umbrella

It has been a year since the collapse of Lehman Brothers, and the subsequent near-collapse of the international economic system followed quickly by the massive increase of (at least visible) central government presence in nearly every aspect of our economic lives.  In spite of this period of time that might permit reflection on these events, it seems we have yet to do a real accounting of the causes of this crisis and thus discern a true path to mitigation of the factors that precipitated those days and months of panic and this long period of simultaneous quiescence and discontent.   Perhaps at the deepest level, our inability to actually achieve a true accounting is the actual source of the crisis.  For to do so would require us to speak in terms of character and sin, and to eshcew our accustomed public language of technique and method.

As legislators speak of new regulations of the financial industry (even as we find out daily that the problem lie more in the lack of real enforcement, as well as the ability of the industry and government to change existing regulation when it proved onerous for profits and campaign contributions), and as people in the industry mouth their commitment to changing their ways, those with eyes to see discern that nothing has changed because at base our behaviors are being influenced and even governed by a set of systemic and deeply embedded assumptions about the nature of human society.   We remain profoundly committed to an economic and political system of abstraction, one that begins at the most basic level by generating as many externalized costs as possible in order to give the highest degree of immediate pleasure and satisfaction to the soveriegn self who happens to live now.  It further extends in our manipulation of nearly every social mechanism – schools, living arrangements, economic frameworks, work, entertainment, parenting, even death and burial – that creates distance between us, that renders those relationships normalized, homogenized, abstracted, theoretical, de-personalized.   We accede to the destruction of places, of history, of cultures and traditions because we cease to perceive any real connection to them – we are exceedingly good at erecting museums to what we have lost, but very bad at actually retaining anything of lasting value.

And so we learn, and should not be surprised, that very little has changed.  We learn, for example, that a year after government extended its tentacles ever more deeply into the economic system to prevent the failure of institutions so large that they would have created systemic implosion, that many of the nation’s leading financial institutions are even bigger than when the crisis began.  And why wouldn’t any rational player not seek to be as big as possible, when the lesson clearly to be drawn from the past year was that the bigger you are, the more likely that the government will bail you out if you land in trouble.  Thus, the bigger you are, the riskier you can behave, and presumably, the more money you can make – at least in the short term, which is all that matters in the age of the quarterly report.

We also learn that our economic system remains addicted to the peddling of “financial products” that reflect no real value in reality.  This should have been one massive take-away from the events of the past year – a fundamental reassessment of what an economy is for – whether it exists to help create and deliver the basic goods of life necessary for “mere life,” which then allows for the opportunity to achieve “the good life” in ways that are not solely dependent on the material goods that an economy can provide (rather, that come from our relationships with our families and our communities, particularly the gifts of fellowship, our shared capacity to instill a deeply embedded set of virtues in each new generation, our opportunity to worship together in gratitude to the source of our blessings); or whether an economy exists to allow maximum extraction of profit by any means necessary, particularly if we can effectively get something for nothing.

The most recent “financial product” that reflects our commitment to the latter – and particularly, the divorcing of an economy of real value from an economy of falsified and abstract moneymaking – was disclosed in an article in this past Saturday’s New York Times.  There it was reported that financial wizards have cooked up a new financial scheme in which life insurance policies of elderly people are purchased for a percentage of the actual face value of the policy, and then “bundled” as securitized “investment” vehicles.   According to the article,

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.

Of course, our best and brightest have learned nothing from recent history:

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

What this “investment product” will effectively generate is the hope and even subtle efforts to increase the likelihood that policy-holders will die early.  It will pit a portion of the “investment community” against the sick and elderly, and foster a widespread sentiment that someone’s premature death will help to increase my bottom line.  Because these already abstract policies will have been securitized, it won’t matter that we’re talking about someone’s father or grandmother or friend or lover.  All that will matter is that my rate of return be incrementally increased.  As with the recent mortgage debacle, I am required to know nothing about the people who hold the mortgages; our relationship has been rendered abstract and distant, and my only basis of judgment about the propriety of those loans is my wager that I will receive an outsized return on investment.

What’s striking about this newest “product” being cooked up by our financial wizards is its ultimate perversion of the original idea of insurance.  Everything that is touched by our contemporary mode of abstraction and de-personalization turns to mud.  In this case, insurance – which began as a form of communal care and even charity – is turned into an instrument that not-so-subtly induces us to wish for another’s premature death.  Here is Stephen Marglin from his truly excellent book The Dismal Science: How Thinking Like an Economist Undermines Community.

Like fire insurance, life insurance and health insurance were originally embedded in community, and the evolution of insuring human being is particularly instructive.  In medieval and early modern Europe, gulds provided assistance to members who had fallen on hard times as well as to widows and children of members who had died.  Confraternities were religious devotional societies but also much more: they provided care in sickness and death, and indeed beyond the grave, providing funds to say masses that would ease the passage of the departed through purgatory.

Insurance, particularly for the confraternities, was closely allied to charity.  Members’ claims took precedence, but most confraternities extended material as well as spiritual support to the poor of their communities as well as their own members.  Although looking back we can easily identify mutual insurance as a separate and distinct reason for confraternities, in the premodern European setting, insurance charity, and spiritual consolation were a piece.  And though it may strike the modern mind as odd that death benefits would include insuring the progress of the soul out of purgatory, it would have struck the medieval mind as odd to separate insurance for the here-and-now from insurance for the hereafter.  (14-15)

While this original source of insurance may seem too historically distant to be of relevance to us, Marglin notes that even into modern times, the way a community insures itself against risk reveals most deeply its self-understanding:

The example of insurance may appear to be somewhat random, but it is in fact not.  The Amish, perhaps unique among twenty-first century America in their attention to fostering community, forbid insurance precisely because they understand that the market relationship between an individual and the insurance company undermines the mutual dependence of the individuals.  For the Amish, barn raisings are not exercises in nostalgia, but the cement that binds the community together.”  (18-19)

What, then, of a society whose next “evolution” in insurance is its “securitization” so that “investors” can make a quick and painless profit, at once encouraging the elderly to spend the money now (they are the knowing accessories of this scheme, like those people who accepted the easy money in the form of sub-prime mortgages), while creating a widespread societal cheering squad for the quick death of policy-holders.   What should be evident to us was that our all-too-recent financial crisis was not itself a “disease,” but a symptom of a deeper pathology whose diagnosis still eludes us, so deeply does it lie in the DNA of our increasingly sick society.

{ 11 comments… read them below or add one }

avatar Dave Trowbridge September 9, 2009 at 10:19 am

In Anthony Trollope’s day they called it “looking after dead men’s shoes.” Now it’s a business model.

As his novel The Way We Live Now shows, we’ve been a sick society for a very long time. One wonders when we’ll reach the bottom, where things finally fall apart because there’s no center to be found.

avatar Michael DeMoor September 9, 2009 at 11:26 am

Again, I’m largely in agreement, but want to pose a question. Although it’s not clear (at least to me, not being an economic historian) whether market-based insurance killed community-based insurance or whether the decline of the communities provided by guilds/confraternities etc., necessitated the financialization of insurance, the fact is that the kinds of community necessary for avoiding market-based insurance are simply not present for most of us. Might a case be made that — even though normatively speaking insurance is best made community-based — a “big” insurance provider legitimately steps in to compensate for this kind of “civil society failure” (akin to so-called “market failure”)? This is particularly relevant with respect to the health care debate. Is there such a thing as “civil society failure” and, if so, does the state or the market have a legitimate role to play in compensating for these failures (even at the risk of perpetuating them)?

avatar Patrick Deneen September 9, 2009 at 12:24 pm

Michael DeMoor,
True enough. But it’s important to get a handle on the chicken/egg problem you pose here, and – given the presence of a strong communal alternative in modern times, namely the Amish, there is at least evidence that our current situation is the result of conscious human choice. As such, let’s just stipulate that the undermining of communal/charitable forms of insurance was the result of a mutually-reinforcing cycle in which the attenuation of community ties resulted in abstract market replacements, which in turn contributed to the further attenuation of community ties. At base what informed this mutually reinforcing cycle was a different conception of the constitution of human good and flourishing. Only with that in mind can we begin a genuine assessment of the problems and challenges we face – including debates over health care – and in that light, begin to make possible the suggestion of true alternatives to the corporate/government false dichotomy that is currently placed before us as the sole options.

Still, recognizing this is where we are, are there ways that we could devise forms of (e.g.,) insurance that might begin to move us away from this false dichotomy? This might mean a governmental intervention, but of a very different sort, or perhaps efforts on the part of smaller and more local units to fill the breech. Yet those kinds of conversations cannot occur unless and until we understand our situation rightly.

avatar Empedocles September 9, 2009 at 12:55 pm

I have come upon a great word: neikophilia, the love of breaking the connections that bring people together. I can’t wait to use that as an insult, as in, “you and the rest of the deracinated neikophiliacs should should stop destroying our country and communities.”

avatar Michael DeMoor September 9, 2009 at 1:42 pm

Patrick Deneen,

Agreed. And yet, my concern is how this diagnosis about what is “at [the] base [of]… this mutually re-enforcing cycle” can translate into policy and policy disputes. Is there a contradiction in having, say, big government intervene to provide insurance (say, health insurance) in the wake of “civil society failure” and simultaneously attempting to create an environment in which communities can be restored so as to make large-scale government intervention obsolete? What would that kind of policy look like? A whole-scale mistrust of “big” institutions like government as being the problem (or at least necessarily an ingredient in the problematic cycle) would seem rule this out and, perhaps with it, any approach to the problems that happens at the level of public policy. If government action is just a way of exacerbating the problem, then does the solution lie entirely outside of the realm of policy (perhaps in grass-roots organization, spiritual transformation, etc.); and, if so, where does that leave urgent policy questions.

I’m a sympathetic audience for your (and FPR’s) diagnosis of a number of problems but have reservations about the generalized suspicion of everything “big”. I’d love to see some reflection on what the appropriate role of the state is in fostering or enabling community, character, virtue, etc.

avatar D.W. Sabin September 9, 2009 at 2:49 pm

I’m glad you picked up on this, I read the article in disbelief with all kinds of satire bubbling over. I just can’t wait for this latest bit of securitization to run amok and we can have a “Death Bubble”. Now the logic of the so called “Death Panels” emerges. I personally am cheered by it because it sounds very much along the lines of my Health Care Off Track Betting Scheme. Maybe we can have a revival of the old “Queen For A Day” tv show and enjoy a reality television production that lets a panel of judges conduct the “Death Panel” after the contestants score points on the basis of how bad their condition is. Medaille’s NASCAR Politician sponsor patched Jumpsuits have to figure in here somewhere. Instead of Ambulance chasing, perhaps we can have ambulance races.

DeMoor, there seems to be an implied acceptance that government must be “big” to satisfy the requirements of a complex society and large population with the benevolent government running to the rescue of intractable problems confronting a “global population”. This is where the ruse begins. Subsidiarity is the key, appropriately scaled government response applied at the appropriate point of concern with an emphasis upon chaste restraint being a given. Any society which accepts the distance between the government and the governed as ours now does is laying itself open to third party special interests attempting to capitalize upon the distance. The upshot of this is that the local cannot help themselves and in the fullness of time, they become helpless by default.

It is not big that is an automatic evil here, it is when big overtakes any evidence that there was once a “little” that helped define what was “big” in the first place.

avatar Michael DeMoor September 9, 2009 at 4:57 pm

Sabin (may I call you D.W?)

Your appeal to subsidiarity is well taken and in many ways constitutes a satisfactory answer to my queries. I would venture to say, however, that likely any government program to provide insurance in the wake of a failure of local communities to provide it would likely have to be administered at a more-than-local level (here in Canada health insurance is administered by the provinces) given the lack of ties existing of the populations to local communities, and hence the government in this case would have to be moderately “big” (insurance as it currently exists also tends to depend on an economy of scale to be solvent — though that’s no guarrantee of solvency of course).

Again, no disagreement, but an earnest desire to know what kind of state-intervention (or provision) can be compatible with your concern that local communities not be deprived of the ability to care for themselves. This is an issue with subsidiarity in general: if subsidiary communities fail to perform their function and “higher” communities (or levels of government as the case may be) “step in” to address the failure, how can this be done in a way that does not result in the permanent shift of responsibility and control of that function “up” the scale? It seems to me that this is a very pressing issue and one that has a great deal of consequence for addressing current policy against the background of the general diagnosis that Patrick Deneen offers. I don’t expect it to be resolved here, of course.

avatar John Médaille September 10, 2009 at 3:10 pm

You might have titled this, “The Death Panel as a Business Model.” It is interesting to note that the financial instrument which cased the most damage, the CDS or “credit default swap,” is also an insurance policy, although not called that because then it would fall under insurance regulations. What it did was insure a particular financial instrument, say a bond, against risk of default. As such, it is a useful product: you buy a bond for the interest and an insurance policy to protect the principle. However, the major market was for people who didn’t own the bonds; they were just making bets on failure. Thus a useful instrument gets converted to pure speculation that has no usefulness whatsoever. One loss now gets converted into thousands of claims, claims for which the insurance company kept no reserves.

Think about a fire insurance policy on your home, certainly a useful product. The actuarial tables are predicated on the notion of one fire, one claim. Now suppose that thousands of people decide to buy a policy on your home, hoping that it will burn down. Now its one fire, thousands of claims. But all but one of these claims actually cover a loss; the rest make a claim for a loss they did not suffer. Actually, it is a very sophisticated form of usury.

The life insurance securities duplicates this problem. There will be an inevitable move to sell as many policies as the market will bear, and to short the reserve funds or raise the price.

avatar D.W. Sabin September 10, 2009 at 5:21 pm

DeMoor,
You can call me whatever you like. I don’t know enough about the economics of the health care industry to provide any meaningful input on how it might incorporate subsidiarity but I do know that because I am self-employed and on a high deductible, generally only catastrophic care plan, I have gone directly to the medical institution and my doctors and explained my situation to them and found it invariably leads to cost reductions and reasonable terms because I know them and we have a relationship.

I think there are times when Economies of Scale actually run backwards, foisting inefficiencies or the unnecessary on the smaller scale . What bothers me is the assertion being made now that the Government …a competition averse institution…..wants to bring competition to bear on the Private Insurance Industry , hardly a bastion of cost competition. I really doubt the issue of service access, quality of care or cost will be remotely addressed by the solution proposed and there is a distinct chance ….given the trends of the last several decades that there will evolve a class Monopoly System of Health Care with the moribund Middle class joining the welfare class in a typically moribund Public Health Plan while the Wealth Class retains their private care and insurance system while prices continue to escalate. Higher taxes and deteriorating service seems to be the trend we are embracing in order to remain the Global Police for a Corporatized World.

avatar Matthew Wade September 13, 2009 at 8:21 pm

I’ve often tossed the idea around in my mind (where there is quite a bit of space to toss) of organizations like the Knights of Columbus moving from life insurance to other kinds of insurance: medical, dental, vision, etc. It seems that an organization like the Knights of Columbus is the closest we’ve got right now to an organization that could take the reins in a Subsidiarity race. Of course, that would involve doctors willing to join the network provided by the KofC for prices that would probably be lower than what the “market” fetches these days. I’m sure there are variables out there that escape my fingers on the keyboard at this moment, and perhaps there is simply a lack of motivation on the part of the KofC leadership to explore this idea, but as I see the term “Subsidiarity” floated around, I immediately think of KofC – Catholic nonetheless.

And Mr. Deneen, you mention that “it seems we have yet to do a real accounting of the causes of this crisis and thus discern a true path to mitigation of the factors that precipitated those days and months of panic and this long period of simultaneous quiescence and discontent.” I thought a certain Austrian-Catholic wrote a book titled, I believe, “Market Meltdown…” that answered these questions?!?!

avatar United Dental Insurance December 4, 2010 at 4:50 pm

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