The Rise of the Risk Management Industry

November 1, 2013

As he was leaving office, Dwight Eisenhower felt a responsibility to warn the nation of coming threat from within, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex.” These turned out to be words booth wise and unheeded, as our military expenditures now total nearly that of the rest of the combined nations of the world.

I’m now seeing a new threat from within, rising and to some extent already risen. The risk management industry, with insurance companies at its core, has wormed its way, insidiously and  in many layers, throughout nearly every industry and organization in these United States. This cancer has grown much deeper, though through much the same mechanism as the military industrial complex; by taking advantage of fear, both that of the general populace and the government and corporate entities.

A friend of mine recently posted a saying: “A book is the only thing you can buy that can make you richer”. I would argue that another profitable purchase would be a Congressman. While I do think there are some career fence sitters in office who pretty much just vote in whichever direction offers them the most favors, I like to think most individuals in government feel like they are doing the right thing, though I think getting to that coveted and contested office, I think nearly requires one to be of the opinion that the ends justify the means, and that it would be distasteful too look too closely at how the sausage was made.

Unlike these individuals, organizations, such as corporations, unions, and political parties, are generally run or heavily influenced by committee and legal advisers. The people of these committees see it as their job to do what is in the interest of those they represent. If, for example an industry of large donors made it clear that their donations to a political party would keep coming so long as the party voted in their favor, then it is quite likely that the party would choose to endorse candidates who have agreed to vote accordingly. They justify this by telling themselves that if they don’t go along, then the other party will, and will win, which logically they would see as being a worse choice than taking the support themselves and  then trying to enact their own ideology. The beauty of this situation from the donor’s perspective is that they really can’t lose. All they need to do is give support to both sides and threaten to withdraw it from the one who gives them the least in return.

These days, everyone in business is obsessed with avoiding liability. The blame usually comes down on people who start frivolous lawsuits, but really, the system is designed to encourage such things. There are three main players in this: The business trying to avoid being bankrupted by a large lawsuit, the insurance company trying to sell coverage without actually having to pay anything out, and the individual or government agency trying to get money for a perceived wrong.

Kaufman’s Law: A policy is a restrictive document to prevent a recurrence of a single incident, in which that incident is never mentioned.

The business will hire people to keep track of regulations create appropriate policies, and it isn’t just legal regulations they are following. Insurance companies have their own regulations, some of which must be followed to get coverage, and others which will nullify their responsibility to pay if they are not followed. The nature of such preventative policies is that they raise both the cost and the complexity of doing business to the point where it is nearly impossible for a small business to be competitive. The regulations have gotten so thick that no one even knows them all. This is of course fine with government and insurance companies alike, since anyone not knowing they have violated a regulation is still going to end up paying a fine or be denied coverage as a consequence.

The profit motive of insurance companies should not be discounted. If nothing else, the mere fact that they are profitable means that they are an inefficiency in the system, a middleman who increases wait times, and decreases care options. Obamacare pretends to be a cost saver in the system. The early claims were that it wouldn’t raise costs to taxpayers, that the healthy would be made to pay for the sick. I was disgusted to read this piece of economic ignorance on CNN Money:

“Getting subsidy-eligible people to enroll is important for the overall success of the exchanges. The first to sign up are likely those desperate for health insurance, so they are a sicker and costlier population. They’ll pay for insurance with or without subsidies. But they must be balanced out by younger and healthier folks, many of whom are likely to be enticed by subsidies, experts say. The subsidies were expected to be very popular: The Congressional Budget Office projected that 86% of the 7 million people enrolling in the exchanges for 2014 would be eligible.”

The second problem is one of outreach. Many people, particularly among the lower income, don’t know that they are eligible for subsidies or even that they have to sign up for insurance, said Dan Mendelson, chief executive of Avalere Health, an advisory company for insurers.
“This requires aggressive messaging,” he said. “They need to go into these communities and get them to sign up. The president has been spending his time apologizing.”

So first, the healthy were going to be made to pay for the sick. Now the healthy will have money taken out of their taxes and handed back to them, only to be forced to give it to the insurance companies. And then there is this article in Businessweek, showing that there is a provision in the bill making sure that if the insurance companies find their costs to be too high, that the government will backstop their losses, and also that there are cost saving measures set to make everything seem cheaper at the beginning, which fade out after three years.  Combine this with the website problems and various postponements, and it really looks to me like they are trying to stall until the midterm elections and put forward the appearance that things are great and they are just working out a few minor glitches, rather than making a bubble that will lead to bailing out the insurance companies that we have already paid three times over.

How many times over do we need to pay for our health care? Back in the day a patient went to the doctor with an ailment, saw them promptly, made decisions between the two of them and then the patient payed a reasonable fee. Now we pay insurance companies, our doctors and hospitals pay insurance companies, the government pays insurance companies, and in return, the insurance companies make us go to a doctor who is in their network, they decide what care to pay for, and if you have a problem with your bill, they leave you on hold until the creditors show up. And if that weren’t bad enough, we can’t even wash our hands of the whole thing and take care of ourselves. We’re mandated to pay for the care we don’t use.

An Excellent Website for Economic Insight

October 13, 2011

I’ve been reading the Weekly Market Comment section over at HussmanFunds for a while now as one of my top few sources of insight on what is going on in our economy. A new post by John P. Hussman, Ph.D. goes up every Monday. Their quality and interest varies, but when he’s on a roll, I find myself re-reading the post several times throughout the week, seeking deeper understanding. A few excerpts from the October 10, 2011 post and links to other posts below:

“When Wall Street talks about the “failure” of a bank or other financial institution it means the failure of the company to pay off its own bondholders. It does not mean that depositors, counterparties or other bank customers lose money. A bank is essentially a big portfolio of assets, about 70% which are typically financed by depositors, customers and other liabilities, about 20% by the bank’s own bondholders, and about 10% with the capital of the bank’s stockholders. In a typical bank “failure,” the bank is taken into receivership by regulators, the liabilities to stockholders and bondholders are cut away, the remaining package of assets and liabilities is sold as a single entity to some other firm, the old bondholders get the proceeds of that sale, and the stockholders are wiped out. When investors willingly take a risk, and buy the stocks and bonds issued by an institution that goes on to mismanage its business, this is the appropriate outcome. Depositors and customers typically don’t lose a penny”

“If public funds are provided during a financial crisis, and it cannot be clearly demonstrated that the institution is solvent, the funds should be provided post-failure, as senior loans to a restructured institution where shareholders and existing bondholders have already been subject to losses. The interest rate should be relatively high, to encourage replacement of public funds with private ones. With few exceptions, when public funds are used to avoid major restructuring and shield private investors from losses, the result is almost inevitably a larger, less transparent, and more recklessly managed institution.”

“The same is true for government or “sovereign” debt. When Wall Street talks about “failure” of Greece, for example, it means failure of Greece to pay off its own bondholders. In trying to avoid this failure, Greece is instead forced to impose extreme austerity and depression on its citizens. From the standpoint of those citizens, Greece has already failed them painfully. Those are the choices – let bad debt “fail” or force depression on innocent citizens.”

“In 2008, the Federal Reserve created a set of off-balance sheet shell companies called “Maiden Lane” to buy undesirable long-term assets of Bear Stearns and other financial companies, justifying the purchases by appealing to Section 13.3 of the Federal Reserve Act. But if you actually read Section 13, it is clear that under the law, “discounting” means (as it has always meant) providing short-term liquidity by essentially providing a check-cashing service for obligations that are short-dated, well-collateralized, and promptly collectible. The Fed’s creation of the Maiden Lane companies to purchase bad assets was, and remains, illegal under the language and intent of the Federal Reserve Act.”

50% Contraction in the Fed’s Balance Sheet This is a great article on the Federal Reserve and it’s actions regarding interest rates and Treasuries. It’s a bit of a tough read, but if you can get through it and understand it, I think you will gain tremendous understanding of our current economic regulatory motivations and hurdles.

Handicapping QE3 This one has an in depth look at the results of the previous rounds of Quantitative Easing, and the likely timing and effects of a third round.

For the rest of his analysis, check out the full list of Weekly Market Comments here.

Down With Evil Corporations, Dare to be Stupid

October 8, 2011

Tea Party protest facebook public property

Those of you with facebook accounts have no doubt seen one or the other, possibly even both, of the above and below images (the one below had the caption Dare to be Stupid, Click LIKE & SHARE if people calling for “zero taxes” shouldn’t be using public streets and sidewalks .

Dare to be Stupid - facebook Occupy Wall Street using corporate items

The former is an Occupy Wall Street protest. I think there is a bit of validity in the picture in the sense that while government has a monopoly on force, you are allowed to avoid using the products of corporations you don’t approve of in order to vote with your wallet to change their policy. Even so, the Occupy Wall Street message, while vague, seems to be one directed at general wealth disparity of management, rather than opposition to any given company or product.

The latter is a Tea Party protest, with the implication that people shouldn’t be allowed to protest their government in public. These people paid for the things around them, regardless of whether they wanted to. While signs like “CUT TAXES NOT DEFENSE” are hard to defend in our current budget, the post is centered more on the validity of protesting, rather than the flawed message. The first Amendment clearly gives them the right to assemble and redress their grievances, and unlike OWS, they are on public property rather than private.

Both of these posts have tens of thousands of likes and shares. They are unhelpful. They lack substance. They serve only to increase partisan divides through snarky peer pressure.

These two political movements should be embracing each other. They both find their main opposition not in each other, but in the status quo. Ron Paul recently made the point that compromise is when you give up half of your beliefs. He said we need to be finding common ground with others issue by issue, rather than picking one of the two parties and sticking with it blindly. What do they agree on? That those in power are abusing it, that there is too much money in politics, and that the system is broken beyond the point where working within the established system will fix it.

They are both decentralized movements, which is both a strength and a weakness. Those in power (the combination of the two parties and their joint corporate masters) are ridiculing both sides on the airwaves. Photos like those above are shown as if they represent the views of the entire movement. On the other hand, without centralized structure, they are able to pull together a group of people who don’t agree on everything, without forcing any of them to compromise their beliefs. They are a hydra, much like many of the decentralized militant groups around the world. It’s hard to kill something that has no vital organs. And for each, the existence of the other alleviates that which has plagued every third party that has tried to spring up: the kingmaker excuses. If only one of these movements were to exist, the main party on the other side of the spectrum would get an easy win due to the split vote. If they are both strong, the two party system is out of excuses.

Some Ron Paul Videos

October 2, 2011

Just an update on some recent Ron Paul videos. First up we have a couple from Jon Stewart, who has given a boost of cred to both Ron Paul and himself by highlighting the coporate media’s fear of everything Ron Paul. Stewart shows once again that he earned his place as the most trusted journalist in America. Sometimes all you need is an observant nature and an unwillingness to be bought.

 

Stewart had him on again more recently. Below is the third part of the interview. The first two parts are there too, but were of less substance. Ron Paul needs to get better at explaining his positions to liberals. It isn’t that he wants to destroy all social programs and safety nets, he is just trying to get them back to a more local level.

 

 

There was also this interview on FOX, where he talks about working with the Democrats, and how compromise in the modern political sense is where you give up half of your beliefs. He instead is willing wo choose his allies issue by issue, and find common ground rather than concessions.

Ron Paul Beliefs

September 28, 2011

Ron Paul makes quite a campaign commercial.  It’s interesting to see a candidate for president run on a platform of consistency, honesty, peace, liberty, and sincerity, and not have a single one of his opponents question his credentials on any of it. He faces only two obstacles: A corporate financed media who censors his victories, and a fear that a reduction in federal power would bring back the dark ages.

I urge my readers to help with these two hurdles.

On the issue of electability: If he wins the primary, Republicans will vote for him rather than Obama. Those supporters of Obama who are primarily anti-war will come around as well, since Ron Paul has far more credibility on the issue.

On federal power: Much of the power of the federal government is recent. For example, I see people recoil when they hear he wants to do away with the Department of Education, as if doing so would put us into a situation where all the schools closed and children never learned to read. The Department of Education was created in 1979. If you went to school after that, do you think you got a better education than your parents? Taking the power over education from the teachers and communities and putting into the hands of federal policy makers has taken the substance out of learning and left it cold. Ron Paul seeks to put the power back in the hands of states, communities, and teachers, not to end education.

Be heard. We can’t have the media convincing people that we don’t exist. We need to turn headlines like Poll: Romney leads New Hampshire, Huntsman in third, Perry in fourth into a rallying cry against a system trying to fix the vote for those in power.

Next Page »