Consumer Protection – The Wrongologist

Democratic Party Messaging

The Daily Escape:

Pikes Peak, Colorado Springs, CO – December 2024 photo by Monica Breckenridge.

The Democrats are meeting this week to decide on who will lead them into the 2026 midterms and the 2028 general election. Wrongo thinks it’s time for a revolution.

The key question is how do Democrats go back to winning presidential elections? And it may not be the way you think. From Jon V. Last:

“Since Trump’s emergence in 2016 the opposition has responded by acting as if it were still 2015. The Biden administration pursued a vigorous, bipartisan agenda filled with popular legislation designed to promote economic growth across the board. Biden spent money on infrastructure and manufacturing—much of it in red states and rural areas where Democrats had little support.

The Biden administration’s theory was that by governing from the center and focusing on employment and economic growth, Democrats could retain the support of the majority….”

But that theory didn’t work, and Trump won, running on zero ideas about growth, prosperity, or progress. His campaign was posited on the infliction of pain to outsiders. Trump didn’t promise to improve the lives of his voters. He promised to punish the people his voters wanted to hurt. That was the entirety of his electoral proposition, and none of it was subtext. Instead it was bold-face, ALL CAPS text.

Last says it worked because America has changed and the majority of voters are no longer motivated by wanting progress for themselves. Instead they’re motivated primarily by anger that out-groups—the people they do not like—might be succeeding or getting benefits they’re not getting.

If this is true, and at least some evidence suggests it is, how do Democrats persuade voters not to be quite so angry and to vote for them? From Brian Beutler: (emphasis by Wrongo)

“…winning the next election will require Democrats to persuade some as-yet unpersuaded voters that they’re worth voting for. Whatever policies Democrats think are popular, whatever affects they associate with normalness and affability, if they can’t do the delicate work of changing a mind, they can’t get anywhere.”

“Democrats are about to have as little power as they’ve had at any time in the past two decades for a simple reason: Most Americans weren’t convinced that they’d be better off under Democratic rule. That’s it. And there’s no shortcut back to power that avoids the difficult task of convincing people to change their minds.”

More: (emphasis by Wrongo)

“The Democrats need more and better communicators, and, crucially, it needs the people who don’t understand their potential to influence conventional wisdom and public opinion to get with the times. Most persuasion doesn’t happen person to person, it is mediated. When it does happen person to person, it is most often between people who already know each other, and usually one of those people is regurgitating ideas they picked up….And the ripest targets are no longer classic swing voters who are happy to talk politics with strangers….”

Couple all of this with the problem of where people get their news, and you have Dems digging out of a ditch partially of their own making. What Democrats are missing more than anything is creative thinking about how to reach people who will never answer a telephone call from a number they don’t recognize, never answer the door for a canvasser, and never form lasting political beliefs by watching or reading professional newscasts (because they rarely, if ever do).

This time around, Democrats either need their leaders to adapt, or else they need new leaders.

Jon Last thinks what will win votes in this environment is a lefty demagogue akin to what Bernie Sanders has been selling for years with his “millionaires and billionaires” rants. Sanders’s pitches resonated with younger voters. He got quite a lot of traction in 2016, but Democratic Party primary voters were not ready for him.

Who should the Dems support to lead them into the next round of elections? It should be a group of people in the 30’s, 40’s and 50’s. And thank God there is at least some movement among “younger” Democrats on the Hill to challenge the party’s gerontocracy.

Billy Ray is a screenwriter. His Captain Phillips screenplay earned him an Oscar nomination. He thinks the Democrats’ storytelling ought to start with:

“Whoever is going to be our next presidential candidate needs to look to the American people and say, ‘You matter. Not me, not Trump. You matter. You matter to your family, you matter to your community, you matter to your country,’” he adds. “‘You matter to our collective future, and you matter to me. And what I’m going to do for the next four years is just work for working families. I’m going to do the things that made the Democratic Party your party for so long.’”

Working families. Who among the Democrats out there can build on and carry this message home?

Evolve or Die, Dems.

Implications Of Brian Thompson’s Assassination

The Daily Escape:

Bear Trap Gap, NC – November 2024 photo by Mandy Gallimore

“If you want things to stay as they are, things will have to change”– Il Gattopardo

If you’re on social media, a concerning number of people seem to openly support gunning down a “corporate rich guy” in broad daylight. Brian Thompson, the CEO of United Healthcare was murdered in what appears to be a targeted killing. And the comments about it on the internet underscore there is kind of a depravity circulating in too many Americans.

This, after two attempts to assassinate Trump during the campaign. Which stirred up similar, although more muted reaction on social media.

The killer left anti-insurance messages on the shell casings of the bullets that killed Thompson, using the words: “deny,” “defend” and “depose”. Those words are references to the ways insurance companies avoid paying for care.

An excellent summary by Bob Lefsetz:

“And we thought the revolution would arrive as a result of the red/blue divide. When in truth, it’s all about income inequality. Please don’t criticize me for having sympathy for those screwed by the insurance companies. If I were in charge, there’d be no guns at all, or a law akin to that in Australia. But one would posit that the shooter is pissed because the insurance company didn’t pay.

But that’s what insurance companies do, not pay. That’s their business model. Even assuming you can see the doctor of your choice, which is rare.”

Yes, not pay whenever possible is what insurance companies do.

To be clear, this is why advanced societies have tended to create broad publicly funded social safety net programs. It’s not because their bleeding heart politicians love giving away money. It’s because making sure people have humane standards of living keeps them from becoming desperate and doing stuff like this. During the Great Depression, capitalists agreed—grudgingly—to the New Deal because they were afraid otherwise the country would “go Communist”.

We have no clarity on the actual motive behind the killing, but all signs point to it being linked to dissatisfaction with our health insurance system. And we need to remember that Brian Thompson was a human being with a family. So calling his death justified is despicable.

It’s the health insurance payment system and healthcare pricing for goods and services that is despicable.

From STAT:

“The public’s dissatisfaction has never been higher. Recent polling data show the health care system is as unpopular now as it was before the Affordable Care Act went into effect 15 years ago — a time when insurers could decline to cover people if they had any number of pre-existing health conditions and nearly 49 million people lacked insurance. A survey from Gallup released Friday reveals that “Americans’ positive rating of the quality of health care in the U.S. is now at its lowest point” since 2001.”

“Roughly 25 million Americans remain uninsured. Tens of millions of others have health insurance but can’t afford their deductibles, coinsurance, or copays due to the high prices of tests, surgeries, and prescription drugs….These barriers aren’t just a nuisance — they can have real effects on patients’ health.”

The KFF foundation reports that 100 million Americans have medical debt, and its highly doubtful that they can afford to pay it down. Even people with platinum forms of coverage face long waits coordinating the complex and uncoordinated delivery of their health care, as Wrongo knows firsthand.

After getting care, patients are inundated with medical bills they don’t understand — perplexed why their insurer isn’t advocating on their behalf, and fearful that hospitals and other providers will send them to collections or sue them.

It’s all part of a health care system that is projected to spend $5 trillion this year, eating further into workers’ wages. Those who feel most aggrieved often are the sickest. Most people are generally satisfied with their health insurance. However, people who have more health conditions and therefore need to get care more frequently don’t like their coverage nearly as much as healthier people, according to polling from KFF.

So, the more they know you, the more they dislike you. People are feeling a sense of helplessness in trying to address this mammoth commercial insurance industry that’s putting restraints on people’s ability to get care. When you feel that sense of helplessness is when you end up having situations like this. People don’t really know what else to do.

The murder of the CEO and the public’s reaction reveals that:

Americans are blindingly angry, and not just with the healthcare system.
Due process is no longer trusted. Have enough money and you’re likely to buy your way out of a bad situation. The FTC says Twitter must comply with the consent decree and Elon Musk just doesn’t do it. The government is no match for the rich. Money can insulate you from so much.
Vigilante justice has become a solution in some places because of the lack of due process.

We’re entering a period that is very similar to the Gilded Age of the 1880s and the 1930s.

Our social contract is in free fall. And the Trump administration’s proposed cabinet officers will make it worse.

What will happen in a country with 400 million guns and 320 million people? Things may go downhill quickly. Never forget, most change is fomented by individuals. A fruit vendor in Tunisia ignited the Arab Spring.

Is this the start of change in America? One person gunning down an insurance company executive?

Wrongo doesn’t condone the shooting. At this point we have no motive. But what we do know makes you think about our broken health care system and the overcompensation of the people who run it. They’re getting rich on our illnesses. They take our money and then, don’t pay.

Ain’t that America.

Oops, Boeing Does It Again

The Daily Escape:

Lenticular cloud at sunrise, Salton City, CA – May 2024 photo by Paulette Donnellon

At a time when Boeing is facing calls by the flying public as well as from governments to return to its focus on safety, the company has scored an “own goal” by deciding to pick a fight with its in-house firefighters union, who help to keep Boeing itself safe.

From The Stand, a Seattle-based newsletter about working people:

“The more than 120 fire fighters who protect Boeing employees and facilities in Washington state — members of the International Association of Fire Fighters (IAFF) Local I-66 — are struggling to get a fair contract from the Arlington, Virginia-based company.”

At the heart of the dispute is Boeing’s insistence on raising the time it takes for firefighters to reach the maximum pay scale from 14 years to 19 years. Negotiations have been ongoing through a federal mediator for more than two months, with no deal reached. Nineteen years is nearly the entire work span of a firefighter’s career. If this deal is accepted, they will hit the top of their pay scale and retire soon after. It’s understandable why that would be good for the company. From Boeing: (emphasis by Wrongo)

“Despite extensive discussions through an impartial federal mediator, we did not reach an agreement with the union….We are disappointed the union chose not to even bring our offer to its members for one final vote….We have now locked out members of the bargaining unit and fully implemented our contingency plan with highly qualified firefighters performing the work of IAFF members.”

Florida Lets Measles Run Free

The Daily Escape:

Highland Lighthouse, North Truro, Cape Cod, MA – February 2024 photo by Barbra A. Bentley

Let’s take a break this Saturday from a) Russia’s infiltration of the Republican Party and b) the growing realization that unless House Speaker Mike Johnson Johnsonless whips his members into shape before March 1^st, we’ll have a government shutdown. Instead let’s focus today on Measles.

You are a witness the continued collapse in US public health standards since Florida’s Surgeon General has said its ok for unvaccinated kids to attend public school even though there are measles outbreaks. From KFF News:

“With a brief memo, Florida Surgeon General Joseph Ladapo has subverted a public health standard that’s long kept measles outbreaks under control. On Feb. 20, as measles spread through Manatee Bay Elementary in South Florida, Ladapo sent parents a letter granting them permission to send unvaccinated children to school amid the outbreak.”

“The Department of Health ‘is deferring to parents or guardians to make decisions about school attendance,’ wrote Ladapo, who was appointed to head the agency by Florida Gov. Ron DeSantis, whose name is listed above Ladapo’s in the letterhead.”

With his brief memo, Ladapo has subverted a public health standard that’s long kept measles outbreaks under control. This is where you wind up after decades of indoctrination of libertarianism and neoliberalism, where “freedom” becomes anarchy, a rejection of the ability of the state to impose restrictions, even in the name of public safety.

Everyone in America knows that measles is highly contagious, that it kills, and can do lasting damage. More from KFF:

“Most people who aren’t protected by a vaccine will get measles if they’re exposed to the virus. This vulnerable group includes children whose parents don’t get them vaccinated, infants too young for the vaccine, those who can’t be vaccinated for medical reasons…”

The CDC advises that unvaccinated students stay home from school for three weeks after exposure. About 1 in 5 people with measles end up hospitalized, 1 in 10 develop ear infections that can lead to permanent hearing loss, and about 1 in 1,000 die from respiratory and neurological complications. They reported that in 2023, childhood immunization rates had hit a 10-year low.

Worse, only about a quarter of Florida’s counties had reached the 95% threshold at which communities are considered protected against measles outbreaks, according to data posted by the Florida Department of Health in 2022.

Rebekah Jones, a data scientist who was removed from her post at Florida’s health department in 2020, over a rift regarding Coronavirus data, said:

“I think this is the predictable outcome of turning fringe, anti-vaccine rhetoric into a defining trait of the Florida government,”

A strategy of letting measles spread (which can wipe out your body’s immunity memory) while Covid is still pin-balling its way around the country? Sounds legit.

The way that things are going with public health in the US, it’s only a matter of time until the health departments of other western countries start issuing travel health notices for their citizens wanting to visit the US, advising them of the diseases that are being left to run free, particularly in Florida.

From The Nation:

“In 2022, Georgetown University political scientist Donald Moynihan wrote a piece on how to undermine the administrative state….No country becomes a world power without a capable public service.”

Perhaps the corollary, as stated by The Nation’s Gregg Gonsalves is this:

“No country becomes healthy without a capable public health system.”

That describes America today. More from The Nation:

“We did terribly on Covid…part of the reason was that our fundamentals were weak, but our politics are also set up to undermine public health….This has implications well beyond…the pandemic. It’s about how we expect to survive and thrive in America….This is a disaster in slow motion, and we’re watching it unfold as bystanders.”

There you have it: another thing to lose sleep over, and the election is still 7+ months away. Will there be enough infant deaths to generate sufficient outrage to roll this decision back?

Highly doubtful.

Wrongo is leaving you with that thought and is segueing into our Saturday Soother, where we take a break from doom scrolling and spend a few stolen moments alone with our thoughts. Here on the Fields of Wrong, there is still snow on the ground. So while we hope that spring is just around the corner, there’s little evidence to support it.

To help you relax, grab a seat by a south-facing window and watch and listen to Samuel Barber’s “Adagio for Strings”, played here by the Vienna Philharmonic, and conducted by Gustavo Dudamel. Dudamel is scheduled to become music director of the New York Philharmonic in 2026. This performance was a part of the annual free Vienna Summer Night Concert in 2019.

This is the fourth time Wrongo has featured this composition, although you are seeing this particular version for the first time.

Barber finished the Adagio in 1936. In January 1938, Barber sent an orchestrated version of the Adagio for Strings to Arturo Toscanini. The conductor returned the score without comment, which annoyed Barber. Toscanini later sent word that he was planning to perform the piece and had returned it simply because he had already memorized it!

It was performed for the first time by Toscanini in November, 1938. Here, it is conducted by Gustavo Dudamel in 2019, like Toscanini did, without a score:

Biden’s Plan To Cut Drug Prices

The Daily Escape:

Mars on left, Earth on right – image by alofeed

The Biden administration released its list of 10 prescription medicines that will be subject to the first-ever price negotiations by Medicare. This is a big deal because Medicare covers 66 million older Americans, people who routinely take very expensive drugs.

Until recently it was illegal for Medicare to negotiate prices with drug companies. But the Inflation Reduction Act (IRA), passed last August, gives Medicare that power. It also forces companies to pay a rebate to Medicare if their drug prices rise faster than inflation. The Congressional Budget Office estimates that price-capping measures will reduce Medicare expenses (and the federal deficit) by $96 billion by 2031.

The list includes drugs for diabetes, arthritis, and Crohn’s disease, and could sharply lower medical costs for patients. Reuters says that the US Centers for Medicare & Medicaid Services (CMS) spent $50.5 billion between June 1, 2022 and May 31, 2023 on these 10 drugs. That was about 20% of the total cost of drugs in the Medicare prescription drug program known as Part D.

The WaPo had an opinion piece by David Goldhill, CEO of SesameCare.com, a digital marketplace for discounted health services: (brackets and emphasis by Wrongo)

“The pharmaceutical industry earns almost 50% of its worldwide revenue here [the US], as do medical information-technology firms. [Medical] Device makers earn 40% of their money in the US. And this understates things, because US revenue is generated from higher prices, so margins are greater. If the US accounts for half of a company’s revenue, it probably contributes at least 75% of its profits.”

This has always been the business plan for Big Pharma: Make your money in the US and take whatever scraps of profit you can get in other markets.

That market subsidy is paid by American taxpayers generally (through the funding of Medicare) and by US pill-takers specifically when they pay higher co-pay prices for the drugs that help with their chronic conditions. The Economist points out that prescription medicines in America cost two to three times more on average than in other wealthy countries:

The blue dots are the price paid in the US for brand name drugs. The grey dots are prices paid in the various countries for all US drugs sold in those countries. The comparison of brand name to generics shows how much greater the cost is to an American. It also follows that US patients’ out-of-pocket expenses, (the slice of drug costs not covered by insurance), are among the highest in the world.

It’s understandable why Biden’s move to start negotiations on some of the most expensive drugs has been fiercely opposed by the pharmaceutical industry. Essentially, high US drugs costs underwrite what amounts to a subsidy for buyers of the same drug sold when it’s outside the US.

Many of the Big Pharma have jumped on the legal bandwagon, challenging price-setting provisions in the IRA. More from the Economist:

“Since the law’s passage over 50 companies have blamed the IRA in earnings calls for clouding their prospects.”

A quick primer on drugs. Most medicines are either small-molecule drugs or large-molecule drugs. The former are the kind of pills that line our medicine cabinets. Large-molecule drugs, (also called biologics), are more complex and must be injected. The IRA grants biologics 13 years of pricing freedom after a drug is approved, while small-molecule drugs get only nine years post-approval before they must face Medicare’s bean counters. The industry estimates that small-molecule brands could lose between 25% and 40% in overall revenue due to the earlier cap on prices.

PhRMA, the pharma Industry’s lobbyist argues (and Republicans back them) that high US prices reflect the high cost of drug development. The pharmaceutical manufacturers are, of course, suing to stop the price negotiations. They say that allowing the government to negotiate lower bulk prices for drugs will stifle innovation, and will cut funds for research.

One thing that Big Pharma wants to avoid showing us is that they rely on smaller, more agile biotech firms for ideas. Between 2015 and 2021, 65% of the 138 new drugs launched by Big Pharma originated mostly from smaller firms. So, while innovation isn’t totally gone from the big firms, what they’re mostly doing is marketing the intellectual property of small pharmaceutical firms.

It didn’t take long for Republicans to jump on the decision to allow Medicare to negotiate drug prices. From Politico:

“Piggybacking on the pharmaceutical industry’s strategy, Republicans are working to persuade Americans that the Biden plan will stifle innovation and lead to price controls.”

Politico quotes Joel White, a Republican health care strategist:

“The price control is a huge departure from where we have been as a country….It gets politicians and bureaucrats right into your medicine cabinet.”

Politico says that the GOP effort to reframe the drug price debate may hurt them, since they plan largely to run on inflation, while the Biden plan will lower drug prices. Also they quote a new poll from the Kaiser Family Foundation (KFF) that shows 58% of independent voters trust Democrats to lower drug costs compared with 39% of Republicans.

Our politicians and pundits have bleated at us for years about being an “exceptional nation” – but what we really are is exceptionally gullible. As long as the large healthcare and pharmaceutical companies insist on standing between American consumers and their health needs, maximizing their profit will always come first.

We also continue to elect leaders who lobby for keeping corporations unleashed so that they can make as much profit as possible, while saying that the “market” will decide where the public good is prioritized. This keeps us hopelessly mired in a grossly expensive, and often ineffective healthcare system.

We continue to let ourselves be convinced by corporations and our politicians that reforming healthcare is impossible. That the solutions and methodologies used by other developed nations are substandard, and/or somehow immoral.

The Hill reported that the 14 leading US drug companies paid out more in stock buybacks and dividends from 2016 to 2020 than they spent on research and development. Those firms spent $577 billion from 2016 to 2020 on stock buybacks and dividends, $56 billion more than the $521 billion they spent on R&D. So, it’s oblivious how Big Pharma could easily fund their R&D with lower drugs prices.

It is also useful to remember that America has more healthcare billionaires AND healthcare bankruptcies than any other country. Those two things are inextricably linked.

As long as the pharmaceutical companies can maximize profits by buying politicians rather than by charging higher prices in other countries – the American people are the ones who will continue to get screwed.

How To Think Differently About Housing

The Daily Escape:

Sunrise, Outer Banks, NC – June 2023 photo by Stephen P. Szymanski

Wrongo and Ms. Right have 12 grandchildren, only one of which is still in high school. The other 11 are out of school and pursuing their careers or are finishing their education. Only one of the 12 owns a home. Their experience with real estate is representative of what most younger Americans face in today’s real estate market. Ben Carlson uses data from Redfin to show us that mortgage payments are way up over prior years:

The median mortgage payment was up by more than $1,000 over four years. Carlson reminds us that this is just the monthly mortgage payment, it doesn’t include insurance, property taxes or upkeep. This is part of the reason that housing affordability is more excruciating — the pace of the increases has happened so quickly. We’ve simply never seen prices and rates rise this fast in such a short period of time. And asking prices are up as well:

Note that at the end of May 2023, the median asking price was $397k, up from $300k in May 2020, a 32% increase in four years.

But high mortgage rates and rising home prices aren’t deterring all buyers. John Burns Research shows buyers still outnumber sellers by a wide margin in today’s market. They report that as of April, even with 7% mortgage rates, 78% of all real estate agents say that buyers outnumber sellers in their markets.

And for rentals, the national median rent for a one-bedroom apartment has climbed to $1,504, according to research from Zumper. That’s significant: It’s only the second time in history that it has risen past $1,500. But the median doesn’t represent what you’ll pay in big cities:

In America, buying an investment property near work is more lucrative than actually working. The growth of asset values has outstripped returns on labor for four decades. Last year, one in four home sales was to someone who had no intention of living in it. Investors are incentivized to buy the type of homes most needed by first-time buyers: Inexpensive properties generate the highest rental-income cash flows.

Harvard’s Joint Center for Housing Studies found that in 2019, the median net worth of US renters was just 2.5% of the median net worth of homeowners: $6,270 versus $254,900. There’s no better example than the economic challenges to America’s young persons than trying to find (relatively) affordable housing near where they work.

A very interesting article in the May 23 NYT Magazine suggests a possible solution to housing inflation. Vienna, Austria began planning it’s now world-famous municipal housing in 1919. Prior to that, Vienna had some of the worst housing conditions in Europe. Vienna’s housing program is known as “social housing” (Gemeindebauten), a phrase that captures how the city’s public housing and other limited-profit housing are a widely-shared social benefit:

“The Gemeindebauten welcomes the middle class, not just the poor. In Vienna, a whopping 80% of residents qualify for public housing, and once you have a contract, it never expires, even if you get richer.”

Vienna isn’t a small town. Its population is just under 2 million, and if it were in the US it would be our fifth largest city, between Houston and Phoenix.

The availability of Vienna’s social housing also helps to keep costs down even for private housing:

“In 2021, Viennese living in private housing spent 26% of their after-tax income on rent and energy costs on average, which is…slightly more than the figure for social-housing residents overall (22%).”

One of the reasons Vienna’s social housing works is that it is not means-tested; it is open to middle class people. And as a result, the residents care more about whether their grounds stay clean and beautiful. In the US we restrict public housing to the poorest of the poor, making public housing something to escape from, not to enjoy.

Meanwhile, 49% of American renters are paying landlords more than 30% of their pretax income, In New York City, the median renter household spends 36% of its pretax income on rent.

The key difference is that Vienna prioritizes subsidizing construction, while the US prioritizes subsidizing people, like with housing vouchers. One model focuses on supply, the other on demand. Vienna’s choice illustrates a fundamental economic reality, which is that a large-enough supply of social housing offers a market alternative that improves housing for all.

Calls for a federal social-housing plan in America might sound far-fetched but the US government is already deeply involved in the housing market. There’s generous support for homeowners and deliberately insufficient support for the lowest-income households. In 2017, the US gave $155 billion on tax breaks to homeowners and to investors in rental housing and mortgage-revenue bonds, more than three times the $50 billion spent on affordable housing.

For many, housing expense can be an economic burden. And it’s hard to even contemplate what it would mean to have it not be a problem. What’s mind-boggling is how social housing gives the economic lives of Viennese an entirely different shape.

Imagine where the rest of America’s young adults’ income might go if they were able to spend much less of it on housing. Vienna’s program is a look into a world in which homeownership isn’t the only way to secure a financial future.

Final Thoughts On The SVB Situation

The Daily Escape:

Spring wildflowers, Four Peaks Wilderness, AZ – March 2023 photo by Chris Flores

(This will be the final column for this week as Wrongo and Ms. Right are heading to CA for the Napa Valley wedding of granddaughter Nicole. Columns will resume on 3/23)

Several readers commented on how Silicon Valley Bank’s (SVB) major problem went beyond Wrongo’s discussion of asset management. They’re all former bankers and former colleagues of Wrongo, and they rightly brought up liability management as a key contributor to SVB’s problem.

For banks, the deposits that people make are the bank’s liabilities. The essence of banking is borrowing short term (deposits, overnight borrowings and medium term borrowings) in order to lend that money out for a longer term (mortgages, long term loans or, investments in bonds and long dated US treasuries). The difference between what they pay on their liabilities and what they earn on their loans and investments (the spread) is how banks make their profits.

SVB had little risk that their loans wouldn’t be eventually paid back (credit risk), but they did have substantial interest rate risk if rates went up. That included the risk that the face value of the bonds they invested in would decline in value in higher interest rate scenarios.

This is a well-known challenge for all banks. They try to maintain enough of their assets in easily sold investments so if there’s an unforeseen need to pay out cash to depositors, they can meet that need. The bigger the expected (or unexpected) cash need, the more assets the bank must hold that are easily converted to cash.

It wasn’t a surprise to the banking industry that the Federal Reserve (Fed) was raising rates; Chair Powell clearly said they were going to do that until inflation was under control. Basic liability management principles should have told SVB to move to hedge the risks in a rising rate environment by investing more in very short term (near cash) assets. But SVB didn’t. Maybe they thought they knew better.

SVB isn’t alone. The Fed raised interest rates quickly and sharply during 2022, so the face value of bonds fell. According to the FDIC, US banks were sitting on $620 billion in unrealized losses (assets that had decreased in market value but were still on their books at purchase price) at the end of 2022.

Of that amount, Bank of America alone had unrealized losses of around $114 billion, or 18% of the total.

A major risk that the banks didn’t correctly anticipate was the effect of huge cash injections into the economy during the pandemic, along with a prolonged period of historically low interest rates that predated the pandemic. That had ripple effects on all banks. According to Marc Rubinstein:

“Between the end of 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion. With loan demand weak, only around 15% of that volume was channeled towards loans; the rest was invested in securities portfolios or kept as cash.”

Then came the Fed’s rapid rise in interest rates. From FDIC Chairman Martin Gruenberg:

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies….Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,”

Banks do not continually adjust the value of their bond portfolio to market. So their unrealized losses can be difficult for an outsider to see. It also means banks find that selling parts of the portfolio will bring in less cash than they may need, because the securities are worth less in the market than they originally paid for them. That happened to SVB.

From Michael Batnick at Irrelevant Investor:

“Without the pandemic, rates are not at zero for two years. Without the pandemic, $638 billion does not go into venture capital. Without the pandemic, rates don’t go from 0% to 4.5% in a year. And without the pandemic, we wouldn’t be talking about a run on the bank.”

So there’s plenty of blame to go around. The SVB management surely failed: More Treasury bills and fewer bonds would have helped, that’s for sure. They had to know that their customer base, which was concentrated in start-ups, were hemorrhaging cash. They knew that they had unrealized losses in their bond portfolio. Shouldn’t they have shortened their asset mix?

Should we blame the regulators or SVB’s auditors? KPMG gave them a clean bill of health just a few weeks before they went belly up. You would think KPMG should have seen what was coming. And the Fed just announced that they are leading a review of “the supervision and regulation of Silicon Valley Bank in light of its failure.”

For SVB, the government drastically changed its policy about insured deposits. Had SVB been “The Bank of Depositors With No Political Clout”, you can bet that the $250,000 insured deposit limit would have been enforced. And depositors with larger deposits would have had to wait for their money.

But, the exception was made, and now, it will certainly happen again. Ben Carlson says it best:

Ohio’s Airborne Toxic Event

The Daily Escape:

Roan Mountain, NC – February 2023 photo by Spencer Carter. Roan Mountain has the largest naturally growing gardens of Catawba rhododendrons in the world.

Back on February 3, a Norfolk Southern (NS) train carrying hazardous materials derailed near the town of East Palestine, Ohio. Federal investigators say a mechanical issue with a rail car axle caused the derailment. After several days of underreporting, we now know what happened.

Here are some facts: The derailment included 50 cars, 20 of which carried toxic materials, 14 of those contained vinyl chloride. The subsequent fire burned for three days. Then there was a “controlled release” of poisonous gas. And finally, effects of the poison were felt on locals, their animals, and local waterways.

The axle problem is important since it is the cause of all the hardship in East Palestine. Trains use steel wheels on steel rails because they produce 85+ % less friction than rubber truck tires do on roads. The contact point of a wheel on the rail is about the size of a dime. Compared to trucks, trains are cheaper (4 cents vs 20 cents per ton-mile in the US), and more sustainable: One ton of freight can be moved over 470 miles on a single gallon of diesel fuel.

But sustaining that economic advantage requires the railroads to maintain all that steel in good working order. Otherwise if things go wrong with a train that’s 4.5 miles long, they can go very, very wrong. And reporting seems to indicate that NS didn’t maintain its steel wheels correctly.

Also, the derailed NS train was not classified as a “high-hazard flammable train,” despite its hazardous and flammable cargo. Such a classification would have lowered its speed and affected its route. From Lever News:

“Though the company’s 150-car train in Ohio reportedly burst into 100-foot flames upon derailing — and was transporting materials that triggered a fireball when they were released and incinerated — it was not being regulated as a “high-hazard flammable train,” federal officials told The Lever.”

Apparently when current transportation safety rules were first created, a federal agency sided with industry lobbyists and limited regulations governing the rail transport of hazardous compounds. That decision effectively exempted many trains hauling dangerous materials including the NS train in Ohio, from the “high-hazard” classification and its more stringent safety requirements.

Generally, workers want safety and the bosses want money. Safety requires additional time, more workers, and money. Deregulation contributes to the lack of safety. Using vinyl chloride in a chemistry lab requires safety equipment. Tank cars containing thousands of gallons of it should require more than the government apparently thinks is safe.

Wrongo always looks at the politics in these sorts of industrial disasters because they are usually caused by the economics created by politics.

Given how dangerous these chemicals are, and given how they are used and transported, we have to expect accidents like this to happen. But the government should be able to tell us whether the current accident rate is higher or lower than expected, and if higher, what should be done to correct the problem.

We trust the bureaucrats that make the rules to balance safe operations against the risk of an airborne toxic event like this. Wrongo’s brief look into this one incident doesn’t evidence that kind of trust. It appears that the bureaucrats who make the rules on railroad safety were influenced by the industry and wrote a rule that puts the economics for the railroad industry ahead of public safety.

These issues exist everywhere in the relationship between industry and government. There’s always pressure by the industry on the bureaucrats to deregulate. In a man-made disaster, that can place greater burdens on the communities, like just happened in East Palestine.

This is what the Michael Lewis’s book “The Fifth Risk” is about: People who go to school, get extensive training and then work in obscure corners of the government. Lewis talks about how important these people are, and how for decades they’ve been denigrated, vilified, and ignored, largely by Republicans.

This is another area in which the GOP is awful in a completely lopsided way to Democrats.

The existence of corporations who can impose risks on the rest of us is what happens when there is unequal political power. We need a state with a strong regulatory system to protect us. The state must build regulatory regimes for chemical spills that shift the risks back onto those who create them.

NS in this case, has said that they will be fully responsible for the damages caused in East Palestine.

That’s encouraging, but how does that little town with a population of less than 5,000, or even the state of Ohio hold NS to their word?

It’s Impossible To Buy A $200k Home Anymore

The Daily Escape:

Mt. Hood sunrise – February 2023 photo by Mitch Schreiber Photography

Happy Valentine’s Day for those who celebrate! If you don’t celebrate, find someone or something to give a little bit of love to.

In all of the hype about the Super Bowl and Rihanna’s halftime show, you may have missed that homes selling for less than $200k have basically disappeared in America.

John Burns, a real estate consultant, reports that they are now 0% of the new home market. They were 40% of the market 10 years ago. Burns also says that $500k+ new homes have grown from 17% of the market to 38% of the market during Covid. He provides this handy chart showing how average home prices have changed since 2010:

At the same time, sales of homes going for $500k or more (red line) have shot up from less than 10% to nearly 40% of the new homes market and represent the largest share of new home sales.

This isn’t great for Millennials looking to buy their first homes, or for retirees who have to downsize. It also explains why many first-time homebuyers are angry.

It’s not only the $200k and under segment that has fallen off a cliff. New homes going for between $200k – $300k now make up just 11% of the total, down from 80% of all new home sales in the year 2000.

Ben Carlson shows Federal Reserve new home price data going back to 2000 that breaks down new homes price points more clearly. He says that those being sold for $750k and up have gone from less than 1% to more than 10% of the market.

A few reasons for the shifts: First, we’re not building enough new houses anymore. Second, we’ve seen changing tastes drive demand toward larger homes, helping move the market to a new floor in home prices. Inflation didn’t help either.

We overbuilt in the 2000s housing bubble, and that led to more than a decade of underbuilding ever since. There was a brief spike during the pandemic housing craze but that has abated with mortgage rates rising so rapidly in the past year.

In 2002-2006, we were building around 120,000 new homes per year. In 2022, it was more like 65,000 units per year. Tastes have changed as well. Houses today are substantially larger than they were in the 1950s, 1960s, and 1970s.

In his book The Fifties, David Halberstam talks about how the housing market played a huge role in the rise of the suburbs following World War II. Then houses were about 1,300 square feet. In the 1970s, the median size of a new home in the US was 1,525 square feet. Today it’s around 2,500 square feet.

Tastes have changed. People want bigger houses. They want open floor plans for entertaining, bigger bedrooms with more bathrooms, and more storage space for all of their stuff.

It’s also true that homebuilders aren’t incentivized to build starter homes anymore. In the 1950s the government helped out the troops and their families. With the GI Bill, the federal government took some of the risk that homebuilders wouldn’t be able to find mortgages for all the new houses they were building.

Local zoning regulations have made it difficult to get approvals to build new homes. So builders have moved upmarket in home size to justify those upfront expenses. Starter homes aren’t as profitable as they once were.

There’s a big change in the buyer’s market as well. The WSJ quotes John Burns: (emphasis by Wrongo)

“You now have permanent capital competing with a young couple trying to buy a house.” Burns estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in.”

The Atlanta Journal-Constitution in an article last week entitled: “American Dream For Rent: Investors elbow out individual home buyers. Metro Atlanta is ground zero for corporate purchases, locking families into renting’. The Journal says a generational housing shortage, inflated construction costs and a surge in consumer demand all contributed to the historic rise in prices.

But there’s little doubt that a flood of cash from institutional investors has exacerbated it. They quote Maura Neill, a realtor in Alpharetta:

“They go after every listing under $500,000…it’s like clockwork…The property gets listed and, sight unseen, they make offers within an hour.”

This is late-stage capitalism at work. Young working couples are increasingly shut out of buying homes. America is failing them. It would be helpful for families to build equity by purchasing homes instead of renting.

Pricing families out of home ownership carries risks to a cohesive society.

We should have a federal tax policy that disincentivizes ownership of multiple single-family homes, by investment funds. The way to remedy this is to steer investors to other assets that don’t directly impact individual welfare to the same degree as single family housing.

Monday Wake Up Call – September 26, 2022

The Daily Escape:

Arches NP, UT – September 2022 photo by Nathan Smith

It can now take longer than 10 years for a typical first-time US home buyer to afford the down payment on a modest house, so says S&P Global in a July report (registration required). From the report:

“By fourth-quarter 2022, it will take 11.3 years for a first-time homebuyer with median income to save for a 10% down payment. It will take this homeowner 22.6 years to save for a 20% down payment. Both are over twice their pre-pandemic rates of five and 10.6 years, respectively.”

S&P estimates that with house prices rising so quickly, down payments are now twice the amount that they were before the pandemic. They also estimate that 60% of households could be priced out of the housing market by Q4 2025.

The NYT also is looking at the US housing market. They say that the US has a deepening housing crisis, including an acute shortage of:

“small, no-frills homes that would give a family new to the country or a young couple with student debt a foothold to build equity…”

Factors include land costs, costs of construction materials and government fees. The typical new home has grown in median size over the past 60 years, while the average number of people living in each home has declined:

These long-term trends were accelerated by the pandemic, which drove up demand for homes and house prices as people scattered, worked from home, and snapped up second residences.

Local policies are also driving this new reality. The Times reports that communities nationwide:

“…are far more prescriptive today than decades ago….Some ban vinyl siding. Others require two-car garages. Nearly all make it difficult to build the kind of home that could sell for $200,000 today,”

So, high prices due to high demand. High mortgage rates due to the FED clamping down on inflation. And cities and towns making it more difficult to build low-end homes. On top of that, investors bought about a quarter of all single family houses sold last year.

Wrongo grew up when homes were affordable for a one-salary family. His 1,400 sq.ft. “starter home” in a tidy NJ suburb (walk to take the NYC train to Wall Street) cost $28,000 in 1970. We sold it for $38,000 in 1976. Zillow estimates that it would sell today for $647,000, 23 times what it did in 1969! It’s unbelievable how high home values in that neighborhood have risen.

Also, home buyer expectations are higher today. If a home doesn’t have an open floor plan, three bathrooms and granite countertops, most young buyers think they are settling for much less than they want.

Owning a home has been a part of the American Dream, but it’s one of the three legs of that dream that are currently being killed: (1) High housing costs (2) Stagnant wages and (3) High health-care costs. When you add college debt to the mix, you have the makings of a revolution against the 21^st century’s form of capitalism.

Part of the American dream is for your kids to succeed. That starts with a good education in a school district that aligns with that goal. That can rule out most public schools in our larger cities. If young families can afford the costs of private schools in cities, they must be very well off.

The only way that most people can choose that kind of school is to look in the suburbs. Suburban school districts pay for their good schools with taxes on expensive homes. That means parents, and the local government all have a stake in keeping local property values as high as possible, thus the difficult zoning regulations that make houses larger.

But smaller homes are also desired by many retirees. People who are living out their golden years often want to “downsize” into an affordable small home, condo, or townhouse. Many of these developments are being built throughout America. They can be beautiful inside, but they are often attached or semi-attached boxes crammed together on land that was never supposed to be developed.

Time to wake up America! Today in most parts of the country there is hardly anything on the market for under $300,000. Not much that resembles the tidy starter home Wrongo purchased 52 years ago.

Affordable housing prices aren’t coming back without government intervention. America needs to look carefully at its housing policies along with how we have let financialization take over the housing market.

Financialization of housing refers to the increasing presence of corporations and organizations that are creating or using real estate management, mortgage processes, and financial instruments to profit-seek against individual homeowners.

To help you wake up listen to Buddy Guy perform “Gunsmoke Blues” along with Jason Isbell. The tune is highly relevant, and very powerful. It’s from Guy’s album ,“The Blues Don’t Lie” due out on September 30^th:

Lyrics:

Trouble down at the high school
Somebody got the gunsmoke blues
Trouble down at the high school
Somebody got the gunsmoke blues
Read it in the morning paper
Watch it on the evening news

…

Some folks blame the shooter
Other folks blame the gun
But that don’t stop the bullets
And more bloodshed to come
A million thoughts and prayers
Won’t bring back anyone

The Wrongologist

Geopolitics, Power and Political Economy

Category: Consumer Protection

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Monday Wake Up Call – September 26, 2022