5.08.2007

When Business is Better Than Government

You'd think with all the hurricanes the southeastern part of the US
has been hit with lately, that insuring the area would be pricey.
You'd be wrong, according to the latest issue of Business Week, which
offers two reasons why premiums have actually gone down. I couldn't
help but respond, because one of the reasons is a good one and one is
a bad one.

First, the bad one: governments have artificially capped rates, in the
spirit of protecting the consumer. Sounds good, except that in order
to do this, they've exposed themselves to having to bail the insurers
out if a truly catastrophic event occurs. Some say this is a good
thing - that the government should be the insurer of last resort - and
while I don't totally disagree, I think it's an inefficient way to do
it, since what'll happen in that event is that current taxpayers will
be getting over on future taxpayers, who'd have to pay if there was a
bailout.

In contrast, the second reason rates are low is that those whiz-kid
financiers from Wharton and other places have figured out creative
ways to move money around. In business terms, it's called liquidity,
and while you may sneer at richy-rich hedge fund managers and
investment bankers, they play an important role in putting every
dollar to its best use, and giving people with dollars, like insurance
companies, effective ways to provide the same coverage at lower rates.
The upshot is that, despite a slew of hurricanes, the southeastern
part of the country can still be a place that economic development
happens, and isn't priced out of the market because of exorbitant
interest rates.

This story reminds me of two things I believe: one, that there are
some areas in which business is fundamentally better than government
at achieving something in the market, and two, all of this financial
wizardry that has proliferated in the last generation or so is not
only not a bad thing, but can be an awfully good thing. And you can
take that to the bank.

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