AIG spells nationalization of entire insurance industry

A I Jeez

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.

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A letter concerning economic reality

As a response to this bloomberg.com article, which declares and celebrates the end of laissez-faire economic influence, I shared with my mother (who forwarded the article to me) thoughts so relevant to the economic discussion in America today, they are worth repeating here:

This article, besides unpardonably confounding economic liberty with imperial oppression and brutal dictatorhip, grossly neglects theoretical argument, so the ignorant reader is to accept its conclusion without understanding it.  This negligence of thought is a necessary means to an unreasoned end.  So far from being worthy of publication, this article would be expensive at any price, and is not worth the time spent reading it.  By equivocating much, it says nothing.

The idea that Barack Obama will “referee the laissez-faire versus free-market debate” is laughable; as referee in that non-existent contest (laissez-faire and free-market are inseparable allies), Obama would probably sabotage both competitors and declare an interventionist victory.

I will present a few points ignored by this article that, if attended to, would render a very different image.

First, it has been over a century since we have had a free market for goods and services and private control of production and consumption.  Therefore we have not had capitalism, and it is irrational to blame economic woes on a system that does not exist; it is as reasonable to blame Martians.

Secondly, and most importantly, government fostered the economic crisis.  Behold artificially low interest rates during the tech bust of 2001-02.  The only way to keep rates so low is by printing money out of thin air.  This government-created free money combined with implicit government guarantees of new loans via Fannie Mae and Freddie Mac generated a housing bubble and subsequent financial bubble large enough to threaten the existence of the global financial system.  Because that system is naturally undeserving of its legitimacy, its collapse may be a good thing, but only if governments practice humility in the aftermath.  Governments should understand that the maximization of individual freedom is their purpose, both politically and economically.  Governments should come to know that the evils of paper money cannot be overstated.  Governments should not allow interested monopolies to control monetary bases.  Governments should focus on destroying monopolies, not turning them into unavoidable institutions.  Inexplicably, we must now rest our hopes of economic salvation upon the imminent Representative Barney Frank and Senator Christopher Dodd, both of whom promoted bad loan practices and free money policies for years, and neither of whom saw the economic crisis coming.  This is a sure case of the inmates running the asylum.

On this point, note that at least one House Representative did accurately predict the events that led to the financial bust.  In a speech to the House in 2001, he said “despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policies of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.” That Representative was ignored by almost everyone, and probably laughed at by the interventionist economists that this article aggrandizes.  That Congressman was Dr. Ron Paul, who continues to be widely ignored by popular economists, his colleagues, and our media.

Thirdly, most true free-market economists follow the “Austrian” theories of Murray Rothbard, Ludwig von Mises, and Friedrich A. von Hayek.  Free marketeers typically place more value on each of these three than Milton Friedman because their work was much more thorough, more laissez-faire, and more conclusive.  Few if any contemporary proponents of laissez-faire economics hail from the University of Chicago.

Economic science and history inform us that there will eventually be a final and all-destructive economic downturn: the fiat currency bust, which in the United States will be the destruction of the dollar.  The nature of this destruction will likely be hyperinflationary, like Germany’s post-WWI Mark or the ancient Roman denari (severe dilution of silver content in coins was the ancient “paper” money, and is still practiced).  I hope this will be followed by a return to sound asset-backed currencies and the elimination of fraudulent banking institutions, whose theft brings so much hardship to the unaware, unoffending, humble human.

Sifting through the crap

Crap

99.9% of everything you will ever hear from a U.S. politician or media pundit is total crap. I present to you five widely discussed issues that do not matter, so that next time you hear them on the radio or television, you can say to yourself “this is pointless conversation”:

  1. Energy policy: The energy industry is part of the economic market. It operates most efficiently on its own and requires no help from the government (unless there is a monopoly in the market). Anyone who thinks limiting our choices on energy is a good thing is delusional. Stay away from them. It is remarkable how many believe that people can be made better off by the imposition of limitations on their choices. Here’s how it works, honestly and simply: when (and only when) gas prices become too high, an alternative energy source will become dominant.
  2. Environmental issues: If your property is being damaged by another person’s (or group’s) pollution, sue them. If you can prove your case, you will win. Chances are, you’ll be one of many, and those who choose to pollute will soon stop because of the amount of expenses they are incurring from mounting lawsuits. There are no regulations necessary–just the simple legal protection of property.
  3. Illegal immigration: The leaderships of both parties have decided nothing will ever be done to stop this. In fact, they hope to someday unify Mexico, Canada, and the U.S. under a multinational government.
  4. Racism, sexism, feminism, anti-religious sentiments, and other prejudices: You are easier to control if you think along these lines at all. Whether you are practicing these or blaming others for doing so, you are falling right in line with what the status quo wants. You are focusing on an issue that does not matter, which works out perfectly for the people trying to make sure they can continue to steal money from you without your noticing.
  5. Islamofascism: This is a huge myth. If you think radical Muslims are about to take over the United States, you are wacko. You need to see a mental health professional and talk about your irrational fears.

From now on, if you hear one of these issues mentioned on the news or anywhere else, remember that someone is trying to entertain or bewilder you, and that nothing they say can swindle you out of a wise and well-reasoned vote. The list above is far from exhaustive.

Now that you know what sorts of issues don’t matter, here’s some that do: The Constitution, Bill of Rights, fiscal restraint, and sound monetary policy (the elimination of fiat currency). If your legislators are focusing more on the first list than this one, they need to be replaced.

You’re welcome.

Clearing a path to affordable living

Standing between you and your living

Markets are most advantageous to individual participants in a state of perfect competition, where we find fair wages, fair prices, and fair opportunities.  Perfect competition is unattainable in any market. However, this does not mean our society should not strive to attain it.  With the passing of Sherman Anti-Trust legislation in 1890, Congress first recognized the public’s need for competition.  Congress recognized that some extremely large corporations were creating insurmountable barriers to entry for competitors.  The government knew that the best way to promote competition in a market is by minimizing that market’s barriers to entry, and therefore passed anti-trust laws.  Current Anti-Trust legislation protects against the abusive strangling of competition that was prevalent in the pre-income tax days of the late nineteenth century; but today, competition’s adversaries are subtle, suffocating forces, that the old competition laws do not address. These newer anti-competitive forces, though subtle, are undeniably more numerous, more pervasive, and more restrictive than the old tactics of the “robber barons.”  Moreover, these anti-competitive measures have used and seek to further use the government, which exists only for the benefit of the public, as a means for stifling competition.  Why would a corporation seek–even write–legislation that restricts its own industry, but for the restriction it puts on its competitors and the protection it provides itself?

It is still true, as any economist or well-educated politician will admit, that maximizing competition involves recognizing and breaking down barriers to entry; in order to walk the proper path, we must first blaze and cut the trail, and we will find it necessary to dispose first of the largest and thorniest impediments.  When the task is so simple as cutting a literal trail in the woods, the greatest obstructions are visible to all; but when we are asked to clear the severely mangled path of the invisible market, the prickles and roots must be uncloaked, and the path’s participants (the public) allowed full view of them. They might be surprised to learn that the largest obstructions are called “taxes” and the most vexing weeds “regulations,” which multiply so quickly that the eye cannot watch them, and the mind cannot fathom their extent.  In almost every market’s path, individuals will find–upon diligent examination–that the elimination of only taxes and regulations would leave a clearing so starkly contrasted to the brush that currently lies before them, that it would be cause for celebration.  They could imagine themselves skipping where those obstacles once stood.

After this honest presentation, market participants are left with real choices: they may try to maneuver through the cramped, bladed monstrosity; they may become frazzled, and sit in their place as eternal sideliners, watching with amazement or amusement as others awkwardly navigate the improper market; but eventually, having their unoffending humility tortured to action, they shall realize the utility of hatchets and chainsaws, and choose a delegation to take up axes or machete, and begin destroying the offensive contrivances that stand in their path, replacing tax and regulation with opportunity and innovation–economic revolution.

Partisan economics: no liberals in America

A sticker for every conversation you don't care to have.

The term “liberal” is misused among Republicans.  What they dislike is not true or classical liberalism.  Classical liberalism defends individual freedom, and actually advocates a free market. The Democrats the GOP complains about are far from liberal; they are socialists. The “liberal socialist” Democratic party contradicts its own character, because socialism and liberalism cannot naturally coexist. Socialism cannot be implemented without using methods that deny basic liberties.

Americans widely misunderstand their nation’s socioeconomic problems, which have come about because of monopolization and socialization of industry–the steady dismantling of the free market.  Democrats have economics all wrong, but so do Republicans.  Neither of them actually wants free market capitalism.  Both do whatever the corporate lobbyists want them to do.  Neither reads the corporate-manufactured, bipartisan legislation–legislation that stifles free market competition, and hurts the individual market participant.

Democrats use a superficial argument that has always appealed to the lowest common denominator: they blame the rich. Those who wield power and have not been elected, according to Democrats, cannot have good intentions. To them, there is nothing noble about employing a hundred people if the employer profits from it. This faulty notion is frighteningly crossing party lines, and socialist sentiment is growing among the leaders of both parties now.

If society rejects profit, private business has no reason to exist, and the state must plan the economy.   When profit is stolen by the government, the liberal socialist may momentarily feel triumphant, but this subsides upon the realization that an even larger and more coercive group of elites that were not elected must start forming–this is the group of “experts” that plan the economy private enterprise abandoned.  These experts cannot be restricted by the electorate, because the economy is too complex for the people and legislators to agree on its directives. For a socialist nation to be productive, liberty and democracy must necessarily be sidelined–scoring goals in socialism requires totalitarianism.

Democrats should be heard, but cannot be taken seriously on economic policies. Their disdain for corporations is not irrational, but it is partially misplaced, because collective power is naturally corruptive and malevolent, whether it exists in monopoly or in government.  Blind faith in government only exists because the faithful are too far removed from democratic government’s historic evils. 

Don’t worry, Republicans.  I have not forgotten you. 

Republican herds argue that corporations naturally become powerful monopolies in free market capitalism, but anyone who has observed the lengths to which corporations go to influence public policy, sees nothing natural about these monopolies.  Republicans are but a baby step ahead of socialist Democats; they oppose socialism, but see nothing wrong with corporatism, which may be more productive than socialism, but is perhaps more hostile to individual liberty and almost as destructive to individual prosperity.

Democrat and Republican leaderships should both understand–and we assume they do not, because if they do, we can only conclude that they wish ill upon our nation–that it does not do the nation good to insult the flawed socioeconomic policies of one party, if it is only for the benefit of the flawed socioeconomic policies of another.  They should both do what neither is yet willing to do: reject corporatism and maximize competitive forces of the market.  In doing so, they will have to sacrifice much power–not an easy thing for a politician to do.

Bunch of drunks run the economy

Another shot of the green stuff, please.

“Mishief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges, which are employed all together for their benefit.” – Andrew Jackson 

“Banking establishments are more dangerous than standing armies,” warned Thomas Jefferson, in defense of Americans against the possible monopolization of money. Jefferson’s foresight is noteworthy, and will soon become even more so. The interests of banks are compounding against the interests of citizens, in this country and around the globe.

Today the Federal Reserve introduced the Term Securities Lending Facility to address “increased pressures in liquidity markets.” The TSLF will give $200 billion of Treasury securities to banks each month, and banks can exchange their residential-mortgage-backed securities for these Treasury securities. In simpler terms, the TSLF is a tool that gives banks an easy way to transfer their mortgage losses to the U.S. Treasury.

The TSLF comes on the heels of (and in addition to) two other unprecedented and controversial Fed actions, the Term Auction Facility (TAF) and Federal Reserve repurchase agreements. The Federal Reserve has hinted that these actions will continue for the next six months, and may even increase. Currently, the new facilities pump $400 billion of fiat currency into the market each month, which, in our $12 trillion economy, represents 40% of GDP.

The Fed is also expected to cut rates yet again, in an attempt to stimulate growth through inflation. Low rates, stagnant consumption, negative savings, and high investment, make an awkward combination that would leave even Keynes scratching his head. The U.S. economy is in dire need of a market correction, but the Fed has decided to avoid a market correction (job losses) in favor of a dollar correction (hyperinflation). The Fed may consider that stock prices are measured in dollars; it will probably not consider that wages are paid in dollars. While jobs may be saved, wages will not be able to pay for the inflated prices of the coming year, and then Barack Obama will come to the rescue, touting free healthcare, food, water, electricity, and whatever else a too fat and too happy American public might hope for. The Federal Reserve is unwittingly forcing the United States into complete democratic socialism, and cannot stop it but through honesty, which isn’t forthcoming.

Moving on to the gloomy part of the Fed’s announcements this morning, the Fed’s efforts will be coordinated with those of the European Central Bank, the Bank of Canada, the Bank of England, and the Swiss National Bank. When national sovereignty is properly respected, these banks operate as monetary competitors, helping their citizens by practicing competitive responsibility. This morning, they publicly declared that the nightmare of many neo-classical economists for decades had become reality-collusion against humankind among the planet’s monetary policymakers. Those investors who thought they outsmarted the Fed by switching to Euros or Swiss Francs have not escaped. There truly is no safe store of value in paper anymore.

Buy gold and beans.