'The Journal Editorial Report,' August 15, 2009

This is a rush transcript from "The Journal Editorial Report," August 15, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: Up next, Obamacare and the death panel claims. Will his reform plan ration care for seniors. We'll separate fact from fiction.

Plus, remember Fannie Mae and Freddie Mac? Meet their cousin, Ginnie, Uncle Sam's latest subprime mortgage lender and possible bailout candidate.

And the Feds gear up for the 2010 Census. But they're not just counting U.S. citizens.

"The Journal Editorial Report" starts right now.

Welcome to "The Journal Editorial Report." I'm Paul Gigot.

Claims are flying fast and furious that the Democrat's health care reform plan will institute what critics are calling death panels to deny care to sick seniors and children with birth defects.

Former Alaska Governor Sarah Palin got in on the act recently writing on her Facebook page, quote, "The American I know and love is not one in which my parents or my baby with Down's syndrome will have to stand in front of Obama's death panel so his bureaucrats can decide based on a subjective judgment of their level of productivity in society whether they are worthy of health care," unquote.

Trying to tamp down such talk, here's what President Obama had to say at a town hall this week.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: The rumor circulating a lot lately is this idea that somehow the House of Representatives voted for death panels that will basically pull the plug on grandma because we've decided that we don't — it's too expensive to let her live anymore.

(END VIDEO CLIP)

GIGOT: Here to separate fact from fiction, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; senior editorial page writer Joe Rago; and WSJ.com columnist, John Fund.

All right, Joe, who is right here, Palin or President Obama?

JOE RAGO, SENIOR EDITORIAL PAGE WRITER: I think they're both right in a sense or they're both wrong. There's not really a death panel in this bill. I think that's pretty over the top. But I think Palin and seniors have a right to worry about the direction that American medicine will take under Obama Care. What we're likely to see this year is a big coverage expansion, government insurance for the middle class. And there's only so much tax revenue that can be had under this tax code. and once budgetary pressures start to explode we're going to have to start trimming and making choices and seniors might be the ones on the chopping block.

GIGOT: On the point on the so-called death panel, this was a provision that said there would be end-of-life counseling that would be a part of any insurance reform plan. Now, that's been pulled out of the Senate Finance Committee part of the bill.

RAGO: That's correct.

GIGOT: After this controversy. But you're talking about basically the cost will get so big that ultimately it's unaffordable and you have to clamp down and ration care. And seniors are the first in line.

Do you agree with that, Dan?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: I do. One of the pieces of data that emerge from this, and everyone wants to become aware of, is Medicare spending over 25 percent. About 27 percent of Medicare is spent in the last year of life. OK? And that's where the savings are. This is coming down to a matter of trust. He, President Obama is trying to tell those people, we won't go into that 25 percent of Medicare spending and threaten your care. And people are sitting out there saying how am I supposed to believe that, if we're responsible for most of this Medicare spending. And he simply hasn't convinced people that the government won't, as Joe is suggesting, ultimately look for ways in that tranche to save money.

GIGOT: Even President Obama said, look, as part of the plan, the House bill, they're going to look to Medicare for saving. They have said this explicitly. And they have an argument in the fact that Medicare is 11 percent a year already because of the great increase demand and the prescription benefit and so on. So the one hand he says don't worry, on the other says we have to cut Medicare.

MARY ANASTASIA O'GRADY, COLUMNIST: That's right. I think he knows we have to cut Medicare. Medicare, from the start, has been unable to meet its promises. In 1965, they said that by 1970 it would cost about $3.1 billion. It came in at 6.5. In 1967, they said by 1990 that it would cost $12 billion. It costs almost ten times that.

So, you know, basically what happens when something is free, paid by the government, the demand is always going to outstrip supply. And the only way to ration that is to have someone come in an arbitrator and say, no, this is too expensive, you can't have that. And I think that seniors see that coming.

GIGOT: And Medicare rations care, Joe, in numerous ways, doesn't it?

RAGO: That's right. Certain procedures that — diagnostic again, something called a virtual colonoscopy.

GIGOT: Which is a less intrusive version of colonoscopy.

RAGO: Exactly. Certain asthma medications, all sorts of restrictions on what type of care doctors are allowed to deliver or reimbursed by the government for, and those strictures will have to be tightened down once there's this new liability on the books.

GIGOT: John Fund, let me ask you about another program. Medicare Advantage, which was something created as part of the prescription drug benefit, and then it goes to insurance companies that provide prescription drug coverage and Medicare especially in rural areas, that's on the chopping block.

JOHN FUND, WSJ.COM COLUMNIST: $180 billion over ten years, Obama has targeted for effective elimination over time, and seniors are going to be very upset about that. 22 percent of seniors are on Medicare Advantage, including half of African-Americans on Medicare, 40 percent of Hispanics. And they get better preventive care, better coordinated care from physician networks on that. They will pay higher fees if they are pushed back into traditional Medicare if they want the extra services they now get from Medicare Advantage.

GIGOT: And the irony here, Dan is the Democrats used Medicare to beat the Republicans over the head for decades, saying you're going to cut Medicare, you're going to chop Medicare, and now it's turned around.

HENNINGER: Exactly, one of the realities that's emerging — this is going beyond Medicare. It's — if the government runs something that's expensive, people are going to get answers they don't like. Some people are going to get answers they don't like. Why do you think that Washington is overflowing with lobbyists for every industry that's there, to prevent them from getting those answers? Now we're talking about health care, where people think they ought to have a say in how they get treated and this is not going to happen.

GIGOT: And the difference here is between rationing between politics or by government, which is what happens when you have a government program, and what we have now, which is a form of rationing, we have to admit, but by prices and private contracts and tens of thousands of private individual choices and contracts.

O'GRADY: Everything in our lives are in a free market, everything is rationed by price. It's exactly — because otherwise everybody would want lobster for dinner every night.

(LAUGHTER)

But I think actually Dan hits on an important point which is that Obama care is kind of an expansion of Medicare for the entire...

GIGOT: For everybody, that's right.

O'GRADY: And Britain has this experience with its own government run health care where they have to have a government body, that goes by the acronym NICE — it's not very nice — and really, what it does, it limits a lot, the kinds of drugs you can get and the kinds of services you can get. And, you know, if you look at what happens in Britain, you might wish someone would pull the plug on you. Because what ends up happening is you can't get that hit, you can't get that medication. The quality of your life really deteriorates even if somehow you stay alive.

GIGOT: We have a clip from president Obama about the AARP, the self- styled senior lobby. Let's listen.

(BEGIN VIDEO CLIP)

OBAMA: We have the AARP on board because they know this is a good deal for our seniors.

AARP would not be endorsing a bill if it was undermining Medicare.

(END VIDEO CLIP)

GIGOT: All right, John. Because the AARP and turned around later said they had not endorsed any of the bills now moving through Congress. What's the truth?

FUND: Well, they've long supported comprehensive health reform, which includes a lot of things on the Democratic bill. They've been careful not to endorse the details. They know a lot of these cuts are going on fall on their members. Their members are revolting and flooding AARP offices with questions and complaints that AARP would even think about endorsing such a bill. So I think AARP wants this bill to pass privately because their leadership is liberal, but they also realize they can't afford to alienate a large chunk of 40 billion members.

GIGOT: We'll have to follow this revolt of the seniors.

When we come back, remember Fannie Mae and Freddie Mac? Meet their cousin, Ginnie. She's putting taxpayers on the hooks for hundreds and billions in new subprime loans. Could taxpayers be in line for the biggest bailout of them all?

(COMMERCIAL BREAK)

GIGOT: Happy anniversary. It's been almost one year since you, the taxpayer, took shares in mortgage giants Fannie Mae and Freddie Mac. Now meet their cousin, Ginnie Mae, or the Government National Mortgage Association. She is about to join them as a trillion-dollar packager of subprime mortgages and that could lead, could lead to the biggest bailout of them all.

Assistant editorial page editor, James Freeman, is here to tell why.

Let's start with Fannie and Freddie, James, one year later. How much have the company's bailouts on the taxpayers?

JAMES FREEMAN, ASSISTANT EDIORIAL PAGE EDITOR: We, the taxpayers, have given them about $85 billion. We're on the hook up to $200 billion.

GIGOT: For each of them.

FREEMAN: For each. That's right. And Freddie inked out a profit recently, but...

GIGOT: A quarterly profit.

FREEMAN: Quarterly profit based on an accounting change. They made it clear in their earnings statement, don't think that we're done taking money from the taxpayers. We're going to need more.

(LAUGHTER)

GIGOT: And James Lockhart, the regulator for seven years, said recently he probably leaving the job, but...

FREEMAN: Smart move.

(CROSSTALK)

GIGOT: ... and saying get out of town. But he's done a good job while he was in office, but he said that we'll probably never — the taxpayers will never see most of that money back.

FREEMAN: It's hard to see how it comes back. If you read the Fannie Mae's quarterly earnings report, they seem to be painting a gloomy picture and it seems unclear whether the $200 billion is going to be enough from their filing.

GIGOT: One of the things fascinating in this is the government and the political class, Congress and the administration, and it had been the Bush administration and now the Obama administration, basically, OK, they lost all of this money but we're counting on you to rescue us from the housing slump, so push more money into the housing guarantees.

O'GRADY: They're pushing more money and there's something called the Federal Housing Administration and, as you mentioned, Ginnie Mae's job is to bundle and sell mortgages that the FHA wrote.

GIGOT: The Veterans Administration too, but most of them are FHA.

O'GRADY: Right, those are up for the — the number of mortgages that the FHA insures is four times as great today as it was in 2006. So, that locomotive is just going strong.

GIGOT: While Fannie and Freddie, they had a so-called implicit guarantee. They had claimed, oh, the taxpayers are behind us. Now, we know better. In Ginnie Mae's case, and the FHA's case, there is no doubt that the full faith and credit of you, Dan Henninger...

(LAUGHTER)

... stands behind the billions of dollars...

(CROSSTALK)

(LAUGHTER)

GIGOT: Does that make you feel good, Dan?

(LAUGHTER)

HENNINGER: As a matte of fact it does not make me feel good with everything else that's going on. What really doesn't make me feel good, the Federal Housing Administration — as we all know, after the incredible catastrophe with the housing bubble that virtually destroyed the American economy, lenders have now gone back to traditional down payment levels of 10 to 20 percent which, you know, about puts more responsibility back on the lender and the borrower. It keeps skin in the game.

GIGOT: There is skin in the game.

HENNINGER: The system we'd had in the entire post-war period, they threw it over the side. What's the down payment for FHA loan? 3.5 percent. They're simply injecting the same moral hazards that led to the catastrophe of the nine months.

FUND: The worst part of the anniversary, you may have thought when we bailed out these companies that this was for the excesses for the crazy bubble we just went through.

(LAUGHTER)

But if you look at Fannie and Freddie, a lot of losses are being generated by the Obama mortgage modification plans that have happened since then. If you look at Ginnie Mae...

GIGOT: Isn't it the Obama-Bush mortgage modification plans?

(LAUGHTER)

FREEMAN: Fair enough. The point is this spring they added onto it. And on the Ginnie Mae side, basically your subprime market that we realized it was disastrous has just moved onto the government programs.

O'GRADY: There's another part of it, too, which is you'll remember there were all of these evil, terrible, private-sector firms that used a lot of leverage during the bubble.

GIGOT: I do remember.

(LAUGHTER)

O'GRADY: And the FHA today has a leverage ratio of 33-1 in its reserve fund, which is Bear-Stearns levels.

GIGOT: The delinquencies on FHA loans are already about 7 percent, which is roughly double what people are saying is really save. And 13 percent, I believe, are delinquent for at least 30 days. Now, that is getting into dicey territory and the taxpayer could be on the hook here if the housing market keeps going down, and there are some signs it is stabilizing in some markets, but if it goes down, what's the size for the taxpayer loss, the scheduled loss here, James?

FREEMAN: It could be huge. Their portfolio was approaching a trillion and the funds to protect against defaults are draining every quarter, approaching zero pretty quickly, so the exposure is massive.

O'GRADY: There's also a big problem with fraud.

GIGOT: Big problem.

O'GRADY: Yeah, there's a group called the Mortgage Asset Research Institute and they've estimated that, overall, in the overall mortgage market, fraud — instance of fraud are 45 percent. And they've also said that in the second quarter of this year, they were at all-time highs.

GIGOT: One other things that's happened with FHA loans, the government has said, we don't like the former level — it was in, I think, 400,000 or that we could insure mortgages up to that level. So let's increase it to 729,000 or so in some very expensive markets, California and some others, but that's not that — the attraction to the program is for fraudsters.

HENNINGER: Our viewers are undoubtedly asking how this insanity could be taking place.

(LAUGHTER)

And the answer is traditionally...

GIGOT: Congress.

HENNINGER: Home builders and Congress are joined at the hip financially. They are one of the biggest contributors of money to Congress.

GIGOT: We should add that it's not just the political class. It's the housing lobby, home builder builders, realtors and a lot of others. They love these subsidies. And if the taxpayers have to take a little risk, hey, you know, that's the cost of doing business, right?

FREEMAN: And what is really amazing on this — the fraud end of it, the HUD inspector general warned that all of the same shady characters that are being prosecuted and hounded for the subprime mess are now applying to be in the government program. And the numbers — many are being approved. So the number of people that are now qualified to offer these taxpayer- backed loans are skyrocketing.

GIGOT: James, thanks for the pleasant last word.

Ahead, California could be the biggest winner in the Census plan to count illegal immigrants in 2010. Will your state lose representation in Congress as a result? Find out after the break.

(COMMERCIAL BREAK)

GIGOT: We are a little more than six months away from the start of the 2010 Census. If you think the goal is get an accurate count of U.S. citizens, think again. Instead, the Census Bureau is set to count all people physically present in the country, including large numbers who could be here illegally. That could give states with high rates of illegal immigration a big advantage when it comes to reapportioning congressional seats. One big winner, potentially, California, which stands to gain nine more seats in Congress than it would if only U.S. citizens were counted. States like Ohio, Louisiana, Michigan, Pennsylvania, could be among the losers.

We're back with Dan Henninger and John Fund. Wall Street Journal editorial member, Jason Riley, also joins the panel.

All right. John, are the — is the Census set to count an awful lot of illegals as part of the count?

FUND: Yes, the Census Bureau says its job it to count everyone in the country, I assume that means illegal aliens and tourists, and make that part of the Census count.

GIGOT: Tourists? They're going to catch them at the airport?

(LAUGHTER)

FUND: Or the hotel. The problem is the Census Bureau, for the first time, is going to be asking on the Census form if you're a citizen, so there's no way of telling who they're counting, whether they're a citizen or not. I think this is highly dangerous. The Census was originally designed to count citizens and permanent residents of the United States. In the last ten years, we've had a large increase of illegal immigration. There's somewhere between seven and 12 million illegal aliens in this country. Adding them into the decision about which states get how many house seats will dramatically change our politics.

GIGOT: Jason, do you agree with that?

JASON RILEY, EDITORIAL BOARD MEMBER: No, I don't. The 14th Amendment is pretty clear. It says, quote, "Count the whole number of Americans in each state." There may be residents in the state that are illegal, but they're still residents. And according to the Constitution, John, they have to be counted. The idea that Census Bureau administrators can arbitrarily decide not to count certain people is legally dubious and probably unconstitutional.

The second point to make is the Census is more than just about reapportionment of members of Congress. It's also going to term federal funds, some $3 trillion in the allocation of federal funds over the next ten years. Why should border states, who are bearing the brunt of these illegal immigrants, be punished for the federal government's inability to take care of our illegal immigration problem?

GIGOT: He has a point, Dan. James says, look, if the people are in the states and they have to pay for the people who are in the states for services whether they're illegal or not, they should be allowed to have then counted because they'll have access to the money.

HENNINGER: Well, you know, I think, Jason, what you're suggesting is something of an abstraction. As a practical matter, the Census Bureau is...

GIGOT: Money isn't a distraction?

HENNINGER: No, but counting people is real. You have to — the Census goes out and takes a physical in place head count of the sort we were showing in the video on the screen. You don't mean to think they'll go out and knock on the doors where the illegal immigrants live and they're going to answer the door and say, oh, yeah, I'm be happy to fill this Census form, when they're in hiding? So then it leads you to something we've talked about on this program before called statistical sampling, in which you use statistics to estimate how many people there are, which is what a lot of groups representing black, Hispanic, Japanese, have wanted the Census Bureau to do. And they've resisted for years because it's an inaccurate account.

RILEY: And the current director says he won't do that, yeah.

HENNINGER: And this leads to a complete morass, if you start trying to count people who are walking.

FUND: Paul, and the current Census Bureau director is someone who originally started this sampling process. He's very much in favor of it. In addition...

GIGOT: But he said — wait a minute, John.

RILEY: He said, on the record, that he won't do it.

GIGOT: He has said, on the record, that he will not do it.

FUND: As far as I know, and for my sources inside the Census Department, they're preparing to use sampling techniques next year.

GIGOT: John, let me ask you about the constitutional argument here. Eugene Baldwin, a constitutional scholar, among others, agrees with Jason and says, look, it you're going to change and you want to count only citizens, then you will have to have a constitutional amendment because the 14th Amendment says what it says.

FUND: What has been done in the past is you have two separate numbers, one that could be used, in theory, to apportion the money that these border states, for example, have to bare costs for illegal aliens, and the other to reapportion the House districts. I think you can do something that preserves the original intent of the Constitution and also takes into account the need for federal money to be allocated fairly.

GIGOT: In terms of the allocation of representation, the small states are already — are overrepresented by population in the Senate, so they do get, regardless of the Census count, a fairly good representation in the United States.

FUND: But distortions are now becoming so large. If California has nine more congressmen or women than it's allowed normally, that's an enormous distortion of our political process. And it's no longer a small one we can ignore.

RILEY: I doubt that nine — that California would get nine more, congressman, John, I think other indications show there's been a lot of out migration from California and northeastern states as well.

GIGOT: We have to take one more break. Coming up next, our "Hits and Misses" of the coming week.

(COMMERCIAL BREAK)

GIGOT: Now for "Hits and Misses."

Jason, first to you.

RILEY: This is a miss for the Obama administration who wants to sprinkle black families in white suburbs for cosmetic reasons. The Department of Housing and Urban Development is pressuring Winchester County, a suburb just north of New York City, into building more affordable housing and marketing it to minorities. This sort of social engineering has a horrible history in this country. It divides communities and creates all kinds of racial tension. I'm for integrated communities, like most Americans, provided it was from genuine choice, not where the government deciding where it wants certain people to live.

GIGOT: All right.

Joe?

RAGO: Well, it's hard out there to be a Congressman these days, Paul. They're having their star vacations returned by constituents made about health care and the economy.

GIGOT: Town halls.

RAGO: And now they've been forced to scrap programs to buy eight luxury jets. Now this is the same Congress that went ballistic when G.M. and Chrysler and Citigroup executives traveled to Washington in corporate planes. So this is a hit to Congress for canceling this wasteful program and proving they're capable of being embarrassed.

GIGOT: All right.

James?

FREEMAN: This is another miss for team Obama and congressional Democrats for moving us this fall in the budge reconciliation process towards a single buyer system for student loans. The government already guarantees about 80 percent of the market. Apparently, that's not enough government. We're going to go further. A big miss to team Obama.

GIGOT: All right, James, thanks. More good news from James Freeman.

That's it for this week's edition of "The Journal Editorial Report." Thanks to my panel, and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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