Manhattan Contrarian

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Infinite Credit Card Update, Cantor/Brat Edition

To the progressive -- and unfortunately to many Republicans as well -- it seems that the federal government has limitless borrowing capacity, thus making it possible for the government to cover all the downside risk of life.  And if it is possible for the government to cover all the downside risk of life, then isn't it a moral imperative that it must do so?  The next thing you know we have the government as infinite insurer for everything that is even a little hard to insure right through all the things we used to think were completely uninsurable.  "Uninsurable" -- what's that?  With an infinite credit card, nothing's uninsurable.

This only really got started in the 1960s, but within a few short decades we have government as the infinite insurer of everyone's health; of nearly all home mortgages; of nearly all student loans; of nearly all natural disasters, including hurricanes and other flooding events; of all pensions; of terrorist attacks; and I could go on.

What could go wrong?  The federal government is so huge and has so much taxing power that it could never really go the way of little Detroit, right?  Can anybody name an entire country where government overcommitments actually destroyed the economy and left the people impoverished?  (Well, yes.  In descending order of disastrousness, Venezuela, Argentina, Greece, Portugal, Spain, etc., etc., etc.   And don't forget the entire continent of Africa.)

In the U.S. the gradual government takeover as infinite last resort insurer of everything has proceeded with remarkably little push-back.  Fannie and Freddie have long enjoyed bipartisan support even as they gradually used the government credit card to take over the whole home lending market, run up multiple trillions in debt, and then blow up and cost the taxpayers hundreds of billions.  The big promoter of government flood insurance, as much as anyone else, was then Republican New York Senator Alphonse D'Amato, for whom it was a great payback to the wealthy Long Island beachfront homeowners who financed his campaigns. 

Or let's consider TRIA (Terrorism Risk Insurance Act of 2002).  Prior to 9/11 the government was not in the business of insuring against the risk of terrorism.  After 9/11, insurance companies that had just taken a big hit proposed either excluding the coverage altogether or making terrorism insurance a separate item at huge additional premium.  Maurice "Hank" Greenberg, then CEO of the largest property/casualty insurer AIG, led an industry effort to get the federal government to step up to provide what they called a "temporary backstop" for the terrorism insurance market.  With the "temporary backstop," they claimed, the market could stabilize and the private insurers would gradually come back in.   (Aside:  Greenberg is generally a friend of free markets, and in some recent years has been the Chairman of the market-oriented think tank called the Manhattan Institute.  But it is remarkable how quickly a businessman can turn to crony capitalist when the opportunity presents itself to get access to the government credit card to enhance his own bottom line.  TRIA was one of the great crony capitalist coups of all time -- the insurance companies get the premium and the federal government takes the downside risk.)

So in 2002 the government enacted TRIA.  And surprise, with the government occupying the field, no private market whatsoever has re-emerged.  TRIA is now up for renewal, and Business Insurance in its current edition has the sordid story.  (Sorry I can't find a link -- but I read this obscure trade publication so you don't have to.)  Of course, the American Insurance Association is strongly backing the renewal.  The renewal has just cleared the Senate Banking, Housing and Urban Affairs Committee, and is on its way to the full Senate and then the House:

A key U.S. Senate panel's unanimous approval of a bill to extend the federal terrorism insurance backstop by seven years should speed the reauthorization process in the full Senate, supporters of the legislation contend.  However, passage in the House of Representatives is uncertain and getting it done in a year of Congressional mid-term elections could make it more difficult. 

If it was unanimous (22-0) in the Senate Banking Committee, why any problem in the House?  It's because over there there are actually a few Congresspersons who are catching on to the problem of this infinite credit card thing.  Not the least of these is one Jeb Hensarling of Texas, who is Chairman of the House Financial Services Committee.  Here are some excerpts from remarks that Hensarling gave at a hearing last September on the subject of renewing TRIA:

At the time [2002] it was a thought that originally the TRIA act would give the insurance industry time to re-capitalize and develop new models that they could price for terrorism risks and increase industry capacity. Three years later in 2005 Congress decided to make TRIA a little less temporary and extended it for two years. In 2007, Congress was back again to stretch the boundaries of modern linguistics by extending TRIA temporarily for seven additional years and expanding it to cover any acts of terrorism, foreign or domestic. So we all must recognize that in just five years TRIA has leapt in scope and quadrupled in length, neither of which I think could be mistaken for facilitating a transition to a viable market for private terrorism risk insurance. . . .

[H]ow can we be convinced that the federal government is any better as our National Flood Insurance Program is under water, pun intended? PBGC, $34 billion deficit, and as we look at the national debt clock, which I know is inconvenient to some, it principally turns because insurance programs -- be they social insurance programs such as Social Security and Medicare or others -- the government has not done a particularly good job. That ladies and gentlemen, represents a man-made disaster.

Hensarling is also known, by the way, as the proponent of the most comprehensive (although far from perfect) proposal to wind down Fannie and Freddie and get rid of them permanently.

And now we come to the subject of Cantor and Brat.  Brat has actually spoken strongly on the subject of getting rid of Fannie and Freddie.  Cantor?  He just didn't see this issue of the government taking on infinite insurance obligations as something worth fighting over with the other side.  For example, this from the Wall Street Journal of June 10:

Already this year, Mr. Cantor had drawn conservative resistance by striking a deal with Democrats on flood insurance that bypassed Mr. Hensarling's committee.

So perhaps there is hope that TRIA will actually be killed in the House.  And the rest of the federal infinite insurance program?  That will require getting together some critical mass of people who pay attention to the issue and understand its significance.  Maybe we will soon have at least one more.