Marketplace Scratch Pad

Morning Reading

Scott Jagow Jul 31, 2009

The economy sagged less than expected last quarter. But AIG might be in much bigger trouble than we thought. Plus, an argument for getting rid of job-based health care… in today’s edition of Morning Reading:

Further proof this morning that we’re in the “yeah, but” economy. Just read the sentence construction in this USA Today story about today’s GDP report:

The government said Friday that the economy slowed at a rate of 1% during the quarter. (Yeah, but that was) better than the 1.5% decline expected by analysts…

(Yeah, but) the data also showed consumers cut their spending, a troubling sign as consumer spending accounts for more than two-thirds of economic activity.

“Investors have been trying to trade on any bit of good news. (Yeah, but) it’s not good,” Steven Stahler, president of the Stahler Group in Baton Rouge said of the report.

The report is the strongest sign yet that the ongoing recession is winding down. (Yeah, but it’s) still ongoing.

When the yeah, buts disappear, then we’ll know the economy is really back on track…

The New York Times dug through state regulatory filings and comes to this conclusion:

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

I recommend reading the whole article, but here’s one more excerpt:

“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.

Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies. It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

Like a Ponzi scheme.

The PBS NewsHour interviewed House Speaker Nancy Pelosi, and she says Democrats won’t give up too much to get the health care bill they want:

This is about the American people. What I have always said is, we will have a good, strong bill with a robust public option, and we will.

What I’ve also said is, it’s not about Democrats or Republicans or any place across the spectrum. It’s about the American people. And the bill must work for them.

And this is a bill that says to the insurance companies: A new day has dawned. No longer will you be able to exploit the American people by depriving, discriminating against them if they have a pre-existing medical condition, if they lose their job, or change their job, or want to start a business, or be a self-employed. They still will have health insurance. If they are sick and have insurance, you can no longer pull the plug on their health insurance, as they can do now.

Writing in the Financial Times, management consultant Matt Miller says America should ditch its job-based health care system, pronto:

America’s unique employer-based healthcare system may have made sense 50 years ago, when healthcare was cheap and business faced little global competition. But today’s circumstances are radically different. Soaring health costs strangle business and absorb cash that could otherwise go to wages. The link between healthcare and employment explains why millions of Americans have lost coverage during this recession. Budding entrepreneurs with ill spouses or children stay in jobs they loathe for fear of losing the insurance they need. Keeping employers at the core of the welfare state is bad for business, bad for the economy and bad for families…

The better solution would be a “grand bargain”, through which business shifts health costs off its payrolls and on to government, in exchange for business supporting the broader revenue needed for government to accommodate this shift. Contrary to conservative claims, it is perfectly possible to do so in market-friendly ways. As health systems in Switzerland and Holland show, the US could have universal coverage without taking the road of single-payer care.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.