04/28/10 Baltimore, Maryland – “Ask me how insurance works.”
“All right, how does insurance work?”
“Well, okay, you give me your money…”
“Is that all there is to it?”
“Yes.”
“Is that a joke?”
“Not exactly…”
Fire insurance works by sharing out the risk of a fire among hundreds of homeowners. In effect, if one house burns down, the others have already put aside enough money to rebuild it.
It’s a kind of voluntary socialism…freely collectivizing the risk of a house fire.
But just because you have fire insurance doesn’t mean you will leave a can of gasoline on the kitchen stove. You know it would be a big pain to replace the house and its contents – even if you were made whole financially. That’s why it works, because it doesn’t change human behavior. So, actuaries can calculate the odds of a fire fairly accurately.
But suppose you could insure against losses in the stock market? Or suppose you were guaranteed health care…or a comfortable retirement…no matter what you did? Wouldn’t you at least be tempted to live a little? To take chances? To spend a bit more?
And wouldn’t the whole economy change as a result?
For the last 50 years – or more – we have been taking part in a vast experiment. What will happen as more and more risks and costs are socialized?
We already saw what happened in the mortgage market. Bankers used to take their risks one by one… If they thought a man was a good credit risk, they lent him money. Sometimes they were right. Sometimes they were wrong. Being wrong from time to time was just a cost of doing business.
But then the financial industry collectivized the risk. The banker lent, earned a fee, and then sold the mortgage on to Wall Street, where it was securitized, packaged and resold. What was the consequence? Well, mortgage lenders stopped worrying about individual risks. They changed their behavior and stopped using their own judgment. All they wanted was to close the folder, collect their fees, and move the paper on. Soon, they were lending without asking questions – using low-doc, IO mortgages. House buyers changed their behavior too. Easy mortgage credit pushed up demand…which pushed up prices. Pretty soon, the whole town was on fire.
But then the feds stepped in and collectivize the risk even further. Now, Fannie Mae and Freddie Mac are arms of the US Federal Government. And now we’re all partners in the insurance company! Now, when houses burn down WE ALL have to pay.
We’ve seen what happened when government collectivized other parts of the financial system too. You can collect Social Security whether you saved for your retirement or not. And you could get unemployment compensation whether you saved for a rainy day or not. And you can get food stamps whether you tried to find a job or not.
And now, if you’re a major Wall Street bank, you can get a bailout from Washington whether you deserve it or not.
How about that? The feds have spread the risk around so much that everybody pays for everybody else’s mistakes.
Is that a good system, or what? Government insures everybody against everything. Only the government doesn’t have any more money…
…So, then you give your money to government…
…and that’s all there is to it.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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great post Bill!
Lays it out so smooth…
best post for like 6 months!
If anyone was wondering where Harry went, he has surfaced on Zerohedge where he gets beat profusely with every inane post he spews. Quite entertaining, that.
Dang you Fluglehork, I was hoping to do the same thing.
He’s been posting for about two to three weeks and I just noticed today that was him.
He seems to be holding his own though.
Great scoop Fluglehork.
I can only guess that BB is happy that flea flew the coup.
I gave a lot of money to the government this year.
But, what the hay, it was their’s in the first place.
They gave me some money in Unemployment Compensation and I gave them some back in the form of income taxes.
So, I guess its all a matter of stealing from Paul to pay Peter, or is stealing from Peter to pay Paul, either way those electronic fiat bucks get sent round and round to feed the beast.
By, the way BB, enjoy your vaction while you can. After the pounding Harry has been getting on ZH he may be back where the waters are little safer.
‘You can collect Social Security whether you saved for your retirement or not.’
Exactly what is that FICA thingy I have been forced to pay for the last forty years???
Let’s pretend the FICA thingy is Fire insurance premium and your house just burned down!
Could you collect the insurance even though you didn’t save enough to replace the house yourself?
Kojak…. translate please
“You can collect Social Security whether you saved for your retirement or not. And you could get unemployment compensation whether you saved for a rainy day or not”.
I’m sure you didn’t need kenn to remind you about FICA. So why did you speak of Social Security as if it was a give away? Also, my employer pays the premiums on my unemployment insurance. Why do you think he does that Bill? Because he is MAKING MONEY OFF MY LABOR. I think you should tell us yes or no. Are you a capitalist pig?
I ain’t got no drinking problem!
I drink beer, I get drunk, I fall down.
No problem!
Of course! If my home is still insured based on the amount of my 2007 mortgage application and due to falling house prices i’m now $75k underwater based on current valuations and the balance of my mortgage. Then a fire would….er, um, I gotta go….
Sorry, but I disagree that insurance “….doesn’t change human behavior.” It does and that’s why actuaries can make determinations (bets) on how future behavior will act out.
If it wasn’t for SS that we older have paid in for our decades of labor this crisis would have been much, much more severe and you would have had millions out in “Bushievilles” (or “Rubinvilles”, “Alanvilles” or “Summervilles” etc…..)
Some things need to be “socialized” and some things need to stay just as they are…….Unfortunately we continue to elect too many politicians that don’t know the difference.