The Crypto Winter

Steve Schear schear at lvcm.com
Fri Nov 23 10:24:58 PST 2001


At 11:15 AM 11/22/2001 -0800, David Honig wrote:
>At 08:46 PM 11/21/01 -0800, Petro wrote:
> >       No. Libertarians are for "free markets", which are inherently
> >capitalistic in nature, but the reverse is not true.  There are many
> >*wealthy* capitalists who are all for strongly regulated markets and
> >high barriers to entry. One could argue that they are not Capitalists.
>
>Those are philosophical parasites.  Like a congressvermin who campaigns
>on liberty and once in office destroys it.

A good recent example is Warren Buffett calling for an FDIC-style 
government insurance against terrorism.  In the sweet name of self-interest 
he proposes that the government increase existing insurance moral hazards 
by forcing all citizens to underwrite those who have chosen to live or work 
in higher risk areas.

http://www0.mercurycenter.com/premium/opinion/columns/terror20.htm
I'M in the insurance business -- an expensive place to be in the past 
couple of months. It was made costly for Berkshire Hathaway, the company I 
run, because I did something very dumb: allowed Berkshire to provide 
insurance coverage for a huge catastrophe loss without its getting a 
premium for doing so. The risk we unthinkingly assumed was a loss from 
terrorism.

Given the degree of my error, I was lucky: We estimate our Sept. 11 loss at 
Berkshire to have been ``only'' about $2.3 billion. That's more, by far, 
than we've ever lost from a single catastrophe, but the toll could have 
been far larger. Indeed, had a nuclear device been available to Osama bin 
Laden, the loss could have bankrupted most of the insurance industry.

A potential loss of almost infinite magnitude can be assumed only by an 
entity of almost-infinite resources. That entity doesn't exist in the 
private sector. Only the U.S. government fits the bill.

Washington has accepted this proposition to a point. Congress is now 
agonizingly trying to create some sort of industry-government coalition 
that would insure losses from terrorism.

Some proposals limit the government's liability but leave the risk for the 
industry open-ended. These proposals won't work: If unlimited liability is 
left with insurers, they will necessarily refuse to renew policies they see 
potentially leading them to bankruptcy.

Equally bad, all the proposals now being considered will engender pricing 
based upon risk exposure: If a business is located in a high-risk spot, it 
will be asked to pay a staggering price for insurance. Risk-based pricing 
is normally equitable and desirable. In this case, though, it would have 
anti-social consequences.

For example, the terrorism risk per dollar of insured value may be 10 or 
more times for iconic or critical properties in New York City what it is 
for properties in less-populated areas. But great cities are central to our 
society. We don't want them to wither under the burden of hugely 
disadvantageous insurance costs. Their citizens almost certainly bear 
above-normal physical risks in the terrorist war being waged upon us; we 
shouldn't impose crippling economic costs on them as well.

We should adopt the Federal Deposit Insurance Corp. as a model for where we 
want to head in the insurance industry. The rationale for the FDIC, formed 
68 years ago, was clear-cut: The United States sorely needed to eliminate 
bank runs and the financial panics they caused. Before the FDIC, the risk 
from bank failures resided with depositors, who had no way to shed it.

Neither they nor their banks could lay that risk off on private insurers 
for two reasons. First, the dollar amounts involved were simply too large; 
second, losses were correlated, in the sense that the failure of a few 
banks frequently caused a chain reaction, toppling good banks with bad, 
leaving a mountain of economic damage. Fortunately, these punishing 
disruptions to our economy were ended by the advent of FDIC insurance.

Now, millions of business owners, individuals, landlords and lenders bear 
the economic risk of terrorist attacks. Insurers won't assume the risk -- 
we were previously dumb, but we've learned. It isn't right, though, that 
these risk-laden millions should have to shoulder this burden themselves.

If we were to adopt an FDIC model for handling terrorism, the insurance 
industry would not be permitted to earn a dime from the coverage. Instead, 
a premium tax, payable to the U.S. Treasury, would be levied on all 
insurance. This would have the equitable effect of spreading the 
terrorism-related cost to the country in general, just as we spread defense 
expenditures.

Were such a proposal enacted, it should sharply limit private lawsuits 
seeking to place blame on some party involved -- an airline, say. We should 
want the Treasury to make payments to victims solely to compensate them for 
loss of property, life or direct earnings, without worrying about fault. 
The law also should cover war losses.

Some people will argue that an FDIC model for insurance would be a 
socialistic intrusion into the private sector, yet that institution is 
today generally regarded as having been enormously beneficial. Once, the 
problem was bank runs and economic panics; we found an innovative solution. 
Today, the problem is terrorism and its capricious effects on insurance 
costs; we need a solution of comparable efficacy.

Warren Buffett is chairman of the board of Berkshire Hathaway Inc., a 
diversified company with insurance operations, and a director of the 
Washington Post Co., which has an investment in Berkshire Hathaway. This 
was written for the Post.





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