The New York Times reported on the front page of its Sunday edition that as part of the planned stimulus program, Obama Considers Major Expansion in Aid to Jobless. If the article is true, it is a very bad sign for both the economy and the culture:
One proposal, as described by Democratic advisers, would extend unemployment compensation to part-time workers, an idea that Congressional Republicans have blocked in the past.
Other policy changes would subsidize employers’ expenses for temporarily continuing health insurance coverage to laid-off and retired workers and their dependents, as mandated under a 22-year-old federal law known as Cobra, and allow workers who lose jobs that did not come with insurance benefits to be eligible, for the first time, to apply for Medicaid coverage.
As far as the economy goes, the plan as discussed basically involves paying more people in both cash and benefits to stay unemployed. This is just about the worst possible approach to reinvigorating the economy.
A major recession will require many people to make real adjustments and do difficult things. They will have to relocate to different states, change careers, accept significantly lower pay while they gain experience in their new careers, work short-term at unrewarding jobs while they go to night school to train for better careers, etc.
In the long run, this Schumpeterian process of creative destruction will benefit both the individual and the economy at large. The individual winds up working in a new, more rapidly growing and thus a more opportunity-filled industry while the country sees its resources--in this case labor resources--reallocated to places and careers where they can do the most good.
In the short term, though, this type of transition wreaks havoc on families and individuals--that is why it is called creative destruction. This means that few people will undertake such changes except under extreme necessity. Anything the government does to reduce that necessity--such as paying benefits and giving health insurance--creates a reason for a waitress in Michigan to stay put and hope things get better when the real opportunity for her may be to move to Arizona and work in the elder-care industry.
Beyond economics, extending these types of benefits is extremely corrosive to the culture. As a small business owner, I can’t tell you how many people over the years have approached me looking for work “off the books” because they were receiving unemployment benefits and didn’t want to lose them. These job applicants perceived getting a job as carrying an enormous tax equal to 100% of the unemployment benefits. Add in normal income and payroll taxes plus the cost of commuting and they saw a job as not worth it. These types of benefits tempt otherwise law-abiding citizens to engage in illegal activities.
Traditional unemployment benefits have already been extended by 13 weeks in states with an unemployment rate of at least 6 percent. This will delay the recovery. To add subsidized health insurance and Medicaid for those who never had health insurance plus give money to former part-timers … this is all a way of slowing necessary changes in the economy.
One can appreciate the need to increase aggregate demand; one can empathize with the desire to help unemployed people, but if the goal is a speedy recovery without undermining law-abiding practices, the rule should be simple: Minimize or avoid situations in which we pay people for staying unemployed.
Showing posts with label terrorism insurance. Show all posts
Showing posts with label terrorism insurance. Show all posts
Tuesday, 6 January 2009
Flawed Deposit Insurance Programs Need Reform, Banking Expert Says
Government insurance programs that safeguard bank deposits should be reformed to ease taxpayers’ undue stake in propping up the nation’s banking system, according to research by a University of Illinois finance professor.
George Pennacchi says the Federal Deposit Insurance Corp., created during the Great Depression to halt bank runs, is supposed to protect savings through premiums paid by banks, but is effectively subsidized by the U.S. Treasury, putting tax dollars at too much risk.
“We have a system where when things get bad, taxpayers end up being forced to pay for bank failures, not just the FDIC,” Pennacchi said.
Proof that deposit insurance has grown overly generous has surfaced amid a global economic meltdown, he said, with investment firms such as Goldman Sachs and insurance giant Hartford Financial becoming banks to get access to insured deposits.
“One of the reasons why that’s so, and I think this has been a long-standing problem, is that government has tended to subsidize deposit insurance, sort of through a back door,” Pennacchi said. “The savings and loan crisis is an example. Instead of premiums paid by thrifts covering the losses, about $124 billion came from taxpayers.”
He proposes reforms in a research paper that will be presented this month at an economic conference sponsored by the American Enterprise Institute, a conservative-leaning, Washington-based think tank that seeks to influence public policy.
One reform, Pennacchi said, is veering away from an approach that provides nearly unlimited government financial backing when large institutions such as Bear Sterns are on the brink of failure. The government, he says, deems some banks “too big to fail,” with so many connections to other financial markets that failure could net a disastrous domino effect.
But he says the problem can be addressed without leaving taxpayers on the hook. He proposes a central clearinghouse requiring banks to put up collateral in derivative trading that would cover potential losses if one of the parties fails.
“That would get rid of the too-big-to-fail problem and is done all the time with exchange-traded derivatives,” Pennacchi said. “If you trade on the Chicago Mercantile Exchange, there’s a clearinghouse that requires both parties to put up collateral, so if one of them fails it doesn’t cause a loss for their trading partners.”
He says the FDIC should also reform premiums for deposit insurance that have historically been artificially low, covering only average losses and heightening risks of a taxpayer bailout in the event of widespread bank failures.
A move toward rates charged for similar, private-market insurance, such as credit-default swaps, would likely yield significant premium increases, roughly doubling current rates, Pennacchi said.
“But I think that’s the minimum that needs to be charged to protect taxpayers and prevent the government safety net from expanding even more,” he said.
Pennacchi also advocates either abandoning a dedicated deposit insurance fund, managing the program through the treasury instead, or creating a swap market that would level out banks’ premiums.
He says banks could lock in deposit insurance costs through a premium swap market, rather than paying higher premiums when bank failures rise and receiving rebates on premiums when failures are low. The swap market would be similar to interest rate swaps, transferring risk to investors outside of the banking industry.
“If there’s any reform that would be easy to do it would be to create this premium swap, which would lead to more stability for banks because they wouldn’t face high premiums in bad years when they’re least able to pay,” Pennacchi said.
His research will appear in a book that will be published this year by the American Enterprise Institute. The book will focus on government guarantee programs ranging from the FDIC to crop and terrorism insurance.
George Pennacchi says the Federal Deposit Insurance Corp., created during the Great Depression to halt bank runs, is supposed to protect savings through premiums paid by banks, but is effectively subsidized by the U.S. Treasury, putting tax dollars at too much risk.
“We have a system where when things get bad, taxpayers end up being forced to pay for bank failures, not just the FDIC,” Pennacchi said.
Proof that deposit insurance has grown overly generous has surfaced amid a global economic meltdown, he said, with investment firms such as Goldman Sachs and insurance giant Hartford Financial becoming banks to get access to insured deposits.
“One of the reasons why that’s so, and I think this has been a long-standing problem, is that government has tended to subsidize deposit insurance, sort of through a back door,” Pennacchi said. “The savings and loan crisis is an example. Instead of premiums paid by thrifts covering the losses, about $124 billion came from taxpayers.”
He proposes reforms in a research paper that will be presented this month at an economic conference sponsored by the American Enterprise Institute, a conservative-leaning, Washington-based think tank that seeks to influence public policy.
One reform, Pennacchi said, is veering away from an approach that provides nearly unlimited government financial backing when large institutions such as Bear Sterns are on the brink of failure. The government, he says, deems some banks “too big to fail,” with so many connections to other financial markets that failure could net a disastrous domino effect.
But he says the problem can be addressed without leaving taxpayers on the hook. He proposes a central clearinghouse requiring banks to put up collateral in derivative trading that would cover potential losses if one of the parties fails.
“That would get rid of the too-big-to-fail problem and is done all the time with exchange-traded derivatives,” Pennacchi said. “If you trade on the Chicago Mercantile Exchange, there’s a clearinghouse that requires both parties to put up collateral, so if one of them fails it doesn’t cause a loss for their trading partners.”
He says the FDIC should also reform premiums for deposit insurance that have historically been artificially low, covering only average losses and heightening risks of a taxpayer bailout in the event of widespread bank failures.
A move toward rates charged for similar, private-market insurance, such as credit-default swaps, would likely yield significant premium increases, roughly doubling current rates, Pennacchi said.
“But I think that’s the minimum that needs to be charged to protect taxpayers and prevent the government safety net from expanding even more,” he said.
Pennacchi also advocates either abandoning a dedicated deposit insurance fund, managing the program through the treasury instead, or creating a swap market that would level out banks’ premiums.
He says banks could lock in deposit insurance costs through a premium swap market, rather than paying higher premiums when bank failures rise and receiving rebates on premiums when failures are low. The swap market would be similar to interest rate swaps, transferring risk to investors outside of the banking industry.
“If there’s any reform that would be easy to do it would be to create this premium swap, which would lead to more stability for banks because they wouldn’t face high premiums in bad years when they’re least able to pay,” Pennacchi said.
His research will appear in a book that will be published this year by the American Enterprise Institute. The book will focus on government guarantee programs ranging from the FDIC to crop and terrorism insurance.
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