Saturday, February 25, 2012

FSLIC and Fractional Reserve Lending

My goal is to re-engineer health insurance in a way that would restore the concept of self-financed health care. The two central features of this plan are the Medical Savings Account and the Health Care Advocate.

I chose name name "Medical Savings and Loan" because I chose to supplement the Savings Accounts with a combination of loans and grants instead of high deductible insurace as was done the MMA Act of 2003.

This name brings up a conversation about the collapse of the Savings and Loan System.

The Savings and Loan collapse was a classic equity bubble caused by a fractional reserve lending made worse by Federal backed insurance.

The set up of the Savings and Loan failure was the creation of the FSLIC (Federal Savings and Loan Insurance Corporation) by the National Housing Act of 1934. In case you failed to notice, I highlighted the word "Insurance."

This program sought to spawn a housing boom through fractional lending from the Federal Reserve. It started a classic business cycle. The start of a business cycle is always good times and people loved their savings and loans that lent more than they took in.

The Savings and Loan were on the down side of the boom in the 1970s and the industry was in a state of crisis.

In the 1980s, the boneheads in charged decided to revive the beloved Savings and Loan by deregulating lending.

It is important to remember that the call for deregulation only comes when an industry is in a state of crisis. On the upside of a bubble people praise their regulations. Only the lunatics of the Austrian school of economics scream about regulations in up cycles ... and they are routinely dismissed as lunatics.

Anyway, the savings and loans were on the downside of the business cycle and the boneheads in charge decided to deregulate the lending while keeping the federally backed insurance in tact.

Rogues in the Savings and Loan industry were now free to make risky loans backed by the Federal Government. There was an immediate boom in the construction of houses no-one wanted followed by a bailout.

Fractional reserve lending always creates a business cycle. The social engineers who created the FSLIC thought they could take the edge off the business cycle with insurance. The federally backed insurance actually made things worse. When the market was in crisis on the downside of the cycle, politicos took the bone headed move of deregulating the fractional reserve lending with the insurance in tact making the end of the business cycle worse.

The Medical Savings and Loan does not use fractional reserve lending. Because of the high default rate in medical lending, people would avoid fractional reserve medical lending. The MS&L is a mechanism for unrolling an insurance pool into individual accounts. Although it has a name similar to the Savings and Loan, it is doing the exact opposite of the National Housing Act of 1934.

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