Sunday, March 3, 2013
Savings and Loan Scandal
My goal is to have a meeting about free market health care reform.
In this meeting I wish to present a model for financing health care in which all of the funds flowed through accounts held by individuals. I supplement the savings accounts with loans and grants.
I then contrast this model with group funded care.
This game of using group funding to manage individual risk has a long and sordid history of turning individual risk into nationwide systemic risk.
I've called my presentation "The Medical Savings and Loan."
A valid criticism of this name is that many people associate the term "Savings and Loan" with the Savings and Loan Crisis of the 1980s and 1990s.
I think this association might be useful.
At heart, the Savings and Loan Crisis was an insurance scandal. The scandal was created by federal entity called the FSLIC (Federal Savings and Loan Insurance Company).
The FSLIC was created by The National Housing Act of 1934 to insure the deposits of local savings and loans.
A Savings and Loan is a small institution engaged in local financing. The problem with local lending is such lending can amplify local financial risks. Imagine that a local business gets in financial trouble. This will lead to big losses at the local bank which freezes up assets through out the community.
The goal of the FSLIC was to nationalize the local risk. The FSLIC assured deposits of local banks and reduced the risk of local financial panic. This created a sense of lending security allowing Savings and Loans to aggressive expand lending.
The sense of stability created by the FSLIC increased borrowing (debt financing) and led to a brief sense of prosperity. This debt financed sense of prosperity started a bubble.
Widespread debt financing of housing actually created inequities. Notably, there has been a big drop in the ratio of a worker's annual salary to the cost of housing. There has been a substantial decrease in lifetime savings and a continuous stream of housing bubbles.
The country was already in trouble well before the S&L scandal. We had inflation followed by stagflation in the 1970s and early 1980s.
When one is at the height of a bubble, one tries to prolong the imagined prosperity of the bubble by loosening lending requirements, which only made things worse.
Rogues in the financial sector realized that they could use the FSLIC to take huge risks with federally insured loans making the collapse of the FSLIC even more dramatic.
People associate the term "Savings and Loan" with scandal. This scandal was not the result of local institutions engaged in financing local projects. The scandal was the result of politicos trying to regulate finances with federal insurance.
IMHO, the Savings and Loan scandal is simply one in a long series of financial scandals.
My goal is to create a discussion about alternatives to insurance. In my opinion, The fact that the name brings up a discussion of the collapse of the FSLIC is a plus because the collapse of the FSLIC is relevant to the discussion of federally regulated health insurance.
Was the collapse of the Savings and Loan industry the result of small companies engaged in local financing, or was it the cause of federal regulations that took the individual risk of local financing and turned it into a systemic risk for the nation?
Since the goal of my effort is to start a discussion, I revel in the fact that the very name of the project brings up an important historical event in the ongoing saga of federal regulation.