persons will start incurring end of life expenses. We still want there to be a significant financial incentive for private insurance companies to offer insurance coverage to such individuals for all "normal" health expenses, but not have either the insuree or the insurance company take on some impossible financial burden. The insuree should continue to pay "normal" insurance (same as an early middle-aged person, say 40 years old), with the federal government and private reinsurance covering 100% of all excess health care costs, both end of live and the incremental increase of health care costs expected due to being past "prime" health stage of life. This should address outrageously high health insurance premiums for those over 50.

A similar model is needed for pre-existing conditions and for those who are "at risk". Maybe part of the overall premiums collected by a health insurance company need to be "mandated" to specifically target subsidy of those two categories so that their premiums can remain "normal" at no loss to the insurance company. This should be done based on real actuarial data, with government subsidy beyond "reasonable" expenses. So, for example, if the sum of all chronic condition treatment costs exceeds a mandated fraction of total premiums collected by that insurance company, the government begins to pick up the tab for the excess for new insurees so that there is no financial disincentive for the insurance company to turn down pre-existing conditions or those at risk.

-- Jack Krupansky

Predatory Capital

I have been using the term predatory capital to refer to large amounts of short selling by hedge funds and the in-house proprietary trading desks of "banks" to attack and even destroy individual firms in the stock market. By artificially pushing the stock price of a company down fast and steep enough, predatory capital can dramatically restrict or even eliminate a company's ability to raise capital, and in the world of modern finance virtually all but a few large technology companies are constantly raising and rolling debt and other forms of capital. We saw this in spades during the recent crisis with Bear Stearns, Lehman, AIG, Fannie, Freddie, Citibank, Merrill Lynch, et al essentially shut out of raising any capital which prevented them from surviving without government intervention. This was a complete failure of "free and open markets."

In a "normal" market, a modest or even moderate level of short selling is okay and maybe a healthy thing. Short selling adds no productive capacity to either the economy or the markets, but is tolerated since it gives idle capital an opportunity to earn a higher return than if left idle.

But in a market under stress, as we had in 2008, that "idle" capital was not seeking to find "productive" assets and investments that would be of long-term value to the economy, but simply short-term profit for the sake of short-term profit with no long-term beneficial effect.

Short selling for short-selling's sake is not investment and does not add any productive "information" to the markets.

In a properly functioning market, the balancing of participants increasing or decreasing their economic stake in companies creates the information that shows us how the market values a company and its prospects. Sure, we tolerate people using short-term trading, options, and even short-selling to "tag along" with the market trend, but those "followers" are tolerated precisely because they merely "follow" the flow of information and do not distort the flow of information in any significant manner.

But once that short-term trading and speculation becomes the preverbial tail wagging the dog and begins to distort the flow of information about participants who are buying or selling true, long-term economic stakes in companies, then the markets are no longer providing accurate information or prices. That is what we saw in 2008.

In fact, the improvement in the economy over the past six months proves that stock prices in the latter half of 2008 were not accurately forecasting the future of the economy and the improvement in revenues and earnings of companies.

I will not claim the term predatory capital as my own invention, but it is not commonly used. In fact a Google News search finds zero hits. Nor is the term or any search matches found in the Wikipedia.

A Google search does come up with some mediocre and unhelpful results, but I did find this interesting result from a review of Jack London's book War of the Classes  in The New York Times dated 1905, that sounds eerily prescient of our current times:

Hmmm... "predatory capital wandering the world over seeking where it may establish itself". I couldn't have put it better myself.

But whether corporations absorb the government or government absorbs the corporation does not seem to be any dominant trend. We do a little (or a lot) of both, but the pendulum continues to swing in both directions with no clear bias towards one direction or the other. The point is that predatory capital exploits any such chaotic motion, not just as a source of modest short-term profit but to profit from the decimation or even destruction of capital that is productively deployed.

My apologies to Mr. London if I have distorted his intended meaning of the term predatory capital.

-- Jack Krupansky

Position of Luxury

I will not claim to have invented this phrase, but I had not ever heard it used before it materialized in my head: position of luxury. A position of luxury is a position, typically political or social in nature, but possibly technical as well, that would have significant negative consequences if everybody took that position, but if only a minority take that position then they reap the benefits that accrue from the consequences of the majority taking an opposing position. An example would be an antiwar stance or a conscienscious objector stance which permits the person to gain the benefits of strong national defense and successful prosecution of wars. There is nothing wrong with such a position per se, but it is a weaker position morally since the person is getting benefits for free, or at least without the full costs that persons taking an opposing stance may face.

The core of this concept is that a person can or is depending on others to take action based on an opposing position.

As another example of a position of luxury, a person could safely oppose use of severe or lethal force by law enforcement authorities, knowing that the majority will likely support an appropriate level of force regardless of any opposing positions.

-- Jack Krupansky