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Home Publications Blogs Beat the Press Organization That Could Not See $8 Trillion Housing Bubble Warns About Aging Population

Organization That Could Not See $8 Trillion Housing Bubble Warns About Aging Population

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Thursday, 07 October 2010 22:20

Standard & Poor's, which is probably best known for giving investment grade rating to mortgage backed securities backed by junk mortgages at the peak of the bubble, warned that demographic changes would pose severe budget burdens and urged the United States to begin to begin cutting back programs for the elderly now. In an article presenting Standard & Poor's view on this issue, it would have been worth reminding readers of the company's track record. It probably would also have been appropriate to remind readers that it was paid large amounts of money for the investment grade ratings it gave to these mortgage backed securities.

This background would allow readers to better assess the nature of Standard and Poor's advice to the American people. Economists who are not paid by Wall Street banks have used the exact same data to point out that the projected budget problems are due to the incredible inefficiency of the U.S. health care system. If the United States paid the same per person costs as any other wealthy country the long-term projections would show huge budget surpluses, not deficits.

Comments (11)Add Comment
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written by zinc, October 07, 2010 11:53
Dean, you are right on. As usual, what you say speaks volumes.

S&P really has no credibility. Thanks for your blog.

Actually, IMO the credit rating agencies should be prosecuted for defrauding the fixed income investing public ( generally the aged). Of course these people where vulnerable to reaching for yield, relying on the S&P ratings on CDO, CDS, etc.

The data suggests that the ratings were based on the willingness of the investment banks to pay, not the actual risk of default of the underlying security.

Now we have the continuing agression of the wall street investment banks and hedge funds to divert the steady stream of Social Security withholdings into the "flash crash" prone markets, sponsored by continuing bailouts by the privately owned Federal Reserve. Who owns the Fed ? The investment banks.

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written by zinc, October 08, 2010 1:14
A brilliant article on your web site stated the following: "The main factor driving this story is the desire of foreigners to hold dollar assets."

My impression is that the "foreigners holding dollar assets" are much more likely to be foreign governments, which definately changes the dynamic of what you are saying.

So much garbage has been put out by the idea of "free markets" and the idea that risk averse "investors" are making investments for this and that. The truth, it seems to me, is that the investors are organized as the market makers, creating securities to sell, and the buyers, buying securities to influence the underlying market. China is an obvious buyer of securities.

Your writing is great but I do not think you should leave the impression that there is a lot of Japanese house wifes buying American debt. There isn't. The buying of the debt is by Foreign governments for the purpose of influencing the market, with intent to relocate employment from the US to their country. Since the people of the US are still cast in the role of village idiot, we continue to promote the concept of "free" market access. Duh!!
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written by Aditya Savara, October 08, 2010 5:18
Dean, I agree that our healthcare system is not well managed, but I think that you need to talk more about things like doctor salaries. You have to be realistic about the other economic opportunities out there. Seems there was even a post about that at TAP a while back.

It is easy to say that there are plenty of qualified people who could fill a major bank CEO's shoes -- since there not many major bank CEO's. But there are lots of doctors -- so it is not possible to just lower their pay without seeing potential doctors going to other jobs instead. Or, maybe it is possible: but let's see some numbers. Has CEPR studied this?


http://economix.blogs.nytimes.com/2008/11/14/do-doctors-salaries-drive-up-health-care-costs/

http://www.prospect.org/csnc/blogs/ezraklein_archive?month=02&year=2007&base_name=why_does_american_health_care
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written by Aditya Savara, October 08, 2010 5:20
To clarify my last comment: you cannot compare our healthcare costs to other countries without considering this, since other countries have lower wages to begin with. GDP is not a sufficient comparison since sector salaries do not track by GDP globally, at least not that I am aware of.
Opportunity costs of overpaid doctors, etc.
written by Jorge, October 08, 2010 7:16

I recently read an useful story once about a young doctor who explained that he went into medicine because he wasn't smart enough to be an engineer. But he was, I recall, from a country where they have the good sense not to overpay their doctors. These lower salaries would have many advantages for us. They would not draw into medicine people who would really be better as engineers or technicians. They would not prompt medical schools to raise tuition unnecessarily. They would leave more opportunity in medicine for capable and caring, but disadvantaged people, of which we have many. And of course they would save us money.

This should be a particularly important issue now, when governments at so many levels are in trouble, especially because of rising health costs, especially due to high-priced labor and technology.
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written by izzatzo, October 08, 2010 7:38
From the NYT article, this quote:
The United States currently spends about 10.8 percent of its gross domestic product on programs for the elderly, well below the level typical for an advanced economy and almost exactly what the rating agency found typical for emerging economies.


Having attained the status of an emerging economy, albeit in reverse, the USA will soon be capable of reducing its elderly cost care even further as its average lifespan approaches that of the most primitive third world countries. However, this should not affect the high investment grade ratings assigned to medical device companies on the march downward to a more efficient serfdom.
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written by PeonInChief, October 08, 2010 9:13
And whenever the media, the rating agencies, whatever, produce these silly stories, they neglect to note that more older (and retired) workers means more jobs for younger workers which, as I recall, can lead to higher wages for those workers. I guess this is the last opportunity for the Wall Street folk to grab what little American workers have left--their Social Security and Medicare.
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written by diesel, October 08, 2010 9:25
But is it the most efficient "march downward to a more efficient serfdom"? This is the question rational-market economists must continually bear in mind if they are to fulfill their role in a free society.
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written by liberal, October 08, 2010 3:21
Aditya Savara wrote,
It is easy to say that there are plenty of qualified people who could fill a major bank CEO's shoes -- since there not many major bank CEO's. But there are lots of doctors -- so it is not possible to just lower their pay without seeing potential doctors going to other jobs instead. Or, maybe it is possible: but let's see some numbers. Has CEPR studied this?


Given the outsized role of economic rents in the medical sector, including physician incomes, it seems doubtful that doctors would be able to find opportunities that are as "profitable".
How is it that..
written by Jeffrey Edelman, October 08, 2010 4:37
we never, ever, ever hear about an article from a rating co. or the like warning about the ridiculous offense budget we sustain?



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written by Aditya Savara, October 12, 2010 7:33
Liberal wrote:

Given the outsized role of economic rents in the medical sector, including physician incomes, it seems doubtful that doctors would be able to find opportunities that are as "profitable".


Maybe that's true -- but let's see some numbers. If Dean believes in this cause so much, CEPR should study it. I believe this issue deserves attention, which is why I want the study done.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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