Too Much Financial Reform Could Ruin Health Care Insurance Reform
While Congress looks ready to act on health care reform, another bill of near equal magnitude is making its rounds through the Congress. Financial reform could ruin health care reform, though, if government force crushes the derivatives market.
Importance of Derivatives
The derivatives market is one that extends into the trillions of dollars with some estimates pushing over $600 trillion, 10 times the annual productive capacity of the entire world. Though derivatives are highly leveraged, they remain relatively safe, helping to spread risk among insurance companies, investment banks, and other institutions and governments.
Derivatives and Insurance, what?
Where Derivatives Go Wrong
The biggest problem with derivatives is that when one counter-party (the entity betting against the food producer, in the above case) goes bankrupt or runs out of funds, the entire system in threatened. The European Union recently looked to get rid of derivatives all together and a discussion in the United States is happening as well. However, simply removing derivatives all together wouldn’t fix the system, in fact it’d probably make it worse and more costly for insurance across the board.
AIG
AIG was a perfect example of an “insurance” company betting in the derivatives market. Because the derivatives market is highly leveraged, often requiring a down payment of just 2-3% for AAA rated firms, some companies become overextended. AIG was one of those companies. The firm lost billions on its derivatives portfolio and the shockwaves spread as other firms couldn’t pay off bets they had made due to AIGs default.
A Simple Solution
The simplest and perhaps most effective solution to the derivatives market is to let it operate as it is and keep Government out of Wall Street. As long as firms know they’ll be bailed out when the worst happens, they’re going to keep on riding the risk. Kill the bailouts and you’ll kill the leverage, and we’ll all be left with better risk diversification and perhaps lower premiums on every type of insurance. A win win situation, if you ask me!
I always make sure that my family gets Health Insurance from very reputable companies. health insurance is very important these days..:,