Friday, August 24, 2012

Home from the hospital, finance, and asymmetrical information

My wife's home from the hospital now, napping while I blog, feeling much better though still pretty wrung out.  And I just finished reading an interesting book about banking.  And Paul Ryan is Mitt Romney's VP pick.  And the Dodgers are pulling off a huge trade.  And all this got me thinking about asymmetry of information theory.  Hang on.

Here's why my wife was in the hospital.  She had a very minor medical complaint a couple of months ago.  Off to our doc, and she (the doc) said she wanted to run some tests, and sent us to a specialist for more tests, and he eventually said she needed surgery.  Not urgently, not immediately, but her condition, not serious now, was likely to get more serious if untreated.  He performed said surgery on Tuesday.  Actually, a robot performed it, under the docs' supervision.

Paul Ryan plans to phase out Medicare, replace it with a voucher system.  Instead of Medicare just paying for treatment, folks would get vouchers they could use.  The idea is that people would price compare, and the magic of free markets would drive the costs of medical care down.

I just finished reading a book about the rise and fall of WaMu, Washington Mutual, the bank that until fairly recently held the mortgage on my house.  WaMu, at one point, bought Long Beach Mortgage, a company that specialized in high risk loans, whose salespeople were especially fond of an instrument called an Option ARM.  That is, an adjustable rate mortgage, in which the customer could make one of several monthly payments, the lowest of which was interest-only.  They literally generated thousands of these loans, and at one point, WaMu's risk assessment folk looked at them, and said that if 5% of Option ARMs failed, the bank could be in very serious difficulty.  In point of fact, around 95% of them went into default. Not 5%, 95% failed.  And that's probably the main reason WaMu no longer exists.

What ties these stories together is that phrase, asymmetry of information.  To start with my doctor; there was never a point in our dealings with him when we had anywhere close to the kind of information he had regarding my wife's medical condition, and no possible way for us to obtain sufficient information to make an entirely informed decision.  He said she needed the surgery, and he explained why, and we trusted him.  I don't regret that at all.  I think we were entirely right to do so.  Our health insurance company had access to better information than we had (they employ doctors who consult with them), and they approved it (routinely, I think), and we trusted them as well.  That's the essence of the patient/doctor relationship.  They know more than we do, and we trust them to make appropriate decisions, to give us sufficient information to make what passes for an informed decision, to trust in their training and in the ethical standards of their profession.  That's how medicine is practiced in our country, and it's hard to see how it could be practiced any other way.  Doctors are very well paid, and we don't resent that either--they've earned it, through years of training and experience.

That's why the Paul Ryan voucher plan won't work, can't work.  It's ideology masquerading as reason.  If I'm planning to buy an I-Pad, or a vacuum cleaner, or a pair of shoes, I can gather enough information pretty quickly to make a reasonably informed decision.  And the stakes are low--it doesn't really matter much if I buy a vacuum cleaner that doesn't work all that well.  I'm out a little money, and that's all.  So market forces do tend to drive the costs of I-Pads down over time, and also drive people who make bad ones out of business.

But that's not true of health care. I wasn't about to call around to ten doctors to ask what they'd charge for the surgery.  I wasn't about to call around and see if someone could do the same surgery cheaper but probably less safely by not using the robot. If I'd had reason to question the doctor's diagnosis and proposed treatment, I might have asked for a second opinion from another doctor, but the same asymmetry of information would have applied to that conversation. And in fact, not having the surgery was not an option we ever seriously considered. I'm not particularly interested in my holistic medical options, or price comparing those options with those offered by the surgeon. This is my wife's health we're talking about.  I didn't want the cheapest doctor, or the cheapest surgical option, I wanted the best, I wanted state-of-the-art. And I wanted science. If my insurance had balked at it, I would have done my best to switch to a different insurance carrier.

The WaMu Option ARMs are similarly a story about information asymmetry.  WaMu's risk assessment people decided to hold a series of meetings with people who had used Option ARMS to finance the purchase of their homes.  They'd have these group sessions, and would ask really basic questions, like 'do you know what an adjustable rate mortgage is, do you know the difference between that and a fixed rate mortgage?'  They learned that folks had no idea.  They didn't have the slightest clue what kind of mortgage they'd signed up for.  All they knew is, a salesman had told them they would be able to buy their own home.  They'd gotten statements with several possible payments listed, and made the lowest one.  Every time.  They didn't, for the most part, know what 'foreclosure' meant, or how interest worked.  They had simply signed a bunch of papers and moved into their homes.

Multiply that situation times several million, and you have a world-wide financial crisis. Which is why it's essential that consumers be protected from unscrupulous lenders. Long Beach Mortgage style lending practices can and should simply be regulated out of existence, precisely because there will never be a symmetry of information between lenders and consumers.  I would add such regulations once existed, but no longer do.  Which is why, for me, deregulation is a dirty word.

In Eugene O'Neill's play, A Long Day's Journey Into Night, Jamie, the protagonist, is furious with his father, because he's dying, in large measure because his father never would pay for a good doctor, but only wanted the cheapest doctors.  That's the situation that existed before health insurance; really in that brief time in the early twentieth century when the medical profession was just starting to actually figure out how to diagnose and treat previously lethal diseases, but before medical schools and the AMA and the whole health care establishment we have today.  And it's entirely a good thing that the whole apparatus, training and self-policing and licensing, that all of it exists.  It works.  People get better from things that used to kill them. We're so so much better off.

That's why I like Obamacare.  I think every American should have access to affordable health insurance. That's why I loathe the Paul Ryan Medicare plan.  That's why I like regulations over financial markets.  I think unregulated finance just invites unscrupulous people to rip folks off.

And as a Giants' fan, I think the Giants' front office should try to block the Dodger trade somehow.  I think there's a mechanism to get it done, and I think they should try.  But I admit they have better information about it than I have. 


  1. Although I agree that there have been many well-documented unethical mortgage practices that have come to light over the past few years, it seems that everyone would like to point the finger at the big bad banks who apparently forced consumers into purchasing houses far beyond their means. (Disclaimer: I work for a bank) I think we have to acknowedge that many borrowers were greedy at worst and foolish at best in believing that an interest-only loan would be a good thing.

    I've read horror stories about people who were completely mislead by their banks, but I believe they are in the minority; I think most people knew what they were signing up for and assumed that either their income would increase to make up for increases in interest rates, or, their home equity would increase because after all, home prices only go up, right? And in many cases they were right. Not everyone with an adjustable rate mortage went into default in the last 5 years.

    And by the way, ARMs are nothing new. They were around as least as far back as the late '70's when I bought my first house. I don't think there is anything inherently wrong with an ARM, providing that the mortgager clearly discloses all the details and the borrower puts some thought into whether they can afford the payment at the highest rate.

    Anyway I understand your point about asymmetry of information, and was it just a Freudian slip to call it ASSymmetry or was that on purpose? :)

  2. Freudian!
    Look, there were ethical banks, of course. I'm focusing here on the unethical ones, because they're the ones that destroyed the economy. That's actually part of what I'm saying; absent regulations, some business people will behave ethically, but not all. And there just isn't any human endeavor, ever, in the history of the world, in which large amounts of money are involved, in which crooks won't try to steal some.
    I'm not suggesting making ARMs illegal. Just regulate their use. Put limits on how much interest can go up, for example. Or require that banks keep any loan made on their books for some length of time (ten years, say). Bear in mind, WaMu made essentially no effort whatsoever to explain anything to consumers.
    Were borrowers greedy? Sure, of course. But in an atmosphere where the entire emphasis was on selling bad loans to poor people, ethical standards completely disappeared. Certainly that was true at Long Beach Mortgage, and by extension, WaMu.

  3. I can't tell you how many times, years before we bought our house (I wanted to buy for a long time) I talked to lenders/brokers/whoevers who tried to assure me that "The paperwork says we can put the interest up that high, but we would never do it." I know that what you sign is the only thing that you can hold them to - but I know a lot of people who don't know that. It doesn't take a great lack of ethics - just a bit of sloppiness - on the part of someone selling a loan - to put a buyer in a lot of trouble. And is it really greed to try and own rather than renting? Why is it that so many people only went under when their interest rates went up - many of them were verbally (but not legally) assured that would never really happen. Just saying.

  4. Thank you for articulating what I have known in my gut about the problems with medicare vouchers. I do not understand why people are so rabidly anti-Obamacare. (Maybe a topic for a future blog post from you?) My children (adults with their own families) finally have access to affordable health insurance. They hit the job market just as the economy tanked, and most of them are not working at jobs that offer group insurance rates. I am grateful that President Obama was finally able to get us on the path of reasonable health insurance policies in this country. Although I do not agree with all of his policies, he has my vote on that issue alone. Thank you again for this post.