Inadequate Risk Assessment

Teenagers ought to be great drivers. They’re young and have great reflexes – those only go downhill after the teen years – so if something unfortunate happens, quickly and unexpectedly, they should be able to swerve out of the way or stop on a dime or something. It’s the same with hand-eye coordination and, for most teens, eyesight. Their night vision will never be better, nor their depth perception. They can judge distances better than any professional golfer staring down the fairway trying to decide which club to use. Tiger Woods has to ask his caddy. Teenage boys knew the exact distance to that pretty girl on the corner. The only problem is risk assessment. It’s a matter of lack of judgment. Part of that is not having had enough life-experience – they have not been burned by enough bad decisions yet, the everyday blunders that makes anyone careful about all the other stuff – and part of this is organic. Their brains are still developing. The areas that control abstract reasoning about potential outcomes still need work – they write impossibly stupid essays in their high school English and history classes. It will be years before they can think things through, step by step. That takes practice, and it takes time for the appropriate neural pathways to develop – so teenage drivers take stupid risks, and insurance companies charge the appropriate premium for that. They have their actuarial tables. They know all this. The kids will be speeding, and texting, and all sorts of things, so the only discount they offer is a good-student discount. They also know, as everyone knows, teenagers like risk. Part of growing up is finding out how far you can push things, which is part of finding out just who you really are, and what the limits of the adult world really are – which also makes teenage drivers rather dangerous. Add to this another factor – most teenagers haven’t seen enough people actually die. Slasher movies and video games don’t count. None of that is real. Real death and destruction are abstractions to them, or entertainment, so there’s a baseline assumption that they’re immortal, if they even think about such things. That makes them dangerous. They’re bound to do something stupid. They’re like the Republicans at the moment, the teenage drivers of American politics.

The analogy is not frivolous. They’ve shut down the government, which is slowly but surely crippling the economy, and they’ve dug in and said they’ll refuse to raise the debt limit, which many on Wall Street and every economist in the world tells them will destroy the economy and plunge the rest of the world into a multigenerational depression too, to match ours – all to force Obama to delay and eventually dismantle his Obamacare thing but there’s something odd about that. Obamacare is turning out to be cheaper for folks than anyone predicted, and one must also remember this is not about the majority of Americans, those who get their health insurance through their employer or who have retired and have Medicare, or who are disabled and have Medicaid. This is about the six or seven percent of Americans who don’t have one of those three things, those who the insurance companies wouldn’t cover before, except at an extraordinary price if they did. Now they will, because they smell big profits. It’s hard to see what the big fuss is, but this may be the same inadequate risk assessment that plagues teenage drivers, perhaps because their brains aren’t fully developed yet. The areas that control abstract reasoning about potential outcomes still need work, but then it does take years to develop the ability think things through, step by step. Here the reward, making sure thirty or forty million more Americans will not have any chance at all to buy low-cost subsidized health insurance from private-sector parties, doesn’t seem to match the risk at all. The cost of winning this thing may be a sort of economic Armageddon – somewhat like the cost of the teenage boy running that red light to impress his friends. There may be no cost, but that’s a bad bet.

The government shutdown is a fact of life right now, and Obama is not giving in, and everyone knows all that House Speaker John Boehner has to do is allow the House to vote on the Senate’s “clean” bill, the one that funds the government for the next six weeks and ignores the artificially introduced issue of Obamacare – and if they don’t like that “clean” bill they can vote it down. The Senate sent it over. What do you guys think? Let’s vote on it. Let the chips fall as they may. That’s called majority rule, but that “clean” Senate bill would pass the House easily and that frightens him. As House Speaker he can choose which bills should be allowed a vote, and this isn’t one of them. His party doesn’t want that. They’d lose.

Boehner doesn’t want that either. His speakership is hanging by a thread. He’s frightened. He doesn’t want to lose his job. Yes, this whole thing could be taken care of in ten minutes – the shutdown ends, Obamacare to be discussed on its own merits – but it won’t be. That’s why Obama, finally, publically dared Boehner to call a vote:

“The House should hold that vote today,” Obama said during a visit to the Federal Emergency Management Agency on Monday. “If Republicans and Speaker Boehner are saying there are not enough votes, they should prove it.” … “Hold a vote. Call a vote right now, and let’s see what happens,” he said.

The shutdown could be over in ten minutes – problem solved – and this was a bit of political theater, a rather successful attempt to shame Boehner and make the Republicans look stupid, and dangerous, but it would also solve the actual problem. Nothing will happen of course. This only made Boehner and the rest of the Republicans even angrier. It’s like no one trusts them when they said they just had to run that red light, shutting down the government and causing all the ever-growing economic damage – they had no choice, and the votes to reverse this aren’t really there anyway. Trust them. They don’t have to prove anything, and that’s the sort of thing a sulking teenager says, after he’s wrecked the family car – or he turns to the father and says it’s the father’s fault, for buying an unnecessarily fast car or one with too many fancy options or something. Teenage drivers can be slippery like that. The shutdown will continue.

The debt limit is the problem. Refusing to raise that limit, forcing America into default on all its bills, in order to make Obamacare go away, is a little more serious than running a red light. People like Richard Bove, the vice president of research at Rafferty Capital Markets, sees something worse than the Great Depression happening when we default – but he’s one guy, even if he is one of many. But now he’s not alone, as the folks at Bloomberg News are laying it all out:

Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.

Failure by the world’s largest borrower to pay its debt – unprecedented in modern history – will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.

The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway Inc.’s Warren Buffett to Goldman Sachs Group Inc.’s Lloyd C. Blankfein have warned that going over the edge would be catastrophic.

That’s the opening of their long and detailed analysis. Obamacare may be awful, but risking this to kill it would kill us all, and we should know that:

The U.S. stock market lost almost half its value in the five months following Lehman’s failure. The country had its worst recession since the Great Depression, taking the global economy down with it. Unemployment surged to 10 percent, the highest in three decades.

Another depression was prevented only by unprecedented action by the Federal Reserve, which pumped $3 trillion into the financial system. The U.S. Treasury provided about $300 billion of capital for the nation’s banks.

“If we miss an interest payment, that would blow Lehman out of the water,” said Tim Bitsberger, a former Treasury official under President George W. Bush and now a New York-based managing director at BNP Paribas SA. “Lehman was an isolated company, and now we are talking about the U.S. government.”

The rest of the item explains, step by step, in gruesome detail, how everything falls apart. It’s not pretty. Teenage drivers take stupid risks too, and end up killing some family, driving along in the other lane with three kids in the back seat. It’s kind of like that, and the economist Paul Krugman adds this:

Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world’s key safe asset into default. They don’t sound too confident. But even if they’re right, the government would still go into arrears on many other payments, from contractor bills to medical bills. And it would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time.

I think this is important. Lots of people have been focusing on the possibility of a mega-Lehman event, but even if we somehow avoid that, this will be a catastrophe.

The kid can say the wrecked family car isn’t all that badly wrecked, but it’s still wrecked.

The financial markets haven’t completely tanked yet, selling off in anticipation of the mother of all market crashes, so maybe this is all nonsense, but Neil Irwin says don’t read too much into that:

Market sentiment can barely move for a very long time – and then take a dramatic shift all at once.

There were warnings that Lehman Brothers could collapse throughout the summer of 2008, but only after its bankruptcy on Sept. 15 of that year did the financial world come unglued. In 2011, the warnings that the debt ceiling negotiation could get ugly had been sounded for months – but only turned into an extraordinary bout of volatility about a week before the bill came due for the U.S. government.

Markets are prescient, in other words, except when they’re not.

Ezra Klein has a different analogy:

Analogies between the finances of families and government are typically pretty flawed. But there’s one worth drawing here: That moment when a family realizes it’s broke and stops paying their mortgage, credit card bill, etc… It’s not a good moment for them. It’s a moment that wrecks their credit score and makes it harder for them to be “not-broke” ever again. To try and improve the U.S.’s finances by sharply and permanently increasing its borrowing costs is like trying to prove to your sister that her house is a firetrap by actually setting it on fire.

The teenage driver in love with risk, pushing the limits, thinking himself to be immortal, is a better metaphor, but that one will do too. In both cases someone’s neural pathways haven’t yet fully developed, and Slate’s David Weigel documents that:

On Fox News, the shutdown has been portrayed as a meager “slimdown” that’s allowing the government to function pretty much the way it always has. The only notable exceptions: Park closures, where “barrycades” have gone up to block Americans from their God-given green spaces and memorials. “[Obama] can increase the pain on the American public or he can decrease the pain,” said Andrew Napolitano on Fox News. “He wants the market to go down and he wanted this shutdown.”

Again, this isn’t completely crazy. The White House really did expect the shutdown to sober up Republicans, and to scare them out of more brinkmanship when the debt limit comes up. It’s not happening. Plenty of Republicans look at a potential debt default as another over-hyped crisis.

That’s where this gets strange:

Several times, Republicans have passed (or endorsed) the Full Faith and Credit Act to assure investors that the country won’t default. Just like Obama should be moving around money to keep the parks open, he should be telling investors that he can use incoming revenue to avert a default by paying debt service, entitlements, and the military.

Anything less, according to frequent Full Faith and Credit Act sponsor Sen. Pat Toomey is a “scare tactic.” House Republicans who voted for that act insist that the president’s going to be able to finance the debt and keep old people alive – unless he’s so vindictive that he doesn’t want to. “Social Security benefits are funded by mandatory spending,” explained Texas Rep. Bill Flores to a reporter in his district. “They go out come heck or high water. The only way Social Security payments could be withheld is if two things happen. One is the president decides to withhold them, or two, he takes the staff away that generates those payments or checks that go out the door.”

This is something like the teenage driver thinking he’s immortal:

Republicans talk about this with the confidence of people who can’t lose. “We’ve got more than enough cash flow, more than enough cash flow to pay interest on the public debt when it comes due and the House Republicans have passed a prioritization bill,” said Texas Rep. Joe Barton on CNBC this week. “This talk about default by the U.S. Treasury is nonsense. The president can be smart or the president can be stupid. And I would assume as smart as President Obama is, when push comes to shove, he’ll be smart. So we are not going to default on the public debt. But that doesn’t mean that we have to pay every bill the day it comes in.” …

Republicans have a new, cold confidence that the president, and the press, are lying to them about the downsides of these crises. Democrats are just comforting themselves with polls – Washington Post, Fox News, Pew – that show the public turning on the GOP’s shutdown strategy.

There is no real risk, because all those Democrats and economists sounding alarms really don’t matter:

They keep forgetting that House Republicans aren’t accountable to “the public.” They have to answer to conservative voters. And according to Pew, 54 percent of Republican voters think America could breach the debt limit “without major problems.” The base sees the real crisis as some future, Greece-style collapse. That feels more real to them then these spending and shutdown crises that can be easily blamed on President Obama, parlor tricks meant to make Republicans surrender.

“We’re not French,” Texas Rep. Pete Sessions told a heckler when they met at the World War II Memorial. “We don’t surrender.”

That’s a teenage thing to say, and Matthew Yglesias finds something even more curious:

A new idea is taking hold among House Republicans that perhaps breaching the debt ceiling isn’t such a terrible idea after all. One form this takes is the patently absurd remarks of Rep. Ted Yoho (R-Fla.) who muses that “I think, personally, it would bring stability to the world markets.”

Ted doesn’t understand the markets, or much of anything, but everyone else is talking about “payment prioritization” – which Yglesias summarizes as “you use cash on hand to keep paying interest and rolling over the principal on the national debt, while letting Medicare reimbursements or salaries for FBI agents slide.”

Fine, but Yglesais points out four key problems with that idea:

It’s illegal: Treasury is not authorized to unilaterally decide to pay certain bills and not others. If it were, the constitutional order would completely collapse. Obama could just not cut the checks for farm subsidies or missile defense programs he opposes. Then in a few years President Ted Cruz could refuse to pay SNAP benefits.

It’s also impossible: Because payment prioritization is illegal, Treasury’s payment system is not designed to allow prioritization to happen. Cardiff Garcia has an in-depth roundup of coverage of this angle, but the best simple explanation comes from the Treasury inspector general, who explains that on a technical level, the systems “are designed to make each payment in the order it comes due.” Of course systems could always be changed. But look at all the problems Health and Human Services is having in getting the Affordable Care Act computer systems to work. They can’t just whip up an entirely new computer system in the next two weeks. (And, of course, given the government shutdown, it would be illegal for them to hire someone to try.)

The timing doesn’t work: Over a given year, the Treasury certainly collects more in taxes than it pays in interest. But that’s not necessarily true on any given day. Most days the Treasury doesn’t pay any interest. Then on some days large interest bills come due. To prioritize interest payments, you would need to not pay certain bills the Treasury does have enough cash on hand to pay in order to stockpile money for future interest payments. That further exacerbates problem Nos. 1 and 2.

Prioritization doesn’t solve the problem: Even if all these problems could be waived away, you’re not really solving the underlying problem. Yes, bondholders would still get their money. But nobody in the future could seriously treat U.S. government debt as a risk-free information-insensitive asset. It would become just another speculative play whose odds of working out would depend on your assessment of the ups and downs of American politics. Making the interest payments would somewhat mitigate the ensuing financial crisis, but would by no means eliminate it.

Other than that, this might all work out, but Yglesais points out than none of this makes a lick of sense:

House Republicans can’t have it both ways here. Either the debt ceiling is a major leverage point to extract concessions from the president, or else it’s no big deal. If it’s no big deal, there’s no leverage. If there’s leverage, then it’s because failing to raise the debt ceiling would be very damaging.

Obama is dealing with sulking teenagers, which explains this:

White House spokesman Jay Carney said Monday that lifting the debt ceiling will be non-negotiable for as long as Barack Obama is president.

“Whether it’s today, or a number of weeks from now, or a number of months from now, or a number of years from now, it will always be Congress’s responsibility to raise our debt ceiling so that the United States can pay the bills that Congress has incurred,” he told reporters during his daily briefing.

“It will always be, as long as he’s president, President Obama’s position that that responsibility is not negotiable. That there’s not a game of trading for political priorities or agenda items that Republicans have not been able to achieve through legislation or the ballot box.”

Sometimes you just have to take away the keys to the car. Think about it. Our constitutional system was set up to allow one small group in one chamber of one house of Congress to stop all funding, for whatever reason they’d like. They chose their reason – Obamacare. That this might give these few people a way to nullify the results of an election, or in this case multiple elections, and that it might nullify a law that has been passed by both chambers and signed into law, and that it might render a pesky Supreme Court decision about that law entirely moot, might be a fatal flaw in the system – but that’s how our system was designed way back when. Maybe the founders didn’t think this through, but we have what we have. Boehner and crew really are playing by the rules – but that doesn’t make them safe drivers, so to speak.

Maybe it’s time to offer them a different sort of dare, so try this. Stopping Obamacare by any means possible – shutting down the government, crippling the economy, or forcing America into default, collapsing the world’s economy – unless Obama does the right thing, is half-assed. Demand, in return for ending the current shutdown of everything, stalling the economy, and for calling off certain ruin for everyone, that Obama and Biden resign, right now. Boehner is third in line. He’d be president. Then outlaw the Democratic Party and arrest its leaders – just like the current Egyptian government did with the Muslim Brotherhood over there – to restore domestic tranquility or something. If you want “your” country back, well, take it back. See how far you get with that.

Hey, dealing with sulking teenagers is damned hard! They love to test limits and they’re bound to do something stupid. Use it against them. When you show them what they’re really up to they stop – or they don’t. That’s the other problem with teenagers.

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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One Response to Inadequate Risk Assessment

  1. Rick says:

    To start with, you said this:

    “Our constitutional system was set up to allow one small group in one chamber of one house of Congress to stop all funding, for whatever reason they’d like.”

    Not really. At least the Constitution didn’t do this on purpose. In fact, it only happens because of a blatant oversight on the part of the framers, who didn’t have the foresight to predict political parties. It’s only because one party rules the House, and discovered it can use the so-called (but maybe misnamed) “Hastert Rule” — only allowing everyone to vote on bills that the majority Republicans would win on — to help them bypass majority rule. (Damned shifty, them Republicans!)

    Also, by the way, Matt Yglesias on Treasury “prioritizing payments”, making sure the “important ones” get paid first:

    “It’s illegal: Treasury is not authorized to unilaterally decide to pay certain bills and not others.”

    Okay, but — and I hate to bring this question up — wouldn’t that change if the Democrats and Obama just signed that prioritization bill the Republicans are pushing? But yes, Yglesias partly covers this by saying that, even if that law were passed, it would take a long time rejiggering the computers to make it work, and also that in the meantime, we wouldn’t have the funds to hire professional rejiggerers.

    But those teenage drivers of American politics, seeing what happens if we were to run that red light at the intersection of Debt Limit Avenue and Sovereign Default Boulevard? Good one! Being a parent of two teenagers, that works for me!

    Although I, for one, never bought that bullshit about teenage boys thinking they’re immortal. After all, if they have a serious accident, it’s not just them that dies, it’s also that family in the minivan they hit; do they think those people are immortal, too? I doubt it. The real problem is not that they think they’re immortal, it’s that their judgement skills are still undeveloped, especially when it comes to judging risk.

    Case in point:

    “And according to Pew, 54 percent of Republican voters think America could breach the debt limit ‘without major problems.’ “

    I reckon these particular Republicans are paying the same amount of attention to the present crisis that they were paying to the election of 2012. The only difference is, while the shock on learning how wrong they were that Romney would win only hurt their pride, this time their ignorance will hurt not only the whole country, but probably the world.

    And then we have this guy from Texas:

    ” ‘Social Security benefits are funded by mandatory spending,’ explained Texas Rep. Bill Flores to a reporter in his district. ‘They go out come heck or high water. The only way Social Security payments could be withheld is if two things happen. One is the president decides to withhold them, or two, he takes the staff away that generates those payments or checks that go out the door.’ “

    (Ignoring the fact that he’s wrong about both those two things, but) Two things? I think he missed one.

    The term “mandatory spending” doesn’t mean bean dip if we run out of money to make the payments. As it is, the Treasury department pays bills in chronological order, “as they come due”, which means if they’ve used up the money before we get around to Social Security, they can’t send out those “mandatory” checks.

    Republicans are making the same mistake they always make, which is, on the one hand, demanding that we drastically cut spending, but then, when asked to specify which programs to cut, because they don’t want to offend anyone, they become cowards and just clam up — which is why they stink at actual governance.

    So yes, they go shut down the government, but then whine when someone puts up so-called “Barrycades” around the National Parks — since shuttering the parks is one obvious indication to the public that the whole government has shut down. It never occurs to Republicans that the best way to keep their new best friend, the National Park system, open would be to not shut down the government in the first place.

    But that’s only one of a legion of things that doesn’t occur to Republicans:

    My neighbor, who works for the CDC, has lately been seen gardening in her front yard, instead of being at work, doing what we all will presumably end up paying her not to do after this shutdown ends — that is, researching diseases. I would say the work done at the CDC is at least as important as that of a park ranger, although it’s not nearly as visible to voters — which may be why we don’t hear Republican politicians and Fox News pundits whine about “Barry” closing down the CDC.

    And yes, while I usually complain when conservatives use the household-budget analogy when trying to explain their views of government, some of the analogy does work:

    If you think there will be no damage to your credit rating if you make sure you only pay the interest on your loans, such as your mortgage and car loan — but then balk at paying your other bills, like your electricity or gas or credit card, you’re seriously addled. Try it, and then get back to us on how it went.

    Likewise, if America makes sure it pays only the interest on its bonds, but cuts back on paying everything else it owes by one-third, believe me, its credit rating will fall.

    And when that happens, there’s a good chance the value of the dollar will fall, and so much so that countries holding dollars (ours is, after all, the “reserve” currency of the world, which works to our advantage in ways most of us don’t notice) will see the total value of their holdings drop like a rock, and there’s then a good chance the world will push ahead with discussions on how to replace their dollars with something else. And after that happens, we need to remember to check back with that Florida Congressman Yoho, and ask if he thinks not paying our bills really brought “stability to world markets”, as he predicted.

    People, even some who sympathize with Obama, still ask why he refuses to negotiate, even if it means the worst will happen.

    One reason is that if he does give in and negotiate, they will try this trick again, and eventually, the worst will happen sooner or later. After all, even though he shouldn’t have, he already did this in 2011, and so here they are, like blackmailers, back again, asking for more. Everyone needs to realize that negotiating with someone wearing a suicide vest is not really the way to run a country — no matter what they ask, big or small, you have to give in.

    And so, this needs to stop here, and John Boehner and his gang of thugs need to be made to understand that.

    So John Boehner wants to have a “conversation” with the president? Okay, but it will be very one-sided. It will simply involve Obama telling him “No more! You’re cut off. If I allow this, you or someone else will be back here in no time, with even more outrageous demands, threatening to blow up the world if they’re not met.”

    And if Boehner asks, once again, for some little concession from our side, something to help him “save face”? Obama should tell him no, not this time — that if Boehner wants to save his face, he can do that all on his own, with no help from us, by simply pulling it out of his ass.

    Or something to that effect.

    Rick

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