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!