Subprime lending practices and the healthcare industry

I often hear arguments in discussions, both on the news and in person, that government oversight of certain industries is bad, and that the government should stay out of regulating businesses, because such practices increase burocracy and ultimately our taxes. I always believed that people who support this argument either profit directly from the lack of regulation in ways outlined below, or were brainwashed by other people who do.

I also believe that the damage caused to individuals and the nation’s economy by a lack of government regulation and oversight , and the cost of repairing such damage, outweigh by far the up-front cost of regulating and overseeing a market to avoid the worst.

The recent development in the subprime mortgage industry is a textbook example in support of my point. The blind believe that a free market works in the interest of everybody who particpates in it is a fiction, because there are very few truly free markets. A free market is free of constraints and limits. In reality, markets are constrained by all sorts of things, for example by the availability of resources (such as fossil energy), or because potential participants do not have access (such as access to a home loan for low income families with less then stellar credit ratings). Such constraints create imbalances that favor certain market participants over others, and as certain as the sun will rise tomorrow, there are always people who recognize and successfully profit from such imbalances, at the expense of the rest of us.

Now we hear of the practices of mortgage brokers who coaxed their clients into refinancing deals that ended up costing these poor people much more than what they paid for their original loan. These practices have been going on for years, out there in plain sight, and while there were voices who warned of the potential outcome, there were no serious attempts to curb them. Why not? Because those who profited from such practices are the powerful, the ones who have lobbyists and friends in D.C., the ones who tell you that regulation that is bad for them is also bad for you, the ones who brainwash others.

Now that the profits have been taken, the bubble can burst. A few will have to take blame while the real winners have long been working on new schemes in new imbalanced markets. How hypocritical is it to now claim that the market is ‘fixing itself’, because the bad guys are being taken down. It is too late, the damage is done, the cost to society is real, and it is enormous. And it could have been easily prevented, with a little oversight, and a little bit of funding.

What are the next imbalanced markets with opportunities for bad guys?

Healthcare is one of them. I have not seen Michael Moore’s new work “Sicko”, but it seems that he would agree with me on that assessment. The healthcare market is constrained because neither health nor care are available freely and in unlimited amounts. This market actually works against the interest of both providers (i.e. doctors and nurses) and patients. The winners in this market are the ones who control access and availability, and by doing that they control the cost and their profit margins, virtually without constraints.

Energy is both an example of the past and the future. Enron has only been behind us for a few years, but when I look at what’s going on with big oil, natural gas, and electric utilities, it seems that we have learned nothing.

An area that is relatively untapped in this regard is Global Warming, or specifically, attempts to control it. Plenty of opportunities here, and they even span many industries. I am sure we will see very creative schemes cropping up that will make sure that the history of big, unregulated businesses making lots of money at the expense of small, underinformed, and unsuspecting people like you (and me) will continue.

Update 6/13
I just saw Sicko, and while the movie’s message is much broader, it certainly recognizes, too, that healthcare and for-profit don’t really go together. A very powerful documentary, I must say, but only a first step. The movie by itself will not change anything, I am afraid.