Policy Court

Opinion of the court, delivered by David Lamb:
The American health care system is a lot like Former President George W. Bush: it has a soft spot for the private sector, it costs the nation dearly, and it was a lot more popular seven years ago.

It’s also similar in that it exists in a world unburdened by basic economics; where the American system has a public program—Medicare—that will use federal money to treat cancer in a retired sixty-eight-year-old who no longer pays income taxes, it has no such program to help a fifteen-year-old buy antibiotics for pneumonia, even though local and state governments have invested tens of thousands of dollars in the fifteen-year-old’s education and even though the fifteen-year-old has decades of income taxes yet to pay.

It has been five months since Mr Bush fled from Washington, and yet the United States’ health insurance system, dreamed up by depression-era businessmen in rooms full of cigar and cigarette smoke, has continued to plague Americans like a self-induced lung cancer, that is, from the inside, out.

While President Obama’s proposed health care plan broadens eligibility standards for Medicaid—the public insurance program for low-income Americans—proposes another national plan to compete with private insurers, and mandates health insurance for children, it doesn’t socialize medicine, leaving the possibility that some citizens will remain uninsured. These people, who will be between eighteen and sixty-five, and in jobs which don’t provide health care benefits—often ones that pay below the national average—will be forced to pay more for health insurance if they want it.

As long as there exist public health insurance alternatives, private companies will be allowed to charge outsized premiums to risk-heavy customers—those likely to need significant medical attention in the near future. Meanwhile younger, healthier Americans, and those employed in high-income jobs, will opt for the private plans which they will rarely use. Federal plans will, therefore, either offer insurance at uncompetitive rates or hemorrhage money. In the second and far more likely case, healthy citizens, some of whom won’t have insurance, will subsidize the care of aging and unhealthy ones, much like they do now with current Medicare policy.

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Opinion of the court, delivered by David Lamb, signed by William Leich
If you have ever been to an airport, contracted a computer virus, or taken a look at the Social Security system, you know that security often isn’t secure.  And even though Wall Street bankers call subprime mortgages “securitized,” they know that the difference between “securitization” and securitization is a matter of bears and bulls—and not the type found in the zoo.

The subprime mortgage crisis that became the financial crisis that became the recession that became the Great Recession wasn’t a consequence of market failure or misguided risk-taking.  Rather it was the result of individuals—bankers and homeowners—behaving like individuals at the expense of the broader economy: exploiting bankruptcy laws that mitigated their own risk, not by removing it, but by imposing it on third-parties.

Subprime mortgages are called “secure” because their loan value is designed not to exceed the value of the property.  This means that if a homeowner becomes delinquent on a mortgage, the lending party can foreclose on the home and recover the loan’s entire value.  As long as real estate prices are static, banks don’t carry significant risk writing mortgages without down payments.

The problem is that this system depends on home values not falling below mortgage values.  When they do—when delinquent borrowers owe more than their houses were worth—creditors can be stuck with a deficit: their collateral—the house—is worth less than their credit—the mortgage—which means foreclosure doesn’t bring all of their money back.

Non-recourse loans, which protect borrowers and compose the majority of American mortgages, compound the problem.  These loans stipulate that debtors whose houses have been foreclosed on have no responsibility to pay the remainder of the mortgage if one exists.  In other words, if the value of Mike’s house drops enough that his mortgage is larger than his home’s value and he stops paying his mortgage, his bank can foreclose on his him, but can’t seize his car or his television.

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Opinion of the court, delivered by Nicole Adams, signed by David Lamb
Why did the banker cross the road?  Because there was a $100 bill on the other side.  Why didn’t the economist?

Because he reasoned that if the $100 bill was real, someone would have already picked it up.

The bill was fresh from the Philadelphia headquarters of the United States Mint; what the economist thought was a piece of counterfeit currency was actually bailout money, planted on the other side of the asphalt for the banker who the federal government knew didn’t accept the idea of market efficiency.

President Obama and his administration predicted the banker would reason that if the efficient-market hypothesis (EMH)—the theory that the prices at which all financial assets are traded reflect all known information—held true, then commodity prices never would have spiked in the summer of 2008, real estate prices wouldn’t have increased by 50% from 2000-2007 and since lost those gains, and the “dot-com bubble” wouldn’t be a case study on human psychology applied to economics.

Although many economic theorists still hold that investors are rational, and use the EMH as evidence that stock prices mirror real stock values and that outperforming the market is therefore impossible through any means other than luck, a growing number of financial economists are beginning to doubt the EMH.  Over the past fifteen years, free stock-trading websites have made available information that was previously difficult, if not impossible, to find.  And yet an increase in real-time financial information has correlated with an increase in bad investing—the dot-com bubble, the oil speculation bubble, and the American housing bubble have all come since then.

Because the price of a share of AOL in 1999, a barrel of oil last July, and a two-bedroom Albuquerque condominium in 2007 had little relation to their actual or potential value, something other than market efficiency must have been at work.

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