Friday, September 11, 2009

Social Insurance

Uwe Reinhardt has an interesting article which discusses financial bailouts in the context of social insurance. There are many different types of social insurance that we benefit from, but some types are more "politically acceptable" than others. As he notes:
Why is it the American way that I in New Jersey should feel obliged to give financial help to a family whose beach house in Mississippi was blown down by a hurricane, but it is socialist and un-American to help a Mississippi woman struck by breast cancer?
When financial institutions got in trouble -- think Bear Stearn, Bank of America, Citigroup -- they ran to the government for a bailout.

The financial markets had prided themselves on their expertise in pricing and managing financial risk prudently. But left on their own, they proved that they could not even manage properly as simple a transaction as a mom-and-pop mortgage loan, let alone fancy derivatives such as the collateralized debt obligations (C.D.O.’s) that were based on sloppily-written mortgage loans and the credit-default swaps (C.D.S.’s) meant to insure the value of these C.D.O.’s, but without adequate reserves to back up that credit insurance.

In the end, like teenagers who hate Mother’s strictures when all is well, but run to Mommy whenever they get in trouble, the swashbuckling oligarchs of the financial sector ran to government for cover, owning up once again to the time-honored mantra of this country’s legendary rugged individualists:

When the going gets tough, the tough run to the government.

Another term for “government risk management,” of course, is “social insurance.”
Why are some forms of social insurance more acceptable than others? Is it just politics?

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