The Wall Street Journal reports that since receiving government aid, insurance giant AIG has begun greatly underbidding its competitors in the insurance industry. Fed Chair Ben Bernanke acknowledges this practice, and believes it is necessary for AIG to do this, in order to gain enough marketshare to become profitable.
With billions of government handouts, AIG is able to offer peerless premiums. In a free market, offering such low premiums would be corporate suicide. But AIG is not a free market participant. It has government backing. Bernanke and Treasury Secretary Timothy Geithner have, on numerous occasions, voiced their intent to do whatever is necessary to keep AIG from folding. In this context, risks that would normally bankrupt the company do not restrict its behavior, because its liquidity flows from a seemingly bottomless barrel, the purse of the citizenry. Losses from these risks will continue to be subsidized, and those subsidies will encourage more risks, and bring on more losses.
Other insurance companies cannot compete with a company that has unlimited liquidity. This leaves their executives with a dilemma: they can keep their premiums high and non-competitive, and lose all of their customers; or they can lower their rates to meet AIG’s, keep their marketshare, and become illiquid when they are forced to pay out to misfortunate customers. Both of these options will end in bankruptcy.
When AIG’s competitors are nearing bankruptcy, one of a few results may play out: they may fail outright, leaving their marketshare available to AIG; they may be bailed out by the government, which starts them on AIG’s path of neverending losses; or, they may be purchased by AIG. In each of these results, a government-funded monopoly over the insurance industry is established. This monopoly, like all monopolies, will suffer unnecessary costs and miss opportunities to innovate.
The added costs of a non-competitive insurance industry will be great, even in the unlikely circumstance that it is fully funded by premiums. It is likely, however, that the monopoly would evolve into a nationalized insurance company, or a government service, rather than revert back to a private insurance corporation.
If AIG’s insurance role becomes a government service, it appears that the costs of that service will be borne by everyone who uses dollars, as the Treasury has started printing large amounts of currency to pay its bills. This inflation is perhaps the most regressive form of taxation, because it hurts those who are not wealthy enough to protect themselves properly from its effects.
Filed under: economy | Tagged: aig, bailout, ben bernanke, competition, economy, Federal Reserve, freedom, inflation, insurance, lais, laissez faire, monopoly, nationalization, socialism, timothy geithner | 1 Comment »