At least, that’s what he wants us to believe. The Boston Globe reports that Barney Frank, chairman of the House Financial Services Committee, finally admitted that he was late in seeing the developing mortgage crisis and that he was wrong about the financial viability of Fannie Mae and Freddie Mac.

Now, being late to see something is not a sign of incompetence.  However, when even I saw the crisis coming in 2005 and again in 2007 as did many financial pundits and Congressional leaders, you have to wonder how the head of the Financial Services Committee failed to see it or pay heed to warnings.  In 2003, Frank declared Fannie Mae and Freddie Mac to be fiscally strong and also maintained that even if they were to fail, the federal government wouldn’t bail them out.

Frank maintained those positions for the next five years.  Less than three months before those two government sponsored enterprises were declared insolvent, Frank maintained that they were financially sound.

His excuse?  “I was wearing ideological blinders.”  That’s right, he was concerned that Republicans and the Bush administration were going after Freddie and Fannie on ideological grounds, attempting to curtail the lenders’ mission of providing affordable housing.  In other words, he’d have us (his constituents, at any rate) believe that he mistakenly discounted information because it came from a source he didn’t like.  He wants us to infer that, had he obtained information from some other source, he would have seen the problem developing.

I find that exceedingly difficult to believe.  We’re talking about the head of the Financial Services Committee (in 2003, the ranking member of the minority party).  He would have us believe that he didn’t have his own sources of information who were telling him the same things.  If he admitted that, then he’d have to explain why he voted against a bill that would have instituted tighter control of Freddie and Fannie starting in 2004.  A few years later, when Frank became the head of the committee, he helped push through legislation that did institute such controls, but by then it was too late.  The damage was too extensive.

Even in July 2008, Frank insisted that the companies were “fundamentally sound, not in danger of going under.”  A few months later, he was proven wrong.

I’m not trying to lay the blame for the mortgage crisis or the insolvency of Freddie Mac and Fannie Mae solely on Barney Frank.  There’s plenty of blame to go around, starting with the Clinton administration’s insistence on easing lending rules, the Bush administration’s continuation of those rules, and the Republican-controlled Congress’ failure to institute controls in order to prevent a crisis that they all saw coming.

My issue is with Frank trying to hoodwink his constituents into believing that his “ideological blinders” prevented him from seeing the real problem.  The way I see it, there are only two possibilities:

1. Frank flat didn’t see it coming, in which case he’s incompetent.
2. He saw it coming, but his ideology holds that affordable housing is more important than silly things like economic viability.  In other words, he insisted on maintaining the programs even though he knew what the eventual outcome would be.

If he’s incompetent, he should go.  If he put his ideology ahead of the best interests of his constituents and the rest of the country, he should go.  Either way, the voters in the Fourth Congressional District of Massachusetts should do themselves and the rest of us a favor by kicking the bum out come election day.

In a speech before a joint session of Congress in September, the President said that his “preferred” package for health care finance reform legislation would carry a price tag of around $900 billion. He also said that he will not sign a bill that raises deficits.

On October 29, the Congressional Budget Office released a preliminary analysis of the Affordable Health Care for America Act (H.R. 3962). According to the summary in that analysis, “enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010-2019 period.” Sounds good, right? Let’s take a look.

On page 2, under Estimated Bugetary Impact of H.R. 3962:

According to CBO and JCT’s assessment, enacting H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion over the 2010-2019 period (see Table 1). In the subsequent decade, the collective effect of its provisions would probably be slight reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.
(Emphasis is mine)

That section goes on to summarize the costs and benefits of the bill. Total costs are estimated at $1,055 billion, partially offset “by $167 billion in collections of penalties paid by individuals and employers.” (Penalties for not maintaining the mandated health insurance coverage.) The projected net cost is $894 billion. So how do we get from a net cost of $894 billion to a surplus of $104 billion? “[S]pending changes, which the CBO estimates would save $426 billion, and receipts resulting from the income tax surcharge on high-income individuals and other provisions, which JCT and CBO estimate would increase federal revenues by $572 billion over that period.”

So the President and Congress weren’t entirely truthful when they said that they’re going to pay for this program by cutting waste, fraud, and abuse. They’re going to do what politicians always do: raise taxes and hope for the best. Oh, and they’re going to force employers to either offer health insurance coverage or pay a penalty equal to eight percent of their payroll. What used to be an incentive–an added benefit of employment–has now become a federal mandate. If employers were smart they’d just pay the 8% penalty. That has to be less expensive than the health insurance plans most of them provide.

What the press, the White House, and members of Congress won’t tell you about is what else the CBO report says. For example, under Effect of H.R. 3962 on Discretionary Costs, the report says:

CBO has not completed a comprehensive estimate of the discretionary costs that would be associated with H.R. 3962. Total costs would include those arising from the effects of H.R. 3962 on a variety of federal programs and agencies as well as from a number of new and existing programs subject to future appropriations.

In other words, there are hidden costs. What are they? The report doesn’t say in detail, but it gives a few examples:

• $5 to $10 billion to the Internal Revenue Service for “implementing the eligibility determination, documentation, and verification processes for subsidies.
• $5 to $10 billion to Health and Human Services for “implementing the changes in Medicare, Medicaid, and CHIP as well as certain reforms to the private insurance market.
• “Costs of a number of grant programs and other changes in Divisions C and D of the legislation. CBO has not completed a review of those provisions.”
• And the big one:
  “As noted in the previous section and in Table 1, funding for the proposed Public Health Investment Fund and Prevention and Wellness Trust would also be subject to future appropriation action. The bill would authorize appropriations totaling about $34 billion for those purposes (of which approximately $33 billion would be spent over the next 10 years). The Committee on the Budget has directed CBO to count such spending as direct spending for purposes of budget scorekeeping in the House of Representatives.”

I like that last sentence. The Committee on the Budget told CBO not to count $34 billion of costs associated with this legislation. At least the CBO is up front about it. It’d be interesting to ask the Committee members about that one, wouldn’t it?

Anyway, if you add up those costs, which the CBO identified as “major”, but not all inclusive, you end up with an additional $44 to $54 billion, plus whatever those grant programs would cost. That $104 billion “savings” is now $50 billion. Even less when you include the grant programs and other costs that this preliminary report doesn’t specifically mention.

Oh, and then there are Important Caveats Regarding This Preliminary Analysis. The first item is particularly interesting. The report is based on preliminary legislation rather than the bill as actually introduced. Also, “the analysis does not reflect all of the provisions of the bill.”

In other words, there are MORE hidden costs.

The final section, estimating effects of the legislation beyond the first ten years, says that it will decrease deficits slightly. But it also has a few caveats of its own:

These longer-term projections assume that the provisions of H.R. 3962 are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the SGR mechanism governing Medicare’s payments to physicians has frequently been modified to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress. The bill would put into effect (or leave in effect) a number of procedures that might be difficult to maintain over a long period of time. It would leave in place the 21 percent reduction in the payment rates for physicians currently scheduled for 2010. At the same time, the bill includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). Based on the extrapolation described above, CBO expects that Medicare spending under the bill would increase at an average annual rate of roughly 6 percent during the next two decades-well below the roughly 8 percent annual growth rate of the past two decades, despite a growing number of Medicare beneficiaries as the baby-boom generation retires.

The long-term budgetary impact of H.R. 3962 could be quite different if those provisions generating savings were ultimately changed or not fully implemented. If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.

In other words, any projected savings is wishful thinking.

Honestly, you should read the report. It’s only 27 pages long, and about half of those are tables of numbers. Just reading the report without the numbers should be enough to convince you that this bill, like all the others, is a budget buster.

And, of course, that analysis was based on the bill as introduced on October 29. It was hailed as an “894 billion dollar” package. Today, the press is saying a “1.2 trillion dollar” package. I’m unable today to find any information about the additional $330 billion or how it’ll be offset by revenue so that the legislation remains budget neutral.

Not to be outdone, the Republicans published their own plan for health care finance reform. It has no chance of being passed, which is a good thing. The CBO estimate says that it will cover fewer people and will save $68 billion over 10 years. In other words, it’s just a way for Republicans to say, “See? We have a plan!”

Nobody in Congress has the courage to stand up and say, “Stop!” Where’s the voice of moderation here? Congress will mandate billion dollar multi-year environmental impact studies before doing something trivial, but now wants to push through, without sufficient study, legislation that will have a huge impact on every citizen in the country. Why? Because they can and because they think it will get them votes. For all their pronouncements about it being “good for the country” and “the right thing to do,” that’s all they’re really interested in: re-election. Otherwise they’d be much more concerned about the real costs of what they’re so eager to support.

The President has said publicly that he will not sign (or did he say that he would veto it?) a bill that “adds one penny” to the budget deficit.  It’s probably too much to expect the President to subject any legislation to extensive real world analysis, so I’ll have to be content with the CBO’s final report.  But if, as I suspect, the bill that will be presented for a vote in the House on Saturday turns out to require deficit spending, I will expect the President to keep his word.

A few weeks ago I said that Cash for Clunkers is a wreck.  Now that the program has ended, let’s see the results.

The people responsible for Cash for Clunkers are hailing its success.  I’m still having trouble understanding what the goals of the program were beyond a “feel good” measure designed to make people think they’re getting something for nothing from the Obama administration.  By that metric, the program was certainly a success:  people will remember that Uncle Sam helped them buy a car.  Although they might be a little less enthusiastic when they realize that the $4,500 rebate is taxable.

Transportation Secretary Ray LaHood said that U.S. consumers and workers were “the clear winners” under the program:

Manufacturing plants have added shifts and recalled workers. Moribund showrooms were brought back to life and consumers bought fuel-efficient cars that will save them money and improve the environment.

Let’s take a look at those three “successes”:

“Manufacturing plants have added shifts and recalled workers.”  Surprisingly true.  But with car sales almost certainly going back to below pre-handout levels, I can’t imagine that those workers will be fully employed for very long.  Manufacturers will rebuild their inventories, find that people still aren’t buying cars, and then lay off the workers again.

“Moribund showrooms were brought back to life.”  Well, yeah.  But with no more giveaways, those showrooms are going to be empty of customers yet again.

“…consumers bought fuel-efficient cars that will save them money and improve the environment.”  This one is full of specious reasoning.  According to press reports, the most popular new vehicle purchased under the program was the Toyota Corolla.  So let’s use it for a little thought experiment.  But first, let’s construct our “average” purchaser under the program.

We’ll assume that the “average” person drives 40 miles to work and back each day, plus cruising around here and there.  Give him 300 miles per week.  Also assume that his clunker was paid off and it got 10 miles per gallon.  So he’s burning 30 gallons of gas a week.  At $2.50 a gallon (current price in the Austin area), that’s $75 per week in gas.

A new 2010 Toyota Corolla lists for between $15,350 and $20,000.  I’m going to assume that the cars were bought from dealers’ inventories and that there was a relatively even mix of feature packages, so the average price for a car was $17,500.  With the $4,500 rebate, the price of the car is $13,000.  I’m going to ignore other incentives  and tax, title, and license, figuring that they’d likely cancel each other out.  And since the car will be destroyed, there is no trade in value.  By the time everything’s said and done, the buyer owes the dealer $13,000 for the car.

The new Corolla gets an estimated 35 MPG on the highway and 27 MPG in the city.  Let’s be generous and assume that the guy will average 30 MPG in all of his driving.  So at 300 miles per week, he’s burning 10 gallons of gas a week at a cost of $25.  Quite a savings over the $75 per week he was burning in the other car.  So his monthly outlay for gas is now $100 rather than $300.  Such a deal!

Except we forgot to pay for the car.  If he pays that $13,000 balance in cash, it’ll take him 65 months (almost five and a half years) to make up the difference with his $200 per month savings in gas.  If he gets a loan for that $13,000 (figure 5 years at 5.25%), his monthly payment is $250.  So he’s saving $200 per month but it’s costing him $250.  That new car that was supposed to save him money is costing him $50 per month.  Oh, and don’t forget the $1,000 that rebate is going to cost on next year’s tax return.  That’s another five months of “savings”.

Granted, there’s some savings for maintenance because the new car is under warranty.  But that savings will be easily offset by the increased cost of insurance on the new car.  I’ll call it a wash.

I purposely was very generous with the numbers here in an attempt to make it look like a good deal.  I just couldn’t make it work out.  In general, you will not come out ahead by buying a new car in the hope that it will “pay for itself” by saving on gas.  Unless you drive a lot more than 500 miles per week.

The claim that the new cars will “improve the environment” is wishful thinking.  At best, driving the new car will cause less harm to the environment than will continuing to drive the new car.  And that statement is based only on the differences in fuel efficiency between the two cars.  It does not take into account the environmental costs of manufacturing the new car or disposing of the old car.

There’s no doubt that the Cash for Clunkers program stimulated some economic activity.  Whether that was good is another matter entirely.  They say that $2.8 billion in incentives were passed out.  We’ll round that up to $3 billion to include the cost of administration and other expenses that were incurred but they’re not telling us about.  Reports say that almost 700,000 new cars were purchased.  If we figure an average price of $20,000 (lots of Camrys were purchased under the program), that $3 billion resulted in $14 billion in direct economic activity.  But if we assume that the average loan on those cars was $15,000, then there is $10.5 billion in new consumer debt out there.  Not a good thing, in my opinion.

Certainly there are people who benefited from the program:  car dealers and manufacturers got a boost, as did those workers who got recalled to the manufacturing plants.  Companies making auto loans couldn’t be complaining.  But it’s not all roses.  Car salvage yards are grumbling a bit because their margins have been slashed:  apparently dealers are paying less per car to have them hauled off.  And used car sales have plummeted.  Only 700,000 cars using one-third the gas probably won’t affect gasoline retailers much.  But if it was seven million, I can imagine that convenience stores that depend on gasoline purchases for a large part of their profit would feel the squeeze.

Those who supported Cash for Clunkers can go ahead blindly believing that it was unquestionably a good thing.  I’m skeptical.  As I showed above, the “deal” almost certainly didn’t result in a savings for most buyers.  More importantly, I disagree with the idea that it’s government’s responsibility to prop up a sagging industry.  I also don’t believe that the immediately visible positive effects of this program will in the long term offset the negatives that I’ve outlined.