Tag Archives: regulation

The Problem with Too Big to Fail

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Treasury Secretary Scott Bessent and Progressive-Democrat Senator Elizabeth Warren (D, MA) want to raise the FIDC’s deposit insurance cap from its current level of $250,000 to $10,000,000. They want to do this, too, regardless of the size of the financial institution and the nature of the institution, whether it’s a small deposit and lending enterprise or a large institution that specializes in large and larger investing. This is a very large overreaction over a couple of mid-sized banks going bankrupt from those banks’ management incompetence, not least of which was their decisions to not match their interest rate assets—loans outstanding, including to the government in holding its debt instruments—to their deposit interest rates, which were the banks’ debits. Nor did they match the duration of their loan assets to the duration of those deposit debits.

The runs on the banks, which began over otherwise ordinary credit concerns in the financial markets as a whole, turned into losses the banks should have been able to handle, but for those rate and duration mismatches. Neither the setup—those mismatches—nor the runs have anything to do with deposit insurance.

When any enterprise is held to be too big to fail, as a (fortunately very few) very large enterprises are held to be by the Federal government—the  systemically important financial institutions government considers some banks to be—then those enterprises, secure in the notion that government will bail them out if they run into trouble, become prone to take increasingly large risks and go well past risks that would otherwise by prudent business decisions to take.

That’s a very large moral hazard: not only are those enterprises taking those risks with other people’s money—bank depositors, for instance—they’re putting into risk the money of people far removed from that enterprise: us nationwide taxpayer money that the government will use to prop up those institutions that have gotten themselves [sic] into trouble.

Which brings me to this foolishness of raising the deposit insurance cap on banks. That’s only going to encourage banks, especially the smaller ones, to take risks that are too large for it to handle and would not take were they not so vastly backstopped by Uncle Sugar. That puts into risk play all the smaller depositors who are the ones frequenting these smaller banks. It also puts into play the money of all of us nationwide taxpayers, which money will be used to prop up the failing bank.

This is an insurance policy that should not be raised in its payout. In essence, all this insurance cap increase does is lower the threshold for Too Big to Fail (itself of no true value) down into the middle- and smaller-sized financial institutions.

Let the institutions stand or fall on their competence in a competitive environment. That competition will weed out the lousy managers, and the people will be made whole enough with the current $250k insurance payout. The large enterprises that invest in, deposit into, borrow from the larger financial institutions will exert their own pressures on top of the market’s intrinsic competitive pressures to…encourage…management competence.

That, too

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Progressive-Democrats are keeping the government shut down over their demand to extend—permanently, no negotiations—the Obamacare subsidies that the Progressive-Democrats during the Biden reign had scheduled to expire in November of this year, pretending at the time that the subsidies were just temporary, to tide people over during the Wuhan Virus situation. Their core claim on this aspect is that Obamacare premiums, as paid by the policy holder (carefully excluding, per those same Progressive-Democrats, the premium costs paid for by us taxpayers via those subsidies), will explode.

What the press, with equal care, ignores is that the purported need for those subsidies is a direct result of the cost of the government-run health care coverage program that is the Affordable Care Act. Government-run because these are coverage policies whose coverage suites are mandated by government, including the worst mandate of them all: the requirement to charge premiums (within narrow government set bands) for ailments and potential ailments without regard for the risk of the ailment being covered, and for some of those ailments at no cost to the policy holder at all.

The Wall Street Journal has pointed out an additional price to us average Americans:

If Republicans don’t extend the turbocharged subsidies, she [Minnesota Progressive-Democrat Senator Amy Klobuchar] warned, “early retirees like Bill & Shelly [who live in Meridian, ID] will see their health insurance premiums increase nearly 300%—from $442 to $1,700.”

And [emphasis added]

This is a tacit admission that ObamaCare encourages Americans to stop working. The Biden subsidies turbocharged that incentive by making subsidies larger and available even to those with incomes above 400% of the poverty line. The couple in Ms Klobuchar’s example had north of $130,000 of income in 2024….

This demand for permanentizing the ObamaCare subsidies is just one more aspect of big government taking over our lives, reducing individual liberties (the health coverage industry does not exist in a free, competitive market where individuals can make their own choices of what coverages they want, at prices that competition would make possible) and taking the flip side of individual liberties, individual responsibilities, away from the individual and, instead, spreading them across all of us together, as brokered by Government.

The editors offer some solutions that would be a good beginning toward correcting the failure that is the ObamaCare essay into socialized medicine.

  • codifying association health plans that let small businesses join up to form a larger risk pool to improve the economics of offering insurance
  • continuing to expand plans that can be paired with tax-preferred health-savings accounts
  • fix[ing] some ObamaCare regulations like the medical-loss ratio that obliges insurers to spend 80% of premiums on claims, which in practice is a profit cap

Also needed, I claim:

  • allowing health coverage plan providers to sell policies that cover preexisting conditions at premiums consistent with the risk involved. The risk here is not certainty since the preexisting conditions will not all flare up and require medical intervention simultaneously; the risks can be amortized across time, if government only got out of the way
  • allowing individuals to choose from, and insurers to offer, tailored coverages: only primary care—annual exams, for instance, and the occasional flu or broken bone
  • coverages only for catastrophic health potentialities
  • reducing the regulatory burden on doctors who want to eschew being reimbursed via health coverage providers by doing cash reimbursements, perhaps by annual subscriptions

But to do any of that, it’s necessary for the Progressive-Democrats to end their extortionate demand on subsidies as a condition or reopening, so those discussions can begin; it’s necessary for the Progressive-Democrats to release from their basements us American people, especially the poor and their children, whom they’ve taken hostage against their demand.

A Medical Man Demands Slow Approvals

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In his letter to The Wall Street Journal‘s Letters section, Todd Lorenz, a Stanford University employee degreed as a Medical Doctor, pushed for FDA to continue to pass on the efficacy of a new drug as a condition for approving it, never minding that that would drastically slow approval and subsequent availability.

There is no way to know for certain if drugs work without doing efficacy studies in humans. Preclinical and animal studies, while helpful, can’t predict with confidence which drugs will be useful. Most investigational cancer drugs that go into the clinic have been shown to work in animal models. Most don’t work in patients.

In a truly competitive free market, those that don’t work won’t stay in the market for long. Delaying approval until efficacy can be “proven,” though, denies cancer patients access to those drugs that do work, unnecessarily—unconscionably—risking their lives. Lorenz closed with this:

The answer, then, is to approve drugs after they’ve been demonstrated to be safe. Yet no drug is completely safe; some can lead to substantial adverse reactions. It may be acceptable to prescribe drugs with such profiles if the diseases they are intended to treat are serious enough to warrant the risk. The choice to use any drug in a particular patient always depends on such a cost-benefit analysis. Without an objective assessment of efficacy, no such determination is possible.

No drug is ever completely efficacious, either. Even so, Lorenz contradicted his call for a cost-benefit analysis with that repeated demand for an objective assessment of efficacy. He ignores the simple fact that that cost-benefit analysis is best done—is most effectively done—by the patient and his doctor, not by Government. The benefits and costs of a particular drug treatment can only be assessed empirically by those two critical analyzers acting in a medical drug market that is competitively fed by safe drugs. Those empirically collected use and outcome data will determine efficacy, and they will do so far faster and far more thoroughly than can a government agency populated by bureaucrats who happen to have medical degrees of one sort or another, and who hold out for repeated trials with sample sizes that are miniscule relative to the target population, even if those sample sizes argued to be statistically significant.

UCLA Emeritus Professor James Meyer, also the proud possessor of a degree as a Medical Doctor, complemented Lorenz with his own non sequitur.

Messrs Hooper and Steiner [Deregulation Can Make Medications Cheaper] argue that the cost of new drugs could be greatly reduced if the FDA focused only on their safety. Maybe so. But this overlooks that the federal government has had a major and increasing interest in efficacy since the passage of Medicare (1965), the growing responsibility for veteran care since the Vietnam War (1965) and the passage of ObamaCare (2010).

You bet it does. Those agencies have burgeoning populations of bureaucrats to keep employed and to keep expanding. Never mind that bit about denying access to safe drugs by those who need them until a collection of bureaucrats gets around to approving “efficacy.”

A Solid Proposal

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John Early, of the Cato Institute and ex-Assistant Commissioner of the Bureau of Labor Statistics (two times), has a thought on how to further remove unconstitutional race considerations from Federal government tolerance and behavior. Expanding on Chief Justice John Roberts’s observation that “the way to stop discrimination on the basis of race is to stop discriminating on the basis of race[,]” he offers this:

One simple way that the Trump administration can promote these objectives is by revising the Office of Management and Budget’s Statistical Policy Directive 15, which specifies the kind of data on race and ethnicity government agencies must collect. The current directive is unconstitutional, discriminatory, and scientifically unsound.
If OMB revised the directive to prohibit the collection of racial data, it would make it more difficult for regulators and attorneys to devise schemes for government to discriminate by race.

He’s mostly right on this. There is no need for the Federal government to collect race or ethnicity data under a couple of axes. One is that it’s barred by the 14th Amendment, which requires all of us to be treated equally under law. That makes race irrelevant. The other axis is that we’re all American citizens—see that 14th Amendment, again. We’re all the same in every way that matters to law.

There is, thus, no need for the Federal government to collect any data on persons present in our nation beyond the number of American citizens and the number of non-citizens actually present. I’d break that last into two categories, but not doing so wouldn’t be a deal breaker: the number of resident aliens and the number of illegal aliens. That last subcategory would, of necessity, be a guess, but DHS and Interior have the resources with which to make reasonably educated guesses.

“Mostly right:” there’s little need to collect ethnicity data either: the ethnicity of us American citizens is American. Full stop. There might be interest in collecting ethnicity data regarding non-citizens present in our nation, but that centers mostly on the illegal aliens so we know the first option regarding where to deport them. Ethnicity data regarding these, though, can be identified as the illegal aliens are caught; there’s no real need to collect the data as a matter of course.

Personal Responsibility

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This is a core tenet of our federal republican democracy—the concept that us American citizens are the ones primarily—and most often solely—responsible for the outcomes of our decisions and our actions. This is a tenet that applies just as firmly in our fundamentally capitalist economy to our businesses. In particular, for this post, it applies to our banks, large, small, and in between.

Or, it should apply. Dangerously, our banks, particularly our small and mid-sized banks, would be relieved of that responsibility under legislation that Tennessee Republican Senator Bill Hagerty, who should know better, and Maryland’s Progressive-Democrat Senator Angela Alsobrooks, who is merely acting on her party’s big and bigger government bent, are proposing. That legislation would raise the FDIC’s deposit guarantee from $250,000 per depositor’s account to $10 million.

The editors of The Wall Street Journal have the right of it on this one.

The truth is that a higher insurance limit will increase moral hazard and make the banking system less sound, which will hurt all Americans.

Because

It would also encourage more risk-taking since banks will have to worry less about runs.

Massachusetts’ Progressive-Democrat Senator Elizabeth Warren as recently as 2023:

We have to do this because these banks are under-regulated, and if we lift the cap, we are requiring—or relying even more heavily on the regulators to do their jobs.

Here is the monarchist Party’s purpose revealed and now pushed by Alsobrooks: an ever more intrusive and controlling central government.

The proposed legislation is an idea whose time never will be, and the proposed legislation needs to be scotched in committee, if not before.