On Privatization
07/01/2023
We hear a lot these days about the (potential) benefits of
Privatization of (name it) in a slew of areas. While there is no “one size fits
all” definitive answer regarding these benefits, one thing becomes clear in the
literature, that being that the point of view of the writer, rather than data,
often determines the conclusion. This is evident in the wildly divergent
natterings of ultra-leftists like Noam Chomsky and radically conservative
writers such as Michelle Malkin. Neither, presumably, seems able to meld either
their philosophies or opinions with the well being of the body politic in the
balance.
I said all that
to say this. Privatization without adequate legal and specific oversight has
the potential for several ills, moral, personal and national.
I listed moral
first, because it’s so easy to address. Two words “Blackwater Security.” The following is self-explanatory, excerpted
from a 2007 article by Peter Singer, a senior fellow with the non-profit (and
centrist) New America think tank.
“On Sept. 16,
2007, a convoy of Blackwater contractors guarding State Department employees
entered a crowded square near the Mansour district in Baghdad, Iraq. Employees
from the firm would later claim they were attacked by gunmen and responded
within the rules of engagement, fighting their way out of the square after one
of their vehicles was disabled. Iraqi police and witnesses instead report that
the contractors opened fire first, shooting at a small car driven by a couple
with their child that did not get out of the convoy’s way as traffic slowed. At
some point in the 20-minute gunfight, Iraqi police and army forces stationed in
watchtowers above the square also began firing. Other Iraqi security forces and
Blackwater quick-reaction forces soon reportedly joined the battle. There
are also reports that one Blackwater employee may even have pointed his weapon
at his fellow contractors, in an effort to get them to cease firing.”
Consider that a moment ……. The only
thing agreed upon is the consequences: After a reported 20 Iraqi civilians were
killed by operatives paid by the US but not under US military control. Despite
its mission of guarding U.S. officials in Iraq, Blackwater had no license with
the Iraqi government. Secondly, the murky legal status of the contractors meant
they might even be exempt from Iraqi law. The Blackwater mess roiled Capitol
Hill and shined light on the many questions surrounding the legal status,
management, oversight and accountability of the private military force in Iraq,
which numbered more than 16,000 — at least as many as the total number of
uniformed American forces there. The debate heated up again in hearings
by the House Oversight and Government Reform Committee. The problem is, some of
the most critical questions went unasked.
When we
evaluate the facts, the use of private military contractors appears to have
harmed the counterinsurgency efforts of the U.S. mission in Iraq, going against
our best doctrine and undermining critical efforts of our troops. Instead, the
massive outsourcing of military operations has created a dependency on private
firms like Blackwater that has given rise to dangerous vulnerabilities.
Secondly, consider
the consequences possible for many ordinary citizens if, for example, Bush 43
then, or Paul Ryan (later) or even Trump (who spoke of eliminating SS payroll
taxes) had succeeded in privatizing Social Security. Without any actual details
of what such a plan might look like there are multiple scenarios. The most
common one proposed would be entirely handing off Social Security to Wall
Street. This would eliminate Social Security taxes and require instead
employees to contribute to their private retirement account. This is a zero-sum
condition for the employee, who sees the smaller paycheck either way. This also
assumes that every such employee will either 1) Be financially savvy enough to
personally handle their own investment portfolio or 2) Select a financial
advisor who, like Caesar’s wife, is “above reproach.”
Both options
are fraught with “what ifs?” As a
personal example: My wife was an employee of a major hospital corporation which
offered employees a retirement 401K “ish” plan in which the employee had a wide
range of options for managing their personal contributions. The company even
offered a generous 25% matching for contributions. The new system was incepted
in 2004 and we immediately began participation (I mean, who doesn’t like
depositing 4 dollars and getting $1 more “free?”) The plan offered a wide
range of Mutual funds and a very low interest money market account. The money
market account’s return was actually less than Social Security for the same
amount!
After
consideration and discussion (I have a business master’s degree and was
certified to teach economics) we opted for a fairly conservative family of
funds, and were pleasantly rewarded with slow, but steady growth. At this time,
however, since all fund performance data was available to participants, I noted
that one sector was generating in excess of 25% annual return on investment! We talked and considered, thankfully keeping
contributions where they were. This scenario is analogous to the proposed
privatization scheme….with one exception: whereas we were skeptical about the
sustainability of such a high ROA, many would simply have chosen to put their
retirement funds lock stock and barrel into this “too good to be true”
investment.
Now, as the
late Paul Harvey used to say, “For the rest of the story.” The high return fund in question was the
Bear-Stearns Real Estate Trust. Even without specific information available to
those limned in “The Big Short” it just seemed “too good to be true.” And it was. In January 2004, the trust was at
$78 per share, and the “bundling” of high risk mortgages masquerading as cash
had just started, Bear-Stearns leading the way. At this point remember, even a
financial advisor more interested in the percentage of return he would earn
from managing privatized accounts might well have put clients into this fund
also. By January 2006, (Wife still working, both still watching) the fund was
at $170/share. Still seemed odd, we stood pat. In April 2008, the excreta
entered the ventilation, and leading the crash of the housing bubble were our
old friends, Bear-Stearns. Share prices (if they could have sold any) fell below $5/share. For the math impaired here’s an example.
Assuming an
employee really socking it away had managed to amass shares worth, in January
2006, $500,000, and planned to retire in January 2008 using the money for
(whatever, buy retirement home, a boat, you name it). When the dust settled in
early 2008, and the retiree was forced to withdraw funds, being no longer
employed, the half a mil would have looked more like $14,000. At the same
period, regardless of how we critique it, Social Security recipients continued
receiving their calculated amount. And, by the way, the trust was dissolved,
Bear- Stearns sold and no one recovered jack shit!
Privatization
would have been absolutely disastrous for many Americans.
Finally, These
same conditions, as anyone alive and breathing in 2008 should remember, were of
national consequence as well as individual. Why? Because, unlike what the Trump
administration would have liked like us to believe, regulation of financial
markets in the public interest isn’t a “bad thing”, neither are reasonable
asset requirements required for loans, private or corporate. The Housing Bubble collapse triggered the
Great Recessions which, 5 or 6 years later, we finally climbed out of.
Regardless of whining from Wall Street and commercial banks, the Obama era Dodd-Frank
bill was aimed at preventing the recurrence of such a fiasco. So, ask yourself why the Trump administration was seemingly dead set on loosening such consumer
safeguards it provided. Look no further that Steve Mnuchin, SecTreasury. Former
job description – CEO of Goldman-Sachs, yet one more corporate entity severely
wounded by the collapse. P.S. Trump’s eventual weakening of Dodd-Frank included
severely weakening
the “Volker Rule”, which limited the
ways, and provided for oversight regarding how, commercial banks could invest client’s
deposit funds. Remember the Silicon Valley Bank collapse? The emasculated Volker
rule’s first casualty.
Wouldn’t you think that having had
this happen once would be a red flag to the rest of the industry? You wouldn’t
if you knew that, as bad as the Recession was for the average American, most
high officials of the investment banks which led the hogs to the “bad mortgage”
trough came through perhaps a bit poorer, but largely unscathed. It is
reminiscent of a scene in Mel Brooks’ film History of The World, Part I. Set in
the Roman Senate, a discussion occurs regarding conditions in Rome, and one
individual asks, “What about the poor?” To which after a momentary pause, they
reply, with one voice, “F*** the poor!” One can almost see Trump in a toga.
Putting that
amount of money (Social Security sized amounts) in private hands might well
lead to simply too much temptation and too little oversight. What does that
look like?
Let’s finish
with a brief story about Angelo Mozilo. Who? Mozilo, the perpetually over-tanned
(sound familiar?) son of a butcher from the Bronx, co-founded Countrywide
Financial in 1969. He built it into an unstoppable mortgage machine that made
it easy — evidently too easy — for millions to own a home. (note, I actually
know persons who attempt to shift the blame for bad loans onto the Clinton
administration for encouraging banks to lend to qualified
borrowers instead of racially profiling, aka “redlining,” as was not uncommon
well into the 1990s.)
Under Mozilo,
Countrywide pumped out thousands of complex mortgages to people who couldn't
afford them — and often didn't understand them. These would be - you know- those same, often economically
unsophisticated, folks whose life savings Bush 43 or Paul Ryan wanted to
entrust to guys like Mozilo? One
product, an adjustable-rate mortgage known as a pay-option ARM, gave borrowers
the option of making small payments in some months, or even skipping some
payments altogether. Who wouldn’t love that, huh? Many borrowers ended up owing
more than their houses were worth, resulting in countless foreclosures. The
borrowers simply did not understand the risks involved with the mortgages and
Countrywide simply did not tell them. Of course, as it turns out, Countrywide
didn't worry much about what happened after the mortgage was signed because it
packaged most of the loans together and shipped them off to Wall Street, a
process known as securitization. Again, under-regulated, bundles such these,
many of which included toxic mortgage loans were certified by rating organizations
such as Moody’s or Dunn and Bradstreet, in competition for business, as AA or
even AAA when what they deserved was a C or D rating at most. (Read “The Big
Short”).
Countrywide
sold or securitized 87% of the $1.5 trillion in mortgages it originated between
2002 and 2005, according to the final report by the Financial Crisis Inquiry
Commission, a bipartisan federal committee charged with investigating the
causes of the meltdown. "Ambition and arrogance made Countrywide offer to
the market a product that was inferior," said Jonathan Adams, senior
analyst at Bloomberg Intelligence. "They did the market a terrible
service."
Missing from this statement is the fact that "The Market" failed to do due diligence in assuring the legitimacy of these artificially inflated blocs of shady mortgages as investment grade instruments (they weren't), safe for investment by public or private retirement funds. Note the willingness to blame the, admittedly culpable mortgage brokers but not the millionaires running the commercial banks whose greed and lack of oversight was contributory to the collapse.
So, also think
about this the next time someone suggests that private does it better. One last
shot. For all the flak Kevin McCarthy and others of the GOP threw, and still throw, at
Medicare, both the Kaiser foundation and Johns Hopkins researchers have found that, far from inefficient, Medicare does more
with less than comparable services from private healthcare carriers. I’m just
sayin’. The actual numbers? Medicare overall admin costs: in the 2 to 5% range.
Medicare Advantage Plans and other private insurers are in the 17 to 18% range!
Lest one think this is a fluke, Britain’s NHS also runs a 2% annual admin cost.
Yeah, single payer is more efficient!
