You don’t hear much today about the nanny state even though it is displayed in the full dress of overwhelming force. Criticism of nanny is ordinarily directed toward the welfare mother, pubic housing, government employees, social security and Medicaid, Medicare, even national emergency handouts, which has now become financial behemoths as too big to fail, when in faith we are told, the free market is capable of taking care of itself. Much like insurance companies notorious for exorbitant co-payments and deductibles place individuals in jeopardy when hit with a catastrophe and inevitably are left bankrupt.
Now, however, that nanny is bailing out the financial market—despite some ambivalence from both parties to the contrary—most generally agree with some ambivalence that such action is necessary to protect all of us from widespread economic disaster. Everyone to some degree has a sour taste when it comes to nanny state—in America, that is—for we all would like to possess self-reliance, yet at the same time want the comfort of a cushion. But just as the lesser spouse wishes self-reliance or at least partnership, he or she acknowledges that one is vulnerable and regrettably dependent or the lesser of co-dependence , so, too, the nation when crisis hits—as in national disasters—accepts the government as the only insurance company in town.
The finance oligarchy in its drive to leverage beyond reason to the point of Ponzi turned to its nanny AIG and hedge funds to do the impossible. Aside from state commission rules, it is no accident that respectable insurance companies did not participate in this quixotic risk venture just as they would normally abandon flood insurance, and rightly or wrongly have the instincts to raise premiums in face of growing risk. AIG insured on the cheap since it was as cavalier concerning risk management as were the banks insured. Had the insurance rates been commensurate with the risks, that in itself would have raised the red flag of self-regulation.
The AIG math, however, does not account for the trillions lost by the central bank-brokers. After all what insurance company than AIG products branch would be eager to back, say, Merrill Lynch at 40:1 or Goldman Sachs at 30:1 leverages? What investors would back further investments with the likes of paper tigers Bear Stearns or Merrill Lynch? —only other paper tigers like JPM-Chase and Bank of America, along with the blessing of, thank you very much, our government premium free.
Imminent countervailing action should be forthcoming to rollback mergers and invoke antitrust laws on those deemed "too big to fail"— such as JP Chase absorbing Bear Stearns and WAMU, and Bank of America’s Merrill Lynch to say nothing of Wells Fargo’s Wachovia—in order to return to relatively sane 10:1 leverage and FDIC backing, plus bank shareholders insisting the modest leverage be insured privately, lest they again appeal to the government, the ultimate insurance company.
Copyright Richard R. Kennedy, May 4, 2009