Capitalism/financial crisis tutorial Part 15

I hope that you have been finding these useful, especially the young people, who I think of all the time.



Today you need to think about the role of insurance companies in true capitalism. Like everything else, the insurance business started as an honorable occupation, and has now been warped by the looting mentality. Thus insurance companies started out as a firm and valid foundational part of capitalism, and have degenerated into one of its destabilizing rather than stabilizing forces. Here is why.



The concept of insurance came from the exact same place as capitalism itself, which is those "corn farmers" I told you about who grew their own subsistence corn and then sold their surplus corn on the market place for cash. What were the basic subsistence needs for humans for most of their existence? Food, clothing and shelter. These are all summarized in the concept of a home and the ability to cultivate food (farm). Eventually those took the form of houses and barns. Back when families were large it was easy to build one's own house, even if it was a simple structure, such as in the 1800's, such as a log cabin for the dwelling and a farm for storage. Now remember, up until the middle of the last century, all humans relied on open flames as their source of heat and light, so devastating fires to house or barn were a constant risk and a frequent occurrence. "In the good old days" extended families and indeed even the entire community would come together to rebuild the home or barn of a community member who lost it in a fire. You still see that in Quaker and other communities. People would hold a "barn raising" to build a new barn for a new family, and they would rebuild the barn or the house if there was a fire. So this is the origin of "insurance," before it became insurance, which is the concept that no one was really alone, and if one suffered a loss to fire, others would come together and help you to rebuild.



As humans industrialized, they started purchasing homes, and started living in communities other than their extended clans who were settled in a particular area. So people started to get the idea that groups of individuals would pool money in advance of a tragedy, so that members could draw upon that money to replace what was lost in, typically, a fire, the continuing risk. I know most of you young people only think about auto insurance and health insurance, because you have grown up in that era. But that has little to do with genuine insurance as it first emerged as a step forward in capitalism. It all was about protecting one's ability to "subsist," which is to eke out a living in farming and in protecting your dwelling or place of business from fire.



So here is a VERY simplified model of how the concept arose and how it actually worked, in the beginning. Suppose in a certain community in the USA there were lots of farmers. Rather than count on each other (who work day and night already in one of the hardest jobs that exists) to rebuild when there is a fire, they get together and decide to form an insurance company. So let's say that 1000 farmers each pay $50 a year into that insurance company. That is what we now call the "premium." It's not a collective savings account because it is sharing the risk, not putting money aside to handle the risk. So the way it works is that 1000 farmers have paid $50 each year in order to buy the right to have their dwelling or farm rebuilt and replaced if there is a fire. The insurance company therefore has $50,000 at the beginning of the year. Suppose there is one fire that affects one farmer out of the thousand. The insurance company then dips into the $50,000 and pays a previously agreed amount to pay for the barn replacement. Let's say that the barn and equipment is a $5,000 loss, so they pay the $5,000 out of the $50,000, and they still have $45,000 available for any subsequent fires. If a fire typically costs $5,000 in damages, that means they are funded by the farmer's first year premiums to handle a maximum of ten fires that year.



Now, people who are in the business know the risks. So these farmers, for example, would be pretty wise about knowing how many fires tend to occur in their areas. Think about California, for instance, and their fire prone areas, in the news recently because of the risk from drought, high winds and deforestation, replaced with brush. So a group of farmers in California, if they were going back in time and making a farmer insurance agency such as the one I've described, would take into account how frequent fires are occurring (and the cost of replacement) when they figure out how many members they need, how much premiums to pay, so that they have sufficient funds to handle the year's anticipated risk. Same thing if the farmers were in upstate New York. Now, you might think that they had a lower risk of fire, lacking the same weather risk as California. But in the "old days" there was much more fire risk in "winter states," because open fires were used within homes and barns for both light and for much needed heating. So a group of farmers in New York would know about the number of times fellow farmers have had a burn due to a winter fire accident, and thus would plan accordingly. If you see what I mean and am following me in this example and explanation, you'll see that "insurance used to be local and property oriented, property that was vital to survival, one's home and farm." Insurance had nothing to do with the replacement of luxuries, as it does today, or in the providing of services. The pure and fundamental form of insurance was a "collective" and local community approach to save each individual's residence and farm by sharing the risk and paying out from a well planned pool of insurance fund that was funded via one a year premiums.



OK, now what happened to the money all year? As local banks sprang up, the money was put in a bank for safekeeping. The first function of banks when they were first "invented" was to keep money safe. The second function was to take some of the safe money, loan it to local people, charging them a small amount of interest. That interest was shared between the bank and the depositors. Thus insurance "companies" gained a modest interest on their money just from virtue of keeping the paid premiums in a savings oriented bank.



This is how insurance was win-win. Insurance replaced the hope that extended family and community would "rebuild" via "barn raising" someone's tragic loss to fire with the certainty that one could hire people to do the job using one's insurance benefit. A family could rest easy knowing that having paid their premium, their potential loss was covered. Remember, this was not a hobby; this was life and death because farming is dangerous and wooden structures with live fires burned often, with fire companies and rescue facilities unheard of and not yet developed. So insurance became many farmers' first exposure to a bank and it was a positive one. They knew their money was safe and they also knew that the insurance company would pay if they had a fire loss. The insurance company provided a living to one or more employees by paying salary from the premiums and also the interest payments the premiums earned. Banks had a good pot of money that was stable (not being frequently withdrawn from them) so they could make good loans to other customers, and earn some interest for the money. And insurance companies as an entity could grow and offer more services as they profited from premiums not consumed by payouts and also by interest payments from having their money on deposit in the bank.



Jumping forward, this is where a good thing became an enormous temptation to go from "making a good living" in service of a noble cause, to "let's make a killing in the market." In the 1950's it was kind of a golden age of modest profit and safety. Large insurance companies made lots of money but not "looting," because they became so large that they had huge premium deposits in the bank that even at low interest rates of payout earned a lot of money just by sitting there in a bank. The banks, both savings and loan and commercial banks, lent the insurance companies money out, so there was ample money for home buying and building modern consumers, and also for the companies and corporations that employed them. But at the same time insurance companies had entered the stock market, investing the funds they had from premiums in order to get a higher rate of return via stocks and bonds rather than savings account interest. There is nothing wrong with that, and in fact, that is great capitalism so long as the ability to pay out if the insured has a claim is maintained. So long as there is enough money in the premiums to pay customers when they have a loss, no problem. But there developed two "risks" that the insurance companies did not manage.



One is that insurance companies became imprudent in what segments of the stock market they invested in. They used to be the MOST conservative of investors, investing premium money in only the "blue chips," the most secure and safest stocks. But in the 1970's and 1980's they got wild and crazy in the "greed is good" attitude that overcame prudence and ethics in capitalism. And so they lost their stabilizing force and started taking greater and greater risks in order to make more and more "crazy" money. So in a matter of decades many insurance companies went from being bastions of conservative investors (whose first responsibility is to provide insurance to their customers), to being "money making financial juggernauts," who jumped into insane and risky "new products" such as yep, you guessed it, derivatives, and risky stocks.



Worse, the insurance companies decided that their customers, those they insured, are the enemy. I'm not referring to deplorable insurance rip off scams, which is a real problem. What I mean is that rather than providing complete assurance of paying the customer in their crisis, they started "writing policies to deny payments" as an admired art form. Yes, I saw that first hand when I worked briefly for a certain insurance company that has been in the news. The most admired "underwriter" (the guy or gal who develops the insurance policy for the customer) is the one who could put in as many "strings attached" in the "small print," to weasel out of payments. People learned that the hard way during hurricanes such as Katrina, where they found agents arguing with them because policies denied payment if the exact same damage to a house was done via wind or water. So you see what I mean? Insurance companies used to be founded and operated with the honest Joe and Mary who needed coverage during crisis in mind. So farmers got together to ensure (pun intended) that none of them would suffer loss of their house or barn to fire without getting compensation for rebuilding from the premiums they had paid. But now, it's like the insurance companies "don't want to pay." Again, I'm not talking about being cautious amidst rampant attempts to rip off via false claims. I'm talking about the giggling that goes on behind closed doors in insurance companies as they figure out ways to look like they are insuring a customer, and then take their premiums, but have worked into the paperwork clauses that would "exclude" payment in circumstances that the insurance company hopes will arise and thus they can keep the premium but not pay the insurance benefit to the customer who has a loss. Then they turn around and enter the crazy gambling casino that the financial markets have turned into in the past decades, in order to "make a killing."



I was incredibly sad when I saw that this was the motivation of the modern insurance company. I remember the days when insurance was sold in order to protect the insured, not loot them and loot the financial markets. Making a decent living for thousands of people and good, steady modest profit no longer was "good enough" for the insurance giants and masters of the universe.



This is why the health care insurance mess is far, far, FAR more complicated than all of you realize. Giving everyone "cheap and available" health care insurance does not solve the larger problem of providing good quality care to everyone. I mean, it's damned if you do and damned if you don't, to put it bluntly. If you don't have insurance, like me, you are murdered whenever you have medical problem and have to "pay out of pocket" (and they charge you different much higher rates if you are a poor cash payer for the same "service" than if you are a person who is well to do and covered by insurance.) So society is structured to require health insurance or you just plain don't get the care, and you are punished for being poor because if you do pay cash, they charge you at least twice as much for the same "procedure."



But even if you have insurance (either private or through a welfare agency), you are screwed. This is because insurance companies, sometimes in collusion with doctors, and sometimes in opposition to ethical doctors, "decide" what medical care they will "pay for." I saw this first hand working in the area of psychiatric medicine in a hospital. Insurance companies are pill pushers, and make no mistake about that. They really are no longer interested in paying for what they (and also health care professionals) derisively call "talking cures." It's very difficult to obtain payment for even something as reasonable as once a week one hour general counseling sessions for someone who has schizophrenia. Instead they have "guidelines" for what types of pills and for how long they will pay for someone who has schizophrenia. It's all about money for them, and, in fairness, they have fallen into the well meaning but wrong headed trap of trying to "commoditize" medicine. But anyone who is honest and well informed will acknowledge that someone with a mental illness or a disability is not at all the same in their treatment needs as someone else with "the same illness profile." Here's an easy example. Suppose you have two patients who are diagnosed as "paranoid." Insurance companies (and worse, overworked, desensitized and often arrogant health care providers) like to provide one treatment for one problem. But there is a huge difference, I can tell you as a counselor, in treating someone who is paranoid due to a trauma that they have received versus treating someone who is paranoid based on ungrounded (though real in their pain) fears and neuroses. Yet an insurance company will see "paranoia" in their request for payment insurance forms and want to plop a standard pills based treatment profile with no distinction. I'm being a little harsh, but not really. Just ask anyone who has tried to get individual attention (and payment) for a loved one's mental illness. My patients (by the way, "health care professionals" don't like that term and like to call them "clients," thus further promoting a political correctness of health as a "business" and a "choice" of commodity) got individual treatment from me only because I was free, being an unpaid intern. When I had to leave at the end of my internship most of them lost the individualized treatment that I provided.



Suppose that going back in time, a group of families had gotten together to organize a mental health insurance coalition, just as did the farmers to protect against fire. They pay their premiums and then would get a payout if one of their family members comes down with a mental disorder. Just as with the farmer barn fire example, you expect payment that would cover a total "replacement," in other words, appropriate individualized treatment for the entire illness. You'd not have a company agree to rebuild only one horse stall because "that's all you really need." You'd not have a company agree to pay for a roof, but not the walls of the barn because "if you tried really hard you'd find out you don't need the walls, just protection from the rain." But that is what health insurance companies do now. They will pay for a "roof" but not the walls, or "one horse stall" but not rebuild the barn. Now, I am damning a whole industry with a broad brush, and I recognize that. But even the well meaning people are swept away by a totally warped process and system that has completely lost its insurance ethos roots. Insurance companies want to be first and foremost "profit centers" and "movers and shakers" (influence); they no longer want to be comprised of the very ethics and priorities of the people that they insure. Traditional insurance companies were made up of people who faced a common problem and risk together. Now its "just a business." Worse, it's a business they seek to weasel out of performing wherever they can.



So there you have it, in a nutshell. This is how the honorable profession of providing insurance has morphed into just a money making engine that calls itself "capitalism," but who has abandoned the subsistence and surplus prudent model of genuine capitalism. I hope that you find this "crash course" helpful (though I'm sure you need some sadness insurance now, LOL *sigh*).

Capitalism/Financial crisis tutorial Part 14

I need to point out, at this time, two errors that have not only crept into modern understanding of capitalism, but have become so predominant that they have contributed to the warping and destroying of genuine capitalism and replacing it with a capitalism that is "in name" only, and not in principle.

The first error is to think that capitalism means the same thing as "competition." It most certainly does not. Competition is a valid concept of capitalism that applies to the obtaining of the best price for the sales of one's surplus. For example, going back to my foundational definition of capitalism, a farmer that grows enough corn for his family and then sells the rest in the market is of course entitled to try to get the best price that he can for his corn. If his corn is better than his neighbor's corn, or gets to a market where there is no demand, that is "competition."

Competition is not, however, "negative" in true capitalism. Using that example, the sole objective of one farmer should not be to do a "beat down" of the other farmer's corn. In true capitalism the quality and demand of the product "speaks for itself." In other words, while cunning marketing and vigorous competition is of course valid and desirable, one farmer should not structure his entire corn crop in order to focus only on competing with an "enemy" competitor rather than letting the market work naturally to either reward or penalize his product. I've seen this from the inside of corporations. When corporations focus on "smashing" or "beating" the competition to the exclusion of normal product offering and development, they stop being capitalists who are both prudent and visionary and instead, use their products (and the buying and selling public at large) as protagonists in an ego and greed based "competition." So imagine that two farmers with surplus corn to sell become "enemy competitors" rather than genuine capitalists. If they are focused on each other's success or failure, they forget not only the market but their own families and the health of the economy as a whole. So suppose they are so busy trying to "beat" each other that they no longer notice that let's say a new disease has developed that threatens their corn production. They are so busy competing and manipulating market share that they do not invest in a new corn, one that may not get the "best price" in the market at first, but one that resists the threat of the new disease.

When capitalists "fight," treating their worlds as video game fiefdoms, where they are "battling" in the so called "healthy competition," they are no longer actually being competitive in a natural market. They are skewing the market to accommodate their battlefield, not to build genuine capitalism. So remember, when you hear about "competition," that refers to angling for obtaining the very best price and market share for your product, but is ultimately self destructive if competition is the be all and the end all of one's purpose. You can see this in the financial crisis. Banks started "inventing" financial products and instruments not with the healthy of the consumer, their company, their community or their country, but with the sole purpose of grabbing more money that is "out there in the market." That is like if one of the farmers decides he can make even more money by selling tainted corn. Suppose the farmer does a marketing blitz to convince the public that buying corn that is one tenth rotten is the coolest and smartest thing to do. So that farmer "beats" his rival who continues to sell corn that is one hundred percent wholesome. And then, over time, the farmer that sells 10 percent rotten corn, "grabs" a bigger and bigger share and "beats" his competitor, because he has convinced the public that buying and eating partially rotten corn is "OK." That is what much of the American "capitalist" economy has become, in analogy, in the name of "competition."

The second error that I want to point out in this edition of our ongoing tutorial is related to this first error of misunderstood and misconducted "competition," that is done for antagonistic and greed purposes, rather than balancing keeping one's focus on wholesome products AND ethics. This second error is the actual "creation" of "products" to gain money that is based totally on looting and exploitation. Trial lawyers are the example I wish to offer up here.

Lawyers offer a "service" for money. Thus they are capitalists even using our farm definition because in theory, a lawyer provides his service to his family and all surplus of his "profession" is then offered in the marketplace for cash. So I have nothing against lawyers and indeed, I even taught a little environmental law seminar in college while I was a student, and took the law boards exam when I considered career options. Further, the idea of lawyers "specializing" had well taken root when I was a student, and I considered becoming an environmental lawyer as my "specialty" (which was a totally new area at that time). So again, I have no problem with "trial lawyers" per se nor with those who narrowly specialize, such as in "product liability."

However, these "specialties" have become monstrous destroyers of capitalism, and have taken on a robotic greed of their own that is appalling and having destroyed much of genuine capitalism. Here is an example of why.

People, in general, over the centuries, do the best that they can. They do not mean to be evil and cruel, in general, so long as they are raised to be normal and loving, within a secure context of family, faith and community. Thus, people are constantly "inventing" or "discovering" things that attempt to improve the quality of life, and if that didn't happen, most humans would not be alive today. How about the first people who realized that some weird mold, for example, would be the basis for discovering the first antibiotic penicillin? I'm going to give you first a silly example, and then a deadly serious example. Suppose that trial lawyers "discovered" that some nut in a laboratory was testing "making people eat mold" and therefore sued to get that laboratory closed down? I wish I was joking but I'm not, really. Fortunately, people back in the 1930's and 1940's were not totally greedy and demented (yet). "Progress" was something that did not need explaining because it was a shared value... millions of people died from infections each year around the world because at that time there was no cure for infections. So people of course through self interest and global humanitarian interest researched medicine in order to serve the greater good, and rarely received great financial renumeration other than their paychecks. But people who make money ONLY through "conflict" (trial lawyers), would have seen the development of "eating mold" as an opportunity for some juicy suing in court, questioning whether that was "healthy" or not. So rather than being part of the community that silently praises and endorses the world, trial lawyers "look for" money making opportunities in the creation of conflict. So that is my "silly" example, but one that I think modern people can understand. Thank God product liability trial lawyers did not exist when penicillin was being developed!

Here is the serious example. Infections were a huge threat to humanity (and remain so, as cleanliness decreases and potency of infections increase), but the invention of penicillin, and its successors saved millions of lives per year. Humans at that time faced another great threat through history and that was fire. Throughout history entire cities have burned, and every community had a constant fire threat. Heat and light were both provided through the use of open flames. And so humans thought they had discovered a wonderful development when they developed use of asbestos as a fire proofing material in homes and buildings. Be assured that many lives were saved through the use of asbestos. It was one of the theoretical "human advances" when humans focused on how to figure out how to have a less fire vulnerable home, school or place of business. For decades people thought they had discovered a remarkable thing, and they had. But two problems developed over time. One was that people discovered that it was a dangerous material to work with, and that it could become a dangerous material to live with. People did not know better back then. Workers had no way of knowing, nor did their bosses and company owners, that they were breathing fibers that would later harm their health and even kill them. However, I am in complete agreement that once the medical threat was determined that everyone should have acted promptly and responsibly to mitigate and prevent it. But people are not born to be geniuses who have full knowledge of right and wrong in a flash. That's just ain't humans, folks, in case you have not noticed. Thus, there was no reason to totally demonize people who thought they were doing the right thing before the danger was discovered. But trial lawyers are experts in "revisionist history." In order to create the marketplace in which they make money (conflict), they label entire segments of well meaning society as "bad guys" who exploit "victims."

Think about it. Who can speak up for the decades of people who lived in safe housing because of asbestos? No one, obviously, because most of human history is lived, not recorded in paperwork. We don't know how many tenements in slums did not burn because they were protected in some part due to asbestos. We don't know how many factories were safer because they had asbestos. We only know that science and medicine revealed the hidden dangers of asbestos once humans had advanced to a certain point.

But modern "capitalists" no longer think in terms of this balance, because they have splintered life itself into kind of gladiator arenas in which they can make money. And so asbestos trial lawyers discovered (and created) a new arena in which they can make money, by declaring "evil doers" (asbestos providers) and "victims" (workers, genuine illness victims, and theoretical 'future' victims). Now, I'm not talking out of my hat, and I'm not pig ignorant. I had to have asbestos removed from my own home (and fell for contractors who were unlicensed and who probably did a lot of harm in their removal procedures). However, I'm all grown up and a good person and so I figure that asbestos is yet another chapter in human history where people discovered and developed a good thing, for good purposes, but as they grew up they learned of side effects that were unacceptable. That's human evolution, folks. Think of the people who first bit into the bad mold before discovering the good mold from which cheese and eventually penicillin came from. People who tried to find cures and good things for human development were not "evil" just because later research and experience shows a bad consequence for what they did. Likewise, asbestos users never set out to destroy anyone or hurt anyone; in their day they thought they were saving lives (and they did, as many potential fires were prevented).

However, I do agree that ethics dictate that once a worker becomes ill because of improper exposure, all should be done to protect him or her or their family. Companies who refused to do so without litigation are part of the problem, and thus put blood in the water that attracts trial lawyer sharks. In true capitalism a company owner who learns their product causes harm (asbestos) has to "man up" and view their product development as a dead end, and pay the financial consequences. (That's one reason why real insurance policies exist; not to "make a killing by marketing freak derivatives.") In real capitalism insurance policies exist so in case their is a huge "oh oh" and product liability, they are protected as a company from being destroyed, and the victims receive compensation.

But some trial lawyers went into the "find the asbestos and loot da money" business. All they do is sniff out use of asbestos and like truffle pigs, point out a place to litigate and sue, so they can loot money out of the situation (and even call themselves "heroes"), whether damage was actually done or not. And so we have had an unbelievable wounding of American capitalism through trial lawyers who seek up, stir up and even create conflict, in order to loot wealth out of the "crisis," whether real or contrived. And insurance companies have become part of the problem by no longer partnering with their customers to anticipate and proactively deal with inevitable product liabilities and dead ends. The whole asbestos litigation industry has been a debacle that I cannot over emphasize as a case study of where moral and prudent genuine capitalism has been totally derailed, all for the purpose of enriching the few, and victimizing the genuine victims twice. So many people have been enriched due to the "asbestos mitigation and litigation" industry that has derailed what should have been a prompt and reasonable approach to the crisis.

In a genuine, moral capitalist economy all the safeguards for bad or defunct "free market" product development would have been in place and activated. Insurance policies would have been written to do what they are supposed to do, insure, duh, not avoid helping pay out their clients when a tough situation arises. Also, a genuine capitalist company owner would promptly recognize his or her responsibility toward asbestos workers, acted swiftly and morally, AND had the security of the appropriate insurance in place, rather than put blood in the water by fighting and denying. Also, in a genuine capitalist economy, opportunities would have arisen for, yes, asbestos remediation companies (those who take the stuff out) and also for mediators and other advisers. But here is the problem. Trial lawyers should have been a last resort minority in this crisis. Instead, they "led the charge" for sheer monetary reasons. They drive, for example, the wealth of remediation companies. In true capitalism companies that alleviate asbestos should thrive because they offer a great and needed service, not because companies are held essentially at the point of a gun because of fear of the asbestos trial lawyers being sicked on them. Trial lawyers should be a "court of last resort," using their "speciality," and not the emperors of that entire segment of the economy.

I hope you have found this helpful, especially the young people, who have to rely on hearing about saner times, since they were born into these times when the "norms" are very abnormal.

Please excuse any typos or misspellings. Often I "cannot contact the server" when I try to spell check.