Kevin Drum

Matt Yglesias comments on an op-ed about the misuse of PSA screening for prostate cancer:

A kind of odd piece of conventional wisdom has hardened that it’s dishonest of Barack Obama or Matt Yglesias or anyone else to suggest that there are some free lunches to be had in the realm of health reform....[But] in the health care domain, in particular, a mix of weak science, bad economic incentives, and poor mathematical understanding leads to a fair amount of over-treatment. And over-treatment for cancer isn’t just an issue of spending money that didn’t need to be spent — treatment for prostate cancer normally has very unpleasant side effects and it’s really cruel to inflict it on men who don’t actually need the treatment. And as far as cancers go, that’s totally typical. Reducing over-screening and over-treatment would probably save money (though it’s always hard to know what the long-term impact will be since everyone eventually gets sick and dies) and will definitely spare patients a lot of pain and suffering.

True enough. The problem is that it's not just doctors and pharmaceutical companies pushing these tests, though that's part of it. It's also patients who demand this stuff, and if you withhold it because "researchers" or "bureaucrats" say it's not cost effective, they go nuts. And they'll be goaded along in their hollering by whichever political party thinks it might gain them a momentary advantage.

I'm not sure what the answer is. Better patient education? I guess I'm not very hopeful about that. Economic incentives? Maybe, but when it comes to cancer that probably won't do the trick either. More rigorous approval procedures for this stuff? Perhaps, though there's an obvious tightrope to walk in order to get this right.

In any case, this is one of those topics that I have a hard time figuring out because my own temperament is so obviously different from most people's. I don't really like seeing doctors, I prefer the lightest treatment possible, and I dislike trying anything that hasn't been around for at least a decade or two. But most people just aren't wired this way. They see their doctor at the first sign of trouble, demand as much attention as they can get, and insist on whatever the latest and greatest treatments are. I just don't get this. But it's the reality, and the cure — pardon the pun — is hard to figure out.

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— Sen. John Ensign (R-Nev.) | Flickr/trevino (Creative Commons).

Democrats have suffered through their share of bad behavior lately, but honestly, none of it compares to the travails of Republican Sen. John Ensign. I mean, the guy had an affair with his top aide's wife, paid out hush money in a way plainly intended to skirt IRS reporting rules, and then worked illegally to get his ex-aide some consulting income doing congressional lobbying. “Senator Ensign has stated clearly, he has not violated any law or Senate ethics rule,” says Ensign's flack, but Ensign can say it as clearly as he wants. The evidence says otherwise.

Today, the New York Times got hold of some emails that suggest pretty clearly that Ensign, who was "a bit rattled" according to one of the messages, intervened with a guy named Bob Andrews, who was trying to get help with some energy projects in Nevada:

According to the documents, Mr. Ensign forwarded the note about the company’s business plans to Mr. Hampton with a message of his own saying: “I think you have played golf with him. This is who I met with.”

That led to a series of meetings between Mr. Hampton and Mr. Andrews about consulting work. “It was my understanding he was in the lobbying business,” Mr. Andrews said of Mr. Hampton. “Being able to lobby our Congressional and senatorial lawmakers was certainly something we were exploring.”

A typical excerpt from one of Hampton's emails to Ensign is below. How this guy manages to stay in office mystifies me. I guess he must have taken lessons from David Vitter and Mark Sanford.

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Guess what? Healthcare reform is getting more popular. Just a little more popular, mind you, but every little bit counts when it comes to wavering congress critters.

What's really important here, though, isn't the magnitude of the change, but just the fact that the tide is shifting. This might have something to do with the recent summit and some of Obama's more aggressive speechmaking recently, but my guess is that it mostly has to do with the fact that there's an actual bill on the table now; Democrats have something concrete to sell; Republican obstructionism has been a little too screechy for a lot of independents lately; and, most important, it looks like we're actually in the home stretch.

That, I think, concentrates the mind wonderfully. The long, dreary dog days of the legislative process are over, and now we're in the final few seconds of the game. It's exciting! And it makes some of the concrete measures in the bill just a little more.....well, concrete. It's still gonna be a close one, though.

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Felix Salmon, who has been a one-man truth squad lately when it comes to credit default swaps, lauds Tuesday's CDS speech by CFTC head Gary Gensler as "by far the best thing written on the subject to date. He's absolutely right about pretty much everything." Among other things, Gensler favors exchange trading for CDS, stronger regulation of all OTC derivatives so that CDS pathologies don't just move elsewhere, and much more restrictive rules on allowing banks to use CDS to meet regulatory capital requirements. All good stuff.

But CDS are basically insurance policies on bonds or other financial instruments, and Gensler thinks that can be a problem too:

At the height of the crisis in the fall of 2008, stock prices, particularly of financial companies, were in a free fall. Some observers believe that CDS figured into that decline. They contend that, as buyers of credit default swaps had an incentive to see a company fail, they may have engaged in market activity to help undermine an underlying company’s prospects. This analysis has led some observers to suggest that credit default swap trading should be restricted or even prohibited when the protection buyer does not have an underlying interest.

Though credit default swaps have existed for only a relatively short period of time, the debate they evoke has parallels to debates as far back as 18th Century England over insurance and the role of speculators. English insurance underwriters in the 1700s often sold insurance on ships to individuals who did not own the vessels or their cargo. The practice was said to create an incentive to buy protection and then seek to destroy the insured property. It should come as no surprise that seaworthy ships began sinking. In 1746, the English Parliament enacted the Statute of George II, which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed.” The statute established that protection for shipping risks not supported by an interest in the underlying vessel would be “null and void to all intents and purposes.”

For a time, however, it remained legal to buy insurance on another person’s life in England. It took another 28 years and a new king, King George III, before Parliament banned insuring a life without an insurable interest.

Interesting! And it's a pretty good analogy that makes the underlying conflict understandable. However, although Gensler acknowledges the problem, he misses the aspect of this that's come to bother me the most: the effect this has on market stability.

Here's the problem: if you own a corporate bond of some kind, but don't want to run even the small risk of default that it carries, you can buy a CDS on that bond. This is basically fine. As Gensler points out, it does have the downside of making bond buyers less careful about due diligence, but that's probably manageable. (And Gensler has some ideas about how to manage it.) But what happens when lots of other people also buy a CDS on that bond? Obviously, you have the problem Gensler mentions, namely that under some circumstances these CDS owners might have a vested interest in helping the bond issuer fail — the same way you might want your house to catch on fire if it's insured for more than it's worth. But you also have another problem: if the bond issuer does default, and there are a hundred speculators who own CDS protection on one of its bond, you've gone from, say, a $10 million event to a $1 billion event. Basically, when things go bad — and eventually they always do — widespread CDS protection can cause things to spiral far more out of control than they would otherwise.

And what's the upside of allowing this? The argument I hear most often is that broad market trading of CDS provides an efficient price discovery mechanism for the underlying securities. Moody's may rate that bond AA, but the CDS market will tell you what traders really think.

I guess I have two questions about that. First, does it really work? Are CDS marks really reliable indicators of creditworthiness? That's debatable. Second, even if they are, is this a big enough benefit to make the instability risk worth it?

I'm no CDS expert, but I wish Gensler had at least addressed this problem. Maybe there's a simple solution. Or maybe the danger is a lot less than I think it is. It's not clear, for example, that CDS instability was a big problem in the 2008 crash. AIG was a big problem, but that's because they sold too much CDS without proper risk management or enough capital to back it up, not because speculators were loading up on specific issues.

So: Does widespread use of CDS make the financial system inherently less stable? Or is this just another of the endless slanders that CDS has to endure? Conversation on this topic welcome. 

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