Much of the loot bailing out businesses is migrating to AIG and through them, to all the biggest banks, the holders of the vast majority of the derivatives market. All parties involved in the evolution of AIG from an insurance organization to it’s present form as a huge hole in the financial system is the story of reckless betting, reckless growing of things that should have been kept small and too great consolidation of risk under one umbrella. The only thing that can prevent this sort of dangerous collapse is to regulate business so we don’t get monopolies or cartels.A well-regulated system is far, far better than the utter chaos created by allowing gnomes to run rampant. The money gnomes want to do several things: get as rich as fast as possible, prevent competition and control the environment so they can run rampant. This is why they appeal to people’s desire for ‘freedom’ and assure them, if we were all free of social and legal restraints, we would live in Paradise.
Instead, we end up in anarchist hell. Anyone looking at history can see that order and protection is superior to chaos and destruction. Order without guarantees of basic freedoms is hell, too. This is where the story of ‘balance’ heaves again, into view. A balance between freedom and control leads to Paradise. It is a delicate balance that must be constantly adjusted. For example, try balancing on a board that is lying across a fulcrum point. One must shift one’s weight carefully to keep the board balanced.
The act of carefully balancing forces is intellectually stimulating as well as forcing us to be aware and conscious at all times of what is going on. Mindless movement is punished by Reality. Reality isn’t something we make up in our heads. It is outside evolutionary forces like wind, rain, volcanoes, lightning bolts, etc.
If we ignore these outside forces, we die. AIG is an insurance organization. Insurance was cooked up by humans so we could survive outside forces such as wind, rain, volcanoes, lightning bolts, etc. That is, when these events intruded on our lives, we could get assistance in picking up the pieces. Once upon a time, no one had any insurance at all. We all got to live at the whims of various real forces and most of us died with no money, nothing to pass on to our progeny.
Banking and insurance grew up together and both began because of distant trade deals that were very uncertain in outcome due to wind, rain, volcanoes, lightning bolts and of course, robbers. When the banks discovered they could lend to traveling merchants on a 10% base, they also discovered they could insure this trade with a 10% fee on the value of the trade. This meant, they assumed that 10% of the time, they would have to pay for the losses. Better still, this fee fed the banking fee and both were essentially the same thing and were used the same way. Only the money flow was slightly different.
The fees coming into the banking/insurance branch was an asset but the savings that supported the lending branch was a debit. If the wealth from the insurance could be entangled with the lending side of the ledger, lending could expand much faster. Lending makes a banker richer. Attracting savings makes him poorer. So we can see where bankers tend to lean! To protect the banking system from collapse, regulators were needed who would force bankers to attract savings before they lend.
The banks would have to have some percentage of capital before lending. The bankers want it to be less than 1%, the regulators should keep it at 10% or better. We just saw this in action: the central bank of China raised reserve requirements all the way to nearly 15% while the US allowed mega-banks to have a ratio of less than 1%.
The Chinese efforts to curtail lending worked. The US, on the other hand, wanted more borrowing and so we see how the ‘more borrowing on an increasingly smaller reserve basis’ goes: to hell. China’s FOREX holdings dwarf US FOREX holdings. From top to bottom: China is capitalized and the US is not capitalized.
But we were arrogant. We had insurance! We had derivatives that would be triggered in a collapse and these things would sop up all the losses and enrich everyone! The foolishness of this belief in being insured against ALL outcomes is why we foolishly went off a cliff instead of practicing balance and control.
DRAFT OF THE AIG PRESENTATION ABOUT HOW THIS OCTOPUS OPERATION HAS TO BE BAILED OUT OR THE ENTIRE SYSTEM WILL COLLAPSE:
This lists all the tentacles of AIG. It went into every possible niche. This was because it was not hindered by maintaining enough a capital base to support these various activities. Anyone can write an insurance policy just like anyone can write a loan. But paying off defaults or paying off losses in the insurance industry is a whole different matter. When we had a quiet period in history with few earthquakes, hurricanes or volcanoes, the insurance industry didn’t figure out that the rate of these things occurring would double at the end of the quiet period.
The insurance industry has to be morbid. The writers of policies have to keep a very close eye on probabilities of disasters. And when things tend to chaos, they have to demand systems that control chaos. For example, they should refuse to write insurance policies for houses built in obvious hurricane zones, right on the ocean. If people insist on living there, they must take all the risk.
The US government constantly steps in to prevent prudence. For example, people who build inappropriate houses in obvious places where Reality regularly wipes out everything, get government insurance so they can be foolish and live where they please. AIG won’t insure them!
AIG was the insurer for all the international transportation systems. They bet that there would never, ever be another cessation of world trade like in 1930. Instead of planning for this inevitable event, they pretended it would never happen and thus, didn’t prepare themselves for it happening. Just like life insurance depends on living in a system where there are no Black Death Plagues, the financial insurance system depends on there never being any Global Great Depressions.
So, all the hundred+ billions we spent, propping up AIG, has not improved anything. Things are worse, not better. AIG would love to have us bail them out of their own miscalculations. After all, the top executives were more anxious to line their own pockets rather than take a realist view of future dangers. They deliberately chose to ignore tremendous warning signs that many parts of their system were under assault.
The human footprint on earth is growing. And it is destabilizing systems. For example, when the Antarctic and Greenland ice sheets suddenly cause all their inland glaciers to dump most of their stored water into the world’s oceans, several big events will occur: most of the world’s major ports and cities will be underwater.
The excess moisture will cause immense storms. The cold water will change the water cycles of the world’s oceans and cause immense climate disruptions. And the heavy pressure on Antarctica will end and that continent’s volcanoes will explode into life and earthquakes will shake the entire earth as the entire continent suddenly begins to move northwards, even faster than Australia.
I bring this up because a good insurer has to worry about these sorts of things. AIG didn’t seek out second opinions about future hazards. This is why there is a number of commentators who accurately called shots about the economic unwinding, for example. What AIG needs is analysts who are interested in ‘what might go wrong’ rather then just la-de-da analysts who are like Dr. Pangloss.
It occurs to all of us, the amount our government spent, bailing out AIG, is more than the amount AIG will give out to our retirees. This is a bad sign. The run on insurance companies is already happening. Just like we have runs on banks. I cashed in my own insurance policy 4 years ago, for example. This is also risky: what if all is well? I could gamble and hope my $20,000 would become $100,000 for my heirs. But the real problem is, the longer I live, the less insurance rewards me for living. This is a paradox of insurance.
If we avoid Reality’s many slings and arrows, we get less and less insurance payoff. This is our ‘reward.’ People who are accident-prone get our money that prudent or lucky people don’t get even though they also pay into the system. The US private pension system was undercapitalized. The US Social Security system was overcapitalized but this money was looted by tax cutting and overspending on military adventures, and the return on both have not replaced the money both looted from the old age insurance fund run by our own government.
But this is exactly how the ENTIRE insurance system was run: undercapitalized and too many promises to pay off for obvious future disasters or inevitable events. Insurance companies want the elderly to die young if they are paying pensions but want people to live as long as possible if they have life insurance.
The list of things AIG insures is a warning bell: they are overwhelmingly, the ONLY insurer! This data was available some time ago. Why did regulators allow AIG to ‘grow’ to this degree? There should be dozens of insurers but they were all sucked into AIG or were put out of business by AIG who LIED about true capitalization of payments and ran an organization on less than 10% real capital.
The stark fact here is obvious: AIG capitalized its payments via the Derivatives Beast. By playing games with the bankers and governments it was insuring, it joined everyone in playing the exact same derivatives games based on changes in interest rates, etc. AIG imagined that they were INSURING THEIR RISKS via playing the same games their clients they were insuring, were also playing!
There is an iron rule of Reality: if we all run to the same source for food or shelter, when hurricanes, volcanoes, wind, rain and lightning hits, we will all die if we are in the same spot! The manic growth of the Derivatives Beast fooled AIG executives. They thought, they were well-capitalized via this monster. They had plenty of money! But it was all money on their computers, not money like in gold, for example.
Humans are funny. We need a dose of Reality so we don’t go crazy and do dumb things. This is why many insurance policies have many clauses concerning how we live our lives. If we die jumping from planes too many times [skydivers have shorter lives] or we drink too much [ditto] or do other risky things, the insurance policy is null and void.
But internationally, caution was thrown to the winds, rains and lightning bolts and AIG insured all sorts of things they couldn’t possibly afford to pay off since this was a potential of being trillions of dollars. AIG even decided to insure governments! No insurance system can insure everything.
All governments are being forced to insure the insurance businesses who insure government bonds. Wait! This is CIRCULAR! This can’t work, obviously. The government is going bankrupt, trying to capitalize the insurer who insures governments against going bankrupt. Wait, this is CIRCULAR! Ouroboros eats his own tail, again.
Why have AIG? The government will insure private aircraft leases! HAHAHA. AIG couldn’t do it. This is called ‘holding a gun to the head while pulling a heist.’ AIG is planning on telling us, if we don’t drive our entire nation into bankruptcy to capitalize their private, international business, they will kill Boeing.
And who will own AIG? CHINA! HAHAHA. Another gun to our heads! If we don’t bail out these stupid gnomes who live in palaces, chase expensive Russian fashion models and drive fast German cars, they will collapse and the Dragon will own their hides.
Note the last three items: if we don’t hand over huge sums of money to these crooks, they won’t be able to repay the money they already stole from us! And our Treasuries will be worth less. And this is because AIG had transformed itself from an insurance system into a RISK organization which took ever-greater risks! When the insurers need insurance to stay alive, this means the insurance issuing organization is DEAD. And trying to keep a dead insurance company alive by bankrupting one’s own government is suicidal.
I will note that NO insurance company ever pays when a policy holder commits suicide.
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