4/9/14 – Banks Pay More, Medicare Pays Less?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 9, 2014 1:30:00 PM

and tagged Commentary, Politics and the Economy

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I’m back in the office today with no overarching story, but a lot of items worth a look.

So much for nuance—banks required to hold more capital

Regulators increased the amount of capital banks have to hold, from 3 percent to about 5 percent of their assets. Why does this matter? Because it makes banks both potentially smaller and safer. By raising the amount of required capital, banks can do less with any amount of it, limiting growth. And with a more solid foundation, banks become less risky.

What’s the downside, you ask? Banks can make less money for shareholders in good times, as returns suffer when leverage goes down—the flip side of reduced risk. Bankers say lending will also suffer, but that seems unlikely given the level of excess reserves out there.

The real reason banks hate the new rule is that it’s simple, transparent, and much harder to game than existing regulations—which is a big part of why regulators enacted it. Are there better ways of doing it? Certainly, and there will be real costs, but this is still an overall win for the country.

Data transparency comes to health care

The headline is that doctors make lots of money off Medicare, but the real story is we now have the data to find out who makes what, and to see if it’s money well spent. Prior to 2012, that information—for a government program, mind you—simply wasn’t available.

After a legal battle, capped by a federal judge’s ruling that the data had to be shared, we can see who’s getting what. “If you can’t measure it, you can’t manage it” rings true here, and now we can start to manage health care costs. Expect to hear much more on the topic, as this kind of analysis will be the first step in controlling health care inflation. Perhaps someday the government will even be able to negotiate medicine costs with the pharmaceutical companies. On second thought, no—that’s crazy talk.

Trillions of dollars in profits abroad where U.S. doesn’t tax

Maybe it’s just me, but when I see the word trillions in a story about how corporations aren’t paying taxes, I expect some government action to rectify the situation. This is a meme that just keeps growing, and is part and parcel of the income inequality/minimum wage gap story. You can see a sociopolitical narrative developing, which will result in a lower-profit, more equal-income world—essentially, a partial reversal of the trends of the past 30 years. We’re not there yet, and may never get there, but you can clearly see the trend developing. For those lucky enough to be “rich,” don’t worry, they’ll get to you eventually.

The end of the world, again

For some reason, perhaps the slight dip in the markets, I’ve received several more “end of the world” e-mails lately. Interestingly, these manifestos have moved from being generally based in exaggerated facts to being almost completely incorrect. This has to be a good sign, that the doomers are now reduced to making things up. Make no mistake, we’re not out of the woods, but we are headed in the right direction.

Back to catching up on e-mail. Have a great day!

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