Editor’s Note: Our friend, Den Blonde Ulven, offers another thought-provoking post.
Recently, when discussing the nature of banking, and particularly usury, with a libertarian friend of mine, the notion of finance distorting markets stuck in my head. And one exploring this area is bound to look to insurance as major player in the finance game.
Insurance, like usury, is sold as a “greaser” or “driver” of the economy in order to allow those who cannot afford to buy a product or service outright to still gain possession and use of said product or service. Unlike usury, which is outright theft, insurance can pay off for those who utilize it.
Insure your car and it gets totaled? Here’s a check to cover its market price.
Bad accident and sent to the hospital? We got you covered buddy, don’t worry about those surgery costs.
However, there are significant hidden costs to this system. We will discuss a few. Insurance:
- Increases prices
- Allows for a middleman
- Creates a morale hazard
- Makes up a cornerstone of the economy
How does insurance cause prices to increase where it touches? By increasing demand. For those unfamiliar with economics- when demand increases, price increases with it. And why does insurance cause demand to increase? Because it allows more people to partake in buying the product or service who formerly couldn’t.
Insurance brings in a middleman, or a third party, to the equation of trade between buyer and seller. Instead of a patient paying a doctor directly for his services, both the patient and the doctor speak through an intermediary- the insurance company. As a rule of thumb, whenever a middleman is introduced, the more room for fraud, tricks, games, and theft to take place.
The fact that a 3rd party exists creates a moral hazard in the trade process. Doctors know that insurance companies have big pockets, so they can demand a higher price, ergo they push up the price to levels that are beyond reasonable for an individual to afford. They even perform extra services that were not necessarily critical for care, knowing that they can be paid for by insurance. Or even collusion between practitioners. Also, the insurance company’s objectives are not always in line with the patient’s objectives and as such can lead to disagreements on payouts or other matters.
In fact, one of the richest men the world has ever known belonged to the Roman Empire, Marcus Licinius Crassus. His firefighting team would show up at burning building and put out the fire for a hefty sum. If not met, they would sit back and laugh as the fire burned. He essentially was an insurance provider who refused to pay if things weren’t going his way.
And now for the real crux of the argument- insurance companies make up one solid foundation of the economy. For this, we must look back to the 2008 financial crisis to ascertain more.
Many people recognize that the mortgage market in 2008 was in dire straits due to so many people financing houses with variable interest mortgages and when the market came to a heel, payments were called, and rates jumped through the firmament. This ties to problems of usury, which are completely valid, but as for what part insurance plays in this mess, we need to look at where some of the government bailout money went.
$182 billion bailout to AIG.
Now why would the government throw so much money at an insurance company of all things? Because if they didn’t, most of the economy would have collapsed right then and there. Yes, you read that correctly. A major portion of the economy rests upon insurance.
Finance is concerned with taking money and investing it in things that turn a profit. These financiers have investment portfolios, of which they put money in many different things, some high risk and others low risk. And insurance, along with mortgages, are considered some of the lowest risk investments that one can buy.
So, when all those mortgage payments started drying up, so did insurance payments. And insurance stocks fall like a rock when revenues decrease. And that means anyone who had investment into insurance stocks was about to take a serious beating, and their portfolios were also going to tank with them.
Now that’s all fine and dandy- sounds like a rich boy’s club that you are not a part of, right? But wait, there’s more! When you put your money in something like a mutual fund, or even some banks, they take that and invest it in companies and bonds that match their investment portfolios. And who do they use to facilitate this process? Yep, those same financiers mentioned above. That means that when those financiers take a beating, so do you because they are taking your money and gambling with it. This goes back to insurance as well because they play the same game.
I am not convinced that insurance is pure theft, like how Aquinas accurately described usury. But any ruler granted permission to reform our Western economies could not go awry by completely eliminating insurance from the face and even the minds of our nations.
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