The Financial Review
PUBLISHED: 25 Feb 2012
Anna Bernasek
Try as they might, big US banks can’t seem to get away from the foreclosure mess. About 4 million American families have already lost their homes in foreclosures since 2007. And there may be a million or so more to come. Now some strong evidence has come out that, in the banks’ rush to get paid, laws have been broken.
The whole saga reminds me of a Bible story. In it, a king calls his servant onto the carpet to repay a huge debt. The servant begs for time, and, moved with compassion, the king forgives the debt. Soon after, the fortunate servant finds a fellow servant who owes him a tiny amount. Catching his unlucky peer by the throat, he demands his money on the spot. The moral contrast is clear.
Now look at recent history. Back in 2007, the US megabanks teetered on the brink of collapse only to be rescued by the unprecedented generosity of the federal government. The bank bailout was an immense benefit to the owners and executives of those big banks, providing them time and resources to limp back to solvency. And keep in mind that this was no random disaster. The crisis itself was created and inflated by the banks themselves, fuelled by unprecedented leverage and shoddy risk management.
A king-sized recession ensued. Employment went in the tank. More than a few home owners saw their principal asset, their home equity, wiped out. Soon, millions of families faced their own hour of need, unable to pay their mortgages and begging for time. The rest is history. Loan forgiveness or modifications were few and far between. Instead, a massive wave of foreclosures and their attendant misery swept across the country.
As if that wasn’t bad enough, it seems the banks and their agents had the audacity to run roughshod over the law. In their rush to get repaid, banks and their agents appear to have ignored long-standing laws and procedures that protect individual rights.
It’s a sorry picture.
Signs of foreclosure abuse first emerged two years ago when an employee of Ally Financial admitted he had signed hundreds of foreclosure documents daily without reviewing them. For months after that more anecdotal evidence emerged suggesting that so-called robo signing was widespread. One by one, major banks suspended foreclosures while they investigated.
Since then, new evidence has come to light that abuses are widespread and far more significant than just robo signing.
A recent audit by San Francisco county officials of 400 foreclosures sheds some light on what has been going on. The audit found that nearly all of the 400 cases involved apparent legal violations or suspicious documentation.
In 85 per cent of those cases, documents recording the transfer of a defaulted property to a new trustee were not filed properly or on time. In another 45 per cent of cases, foreclosure properties were sold at auction to entities improperly claiming to be the beneficiary of the deeds of trust. And 8 per cent of the time, the loan servicer did not even take the step of giving borrowers notice.
The states of Florida, California, Illinois, New York and New Jersey account for 53 per cent of loans in foreclosure but represent only about 33 per cent of all loans.
Banks say that if borrowers are behind on their payments it matters little if they are foreclosed upon a little sooner. They were going to lose the home anyway.
Maybe. But surely some fraction of those affected could have kept their homes, given more time or flexibility. What makes the foreclosure mess so disturbing is that it involves society’s weakest and most vulnerable members.
A few weeks ago, five of the biggest banks in the nation tried to pave over the mortgage mess with a settlement approved by government and state officials.
Ally Financial/GMAC Mortgage, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo agreed to pay $25 billion ($23.5 billion) in cash to borrowers who were foreclosed upon, engineer some principal reductions and offer some refinancing in return for guarantees that banks couldn’t be sued over foreclosure violations.
It looks like a good deal for banks. Cash payments amount to about $1000 to $2500 a family. That won’t come close to putting anybody back in a home.
No one has taken responsibility for the foreclosure mess and the problem remains. Banks can still hire shady operators to do their dirty work and then pretend they are shocked at the consequences.
The San Francisco audit suggests there’s more evidence to come out about the banks’ irresponsible foreclosure practices. Until banks come clean and address the mess they created, Americans will trust them less and less.
And remember how the Bible story ends. When the story of the unforgiving servant gets back to the king, things don’t end well for the servant.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. She is the author of The Economics of Integrity.
Monday, February 27, 2012
Monday, February 20, 2012
Robert Shiller tips a double-dip recession
Financial Review
PUBLISHED: 18 Feb 2012
Anna Bernasek New York
Predicting a market boom or bust is not for the meek. Partly a matter of good timing and partly about being bold, a correct call can turn the forecaster into a star overnight, sought after by the global banking glitterati and invited to A-list events such as the World Economic Forum in Davos.
A bad call, on the other hand, can mean years of ridicule, quickly becoming fodder for endless jokes. Remember the book Dow 36,000?
Then there’s Robert Shiller, who’s in a class of his own. An economics professor at Yale, Shiller not only called the dotcom bubble of the late 1990s and the more recent devastating housing bubble but he warned that both would end badly. Very badly.
Remember back to when previous Federal Reserve chairman Alan Greenspan first used the term “irrational exuberance” to describe the booming market of the late 90s? He lifted that phrase from Shiller, after the economist had given the Fed chief a private briefing.
When the dotcom bubble burst in 2000, Shiller was vindicated and his book published earlier that year, Irrational Exuberance, became a hit. Between 2000 and 2002, about $US5 trillion of value was wiped out of the sharemarket.
Soon after, Shiller turned his attention to the housing market. Along with two other economists, Karl Case and Allan Weiss, Shiller developed a national housing price index in the early 1990s. The index gave those studying the market much more accurate observations of price.
Working through the numbers, Shiller became more and more convinced that the housing market was entering dangerous territory. From as early as 2003, Shiller appeared on television and radio – a lone and persistent voice warning about a national housing bubble. In late 2006, home prices peaked. Since then, they’ve fallen 33 per cent, unleashing one of the worst economic recessions ever.
This week I caught up with Shiller to find out what he thinks about in the post-bubble economy. It turns out there’s still plenty to worry about, except perhaps bubbles.
“My worry right now is that confidence is still shaky,” Shiller says. With Washington in gridlock, “we don’t have Keynesian tools available – we can’t do the big deficit spending at the moment, and we can’t do bailouts because of Dodd Frank. We’ve been tearing down our usual defences and now we are vulnerable”.
Despite recent signs of strength in the United States economy, Shiller predicts a double-dip recession. He defines double dip as a recession that occurs before employment returns to normal.
“Something will come along and tip the economy down,” he explains. “We’re at risk of that now. The European crisis comes first to mind but it could be anything. We don’t really know what causes recessions but we know they come along every few years.”
As for predicting what happens to housing prices, Shiller is less confident. “It’s become very difficult to know what will happen next,” he says. “Housing prices have come down to a more normal level and given interest rates, housing is pretty affordable. But prices could overshoot.”
What adds to the uncertainty, he explains, is the government’s role in the mortgage market and a lack of available credit for borrowers.
Since last northern autumn, housing prices have begun to fall again, surprising many commentators who believed that the market had stabilised. Shiller wonders whether the resumption of declining prices reflects a permanent shift in public attitudes to housing.
“The big question is whether people still think that they really have to get into housing or they’ll miss out on life. There’s evidence people may be just fine with renting instead.”
And just in case there’s any complacency about the housing market, Shiller adds that in Japan, following the property bust that began in the late 1980s, home prices continued their decline – with only minor interruptions – for 20 years.
A prolific author, Shiller’s next book, due out this spring, is called Finance and the Good Society. The impetus for the book was his students. Shiller says that most of his students end up in finance and he wanted a book to help them think about the bigger picture and address moral questions.
“I was working on this book a long time before the Occupy Wall Street Movement came along. People will think I’ve written it in response but I haven’t,” he says.
“People are angry about the banks and I hope the Occupy Movement likes this book. The central theme is the democratisation and humanising of finance. I take as reality that we’re not going to abolish banks or see bank presidents take a big pay cut. And I focus on how can we make finance work better.”
As for any bubbles on the horizon, Shiller pauses. “There are a few bubbles in housing in certain other countries,” he says. “I’m looking at Norway and Canada, for instance.”
And then he says quietly, almost as an after thought: “And there may be an oil price bubble.”
Will Robert Shiller be right three times in a row?
PUBLISHED: 18 Feb 2012
Anna Bernasek New York
Predicting a market boom or bust is not for the meek. Partly a matter of good timing and partly about being bold, a correct call can turn the forecaster into a star overnight, sought after by the global banking glitterati and invited to A-list events such as the World Economic Forum in Davos.
A bad call, on the other hand, can mean years of ridicule, quickly becoming fodder for endless jokes. Remember the book Dow 36,000?
Then there’s Robert Shiller, who’s in a class of his own. An economics professor at Yale, Shiller not only called the dotcom bubble of the late 1990s and the more recent devastating housing bubble but he warned that both would end badly. Very badly.
Remember back to when previous Federal Reserve chairman Alan Greenspan first used the term “irrational exuberance” to describe the booming market of the late 90s? He lifted that phrase from Shiller, after the economist had given the Fed chief a private briefing.
When the dotcom bubble burst in 2000, Shiller was vindicated and his book published earlier that year, Irrational Exuberance, became a hit. Between 2000 and 2002, about $US5 trillion of value was wiped out of the sharemarket.
Soon after, Shiller turned his attention to the housing market. Along with two other economists, Karl Case and Allan Weiss, Shiller developed a national housing price index in the early 1990s. The index gave those studying the market much more accurate observations of price.
Working through the numbers, Shiller became more and more convinced that the housing market was entering dangerous territory. From as early as 2003, Shiller appeared on television and radio – a lone and persistent voice warning about a national housing bubble. In late 2006, home prices peaked. Since then, they’ve fallen 33 per cent, unleashing one of the worst economic recessions ever.
This week I caught up with Shiller to find out what he thinks about in the post-bubble economy. It turns out there’s still plenty to worry about, except perhaps bubbles.
“My worry right now is that confidence is still shaky,” Shiller says. With Washington in gridlock, “we don’t have Keynesian tools available – we can’t do the big deficit spending at the moment, and we can’t do bailouts because of Dodd Frank. We’ve been tearing down our usual defences and now we are vulnerable”.
Despite recent signs of strength in the United States economy, Shiller predicts a double-dip recession. He defines double dip as a recession that occurs before employment returns to normal.
“Something will come along and tip the economy down,” he explains. “We’re at risk of that now. The European crisis comes first to mind but it could be anything. We don’t really know what causes recessions but we know they come along every few years.”
As for predicting what happens to housing prices, Shiller is less confident. “It’s become very difficult to know what will happen next,” he says. “Housing prices have come down to a more normal level and given interest rates, housing is pretty affordable. But prices could overshoot.”
What adds to the uncertainty, he explains, is the government’s role in the mortgage market and a lack of available credit for borrowers.
Since last northern autumn, housing prices have begun to fall again, surprising many commentators who believed that the market had stabilised. Shiller wonders whether the resumption of declining prices reflects a permanent shift in public attitudes to housing.
“The big question is whether people still think that they really have to get into housing or they’ll miss out on life. There’s evidence people may be just fine with renting instead.”
And just in case there’s any complacency about the housing market, Shiller adds that in Japan, following the property bust that began in the late 1980s, home prices continued their decline – with only minor interruptions – for 20 years.
A prolific author, Shiller’s next book, due out this spring, is called Finance and the Good Society. The impetus for the book was his students. Shiller says that most of his students end up in finance and he wanted a book to help them think about the bigger picture and address moral questions.
“I was working on this book a long time before the Occupy Wall Street Movement came along. People will think I’ve written it in response but I haven’t,” he says.
“People are angry about the banks and I hope the Occupy Movement likes this book. The central theme is the democratisation and humanising of finance. I take as reality that we’re not going to abolish banks or see bank presidents take a big pay cut. And I focus on how can we make finance work better.”
As for any bubbles on the horizon, Shiller pauses. “There are a few bubbles in housing in certain other countries,” he says. “I’m looking at Norway and Canada, for instance.”
And then he says quietly, almost as an after thought: “And there may be an oil price bubble.”
Will Robert Shiller be right three times in a row?
Monday, February 13, 2012
The great hedge fund anomaly
Financial Review
PUBLISHED: 11 Feb 2012
Anna Bernasek, New York
Is there a bubble in the hedge fund industry? For some time now there’s been talk about an impending shake-up in hedge funds. Growth was expected to drive the industry’s performance down toward the average, with more competition resulting in lower fees.
In the aftermath of the 2008 financial crisis, that shake-up seemed imminent. The industry’s poor performance, coupled with shocking scandals like Bernie Madoff’s fraud, shook some observers’ faith in the sector. But apparently little has changed.
True, some high-profile funds have closed their doors and some big ones have become smaller. But on the whole, the industry is booming. Fees remain as high as ever and money is pouring in.
What makes it all the more puzzling is that hedge fund performance, especially of late, hasn’t lived up to the industry’s promise of outsized returns. In fact, looking at industry returns, it’s hard to fathom why investors keep investing.
Take last year for instance. On average, hedge funds lost 5 per cent, according to Hedge Fund Research. That’s not great compared with a popular reference, the S&P 500 stock index, which was flat for the year. Or the Dow Jones Industrial Average, which gained 5 per cent.
And last year’s dismal performance of the hedge fund industry is not an isolated event. For two years hedge funds have underperformed the broader stockmarket. What’s more, analysis suggests that investments in hedge funds over the long term have underperformed, not only investments in major stockmarket indices but bond market indices too.
A recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good To Be True, by Simon Lack, raises serious concerns. At the centre of Lack’s book is a shocking conclusion: “If all the money ever invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”
Looking at performance of the industry since 1998, Lack figures that the vast majority of gains have gone to the hedge fund managers as opposed to their investors. In fact, Lack plausibly suggests that in real terms, investors may have lost money in hedge funds over the period while managers raked in stupendous sums.
Proponents of hedge funds will say that the funds, on average, have lost money in just three years since the industry was formed. But their numbers are shaky. The hedge fund indices are calculated based on voluntary reporting. If a hedge fund has a bad year and it keeps quiet, those numbers don’t go in the index. Funds can selectively report good numbers in good years, driving up the indices.
Without detailed disclosure it’s hard to be confident of the quality even of the reported numbers. It’s not beyond the imagination to suppose that accounting games are played behind the scenes.
And, of course, the secrecy of the industry provides an ideal environment for occasional outright frauds. Hedge fund managers like Bernie Madoff and Raj Rajaratnam have become household names because of their crimes, yet there are many more managers still under investigation.
Philip Falcone, the manager of Harbinger Capital Partners, is among the latest to be investigated by the Securities and Exchange Commission for a $113 million loan he took out of his funds to pay his personal taxes.
Despite fraud and poor performances, hedge funds seem to be more popular with investors than ever. The total dollar amount invested in hedge funds hit a record last year of more than $2 trillion.
If you pick the right fund you can win big. While the average one has underperformed the broader market, some have spectacularly outperformed everyone.
Look at Bridgewater Associates for instance, the world’s biggest hedge fund with almost $120 billion under management. Bridgewater bucked the downward trend in hedge fund performance last year by making a 23 per cent gain.
The curious thing about the growing popularity of hedge funds is that demand seems to be coming from the very institutions that can’t afford to lose big – private and public pension funds.
In today’s low interest rate and relatively flat stockmarket, pension funds are having great difficulty meeting their 8 per cent target return on investments. As a result, many are taking a bet on hedge funds in the hope that they produce additional returns. Some estimates have a typical pension fund now holding 20 per cent of its portfolio in so-called alternative investments including hedge funds, private equity and real estate.
There’s nothing wrong with trying to make money in hedge funds. But the typical fee structure – the so-called “2 and 20”, where managers take 2 per cent of assets and then another 20 per cent of any profit – is so rich it may turn out to be impossible to justify. All those pension fund managers piling into hedge funds could wind up with egg on their faces.
PUBLISHED: 11 Feb 2012
Anna Bernasek, New York
Is there a bubble in the hedge fund industry? For some time now there’s been talk about an impending shake-up in hedge funds. Growth was expected to drive the industry’s performance down toward the average, with more competition resulting in lower fees.
In the aftermath of the 2008 financial crisis, that shake-up seemed imminent. The industry’s poor performance, coupled with shocking scandals like Bernie Madoff’s fraud, shook some observers’ faith in the sector. But apparently little has changed.
True, some high-profile funds have closed their doors and some big ones have become smaller. But on the whole, the industry is booming. Fees remain as high as ever and money is pouring in.
What makes it all the more puzzling is that hedge fund performance, especially of late, hasn’t lived up to the industry’s promise of outsized returns. In fact, looking at industry returns, it’s hard to fathom why investors keep investing.
Take last year for instance. On average, hedge funds lost 5 per cent, according to Hedge Fund Research. That’s not great compared with a popular reference, the S&P 500 stock index, which was flat for the year. Or the Dow Jones Industrial Average, which gained 5 per cent.
And last year’s dismal performance of the hedge fund industry is not an isolated event. For two years hedge funds have underperformed the broader stockmarket. What’s more, analysis suggests that investments in hedge funds over the long term have underperformed, not only investments in major stockmarket indices but bond market indices too.
A recent book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good To Be True, by Simon Lack, raises serious concerns. At the centre of Lack’s book is a shocking conclusion: “If all the money ever invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”
Looking at performance of the industry since 1998, Lack figures that the vast majority of gains have gone to the hedge fund managers as opposed to their investors. In fact, Lack plausibly suggests that in real terms, investors may have lost money in hedge funds over the period while managers raked in stupendous sums.
Proponents of hedge funds will say that the funds, on average, have lost money in just three years since the industry was formed. But their numbers are shaky. The hedge fund indices are calculated based on voluntary reporting. If a hedge fund has a bad year and it keeps quiet, those numbers don’t go in the index. Funds can selectively report good numbers in good years, driving up the indices.
Without detailed disclosure it’s hard to be confident of the quality even of the reported numbers. It’s not beyond the imagination to suppose that accounting games are played behind the scenes.
And, of course, the secrecy of the industry provides an ideal environment for occasional outright frauds. Hedge fund managers like Bernie Madoff and Raj Rajaratnam have become household names because of their crimes, yet there are many more managers still under investigation.
Philip Falcone, the manager of Harbinger Capital Partners, is among the latest to be investigated by the Securities and Exchange Commission for a $113 million loan he took out of his funds to pay his personal taxes.
Despite fraud and poor performances, hedge funds seem to be more popular with investors than ever. The total dollar amount invested in hedge funds hit a record last year of more than $2 trillion.
If you pick the right fund you can win big. While the average one has underperformed the broader market, some have spectacularly outperformed everyone.
Look at Bridgewater Associates for instance, the world’s biggest hedge fund with almost $120 billion under management. Bridgewater bucked the downward trend in hedge fund performance last year by making a 23 per cent gain.
The curious thing about the growing popularity of hedge funds is that demand seems to be coming from the very institutions that can’t afford to lose big – private and public pension funds.
In today’s low interest rate and relatively flat stockmarket, pension funds are having great difficulty meeting their 8 per cent target return on investments. As a result, many are taking a bet on hedge funds in the hope that they produce additional returns. Some estimates have a typical pension fund now holding 20 per cent of its portfolio in so-called alternative investments including hedge funds, private equity and real estate.
There’s nothing wrong with trying to make money in hedge funds. But the typical fee structure – the so-called “2 and 20”, where managers take 2 per cent of assets and then another 20 per cent of any profit – is so rich it may turn out to be impossible to justify. All those pension fund managers piling into hedge funds could wind up with egg on their faces.
Monday, February 6, 2012
If an economist were president of the US
The Financial Review
PUBLISHED: 04 Feb 2012
Anna Bernasek NEW YORK
Republican presidential nominee hopefuls continue their merciless attacks on each other. President Barack Obama remains focused on his own tactics and manoeuvring before the November elections. Meanwhile, the big economic problems facing the nation remain unaddressed. So here’s a different idea. What would things be like if an economist were in charge?
Meet Larry Kotlikoff, a professor of economics at Boston University. He’s seeking the nomination of a third party, called Americans Elect, to enter the presidential race against Obama and Mitt Romney, the Republican frontrunner and likely nominee.
Kotlikoff’s message is simple: politicians have made a mess of things and can’t be trusted to fix the major economic problems confronting the nation. In his view only an economist who understands what’s at stake can get the job done.
“I’m trying to put the truth forward and I’m not shy about that,” Kotlikoff tells me. “The country has significant short-term problems, which the [US Federal Reserve] is predicting will last till 2014 at least. Then we have serious long-terms problems. Healthcare is making us broke, the tax system is a mess, social security is in worse financial shape than it’s ever been, and Wall Street still hasn’t been fixed. It remains as big a danger to Main Street as ever.”
Playing off the commonly used “red” Republican and “blue” Democrat imagery, Kotlikoff terms his plans “purple”. By that he means they are designed to appeal to liberals and conservatives.
So far, no one in the White House or in the Republican camp is paying much attention. After all, there’s never been an economist president and few would give a third-party candidate any chance of winning the presidency.
But Kotlikoff brings a focus on the key issues that’s lacking from the major candidates.
He believes unemployment is the immediate concern. By a combination of jawboning and compulsion he would get major companies to hire additional workers. Kotlikoff expects co-ordinated mass hiring to have positive knock-on effects. The housing sector would start to heal and consumer confidence would grow, encouraging even more hiring in a virtuous cycle of economic growth.
Once that’s under way, Kotlikoff would tackle long-term problems. This is where his years of study as an academic economist come in.
Kotlikoff’s best recognised contribution to the field of economics has been a way of accounting for national debt called generational accounting.
That eye-opening approach reveals the staggering financial burden the US is placing on its younger generations.
Officially, the US states its national debt at about $US15 trillion ($14 trillion). But, as measured by Kotlikoff, the debt is far higher. That’s because the great bulk of government obligations – Medicare, Medicaid and social security – are expected in the future and aren’t on the balance sheet today. Future obligations don’t show up in official debt numbers.
Kotlikoff’s method measures the present value of all future spending, including spending on Medicare, Medicaid and social security, and compares that with the present value of expected government receipts. The gap between the two represents government debt.
Just how big is US government debt according to Kotlikoff’s method? Fourteen times official debt, or $US211 trillion.
With Congress failing to reach agreement on savings of a mere $US1.2 trillion over the next 10 years, it’s little wonder Kotlikoff is alarmed. So what would he do?
Since healthcare costs account for 60 per cent of the gap, Kotlikoff would start with healthcare reform.
Worried that Obama’s reforms will do nothing to stop skyrocketing costs, Kotlikoff would give every American a voucher to buy a basic health insurance plan set by a panel of doctors. Under Kotlikoff’s plan, the cost to the government of providing everyone with a basic plan would not exceed 10 per cent of gross domestic product.
Today, the US spends 18 per cent of gross domestic product on healthcare. Individuals could buy supplementary insurance.
To make up the rest of the gap, Kotlikoff advocates changes to the government-funded retirement plan and simplification of the tax code. He also worries about the spectacular decline in national savings since World War II and his tax ideas derive from his intent to encourage saving and investment. In 1950, the national savings rate in the US was about 15 per cent. Today it is close to zero.
Not everyone agrees with Kotlikoff’s ideas about privatising social security, since he wants to provide a guaranteed minimum return backed by the government. Nor are most Americans ready for a switch to the consumption tax Kotlikoff favours. But it’s clear that some changes in each of these areas need to be part of any comprehensive solution to the nation’s long-run problems.
Kotlikoff would be the first to admit he lacks political experience. His purple plans run the risk of pleasing no one on the left or right. But before you dismiss him, consider this: he’s made an honest attempt at tackling the problems.
PUBLISHED: 04 Feb 2012
Anna Bernasek NEW YORK
Republican presidential nominee hopefuls continue their merciless attacks on each other. President Barack Obama remains focused on his own tactics and manoeuvring before the November elections. Meanwhile, the big economic problems facing the nation remain unaddressed. So here’s a different idea. What would things be like if an economist were in charge?
Meet Larry Kotlikoff, a professor of economics at Boston University. He’s seeking the nomination of a third party, called Americans Elect, to enter the presidential race against Obama and Mitt Romney, the Republican frontrunner and likely nominee.
Kotlikoff’s message is simple: politicians have made a mess of things and can’t be trusted to fix the major economic problems confronting the nation. In his view only an economist who understands what’s at stake can get the job done.
“I’m trying to put the truth forward and I’m not shy about that,” Kotlikoff tells me. “The country has significant short-term problems, which the [US Federal Reserve] is predicting will last till 2014 at least. Then we have serious long-terms problems. Healthcare is making us broke, the tax system is a mess, social security is in worse financial shape than it’s ever been, and Wall Street still hasn’t been fixed. It remains as big a danger to Main Street as ever.”
Playing off the commonly used “red” Republican and “blue” Democrat imagery, Kotlikoff terms his plans “purple”. By that he means they are designed to appeal to liberals and conservatives.
So far, no one in the White House or in the Republican camp is paying much attention. After all, there’s never been an economist president and few would give a third-party candidate any chance of winning the presidency.
But Kotlikoff brings a focus on the key issues that’s lacking from the major candidates.
He believes unemployment is the immediate concern. By a combination of jawboning and compulsion he would get major companies to hire additional workers. Kotlikoff expects co-ordinated mass hiring to have positive knock-on effects. The housing sector would start to heal and consumer confidence would grow, encouraging even more hiring in a virtuous cycle of economic growth.
Once that’s under way, Kotlikoff would tackle long-term problems. This is where his years of study as an academic economist come in.
Kotlikoff’s best recognised contribution to the field of economics has been a way of accounting for national debt called generational accounting.
That eye-opening approach reveals the staggering financial burden the US is placing on its younger generations.
Officially, the US states its national debt at about $US15 trillion ($14 trillion). But, as measured by Kotlikoff, the debt is far higher. That’s because the great bulk of government obligations – Medicare, Medicaid and social security – are expected in the future and aren’t on the balance sheet today. Future obligations don’t show up in official debt numbers.
Kotlikoff’s method measures the present value of all future spending, including spending on Medicare, Medicaid and social security, and compares that with the present value of expected government receipts. The gap between the two represents government debt.
Just how big is US government debt according to Kotlikoff’s method? Fourteen times official debt, or $US211 trillion.
With Congress failing to reach agreement on savings of a mere $US1.2 trillion over the next 10 years, it’s little wonder Kotlikoff is alarmed. So what would he do?
Since healthcare costs account for 60 per cent of the gap, Kotlikoff would start with healthcare reform.
Worried that Obama’s reforms will do nothing to stop skyrocketing costs, Kotlikoff would give every American a voucher to buy a basic health insurance plan set by a panel of doctors. Under Kotlikoff’s plan, the cost to the government of providing everyone with a basic plan would not exceed 10 per cent of gross domestic product.
Today, the US spends 18 per cent of gross domestic product on healthcare. Individuals could buy supplementary insurance.
To make up the rest of the gap, Kotlikoff advocates changes to the government-funded retirement plan and simplification of the tax code. He also worries about the spectacular decline in national savings since World War II and his tax ideas derive from his intent to encourage saving and investment. In 1950, the national savings rate in the US was about 15 per cent. Today it is close to zero.
Not everyone agrees with Kotlikoff’s ideas about privatising social security, since he wants to provide a guaranteed minimum return backed by the government. Nor are most Americans ready for a switch to the consumption tax Kotlikoff favours. But it’s clear that some changes in each of these areas need to be part of any comprehensive solution to the nation’s long-run problems.
Kotlikoff would be the first to admit he lacks political experience. His purple plans run the risk of pleasing no one on the left or right. But before you dismiss him, consider this: he’s made an honest attempt at tackling the problems.
Saturday, January 28, 2012
American banks try to pass the buck
Australian Financial Review
PUBLISHED: 28 Jan 2012
Anna Bernasek New York
What’s on Wall Street’s mind right now? It seems to be regulation. Listen to any banker in the US lately and it sounds like regulation is killing them. But take a look at the evidence.
US banks have just reported earnings for 2011 and, at first glance, there is some cause for concern. Acknowledged leader Goldman Sachs’s net income was cut in half in 2011, compared with the previous year. Bank of America, the biggest bank by assets, barely broke even. Without the benefit of a tax provision, BoA would have lost money.
But digging a little deeper into recent numbers tells another story. Those regulations may not be hurting US banks as much as bankers would like you to believe.
Take a look at the strongest big bank, JPMorgan Chase. Its head, Jamie Dimon, has been an outspoken critic of regulations. Since last summer he has openly feuded with global financial regulators about new international capital standards.
Dimon reiterated his criticism of tighter bank rules at JPMorgan’s earnings announcement last week. “Regulatory policy is completely contradictory to government objectives,” he said.
In particular, Dimon singled out two areas of regulation he believes are bad: bank capital rules and restrictions on trading.
But if regulations are hurting so much, why are JPMorgan’s earnings so strong? For the full year, JPMorgan reported a record profit of $US19 billion. That’s up a healthy 9 per cent from the previous year. But it’s also about 25 per cent higher than in 2006 and 2007, when the market was sizzling and today’s regulations weren’t even on the radar.
To be fair, JPMorgan is bigger than it was in 2007 and has to maintain more capital. But other measures of profitability show the bank is not far from boom-time levels. Pre-tax earnings were 28 per cent of revenue, only a shade less than in 2006-07. In this new era, it is turning out results comparable to its best years.
Dimon may have a point on some regulatory details, but in the big picture he’s not getting hurt. For a well capitalised giant such as JPMorgan, it’s clearly possible to thrive under the new rules.
The picture is not the same at the other big banks. Look at Citigroup, for example. According to its latest figures, Citigroup’s profitability is about half what it was during the boom. But the bank’s profitability fell off a cliff in 2007 when its assets and loans problems came to light. That was well before the new regulations kicked in the following year.
For the past two years, Citigroup has turned out steady and growing profits. The fact that they are about half what they were in 2006 probably says more about the bank’s irresponsible practices from the year 2000 on, than about any recent regulatory burdens.
Then there’s BoA, the asset leader. It seems to have some operational and legacy asset problems as opposed to regulatory constraints. The disastrous acquisitions of Countrywide and, to a lesser extent, Merrill Lynch continue to take their toll.
BoA actually showed paper profits in 2008 and 2009, the worst years for its big-bank peers. But throughout 2010 and again in 2011 BoA printed red ink. That doesn’t look like a regulatory problem, especially compared with JPMorgan’s strong results under the very same rules.
So what about the best of the investment banks? How are they faring?
Like Citigroup, Goldman Sachs’s profits have fallen by half. Unlike Citigroup, though, in Goldman’s case the drop is clearly related to regulation. Remember that, to save its skin during the 2008 crisis, Goldman converted from an investment bank to a commercial bank. That brought a whole new set of capital requirements, which more or less directly explain the drop in profitability.
It’s a simple matter of leverage. In the boom era, Goldman’s leverage was about 27 times its equity. Today that leverage is closer to 13 times, essentially cut in half. Investment bankers may make noises about restrictions on proprietary trading and other issues, but it’s no coincidence that profits have dropped in lock-step with leverage.
Morgan Stanley’s numbers tell a similar tale. Profits for 2011 were off 27 per cent versus 2006, while leverage dropped from 32 times to 12 times. Adjusted for leverage, Morgan Stanley seems even healthier than in 2006. There’s just no sign of regulatory strangulation in Morgan Stanley’s numbers.
While everybody misses the profits, the investment banks’ leverage wasn’t healthy for the financial system. At 27 times leverage, it doesn’t take much of a setback to put a company in intensive care. And it is an integral part of the global banking system, then watch out, everyone’s at risk.
On balance, new regulations are not putting banks out of business. What’s more, the financial world is a safer place for it.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. Her book The Economics of Integrity was published in 2010.
PUBLISHED: 28 Jan 2012
Anna Bernasek New York
What’s on Wall Street’s mind right now? It seems to be regulation. Listen to any banker in the US lately and it sounds like regulation is killing them. But take a look at the evidence.
US banks have just reported earnings for 2011 and, at first glance, there is some cause for concern. Acknowledged leader Goldman Sachs’s net income was cut in half in 2011, compared with the previous year. Bank of America, the biggest bank by assets, barely broke even. Without the benefit of a tax provision, BoA would have lost money.
But digging a little deeper into recent numbers tells another story. Those regulations may not be hurting US banks as much as bankers would like you to believe.
Take a look at the strongest big bank, JPMorgan Chase. Its head, Jamie Dimon, has been an outspoken critic of regulations. Since last summer he has openly feuded with global financial regulators about new international capital standards.
Dimon reiterated his criticism of tighter bank rules at JPMorgan’s earnings announcement last week. “Regulatory policy is completely contradictory to government objectives,” he said.
In particular, Dimon singled out two areas of regulation he believes are bad: bank capital rules and restrictions on trading.
But if regulations are hurting so much, why are JPMorgan’s earnings so strong? For the full year, JPMorgan reported a record profit of $US19 billion. That’s up a healthy 9 per cent from the previous year. But it’s also about 25 per cent higher than in 2006 and 2007, when the market was sizzling and today’s regulations weren’t even on the radar.
To be fair, JPMorgan is bigger than it was in 2007 and has to maintain more capital. But other measures of profitability show the bank is not far from boom-time levels. Pre-tax earnings were 28 per cent of revenue, only a shade less than in 2006-07. In this new era, it is turning out results comparable to its best years.
Dimon may have a point on some regulatory details, but in the big picture he’s not getting hurt. For a well capitalised giant such as JPMorgan, it’s clearly possible to thrive under the new rules.
The picture is not the same at the other big banks. Look at Citigroup, for example. According to its latest figures, Citigroup’s profitability is about half what it was during the boom. But the bank’s profitability fell off a cliff in 2007 when its assets and loans problems came to light. That was well before the new regulations kicked in the following year.
For the past two years, Citigroup has turned out steady and growing profits. The fact that they are about half what they were in 2006 probably says more about the bank’s irresponsible practices from the year 2000 on, than about any recent regulatory burdens.
Then there’s BoA, the asset leader. It seems to have some operational and legacy asset problems as opposed to regulatory constraints. The disastrous acquisitions of Countrywide and, to a lesser extent, Merrill Lynch continue to take their toll.
BoA actually showed paper profits in 2008 and 2009, the worst years for its big-bank peers. But throughout 2010 and again in 2011 BoA printed red ink. That doesn’t look like a regulatory problem, especially compared with JPMorgan’s strong results under the very same rules.
So what about the best of the investment banks? How are they faring?
Like Citigroup, Goldman Sachs’s profits have fallen by half. Unlike Citigroup, though, in Goldman’s case the drop is clearly related to regulation. Remember that, to save its skin during the 2008 crisis, Goldman converted from an investment bank to a commercial bank. That brought a whole new set of capital requirements, which more or less directly explain the drop in profitability.
It’s a simple matter of leverage. In the boom era, Goldman’s leverage was about 27 times its equity. Today that leverage is closer to 13 times, essentially cut in half. Investment bankers may make noises about restrictions on proprietary trading and other issues, but it’s no coincidence that profits have dropped in lock-step with leverage.
Morgan Stanley’s numbers tell a similar tale. Profits for 2011 were off 27 per cent versus 2006, while leverage dropped from 32 times to 12 times. Adjusted for leverage, Morgan Stanley seems even healthier than in 2006. There’s just no sign of regulatory strangulation in Morgan Stanley’s numbers.
While everybody misses the profits, the investment banks’ leverage wasn’t healthy for the financial system. At 27 times leverage, it doesn’t take much of a setback to put a company in intensive care. And it is an integral part of the global banking system, then watch out, everyone’s at risk.
On balance, new regulations are not putting banks out of business. What’s more, the financial world is a safer place for it.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. Her book The Economics of Integrity was published in 2010.
Saturday, January 21, 2012
Fed pushes Congress for Housing Policy Action
Financial Review
Published January 21, 2012
Anna Bernasek, New York
US Federal Reserve chairman Ben Bernanke this month sent Congress a report on the housing market urging more policy action. Since then, a rising chorus of Fed officials has reinforced Bernanke’s message in speeches around the country.
Despite “green shoots” in some parts of the American economy, the Fed remains concerned about the effects of continued weakness in the housing sector. Just how big a problem is the housing market?
Housing prices have fallen on average about 33 per cent from the peak in 2006. The last time home prices fell anywhere near that much was during the 1930s. And by some measures at least, the current crash in housing prices is even worse than what happened in the Great Depression. According to the S&P/Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 per cent from 1929 to 1933.
As a result of the recent decline in prices, $US7 trillion in household wealth simply vanished, drastically reducing consumer spending. Today the value of all housing assets is about $US14 trillion. It was close to $US21 trillion at the peak.
Falling home prices have a big economic effect due to leverage. A significant fall can wipe out a home owner’s equity and eat away the value of the bank’s mortgage. Analysts estimate that a 10 per cent fall is the typical threshold for those pernicious effects. With home prices falling three times as much, the impact has been unprecedented.
Lots of people are desperate. The Fed estimates that 12 million borrowers owe more on their mortgages than their homes are worth. That represents about one in five mortgages in the US.
In Florida, Nevada and Arizona, where prices have fallen more than the national average, as many as half of all mortgage borrowers owe the banks more than their homes could be sold for.
It all adds up to a whopping $US700 billion in aggregate negative equity, according to the Fed. To put that another way, it would take a 5 per cent increase in prices just to absorb that shortfall, without any gains going to home owners.
About 3.4 million borrowers with negative equity, amounting to $US275 billion, are late or have stopped making mortgage payments. While the remaining 8.6 million or so are still paying, they might stop at any time. That’s a continuing risk for US banks.
Negative equity creates a series of headaches for borrowers. For starters, banks won’t approve refinancing for borrowers with negative equity so they can’t take advantage of record low interest rates when they need it most. Worse still, it ties borrowers to homes and locations that might not offer the best job prospects so it creates a vicious cycle of falling prices, more negative equity and reduced economic prospects. And to top it off, the worst price declines tend to occur where the job market is not terribly strong.
Although the decline in home prices mostly occurred between 2007 and 2009, more recently home prices have begun falling again. As of October, the S&P/Case-Shiller index of property values in 20 cities showed a decline of 3.4 per cent from the previous year.
What worries the Fed is that it has already used its main tool, interest rates, to try to stimulate the housing market, with little visible effect. Mortgage rates are at record lows, with a typical 30-year mortgage priced under 4 per cent. Yet that seems to have had little impact on boosting demand, which would help home prices.
It seems that the banks aren’t eager to lend. The Fed believes there may be a permanent shift under way in the availability of mortgage credit as banks introduce tighter lending restrictions. Americans who would like to refinance their mortgages or buy properties are finding they simply can’t get a loan.
Mortgage applications are at their lowest level in 12 years and the Fed forecasts that home-loan borrowing in 2012 will decline to its lowest level in 15 years.
If the Fed is correct, new lending standards will further burden the housing market as demand is held back while supply continues to flood the market.
The Fed acknowledges that it lacks a silver bullet to end the housing crisis but it has urged Congress to take three steps.
Since rental markets are strengthening, the Fed has asked Congress to reduce barriers to converting foreclosed properties to rental units.
Next, the Fed wants Congress to reduce obstacles blocking people from getting credit.
And finally, the Fed wants Congress to encourage banks to make loan modifications rather than pursuing foreclosures, which are costly and put more pressure on home prices.
The Fed’s recommendations should come as a welcome relief. They rely on rule changes rather than spending money.
So far, though, the response has been lukewarm at best. More than a few Republican members of Congress have told the Fed it has no business trying to affect the housing sector.
For the sake of the economy, let’s hope Bernanke doesn’t give up too easily.
Published January 21, 2012
Anna Bernasek, New York
US Federal Reserve chairman Ben Bernanke this month sent Congress a report on the housing market urging more policy action. Since then, a rising chorus of Fed officials has reinforced Bernanke’s message in speeches around the country.
Despite “green shoots” in some parts of the American economy, the Fed remains concerned about the effects of continued weakness in the housing sector. Just how big a problem is the housing market?
Housing prices have fallen on average about 33 per cent from the peak in 2006. The last time home prices fell anywhere near that much was during the 1930s. And by some measures at least, the current crash in housing prices is even worse than what happened in the Great Depression. According to the S&P/Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 per cent from 1929 to 1933.
As a result of the recent decline in prices, $US7 trillion in household wealth simply vanished, drastically reducing consumer spending. Today the value of all housing assets is about $US14 trillion. It was close to $US21 trillion at the peak.
Falling home prices have a big economic effect due to leverage. A significant fall can wipe out a home owner’s equity and eat away the value of the bank’s mortgage. Analysts estimate that a 10 per cent fall is the typical threshold for those pernicious effects. With home prices falling three times as much, the impact has been unprecedented.
Lots of people are desperate. The Fed estimates that 12 million borrowers owe more on their mortgages than their homes are worth. That represents about one in five mortgages in the US.
In Florida, Nevada and Arizona, where prices have fallen more than the national average, as many as half of all mortgage borrowers owe the banks more than their homes could be sold for.
It all adds up to a whopping $US700 billion in aggregate negative equity, according to the Fed. To put that another way, it would take a 5 per cent increase in prices just to absorb that shortfall, without any gains going to home owners.
About 3.4 million borrowers with negative equity, amounting to $US275 billion, are late or have stopped making mortgage payments. While the remaining 8.6 million or so are still paying, they might stop at any time. That’s a continuing risk for US banks.
Negative equity creates a series of headaches for borrowers. For starters, banks won’t approve refinancing for borrowers with negative equity so they can’t take advantage of record low interest rates when they need it most. Worse still, it ties borrowers to homes and locations that might not offer the best job prospects so it creates a vicious cycle of falling prices, more negative equity and reduced economic prospects. And to top it off, the worst price declines tend to occur where the job market is not terribly strong.
Although the decline in home prices mostly occurred between 2007 and 2009, more recently home prices have begun falling again. As of October, the S&P/Case-Shiller index of property values in 20 cities showed a decline of 3.4 per cent from the previous year.
What worries the Fed is that it has already used its main tool, interest rates, to try to stimulate the housing market, with little visible effect. Mortgage rates are at record lows, with a typical 30-year mortgage priced under 4 per cent. Yet that seems to have had little impact on boosting demand, which would help home prices.
It seems that the banks aren’t eager to lend. The Fed believes there may be a permanent shift under way in the availability of mortgage credit as banks introduce tighter lending restrictions. Americans who would like to refinance their mortgages or buy properties are finding they simply can’t get a loan.
Mortgage applications are at their lowest level in 12 years and the Fed forecasts that home-loan borrowing in 2012 will decline to its lowest level in 15 years.
If the Fed is correct, new lending standards will further burden the housing market as demand is held back while supply continues to flood the market.
The Fed acknowledges that it lacks a silver bullet to end the housing crisis but it has urged Congress to take three steps.
Since rental markets are strengthening, the Fed has asked Congress to reduce barriers to converting foreclosed properties to rental units.
Next, the Fed wants Congress to reduce obstacles blocking people from getting credit.
And finally, the Fed wants Congress to encourage banks to make loan modifications rather than pursuing foreclosures, which are costly and put more pressure on home prices.
The Fed’s recommendations should come as a welcome relief. They rely on rule changes rather than spending money.
So far, though, the response has been lukewarm at best. More than a few Republican members of Congress have told the Fed it has no business trying to affect the housing sector.
For the sake of the economy, let’s hope Bernanke doesn’t give up too easily.
Saturday, January 14, 2012
Drug profits are hard to swallow
The Financial Review
PUBLISHED: 14 Jan 2012
Anna Bernasek New York
On New Year’s Eve, John Capano, an off-duty federal agent, went to his local pharmacy in the middle-class suburb of Seaford, on Long Island, New York, to pick up some prescriptions for himself and his cancer-stricken father.
What seemed like a perfectly mundane Saturday afternoon errand ended his life. A gunman entered Charlie’s Family Pharmacy demanding painkillers and cash.
After the robber left, Capano tried to apprehend him and shot him in the leg before the pair became embroiled in a scuffle. A retired police lieutenant and an off-duty New York City police officer were next to arrive. In the confusion, Capano was shot dead and so was the robber.
A pharmacy robbery in broad daylight is not supposed to happen in the quiet suburbs of Long Island. Seaford is the kind of place to which people moved to get away from all that.
And while much of the public’s attention has focused on the tragedy of the mistaken shooting, the incident at Seaford highlights the disturbing country-wide increase in abuse of prescription drugs. That has fuelled a rise in crime – and bumper profits for pharmaceutical companies cashing in on the epidemic.
The number of deaths from prescription painkillers soared from about 4000 in 1999 to 15,000 in 2008, the Centres for Disease Control and Prevention report.
That’s still less than half the number of road fatalities in the United States in a typical year. But while road deaths have been declining, deaths from prescription drugs have been increasing at an alarming rate.
The Drug Abuse Warning Network says 86,000 emergency department visits in 2009 were associated with the non-medical use of hydrocodone, among the most abused of all the prescription painkillers. That compares with 19,000 visits in 2000.
Prescription drugs are second only to cannabis as the most abused class of drug in the US.
Perhaps most disturbing of all, as drug abuse in the US extends from illegal street drugs to prescription painkillers, pharmaceutical companies are only too eager to find new ways to meet this growing demand.
Four companies – Zogenix, Purdue Pharma, Cephalon and Egalet – say they are developing a potentially more potent form of hydrocodone that could be 10 times stronger than existing medicines. Zogenix plans to file an application for its product with the US Food and Drug Administration early this year.
Hydrocodone is used in combination with a non-addictive painkiller called acetaminophen. Hydrocodone is an opiate from the same family as morphine, heroin, oxycodone, codeine and methadone. These drugs are highly addictive and people taking them on a regular basis often need to step up the dose to provide the same effect.
If you don’t count the tragedy, that makes for a very effective business model.
Pharmaceutical companies argue that a pure form of hydrocodone will help control pain for people with liver problems, as acetaminophen can be toxic to the liver.
Some doctors are sceptical. They say there is little medical need for stronger painkillers and argue that the profession already has the tools at hand to manage pain effectively.
The market for prescription opiates is big business, and estimated to be $US10 billion a year in the US. The number of people who have taken hydrocodone for non-medical reasons is thought to be close to 25 million, a 2009 National Survey on Drug Use and Health found. That’s nearly 10 per cent of the population.
So far, the abuse of hydrocodone and oxycodone seems to be an American phenomenon. The International Narcotics Control Board reports that the US consumes 99 per cent of the world’s hydrocodone and 83 per cent of its oxycodone. The discrepancy may be the result of loopholes in US law.
As it now stands, patients get up to five automatic refills of hydrocodone compared with one for oxycodone.
Another factor is the growing supply and widespread availability of hydrocodone. The Drug Enforcement Administration (DEA) wrote in a recent report that every age group had been affected by easy access to hydrocodone and the perceived safety of those products by medical prescribers.
In the US, the DEA sets quotas for the amount of addictive painkillers pharmaceutical companies can make. So government agencies have approved the big increase in supply of recent years.
The increasing trend of prescription drug abuse results from many factors: a medical culture that promotes pills over other solutions, ineffectual laws, a ready supply of dangerous products – and big profits.
Washington puts the cost of drug trafficking and drug abuse at $US215 billion a year. The human costs are even higher.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York.
PUBLISHED: 14 Jan 2012
Anna Bernasek New York
On New Year’s Eve, John Capano, an off-duty federal agent, went to his local pharmacy in the middle-class suburb of Seaford, on Long Island, New York, to pick up some prescriptions for himself and his cancer-stricken father.
What seemed like a perfectly mundane Saturday afternoon errand ended his life. A gunman entered Charlie’s Family Pharmacy demanding painkillers and cash.
After the robber left, Capano tried to apprehend him and shot him in the leg before the pair became embroiled in a scuffle. A retired police lieutenant and an off-duty New York City police officer were next to arrive. In the confusion, Capano was shot dead and so was the robber.
A pharmacy robbery in broad daylight is not supposed to happen in the quiet suburbs of Long Island. Seaford is the kind of place to which people moved to get away from all that.
And while much of the public’s attention has focused on the tragedy of the mistaken shooting, the incident at Seaford highlights the disturbing country-wide increase in abuse of prescription drugs. That has fuelled a rise in crime – and bumper profits for pharmaceutical companies cashing in on the epidemic.
The number of deaths from prescription painkillers soared from about 4000 in 1999 to 15,000 in 2008, the Centres for Disease Control and Prevention report.
That’s still less than half the number of road fatalities in the United States in a typical year. But while road deaths have been declining, deaths from prescription drugs have been increasing at an alarming rate.
The Drug Abuse Warning Network says 86,000 emergency department visits in 2009 were associated with the non-medical use of hydrocodone, among the most abused of all the prescription painkillers. That compares with 19,000 visits in 2000.
Prescription drugs are second only to cannabis as the most abused class of drug in the US.
Perhaps most disturbing of all, as drug abuse in the US extends from illegal street drugs to prescription painkillers, pharmaceutical companies are only too eager to find new ways to meet this growing demand.
Four companies – Zogenix, Purdue Pharma, Cephalon and Egalet – say they are developing a potentially more potent form of hydrocodone that could be 10 times stronger than existing medicines. Zogenix plans to file an application for its product with the US Food and Drug Administration early this year.
Hydrocodone is used in combination with a non-addictive painkiller called acetaminophen. Hydrocodone is an opiate from the same family as morphine, heroin, oxycodone, codeine and methadone. These drugs are highly addictive and people taking them on a regular basis often need to step up the dose to provide the same effect.
If you don’t count the tragedy, that makes for a very effective business model.
Pharmaceutical companies argue that a pure form of hydrocodone will help control pain for people with liver problems, as acetaminophen can be toxic to the liver.
Some doctors are sceptical. They say there is little medical need for stronger painkillers and argue that the profession already has the tools at hand to manage pain effectively.
The market for prescription opiates is big business, and estimated to be $US10 billion a year in the US. The number of people who have taken hydrocodone for non-medical reasons is thought to be close to 25 million, a 2009 National Survey on Drug Use and Health found. That’s nearly 10 per cent of the population.
So far, the abuse of hydrocodone and oxycodone seems to be an American phenomenon. The International Narcotics Control Board reports that the US consumes 99 per cent of the world’s hydrocodone and 83 per cent of its oxycodone. The discrepancy may be the result of loopholes in US law.
As it now stands, patients get up to five automatic refills of hydrocodone compared with one for oxycodone.
Another factor is the growing supply and widespread availability of hydrocodone. The Drug Enforcement Administration (DEA) wrote in a recent report that every age group had been affected by easy access to hydrocodone and the perceived safety of those products by medical prescribers.
In the US, the DEA sets quotas for the amount of addictive painkillers pharmaceutical companies can make. So government agencies have approved the big increase in supply of recent years.
The increasing trend of prescription drug abuse results from many factors: a medical culture that promotes pills over other solutions, ineffectual laws, a ready supply of dangerous products – and big profits.
Washington puts the cost of drug trafficking and drug abuse at $US215 billion a year. The human costs are even higher.
Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York.
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