From: azur@netcom.com (Steve Schear)
Date: Tue, 17 Sep 1996 13:28:58 +0800
To: Black Unicorn <unicorn@schloss.li>
Subject: Re: Risk v. Charity (was: RE: Workers Paradise. /Political rant).
Message-ID: <v02130504ae6362385951@[10.0.2.15]>
MIME-Version: 1.0
Content-Type: text/plain


>On Mon, 16 Sep 1996 19:58:25 -0400, Black Unicorn <unicorn@schloss.li> wrote:
>
>Remember the original purpose of social security.  A government fund which
>was self sustaining because it only gave out what was put in and gained by
>investment.

Not quite.  You'll remember that SS was pitched to the masses as such
during the Great Depression, but its true purpose was to allow older
workers to quickly retire and make room for the largely unemployed men in
their prime, family raising, years.

>
>> A social safety net is simply a form of health and life
>> insurance. Statistical arbitrage if you will.
>
>Yes, but not for the reasons you would cite.  Social safety nets prevent
>rioting by the lower classes, revolution and general civil disorder
>because they appease the masses.  Indeed this is a form of health and life
>insureance for the middle and upper classes.

No doubt.  See my previous comment.

>
>> By spreading the risk you
>> minimize the cost. Yes, some people will take advantage of the system.
>> But like a virus, a robust system should be able to withstand this form
>> of attack.
>
>This is absolutely silly.  Speading the risk alone does nothing.  The cost
>for those who can pay is increased, and the cost for those who cannot pay
>is made 0 (it already was 0 incidently).
>
>It is also the reason the taxpayers (and not the savings and loan
>community at large) were forced to bail out the failed financial
>institutions.  Namely, because premiums were not tied to risk.  The FDIC,
>as of last year in any event, charges a flat rate fee for all financial
>institutions.  This is independent of any risk analysis of their
>investments.  i.e., a financial institution that invests in trailor parks
>in Arkansas pays the same premiums for federal deposit insurance as a
>institution that invests in government issued debt instruments.  (There is
>some ceiling for risk, but not a graduated system below the ceiling).
>
>The result was (is) an incentive to risky investments.  If you are a
>financial institution and I tell you "I will charge you $1.00 to insure
>$1000.00 of low risk and low profit investments, but I will charge you a
>while $1.00 to insure $1000.00 of extremely risky but highly
>profitable option and currency investments" which one are you going to
>choose?  (Hint, you're an idiot if you pick option #1).
>
>The reason the insurance fund was depleted is because there was no risk
>balancing built into the system.  The premiums did not cover the losses.
>They would have if they were risk adjusted.
>

Next major recession: Here we go again.

>Spreading the risk, by itself, does NOT reduce cost.  You must properly
>PRICE risk.
>
>This is the distinction between insurance and welfare.

Right on!

>Welfare merely hands out money for those who have not bothered or cannot
>afford insurance.  The result is an INCREASE in cost (taxes) to those who
>are coughing up the cash so that they may support.
>



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