MyGovCost News & Blog

Bloomberg‘s Lisa Abramowicz is asking the question, “What happens when the Federal Reserve loses its stranglehold over debt markets?” Which after having order break down in the U.S. stock market yesterday, after having held for the previous four years, is a pretty good question to ask.

More specifically, she’s looking at the nation’s corporate debt markets, where she identifies a growing cause for concern:

The selloff in corporate bonds is deepening and investors are seeking safety in the longest-dated government debt, which does best when the economy does worst. Defaults are rising as oil tumbles and investors are looking for the best ways to hedge against credit losses.

All this comes as the Fed does, well, nothing much. Instead, it’s China that’s taken the lead with new rounds of financial stimulus in the face of slowing growth. But some days it’s a free for all, with even Kazakhstan wielding its influence….

Investors have sent yield spreads on U.S. junk bonds up 0.64 percentage point this year to 5.68 points, according to Bank of America Merrill Lynch index data. Those on speculative-grade energy securities have surged to 9.64 percentage points, close to the most since 2009.

Instead, investors are piling into Treasuries that mature in more than 15 years, with that debt returning 2.1 percent so far this month and yields falling toward the lowest since April. BlackRock Inc.’s $5.5 billion exchange-traded fund that focuses on longer-term U.S. government bonds received $447.7 million of deposits in the past week, the most among its fixed-income peers, data compiled by Bloomberg show.

Recall that the yields, or interest rates, that investors receive when they loan money to corporations or governments through the bonds they issue rise when the likelihood of a default increases, which is what we’re seeing in the corporate bond market, particularly with the bonds issued by energy-producing firms.

At the same time, when investors come to expect that the overall economy is worsening, instead of seeking out places in the private sector to invest their money, they will simply park it in bonds that they believe have near-zero risk of default. In this case, U.S. government-issued debt securities, where the longer-terms of the bonds they’re buying suggests that they don’t expect a better opportunity for investing for another 15 years or longer.

Mike Shedlock looked at the impact of the Fed’s apparent loss of control over the U.S. Treasury’s yield curve, where he notes that rising short-term rates and falling long term rates are a pattern that is consistent with a growing risk for recession.

Rate Hike Odds Shift to December

The Fed has been trying for months to convince the markets that rate hikes are coming in September. On Thursday the market took another look and came around to my point of view “I’ll believe it when I see it”….

Synopsis Since January 2014

The short end of the curve (2- and 3-Year) acts as if hikes are coming.
The middle of the curve (5-year) seems ambivalent.
The long end of the curve (10- and 30-year) acts as if rate hikes are not coming or alternatively a recession approaches.

For the U.S. government, that’s a mixed outcome because while it reduces the amount of money that it costs to borrow in the long term, rising short term rates will cost the government more. With nearly 72 percent of its publicly held debt maturing in less than five years, it’s likely that the total amount of interest it pays on the debt securities it issues will increase.

That dynamic means that less money will be available for U.S. politicians and bureaucrats to spend as they like. And because they would really like to spend more, that means that they’ll be looking to either hike more taxes or borrow more so they can. Especially if they can exploit the onset of a new recession they helped ensure through their past policies to justify new spending.

As we have noted, Emily Bazar of the California Health Care Foundation’s Center for Health Reporting has been working three shifts documenting the abuses of Covered California, a wholly owned subsidiary of Obamacare. These abuses include a dysfunctional computer system that cost nearly $500 million, cancellation of health insurance without notice when people report changes in income, difficulties leaving Covered California when people go on Medicare, and so forth. For Bazar, this added up to “widespread consumer misery” that doesn’t stop when people die. Covered California places some enrollees in Medi-Cal, which runs an “Estate Recovery Program” that seeks repayment of medical cost, even from family members after a patient dies. Under Obamacare, Bazar writes, this recovery program “just got bigger and its reach broader.”

But the reach does not stop there.

As Bazar now warns, “a hefty Obamacare excise tax – known informally as the ‘Cadillac Tax’ will target high-cost health insurance plans offered by employers. Don’t be fooled by the 2018 start date. Some employers are taking steps now to avoid the tax.” It sets the threshold at $10,200 for individual coverage and $27,500 for families, and it counts both your share of the premium and your employer’s share. It also targets health reimbursement accounts (HRAs) and health savings accounts (HSAs). The Obamacare excise tax will apply to employers of all sizes and includes no adjustment for geography. Therefore, plans in regions with high health costs, such as the Bay Area, are more likely to be hit with the tax. As one Obamacare expert told Bazar, “if someone is part of a workplace that has sicker employees, premiums are likely to be higher and the plan is more likely to be taxed.” And as Bazar explains, “opposition to the tax crosses party lines, but getting Congress to act on anything related to Obamacare is a tall order.”

So Obamacare misery is going to get worse, but if you don’t like the plan, you’ll have to keep it. Under Obamacare, you don’t get what you want. You get only what the government wants you to have. That’s the “transformation” the president was talking about.

One of the biggest news items in the past week was the Chinese government’s surprise devaluation of the nation’s currency, the yuan. This week, Bloomberg‘s Mark Whitehouse reports on the fallout, and the potential disruption it will have on the ability of the businesses and governments of other nations to pay their debts:

The yuan’s depreciation — by almost 3 percent against the U.S. dollar — triggered instability and exchange-rate declines across emerging markets. As of Friday evening in Asia, the Malaysian ringgit was down 3.8 percent from a week earlier. The Turkish lira, Mexican peso and Russian ruble also fell sharply….

The depreciations might help the countries’ exports remain competitive. But they also expose a vulnerability: Over the past several years, borrowers in emerging markets have built up more than $2 trillion in dollar-denominated debt. When the U.S. currency was cheap and the Federal Reserve was holding interest rates close to zero, that debt seemed like a great deal. Now, with the dollar getting stronger and the Fed set to start raising rates, it’s becoming more of a burden….

If investors decide the debts aren’t sustainable, they could pull out en masse, starting a dangerous spiral of declining exchange rates and financial stress that could render otherwise viable companies and governments insolvent.

But surely if that were about to happen, wouldn’t there be lots of early warning signals? In December 2012, Marc Labonte of the Federation of American Scientists summarized what happened to the nations who borrowed more money than they could ever afford to pay back after the investors who loaned them the money decided that their debts were no longer sustainable in recent years, and found that when that happened, things deteriorated far more quickly than the governments and their central banks could move:

The experience of these countries demonstrates that a loss of confidence quickly leads to a vicious cycle—investors demand higher yields on government debt to compensate against the perceived higher risk of default, but these higher yields cause the deficit to spike suddenly, thereby undermining a government’s ability to continue to service its debt. This dynamic causes a country to swing from stability to crisis relatively quickly. Restoring stability has been difficult, and since 2008 GDP has shrunk for three or more years for most of the countries. Falling GDP exacerbates the budget deficit, and vice versa. [Emphasis ours.]

Labonte goes on to identify the similarities that these debt-distressed countries have with the United States.

These countries that have required assistance to finance their deficits have some commonalities with the United States—projections of unsustainably large budget deficits under current policy, a large net foreign debt (with the exception of Italy), asset price bubbles that led to large losses in the financial sector, and large subsequent government outlays to cope with financial sector turmoil.

With those kinds of similarities, and also all of its debt denominated in U.S. dollars, it shouldn’t be much of a surprise that the U.S. government has already implemented the practices of financial repression to help ensure that its supply of “investors” in its debt doesn’t run dry.

Reducing the government’s spending to reduce its need to have such forced investment in the debt securities it issues, doesn’t appear to be an option that U.S. politicians and bureaucrats have seriously considered. Instead, it’s an indication that they’ve become more desperate in seeking to buy time that they hope won’t run out before their own great deal turns bad.

In recent years California has raised per-pupil education spending about 50 percent, to $13,000 a year. As Dan Walters of the Sacramento Bee shows, despite this increase, “national academic testing has found that California’s students rank near the bottom in achievement.” The response of the state’s education establishment is to attack the tests. As Walters notes, Governor Jerry Brown and other politicians “have strangled the test-based accountability system that California adopted in the late 1990s.” Also, the California Teachers Association “despised a system that not only graded schools on how well they were improving academic achievement, but provided the basis for ‘parent trigger’ actions to seize control of ill-performing schools. Nor did the CTA like the potential for using the data to judge teachers’ competence.”

But the CTA is getting what it wants. Brown is pushing a Local Control Funding Formula (LCFF) that gives extra money to districts with high numbers of English learners. As Walters notes, State Superintendent Tom Torlakson, “a close ally of the CTA, told school districts they could spend LCFF money on teacher salary increases, countermanding a directive from his own staff.”

In similar style, low academic performance is no barrier to pay increases for education bureaucrats, such as Steven Martinez of the Twin Rivers District in the Sacramento Area. His recent 8.3 percent increase boosted his pay to $260,000. The deputy superintendent and the two “associate superintendents” also get more than $200,000, plus generous benefits. But salaries are not the only issue. Diana Lambert of the Sacramento Bee writes that the Twin Rivers district and its allies have now paid off former deputy superintendent Siegrid “Ziggy” Robeson to the tune of $300,000. She had supervised the Twin Rivers police department, under fire for “police brutality, false arrest and towing an excessive number of cars for profit.” Twin Rivers has been shoveling out money in a series of legal settlements, including $400,000 to former facilities director Jeff Doyle and $150,000 to former director of visual arts Sherilene Chycoski.

Deputy superintendent Bill Maguire, salary $239,000, explains that mistakes were made and that the district needs to “hold firm in the interest of the children.” For taxpayers the lesson is simple. When tabulating the cost of government, always account for compound waste in the government monopoly education system.

Jeff Desjardins of Visual Capitalist has created a unique visualization of how the world’s nearly $60 trillion of money borrowed by various governments, at all levels, is distributed among the world’s nations:

Desjardins describes some of the bigger numbers and where they came from:

Today’s visualization breaks down $59.7 trillion of world debt by country, as well as highlighting each country’s debt-to-GDP ratio using colour. The data comes from the IMF and only covers public government debt. It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based on USD.

The numbers that stand out the most, especially when comparing to the previous world economy graphic:

• The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
• Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
  China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
• 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.

Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.

In February 2015, the McKinsey Global Institute reported that in the seven years from the end of the fourth quarter of 2007 to the end of the second quarter of 2014, the amount of debt accumulated by the world’s various governments increased by $25 trillion. Or rather, of all the public debt owed in the world today, around 42 percent of it has been borrowed in just the last seven years.

What could possibly go wrong?

China is, by far, the largest foreign lender to the U.S. federal government. But now, with its primarily export-driven economy under stress, it has been shedding its holdings of debt securities issued by the U.S. Treasury. Bloomberg reports on the surprisingly small impact of China’s significant change in its international lending policies:

To get a sense of how robust demand is for U.S. Treasuries, consider that China has reduced its holdings by about $180 billion and the market barely reacted.

Benchmark 10-year yields fell 0.6 percentage point even though the largest foreign holder of U.S. debt pared its stake between March 2014 and May of this year, based on the most recent data available from the Treasury Department. That’s not the doomsday scenario portrayed by those who said the size of the holdings — which peaked at $1.65 trillion in 2014 — would leave the U.S. vulnerable to China’s whims.

The financial danger to America would have been, in the absence of China continuing its previous high demand for U.S. government-issued debt securities, that the interest rate yields on the money being borrowed by the U.S. government would go up, increasing the U.S. government’s cost to borrow money. But, as Bloomberg notes, other things have happened that have reduced the risk of that outcome:

Instead, other sources of demand are filling the void. Regulations designed to prevent another financial crisis have caused banks and similar firms to stockpile highly rated assets. Also, mutual funds have been scooping up government debt, flush with cash from savers who are wary of stocks and want an alternative to bank deposits that pay almost nothing. It all adds up to a market in fine fettle as the Federal Reserve moves closer to raising interest rates as soon as next month.

The particular regulations that have motivated U.S. banks and financial firms to go out on a U.S. government bond buying spree are those that apply to their liquidity coverage ratios, which went into effect in September 2014. A Federal Reserve press release explains the main purpose of the regulations:

The rule will for the first time create a standardized minimum liquidity requirement for large and internationally active banking organizations. Each institution will be required to hold high quality, liquid assets (HQLA) such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-day stress period. The ratio of the firm’s liquid assets to its projected net cash outflow is its “liquidity coverage ratio,” or LCR.

While mandating that U.S. banking and other financial institutions, including mutual funds, maintain a specified minimum portfolio of such “high quality, liquid assets” for the first time, even for the stated purpose of improving the liquidity of those businesses and funds, the U.S. government is, in effect, engaging in a practice called “financial repression.” The Financial Times Lexicon describes what that practice entails:

Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers. Financial repression is also used to describe measures to facilitate a domestic market for government debt and the imposition of capital controls. The combined effect of all these measures means funds are channeled to the government that would otherwise flow elsewhere. Financial repression in China is said to be the cause of its huge accumulation of foreign currency reserves. Similarly western governments were being accused of financial repression following the 2008/2009 financial crisis as they embarked on measures including quantitative easing, capping interest rates and creating more domestic demand for their own bonds.

In forcing U.S. banks and other financial institutions to lend it money through these liquidity regulations, the U.S. government is able to keep its borrowing costs lower than would be the case otherwise, which in this case, allowed it to easily weather China’s dumping of U.S. debt securities without the risk of having the cost of its debt rise and reduce its ability to spend money on other things. And where the U.S. government is concerned, this means things that disproportionately benefit the interests of politicians and bureaucrats over the things that might genuinely benefit the interests of regular Americans.

The price for all that fiscal gamesmanship then is being paid by U.S. individuals, households and businesses, who in addition to being prevented from being able to earn higher rates of interest on their savings and other investments, are being denied the freedom to choose how to best invest their own money.

In being compelled to finance U.S. politicians and bureaucrats insatiable appetite for spending, regular Americans are now finding themselves on the outside looking in at the political favoritism of Washington D.C.’s power elite, who put cronyism ahead of fairness in the U.S. economy. Is it really any wonder, then, that all the promised growth for the U.S. economy somehow never seems to arrive?

Lingering debt of $1 billion and beyond tends to be associated with federal, state or municipal governments. Taxpayers should not be surprised, however, when a school district incurs a debt of more than $1 billion. In 2008, voters in the Poway Unified School District (PUSD) in San Diego County approved $179 million in bonds for capital improvements. This came at a time when the housing slump hurt property tax revenues, so the district, which serves some 33,000 students, turned to CABs, capital appreciation bonds. The district pays nothing for 20 years as interest compounds, but the bonds must be repaid in the 20 years thereafter. As Ed Ring of the California Policy Center notes, interest has now jacked up the debt to $1.27 billion through 2051.

“I think it’s a classic example of the fiscal irresponsibility and failed leadership of our board,” local parent John Riley, told reporters. “It’s a bond that kicks the can down the road and forces future generations to pay for today’s needs.” Poway city councilwoman Merrill Boyack protested, “We were all kept in the dark while they signed bonds mortgaging our future, our children’s future, and our grandchildren’s future.” Angry locals even threw up a website titled “Thanks a Billion.” In similar style, the Escondido Union High School District used CABs to finance $81 million in bonds and will repay $519 million, more than half a billion dollars and a full 6.4 times the principle. As Mr. Ring notes, voters may hold board members accountable but “the burden on taxpayers cannot be undone.”

The massive debt, meanwhile, did not prompt the PUSD to trim the bureaucratic fat. In fact, last year the district rewarded superintendent John Collins with a raise of $63,000, bringing his base pay to $297,735 and his total compensation to $386,000. Superintendents do not have to face the voters but they always get the big bucks, whatever their record of performance. The same is true of the entire government K-12 system, where the money keeps coming despite mediocrity achievement and widespread financial irresponsibility.

The story we’re about to share is completely true. It was just published by Bloomberg and describes how the Obama administration is working to relieve the crushing burden of student loan debt by making taxpayers pick up the tab for the wasted education of a 29-year old Chicago woman who graduated with a doctorate degree.

Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013. This year, she says she hopes to earn $35,000 working part-time jobs as a therapist and yoga teacher—not enough to manage a loan payment of about $2,000 a month. But Strong isn’t paying anything close to that. She’s one of at least 3.8 million Americans who’ve qualified for federal programs that tie payments to income and eventually forgive debt for some struggling borrowers, leaving taxpayers to pick up the tab.

Clearly there’s a lot that has gone wrong here. For example, Laura Strong could have pursued a degree program that would have led her to a genuinely productive career, one that if people valued her line of study enough to justify her academic program’s enormous tuition bills, would have led to a well-paying job in her field of study. But that was something that was not to be found waiting for her at the end of her studies, and as a result, she has instead found herself with a fool’s gold-plated trophy diploma, which she might as well have been awarded for participation rather than meaningful academic achievement.

But with $245,000 of student loan debt to show for her poor choices, we have to recognize that the bad decisions that led to her personal taxpayer-funded bailout weren’t made in a vacuum. She got the federal government to loan her the money to rack up that tuition bill. And in fact, she may have been exploited by the government-academic industrial complex that was counting on her being bailed out even as they jacked up her tuition bills year after year.

Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of borrowers taking out the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.

Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt. In a seminar at Georgetown Law, Charles Pruett, assistant dean for financial aid, was captured on video telling alumni they could “ignore” debt balances if they spent 10 years in government or nonprofit jobs, which would qualify them for early loan forgiveness. (The video was first reported in 2013 by the New America Foundation, a Washington think tank.) Pruett says Georgetown promotes the programs to encourage graduates to take public-service jobs. “It’s an earned benefit, not a giveaway,” he says.

Speaking of that video, here it is:

It seems like an awful lot of nonsense to go through to justify being able to work in a “socially valuable but low-paying line of work,” which is really just a polite way of saying a “job that really doesn’t require all that much education.” Kind of like a minimum wage-paying cashier’s job at a fast food restaurant and many of the kinds of jobs that can be easily taken over by today’s automation technology.

And all to benefit the government-academic industrial complex, at the expense of those they exploit.

There is a better way to handle that situation, one that puts the cost of bad decisions directly on those who contribute to both making and enabling them. Allow all student loans, whether issued by private lenders or the federal government, to be fully discharged in bankruptcy.

Here, people like Laura Strong who have made poor choices in pursuing their academic path would bear the direct penalty of going through bankruptcy proceedings. While that would limit their ability to take out other kinds of loans, it would actually have the benefit of lasting for fewer years on their record than the government’s preferred “income-based repayment” alternative, which is really just the same as an income tax — one that’s additionally imposed on people who have proven to only be capable of earning low incomes.

At the same time, the federal government would have a strong incentive to be a lot less wasteful in how it doles out federal direct student loan dollars, as it would no longer be able to profit when many of the students whose educations they fund turn out to not be capable of paying them back because people don’t value them very much or because the economy won’t support them.

And with a federal government that can no longer subsidize the growth of tuition at U.S. universities to the extent they have, that tuition growth in the future would be much more restrained, which would actually help make pursuing college and advanced degrees more affordable for those who can genuinely benefit from gaining that level of education.

It seems odd to suggest that bankruptcy is a better solution than alternatives that avoid that outcome, but where student loan debt is concerned, the benefits would far outweigh the costs for everyone but the government-academic industrial complex.

And as long as U.S. taxpayers are going to be made to bear the cost, they might as well get something positive to show for it by sticking it to the people who are gaming the system for their own benefit.

The clock ticking toward Puerto Rico’s default on its debt has finally struck. CNN reports that the U.S. territory just went into default for the first time in its history:

The commonwealth paid a mere $628,000 toward a $58 million debt bill due Monday to creditors of its Public Finance Corporation. This will hurt the island’s residents, not Wall Street. The debt is mostly owned by ordinary Puerto Ricans through credit unions.

“This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico,” Puerto Rico’s Government Development Bank president Melba Acosta Febo said in a statement.

The default is a historic moment in Puerto Rico’s economic “death spiral,” a term the island’s governor, Alejandro Garcia Padilla, has used. The island is struggling with about $70 billion in total outstanding debt, and its economy is in recession….

On Monday, Puerto Rico had to make a monthly debt payment of $483 million. Puerto Rico paid all its debt due except the $58 million due to creditors of its Public Finance Corporation. The government is strategically choosing not to pay the PFC debt because the entities that own the debt, credit unions and ordinary Puerto Ricans, have little legal power to fight back in court.

What is happening now in Puerto Rico, as it stiffs the lenders to whom it owes money, is particularly instructive, because it provides insights into how U.S. officials in other jurisdictions would prioritize who gets paid when a debt payment is due and who doesn’t.

In this case, Puerto Rico’s government has chosen to default on some 20 “moral obligation” bonds, which provide the least amount of legal recourse for those who lent the troubled territory money. In this case, that means stiffing the ordinary citizens of the U.S. territory whose financial institutions invested money in the bonds issued by the Puerto Rico’s government. The New York Times describes where the money went and how it was able to rack up so much more debt than it should ever have been allowed to take on:

While Puerto Rico made some other bond payments that were due on Monday, attention in the financial markets was focused on the decision to skip the $58 million in payments due on about 20 so-called moral obligation bonds. Those bonds were issued by a subsidiary of the Government Development Bank for a variety of projects — including school construction and the creation of landfills.

The government bank initially financed the projects, then refinanced them through its subsidiary, the Public Finance Corporation. By tapping the municipal bond market in that way, the bank removed the liabilities from its own balance sheet.

Although this particular type of bond does not carry with it a legal requirement for repayment in the absence of a budget appropriation, market experts said Puerto Rico’s decision not to pay amounted to a default and left them perplexed about the strategy of paying some bonds while letting others lapse.

By taking the actions it did to transfer its liabilities off of its balance sheet, Puerto Rico’s Government Development Bank arguably was committing an act of fraud by making it appear that both it and Puerto Rico’s government were more solvent than they really were. In doing so, they enticed the financial institutions in which ordinary Puerto Ricans entrust their savings, into buying the bonds that they have now defaulted upon.

And in defaulting, they’ve effectively seized the savings of ordinary Puerto Ricans. Not only won’t they receive the interest payments they were due, but they very likely won’t recover their principal.

Unless something changes, that’s the American playbook for government debt defaults.

What if the U.S. federal government were to build a brand-new business from scratch? Would it, with the full backing of the resources of the U.S. government, be an unparalleled success? Or would it — because none of the people who work for the government are really smart enough, capable enough, or competent enough to run anything well — be doomed to fail?

Thanks to the Affordable Care Act, which is most popularly known as “ObamaCare”, we now have the answers to these questions! The Associated Press reports on how well the U.S. government’s experiment to create 23 brand-new non-profit health-insurance businesses called “Consumer Operated and Oriented Plans“, or “CO-OPS”, is going:

WASHINGTON – Nonprofit co-ops, the health care law’s public-spirited alternative to mega-insurers, are awash in red ink and many have fallen short of sign-up goals, a government audit has found.

Under President Barack Obama’s overhaul, taxpayers provided $2.4 billion in loans to get the co-ops going, but only one out of 23 — the one in Maine — made money last year, said the report out Thursday. Another one, the Iowa/Nebraska co-op, was shut down by regulators over financial concerns.

The audit by the Health and Human Services inspector general’s office also found that 13 of the 23 lagged far behind their 2014 enrollment projections.

The probe raised concerns about whether federal loans will be repaid, and recommended closer supervision by the administration as well as clear standards for recalling loans if a co-op is no longer viable. Just last week, the Louisiana Health Cooperative announced it would cease offering coverage next year, saying it’s “not growing enough to maintain a healthy future.” About 16,000 people are covered by that co-op.

“The low enrollments and net losses might limit the ability of some co-ops to repay startup and solvency loans, and to remain viable and sustainable,” said the audit report. A copy was provided to The Associated Press.

To correct the AP’s reporting, we should note that since the U.S. government has been running large deficits without interruption for years, no money collected from U.S. taxpayers was used to fund these poorly considered non-profit ventures, as the U.S. government instead borrowed the money to “invest” in these 23 brand-new non-profit businesses, of which 22 are failing.

But rest assured that the Obama administration’s top people understand what they’re doing and are on top of the situation!

In a written response to the audit, Medicare chief Andy Slavitt said the administration agrees with the findings as well as the IG’s recommendations for closer oversight and clearer standards. He also offered a defense of the co-ops, saying they don’t have an easy job.

“The co-ops enter the health insurance market with a number of challenges, (from) building a provider network to pricing premiums that will sustain the business for the long term,” Slavitt said. “As with any new set of business ventures, it is expected that some co-ops will be more successful than others.”

The administration “takes its responsibility to oversee the co-op program seriously,” he said.

Ah yes, the “solution” to making 22 businesses that only have to break even to remain solvent and be successful is the adoption of clearer standards and more government oversight. What could possibly go wrong?