Are you watching as the nation’s politicians work to solve the financial meltdown of 2008? Though they all have different opinions on what must be done, they seem to agree on one point: hundreds of billions in taxpayer dollars must be thrown at the problem.

The popular phrase of the moment is “bailout” with visions of the federal government buying up non-performing mortgage loans from failing financial institutions. At this point it gets confusing as our elected representatives haggle over the details. What shall we pay for these junk loans? How can we prevent Wall Street fat cats from profiting? Who will supervise the spending of all this money? Will the poor homeowners share in the bonanza? How do we make sure the taxpayer isn’t ripped off?

Amid the furor of the moment, one important question is ignored: Exactly what will the federal government receive as it shells out its money? As a long-time mortgage investor, I’m familiar with acquiring troubled loans. It’s usually a straightforward matter. We’ll take an example. John and Mary Jones purchased their home four years ago with no down payment down and a $300,000 mortgage. They’ve made no payments for the last six months and the bank holding their note is foreclosing. The question becomes, how much will I pay for this loan? What I must know is the current market value of the house—easily determined by comparisons—as well as its probable value a few years hence this takes a little clairvoyance. Let’s presume the property is worth $250,000 today and may possibly drop to $200,000 a few years down the line. On this basis, I’m justified in paying $150,000 for the note, or 50% of its face amount. As its holder, I will try to negotiate a payment schedule with the Joneses. Even at a reduced interest rate, my return will be attractive, and eventual full payoff at some future date will be double my purchase price. At worst, my completing the foreclosure and acquiring the property offers the chance to sell the house for a modest profit. This, in essence, is the heart of the mortgage loan business.

However, this is not the arena in which the bailout is proposed. It’s far more complex. The government will not simply acquire the sort of loan I’ve just described. Let me offer an illustration of the scenario faced. Five hundred loans were packaged together, known as securitized. Some are delinquent, others paying as agreed, and each with its individual terms. Then a ten percent slice of this package got sold off to an investment bank, meaning ownership of a one-tenth interest in each of 500 loans. Finally, this slice was subdivided into two portions, one of which is entitled to receive only the interest payments from the notes, whereas the other receives any principal that is paid. I defy you to figure out what either of these apparitions are worth or what you do with them after you own them.

Nonetheless, the politicos will continue to debate, and harangue, and pose for photo ops, and pretend to know what they are talking about, as they enact legislation that will take the taxpayer to the cleaners.

Welcome to our brave new world.

On Friday, August 24, 2006, the General Accounting Office (GAO), an investigative arm of the U.S. Congress, released a report on the government’s billion-dollar-plus anti-drug advertising campaign. The $42 million study, conducted by the research organization Westat of Rockville, Maryland, concluded that the program, in operation since 1998, is ineffective in reducing teen drug use and recommended that funding be limited by Congress until the Office of National Drug Control Policy (ONDCP), the managing agency, “provides credible evidence of a media campaign approach that effectively prevents and curtails youth drug use.” This constituted the third review in as many years that detailed the ineffectiveness of the government’s anti-drug ads, with the White House Office of Management and Budget labeling it as “non-performing” in 2003, and the University of Pennsylvania’s $43 million study finding in 2005 that it did not work.

You might expect, in view of the evidence, a rapid ending of the project. Perhaps, but government programs don’t work that way. In reality, the program is alive and well, with President Bush recommending that funding be increased from its current $100 million to $120 million for fiscal year 2007. As a part of the War on Drugs, kicked off by President Richard Nixon in 1971 and growing over the past thirty-five years to consume an ever increasing share of the nation’s GDP, it is sacrosanct. There are powerful economic interests that support the concept of anti-drug advertising. Its impetus was formation in 1986 of Partnership for a Drug-Free America (PDFA), by Richard T. O’Reilly, an executive of the American Association of Advertising Agencies, and it soon became closely affiliated with ONDCP as a consultant. Despite controversy over the years, including evidence of clandestine payments from tobacco, alcohol, and pharmaceutical firms, as well as deceptive public service advertisements, PDFA’s influence is not diminished.

Whether advertising to dissuade teenagers from drug use can be effective under any circumstances is questionable. The GAO issued the statement: “Westat’s evaluation reports and associated documentation leads to the conclusion that the evaluation provides credible evidence that the campaign was not effective in reducing youth drug use.” In response, Tom Riley, spokesman for ONDCP, contended that “…teen drug use has gone down dramatically…I think that’s the definition of successful advertising.” In a further rebuttal, drug czar John Walters issued a 5-page statement questioning the validity of Westat’s measurement criteria in that it sought to directly prove the effectiveness of advertising. “Establishing a causal relationship between exposure and outcomes is something major marketers rarely attempt because it is virtually impossible to do,” Walters wrote. Somewhat in corroboration, Nancy Kingsbury, the GAO’s managing director of applied research methods, acknowledged that Walters raised a valid point. “It is a really tough social science question to answer and we understand that,” she said.

A concluding thought:
This gets us to the bottom line. Whether fiscal 2007 funding for the anti-drug advertising campaign will increase or decrease is uncertain—though it’s my guess more money will be shoveled that way. But, regardless of how the infighting comes out, one thing is certain: The War on Drugs will continue to be waged. A drug policy expert from the Carnegie-Mellon University recently reported that “The drug war has cost American taxpayers upward of $40 billion annually in recent years.” So whether the cost of one small portion, which may or may not be effective, increases by $20 million or so doesn’t really matter.