Avoid Investment Scams, Part 2

“You don’t need 99.9 percent of what Wall Street is selling. It’s expensive, unsuitable, or stupid. Most investments are designed to profit the brokers, banks, and insurance companies, not you.” – Jane Bryant Quinn.

My last post discussed a recent Wall Street Journal article, Laws Take On Financial Scams against Seniors, which stated, “financial scams that target seniors are on the rise, and states are cracking down.”  According to the article, “The recession has spurred more scams that play off people’s fear of stocks. Some investments pitched as low-risk could instead be quite complex.”

The sidebar included advice on what questions to ask when you’re presented with an investment “opportunity.”

What are the risks of this investment?

How much does it cost initially to purchase this investment and what, if any, additional or ongoing costs will I have to pay?

How liquid is this investment?  If I need to sell or cash in the investment, how little he can I do so?

Will my investment be tied up? If so, for how long?

What happens if I decide to sell or cash in my investment?  Are there surrender charges or other fees?

For what type of person is this investment a good idea?  For what type of investor is this a bad idea?

Is this investment registered?  If so, with which regulator?

If the speaker can’t or won’t answer your questions to your satisfaction, and in writing, the investment is not right for you.

Understand Risks and Costs

All of these are good questions and arguably they apply to any type of investment.  Understanding the risk of your investment is very important. My advice is to shy away from any advisor who does not take the time to explain the risks of a particular investment.  If the presentation makes you feel extremely “lucky” that you have attended the session in the first place, it’s time to slow down.  And if all you hear in a presentation are the glorious benefits of an investment, and nothing about the risks, head straight for the door.

In my opinion, the questions above particularly apply to deferred annuities and mutual funds.  It’s important to understand what the costs and fees are of any investment you may make.  Keep in mind that Wall Street is very good at obfuscating, hiding fees, and using doublespeak to confuse consumers.

Regarding deferred annuities and mutual funds, under no circumstance should you accept the answer that “you do not pay any fees, because the insurance company or mutual fund firm pays me.”  This is an example of the “doublespeak” that I referred to in the previous paragraph. To put it simply, it’s a lie. Obviously, any fees that are paid out come from somewhere; in fact, they come from the returns that you could get in an investment product.

Beware of B sharers of mutual funds.

Mutual fund B shares are not a scam, but I have met prospective investors who assumed that they were not paying anything to buy their mutual funds.  Actually, they had been sold B shares of mutual funds.  To be kind, the investors were “misinformed,” and the advisor was paid handsomely for this “misunderstanding.”  You decide if this akin to a scam or not.

According to the Securities and Exchange Commission:

Class B shares might not have any front-end sales load, but might have a contingent deferred sales load (CDSL) (a type of fee that investors pay only when they redeem fund shares, and that typically decreases to zero if the investors hold their shares long enough) and a 12b-1 fee (an annual fee paid by the fund for distribution and/or shareholder services).  Class B shares also might convert automatically to a class of shares with a lower 12b-1 fee if held by investors long enough.

In other words, unless you wait for years to sell these shares, you will pay a contingent deferred sales load – in plain English, a commission – to get your money back.  In addition, that quote does not make clear that B shares typically have much higher annual expenses than true no-load funds.

If you read through the prospectus carefully and know enough to ask your “advisor” the “right” questions, you will reach the proper conclusion – that there are better investment alternatives for you.  Actually, there are plenty of better investment alternatives available.

Avoid Investment Scams, Part 1

“There’s no such thing as a free lunch.” – Milton Friedman.

“Fed up with purported financial advisers preying on unwitting older people, investigators from the Arkansas Securities Department last year staged an undercover sweep of one of the hucksters’ favorite showcases — free lunch seminars.”

That was the lead in today’s Wall Street Journal article Laws Take On Financial Scams Against Seniors.  According to the article, which is about some questionable and possibly illegal practices, “financial scams that target seniors are on the rise, and states are cracking down.”

“Besides Arkansas and Michigan, Idaho also passed a senior-victim law in recent months that will go into effect this year. Six other states, including Maryland, Minnesota, Missouri, New Jersey, Rhode Island and West Virginia, have similar bills pending in their current legislative session.”

Leaving aside whether seniors are in particular need of protection, and whether the site of the crime is only a lunch seminar, let’s take a look at the misleading products offered.  Here are some relevant quotes, with emphasis added.

The Arkansas sweep … uncovered …shady practices — misleading claims, underplayed risk.

The recession has spurred more scams that play off people’s fear of stocks.  Some investments pitched as low-risk could instead be quite complex.

The events are generally pitched as educational events, with a free meal thrown in. But in Arkansas, state agents instead found that the dozens of seminars they attended all featured hard-sell pitches for financial products, many of which weren’t appropriate for elderly investors. Presenters at about half of the seminars made misleading claims about potential investment returns, Arkansas regulators say. And at about a quarter of the events, products being pushed were ill-suited to older people, such as investments heavily exposed to swings in stock prices.

The frequency of scams is increasing in the recession, many financial experts say. Seizing on fear of stock-market turmoil, sales people and fraudsters are hawking investments that claim to be “low-risk,” or a supposedly safe way to invest in the stock market and earn back losses. In fact, the products may be complex and have significant downsides.

Firms that have been cited for violations range from big financial giants to single-person offices.  In October 2007, a unit of Allianz SE, the German financial company, agreed in a settlement with Minnesota’s attorney general to review sales practices and to give refunds to as many as 7,000 Minnesota seniors that the state said may have been sold unsuitable annuities since 2001.  Allianz also agreed to strengthen its process to determine suitability for customers over the age of 65.

There is nothing illegal about financial advisers pitching products at seminars, but under securities and investor-protection laws, there are lines that these salespeople can’t cross.  Brokers must follow “suitability” standards, meaning they can’t sell a product that doesn’t make sense given a person’s age, income, or liquidity needs.  They can’t misrepresent products. S ales materials and oral presentations must show a balanced picture, with both the risks and benefits of investing in the product.  Any statements to investors that an investment is “safe as cash” or that it carries no market or credit risk “would raise serious questions under FINRA’s advertising rules,” according to the regulatory group.

A number of products sold to seniors have triggered investigations in recent months, including reverse mortgages, which can help senior tap equity into the home and be beneficial, but which can also include hidden costs. Also popular are deferred annuities, which promise future payments to the investor but which can lock up money for a decade or more.

Conclusion

I am not surprised that one of the vehicles used by the scam artists are deferred annuities, as I have written about this before. Quite simply, variable annuities pay salespeople very high commissions. Annuities may be suitable for some people, but determining what is best for you should be done by someone who does not gain from the decision. In other words, your best option is to hire a fee-only planner to advise you on whether you really need a deferred annuity. Quite possibly, a fee-only planner will come up with a less expensive solution that achieves the same goals as an annuity.

The article lists several sites which will help you if you think you have been scammed. Of course it may be too late at that point.  Instead, I’d recommend one site that will help you find a fee-only planner, a fiduciary acting in your best interests – the NAPFA website.

As mentioned in the article, salespeople must only follow a “suitability standard” and do not have to tell you about the best option for you.  The difference between a “suitability standard” and a “fiduciary standard” may seem like a technicality, but the effect on your financial wellbeing can be huge.

Read Part 2.

Individual Bonds Versus Mutual Funds

Potential clients I meet with sometimes have a portfolio of individual municipal bonds that they have purchased through a stockbroker. In far too many cases, the investors don’t really understand exactly what is in their investment portfolio.  They believe that because they have more than a dozen different bonds that they have essentially diversified their risk.  Generally, this is not the case. Moreover, these investors have no idea how much it really cost them (in the way of commissions or mark-ups) to purchase their bonds.

Whether or not you have a portfolio of individual bonds, you may still benefit from reading this because, the fact remains, what you don’t know about investing can hurt you financially.

As discussed in a previous post, many bond investors inadvertently take on excess risk by buying high yielding (generally synonymous with low quality) bonds.  This post discusses the trade-offs between buying individual bonds and owning a bond mutual fund.

Municipal Bond Funds and Individual Bonds, a report prepared by the Vanguard Group, discusses the pros and cons of buying individual bonds or mutual funds.  As you may know, the Vanguard Group is in the mutual funds business, so you might be suspicious of its conclusions.  Although their analysis could be construed as self-serving, I am, nonetheless, convinced that they are right.  My advice is that you read the entire 11 page report, but if you don’t have the time, here are some relevant excerpts. (Emphasis added.)

Municipal bonds—overview and investment considerations

Municipal bonds are initially issued in the primary market, where pricing is based on market conditions and demand.  It is generally more cost-effective to buy these bonds in the primary market, but institutional (mutual funds, pension funds) buyers dominate that market, and historically, it has been difficult for individual investors to compete with them for the limited bond supply.  As a result, most non-institutional trading is relegated to the secondary market, in which existing bonds are resold.

Drawbacks of trading municipal securities in the secondary market

Trading in the secondary market for municipal securities can be very problematic and expensive.  Unlike most other financial markets, in which price and execution are transparent to the investor via real-time bid–ask quotes, the secondary municipal market provides very limited real-time pricing and execution.

As a result, to be successful in this market requires deep knowledge, understanding, and experience in how it operates.  Compounding the problem is that, in the secondary market, purchases or sales in less than “round lot” quantities are marked up or down to reflect the unattractiveness of these sizes for bond dealers.  In addition, municipal bonds are not as actively traded as taxable bonds, such as U.S. Treasury or corporate issues.  As a result, municipal bonds are less liquid than taxable bonds and have higher transaction costs.

Comparison of municipal bond funds and individual bond portfolios

Several factors should be considered when evaluating the suitability of municipal bond funds versus individual bonds for a portfolio.  These factors include diversification, cash-flow treatment and portfolio characteristics, costs, and direct control of the portfolio.

Diversification

a.  A bond fund provides broader diversification than a portfolio of individual bonds.  Bond funds typically provide substantially more diversification among issuers, credit qualities, and maturities, as well as in the range of individual bond characteristics (for example, callable, noncallable, prerefunded, discount, and premium).

Much of this is possible because a bond fund has a larger pool of investable assets, along with the professional staff needed to conduct credit analysis.

For a self-directed individual, creating a well diversified bond portfolio typically requires a significant capital investment to obtain exposure across issuers, credit qualities, maturities, and so on.

Cash-flow treatment and portfolio characteristics

a.  Bond funds provide more timely investments of initial principal and periodic income cash flow.

b.  Bond funds provide more consistent risk characteristics (the most important of which is duration).  Because of their more regular, ongoing cash flows, mutual funds are better able than alternative vehicles to maintain more stable portfolio risk characteristics over time.

c.  Bond funds make liquidations, especially partial liquidations, notably easier.  Liquidating bond-fund shares does not change the characteristics of the fund’s bond exposure.

Costs

Our review of costs included bid–ask spreads, management fees, and sales charges or commission costs (collectively, “transaction costs”).  Costs are important because they directly reduce a portfolio’s total return.  For fixed income investments, as opposed to equity investments, costs tend to be a more significant drag on performance, and therefore exert one of the greatest influences on returns.

a.  Bond funds typically pay significantly lower bid–ask spreads than individual investors.  Retail trades of less than $100,000 per bond cost between 100 and 200 basis points morer than that for an institutional trade.

b.  Bond funds charge an ongoing management fee (expense ratio) for expenses related to the operation of the fund.

While the annual expense ratio is frequently cited as a drawback for funds, in reality it is generally more cost-effective to pay the expense ratio for years, rather than to risk paying a large spread when buying a bond.

Control of the portfolio

One advantage of self-directed individual bond portfolios … over mutual funds is the owner’s ability to influence portfolio decisions.

a.  Bond mutual funds don’t offer investors the ability to influence the selection of the bonds.

b.  Bond mutual funds cannot pass realized losses through to individuals.

c.  Bond mutual funds do not have a maturity date.  Therefore, the value of the fund at any point in the future is uncertain.

Conclusion

Vanguard believes that the vast majority of municipal bond investors are better served using mutual funds.  Only investors with resources comparable to those of a mutual fund can afford to put the control benefits of owning an individual bond portfolio ahead of the benefits of investing in a mutual fund.  The advantages of mutual funds over individual bond portfolios include better diversification, generally lower costs, typically higher after-tax returns, and more efficient management of cash flows and portfolio characteristics.  The advantages of individual bonds over bond mutual funds revolve primarily around control issues that result from direct ownership.  An investor must assign a very high value to those control aspects to justify the higher cost and additional risk involved in owning individual securities.

Note

The analysis focused on municipal bonds, but similar considerations apply to corporate bonds. Also, the Vanguard Group has very low cost mutual funds, so the trade-off is pretty clear between individual bonds and their mutual funds. Other companies, such as Fidelity or T. Rowe Price, also have low cost mutual funds, provided that you purchase them directly or through a fee-only financial advisor. If you purchase mutual funds through a stockbroker, you may end up paying very high fees, effectively negating the low-cost aspect of mutual funds. As always: Buyer beware.

Why Attempt to Forecast the Stock Market?

Everyone wants to know which way the stock market will be headed. Yet, most people say that they are investing for the long term. Why then do so many people have this fascination with predicting the future? What difference will it make? Maybe they are control freaks, or have some other psychological issue?  Personally, I think it’s because this is what investors have been taught will determine a successful investment program.

In any case, the question seems to come up frequently at social gatherings, “Is this a good time to invest in stocks?” Often, friends will repeat to me a forecast that they have heard. For example, three months ago an officer of a non-profit organization told me her stockbroker said that the Dow Jones would be going down to 7,200; at the time, the Dow was about 7,800. (Wow, I thought, a clairvoyant stockbroker.) As it turns out, his prediction came true. But really, how useful was that prediction, given that the Dow Jones Average is now above 8,400?

Market Timing

More recently, two friends were engaged in a conversation about the direction of the stock market.

One friend had determined that it was a “good time to buy” and had acted accordingly. The second friend had reached the opposite conclusion, saying that the market was “overbought” and he expected a pullback. He had actually “taken some profits” by selling some positions, and he had, in addition, sold short two stocks that he thought would be going down. (Selling short is a way to profit from a decline in a security.)

Clearly they disagreed, and very probably only one would turn out to be right. When asked why I remained mum on the subject, I simply replied that I don’t do forecasts.

Now, back to the original question of “Why Attempt to Forecast the Stock Market?” Well, perhaps as a result of the wild ride we all recently “enjoyed” in the stock market, it’s difficult not to try. From a high on October 9, 2007 to the current market bottom of March 9, 2009, the S&P 500 went down almost 57%. This is the sharpest decline since the Great Depression. Since March 9th, though, the S&P 500 has climbed by about 35%.

Wouldn’t it be great if we could have timed those market swings? As I’ve written in the past, although it would be very nice, it is also virtually impossible. Of course, we keep trying. And some people have placed mistaken confidence in “experts” who seem to know what they were talking about.

The problem is, of course, that market gurus frequently disagree. And choosing one simply because he was recently correct in his predictions could be a big mistake, since there is little consistency in making good forecasts.

Long-Term Investing

I would argue that since no one knows what the short-term direction of the stock market will be, it is a mistake to base your investment philosophy on such predictions. Moreover, it is not necessary to predict the future to have a successful investment experience.

If we really are long-term investors, the only way to benefit from growth in the economy is to invest in equities, which are, in fact, ownership interests in corporations. This doesn’t by any means imply that we should only invest in stocks or stock market mutual funds.

But to ignore the basic difference between a fixed income investment, such as a money market mutual fund, CD, or a bond and equity investments is a major mistake. Fixed income investments have a limited, although more predictable, return. Stocks have higher expected returns, but there is more uncertainty as to just what they will be.

Risk and Return

Why do stock investments have a higher expected return than fixed-income investments? Because they have higher risk. Risk and return are two sides of the same coin.

Nobel Prize winning economist William Sharpe summarized it quite well when he talked about the essence of his award winning research and how risk and return are related. “The bottom line: Yes, Virginia, some investments do have higher expected returns than others. Which ones? Well, by and large they’re the ones that will do the worst in bad times.” (Emphasis added.)

This may sound like a flippant remark, but it is the truth. I think, unfortunately, many people have forgotten the word “expected.” When talking about stock market returns, we got so used to hearing that stocks were superior investments in the long-term, that we forgot about risk. No one ever said that “expected” returns would be “realized” returns, though it seems a lot of people jumped to that conclusion.

A couple of months ago, I thought that some people were unfortunately panicking out of stocks. Their approach was to “go to cash and wait for things to sort themselves out.” Based on past experience, I was concerned  that these frightened investors would miss out on the inevitable recovery. Although no one knows if the stock market did hit its bottom in March, as of now, it was a mistake to have gotten out of the market.

My advice for long-term investors remains the same: To choose carefully an appropriate allocation of stocks and bonds, which depends on your time horizon and your need and your willingness to accept the risk.

After that, you need to diversify properly, keep fees and other costs down, and be aware of taxes. Then follow a buy and hold philosophy, with appropriate rebalancing to your target allocation.

Warren Buffett has famously said that investing is “simple, but it’s not easy.”

Worst Slide Story

If laughter is the best medicine, try a dose of this take-off on West Side Story.

Walt Handelsman, a Pulitzer Prize-winning political cartoonist and animator, has some fun with the songs of the classic musical, which is in revival on Broadway. I think you’ll find his version of West Side Story much more current, and funny to boot.

You are encouraged to sing along, if the spirit moves you.

To get to the web site, click here.

President Obama’s Economic Agenda

Sunday’s New York Times article, After the Great Recession, gives us rare insight into President Obama’s thinking and thought processes concerning a host of issues and “why he was taking on so many economic issues so early in his administration.”

The interview, conducted by David Leonhardt, covers several economic issues including the role of financial institutions, the need for new financial regulation, making education relevant, how to improve global competitiveness, how to achieve greater gender and employment equality, and the need and difficulty of achieving health care reform.

Whew!  Just writing that sentence makes me gasp.

While After the Great Recession is a very long (two cups of coffee) article, I believe it is well worth reading, in its entirety. Whether or not you supported Barack Obama in the presidential election last November, I think it’s important to understand where he plans to take the country.

If you don’t have time to read the entire article, here are some relevant quotes.

I. The Future of Finance

Leonhardt: I wonder if you would be willing to describe a little bit of your learning curve about finance, and what you envision finance being in tomorrow’s economy: Does it need to be smaller? Will it inevitably be smaller?

THE PRESIDENT:  …What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common.

Now, in some ways, I think it’s important to understand that some of that wealth was illusory in the first place.

… Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s. It just won’t be half of our economy. And that means that more talent, more resources will be going to other sectors of the economy. And I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design.

And so I think what you’ll see is some shift, but I don’t think that we will lose the enormous advantages that come from transparency, openness, the reliability of our markets. If anything, a more vigorous regulatory regime, I think, will help restore confidence, and you’re still going to see a lot of global capital wanting to park itself in the United States.

Leonhardt:  There was this great debate among F.D.R.’s advisers about whether you had to split up companies — not just banks — you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies — even not just possible, but better — and then have strong regulators. And it seems to me there’s an analogy of that debate now. Which is, do you think it is O.K. to have these “supermarkets” regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall.

THE PRESIDENT: You know, I’ve looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don’t separate between investment banks and commercial banks, for example. They have a “supermarket” model that they’ve got strong regulation of.

But when it comes to something like investment banking versus commercial banking, the experience in a country like Canada would indicate that good, strong regulation that focuses less on the legal form of the institution and more on the functions that they’re carrying out is probably the right approach to take.

II. The Ticket to the Middle Class

Leonhardt:  I’m curious what you think today’s ticket to the middle class is. Do you want everybody aspiring to a four-year-college degree? Is a two-year or vocational degree enough? Or is simply attending college, whether or not you graduate, sufficient to reach the middle class?

THE PRESIDENT:  We set out a goal in my speech to the joint session that said everybody should have at least one year of post-high-school training. And I think it would be too rigid to say everybody needs a four-year-college degree. I think everybody needs enough post-high-school training that they are competent in fields that require technical expertise, because it’s very hard to imagine getting a job that pays a living wage without that — or it’s very hard at least to envision a steady job in the absence of that.

And so to the extent that we can upgrade not only our high schools but also our community colleges to provide a sound technical basis for being able to perform complicated tasks in a 21st-century economy, then I think that not only is that good for the individuals, but that’s going to be critical for the economy as a whole.

But, again, I think the big challenge that we’ve got on education is making sure that … you are actually learning the kinds of skills that make you competitive and productive in a modern, technological economy.

That’s why I don’t just want to see more college graduates; I also want to specifically see more math and science graduates, I specifically want to see more folks in engineering.

But the broader point is that if you look at who our long-term competition will be in the global economy — China, India, the E.U., Brazil, Korea — the countries that are producing the best-educated work force, whose education system emphasizes the sciences and mathematics, who can translate those technology backgrounds or those science backgrounds into technological applications, they are going to have a significant advantage in the economy. And I think that we’ve got to have enough of that in order to maintain our economic strength.

III. The New Gender Gap

Leonhardt: There is still sexism, there’s still a pay gap, clearly, but the pay of men has stagnated, and the pay of women has gone up.

I think there are a lot of men out there today, working at G.M. and Chrysler and other places, who feel the same kind of dejection that your grandfather did. What do you think the future of work looks like for men?

THE PRESIDENT: I think it’s an interesting question, because as I said, you know, you go in to factories all across the Midwest and you talk to the men who work there — they’ve got extraordinary skill and extraordinary pride in what they make. And I think that for them, the loss of manufacturing is a loss of a way of life and not just a loss of income.

I think a healthy economy is going to have a broad mix of jobs, and there has to be a place for somebody with terrific mechanical aptitude who can perform highly skilled tasks with his hands, whether it’s in construction or manufacturing. And I don’t think that those jobs should vanish. I do think that they will constitute a smaller percentage of the overall economy.

I mean, nursing, teaching are all areas where we need more men. I’ve always said if we can get more men in the classroom, particularly in inner cities where a lot of young people don’t have fathers, that could be of enormous benefit.

IV. Where the Economists are Coming From

Leonhardt:  When you and I spoke during the campaign, you made it clear that you had thought a lot about the economic debates within the Clinton administration. And you said that you wanted to have a Robert Rubin type and a Robert Reich type having a vigorous debate in front of you. And clearly you have a spectrum of Democrats within your economic-policy team.

THE PRESIDENT:  … I’ve been constantly searching for is a ruthless pragmatism when it comes to economic policy.

Somebody who has enormous influence over my thinking is Paul Volcker, who is robust enough that, having presided over the Carter and Reagan years, he’s still sharp as a tack and able to give me huge advice and to provide some counterbalance.

When I first started having a round table of economic advisers, and Bob Reich was part of that, and he was sitting across the table from Bob Rubin and others, what you discovered was that some of the rifts that had existed back in the Clinton years had really narrowed drastically.

If anything, the only thing I notice, I think, that I do think is something of a carry-over from Bob Rubin — I see it in Larry, I see it in Tim — is a great appreciation of complexity.

… I think that one of the things that we all agree to is that the touchstone for economic policy is, does it allow the average American to find good employment and see their incomes rise; that we can’t just look at things in the aggregate, we do want to grow the pie, but we want to make sure that prosperity is spread across the spectrum of regions and occupations and genders and races; and that economic policy should focus on growing the pie, but it also has to make sure that everybody has got opportunity in that system.

I also think that there’s very little disagreement that there are lessons to be learned from this crisis in terms of the importance of regulation in the financial markets. And I think that this notion that there is somehow resistance to that — to those lessons within my economic team — just isn’t borne out by the discussions that I have every day.

… As we’re making economic policy, I think there is a certain humility about the consequences of the actions we take, intended and unintended, that may make some outside observers impatient. I mean, you’ll recall Geithner was just getting hammered for months. But he, I think, is very secure in saying we need to get these things right, and if we act too abruptly, we can end up doing more harm than good. Those are qualities that I think have been useful.

V. Postreform Health Care

Leonhardt:  You have suggested that health care is now the No. 1 legislative priority. It seems to me this is only a small generalization — to say that the way the medical system works now is, people go to the doctor; the doctor tells them what treatments they need; they get those treatments, regardless of cost or, frankly, regardless of whether they’re effective. I wonder if you could talk to people about how going to the doctor will be different in the future; how they will experience medical care differently on the other side of health care reform.

THE PRESIDENT:  First of all, I do think consumers have gotten more active in their own treatments in a way that’s very useful. And I think that should continue to be encouraged, to the extent that we can provide consumers with more information about their own well-being — that, I think, can be helpful.

I have always said, though, that we should not overstate the degree to which consumers rather than doctors are going to be driving treatment, because, I just speak from my own experience, I’m a pretty-well-educated layperson when it comes to medical care; I know how to ask good questions of my doctor. But ultimately, he’s the guy with the medical degree. So, if he tells me, You know what, you’ve got such-and-such and you need to take such-and-such, I don’t go around arguing with him or go online to see if I can find a better opinion than his.

And so, in that sense, there’s always going to be an asymmetry of information between patient and provider. And part of what I think government can do effectively is to be an honest broker in assessing and evaluating treatment options. And certainly that’s true when it comes to Medicare and Medicaid, where the taxpayers are footing the bill and we have an obligation to get those costs under control.

So when Peter Orszag and I talk about the importance of using comparative-effectiveness studies as a way of reining in costs, that’s not an attempt to micromanage the doctor-patient relationship. It is an attempt to say to patients, you know what, we’ve looked at some objective studies out here, people who know about this stuff, concluding that the blue pill, which costs half as much as the red pill, is just as effective, and you might want to go ahead and get the blue one. And if a provider is pushing the red one on you, then you should at least ask some important questions.

Now, there are distortions in the system, everything from the drug salesmen and junkets to how reimbursements occur. Some of those things government has control over; some of those things are just more embedded in our medical culture. But the doctors I know — both ones who treat me as well as friends of mine — I think take their job very seriously and are thinking in terms of what’s best for the patient. They operate within particular incentive structures, like anybody else, and particular habits, like anybody else.

And so if it turns out that doctors in Florida are spending 25 percent more on treating their patients as doctors in Minnesota, and the doctors in Minnesota are getting outcomes that are just as good — then us going down to Florida and pointing out that this is how folks in Minnesota are doing it and they seem to be getting pretty good outcomes, and are there particular reasons why you’re doing what you’re doing? — I think that conversation will ultimately yield some significant savings and some significant benefits.

Now, I actually think that the tougher issue around medical care — it’s a related one — is what you do around things like end-of-life care —

So that’s where I think you just get into some very difficult moral issues. But that’s also a huge driver of cost, right?

I mean, the chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here.

Leonhardt:  So how do you — how do we deal with it?

THE PRESIDENT:  Well, I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that’s part of why you have to have some independent group that can give you guidance. It’s not determinative, but I think has to be able to give you some guidance. And that’s part of what I suspect you’ll see emerging out of the various health care conversations that are taking place on the Hill right now.

VI. Out of the Rough?

Leonhardt:  Do you think this recession is a big-enough event to make us as a country willing to make some of the sorts of hard choices that we need to make on health care, on taxes in the long term — which will not cover the cost of government — on energy? Traditionally those choices get made in times of depression or war, and I’m not sure whether this rises to that level.

THE PRESIDENT:  Well, part of it will depend on leadership. So I’ve got to make some good arguments out there. And that’s what I’ve been trying to do since I came in, is to say now is the time for us to make some tough, big decisions.

The critics have said, you’re doing too much, you can’t do all this at once, Congress can’t digest everything. I just reject that. There’s nothing inherent in our political process that should prevent us from making these difficult decisions now, as opposed to 10 years from now or 20 years from now.

It is true that as tough an economic time as it is right now, we haven’t had 42 months of 20, 30 percent unemployment. And so the degree of desperation and the shock to the system may not be as great. And that means that there’s going to be more resistance to any of these steps: reforming the financial system or reforming our health care system or doing something about energy. On each of these things — you know, things aren’t so bad in the eyes of a lot of Americans that they say, “We’re willing to completely try something new.”

But part of my job I think is to bridge that gap between the status quo and what we know we have to do for our future.

Leonhardt:  Are you worried that the economic cycle will make that much harder? I mean, Roosevelt took office four years after the stock market crashed. You took office four months after Lehman Brothers collapsed. At some point people may start saying, Hey, why aren’t things getting better?

THE PRESIDENT:  It’s something that we think about. I knew even before the election that this was going to be a very difficult journey and that the economy had gone through a sufficient shock and that it wasn’t going to recover right away.

What I’m very confident about is that given the difficult options before us, we are making good, thoughtful decisions. I have enormous confidence that we are weighing all our options and we are making the best choices. That doesn’t mean that every choice is going to be right, is going to work exactly the way we want it to. But I wake up in the morning and go to bed at night feeling that the direction we are trying to move the economy toward is the right one and that the decisions we make are sound.

Conclusion

In watching political commentary on PBS TV, for example Charlie Rose’s interview with David Brooks, I have heard time and time again how confident President Obama is, how comfortable he is with debate within his administration, and how he is a supreme pragmatist. These are all good things.

The phrases that jumped out on me in the interview were: “ruthless pragmatism,” “a great appreciation of complexity,” and “a certain humility about the consequences of the actions we take, intended and unintended.”

Good. Boldness and supreme confidence seasoned with a dash of humility and a modicum of caution sounds like a good recipe to me.

That said, he certainly has more issues to deal with than any other president ever had. And this interview was only about economic issues, totaling omitting foreign affairs – “little” things like two wars, Iranian nuclear aspirations, the potential collapse of Pakistan’s government, etc., etc., etc.

Good luck, Mr. President.

Photo by Nadav Kander for The New York Times.