Nobody said human action doesn’t influence the outcome. It is precisely this influence that categorizes different people into different risk groups. The problem is when there is a dependence between this outcome and the insurance policy itself. The coverage itself cannot have an affect on the outcome probability. If it does, then the event is not insurable. It cannot be classified into a categorical risk group for which definite probabilities can be calculated.
Maybe if you actually stopped and thought about the issue, you might have at least taken the time to read carefully what I have written. Your thought process is so busy in proving me wrong, that you completely missed the main point that I tried to get across to you.
Insurance as it stands is a hoax. If an insurer has higher risk than the insured, which is clearly the reality of the present system, the insurance product is an increase in risk rather than a decrease to the insured. 100% reserve is a decrease in risk to the insured, which is the entire point to insurance. Arguing that only FRB insurance could compete due to lower costs is like arguing that only restaurants with no furniture and no waiters could compete to due lower costs. You have to spend money to provide a valid product.
If you work in insurance you must know that virtually every financial product is insured by the state both explicitly and to a greater extent implicitly.
A ‘bust’ event for a FRB bank is when all customers walk in an demand access to their (promised 100%) liquid assets. A ‘bust’ event for an insurance firm is when all its policies get called in at the same time. The former is STANDARD business (picking up my ‘parked’ property). The latter is a CATASTROPHY – an outcome (war, disaster, etc) which is usually excluded from insurance coverage.
Failing to fulfill STANDARD obligations (which are at the core of your business) is fraud. Failing due to unlikely catastrophic events, isn’t. If a huge meteor hit Earth, we’re all insolvent.
Ultimately, I concede that fraud may not be ‘fraud’ if it’s clearly disclosed and explained as such, so we may be dealing with semantics and definitions here. Only a moron would ‘deposit’ $100 and expect to BOTH have them invested AND available for withdrawal at the same time. Only a moron would park his car in a garage, allowing that tomorrow it BOTH be rented out to someone else AND available to him at the same time. Only a moron would knowingly ‘invest’ into a fully disclosed Ponzi scheme but, hey, who am I to stop a fool from throwing money down the drain? Is taking advantage of a moron – to whom everything has been clearly explained and disclosed and yet he agrees to the ‘deal’ – fraud? Perhaps not.
Don’t get me wrong. I didn’t mean 100% reserve insurance is impossible as in, no company can possibly have more assets than the sum of un-reinsured or otherwise capped liabilities, that can be, and indeed is often done. In this sense companies can be 100% reserve.
What I meant is that if solemn relay expected all of its assumed liabilities (policies) to require payment for, say, more than one year straight, people would just close insurance down as it would be financial suicide. The whole idea is that liabilities must turn out to be only a fraction of assets, otherwise the thing is unprofitable. So yes, companies could pay even all of their liabilities in a year or two, but they would only do so at a major loss, and only if knowing that in the future more normal rates of incidence would come by. If something like this would begin to be expected, insurance would die. So, insurance is inherently a fractional reserve business. A real-wrld example of the bets-known insurers in the world going bust due to ‘runs’ is Lloyd’s of London’s troubles in the late ’80.
I though you where arguing that if the insured party has a discernable and willfull effect on the rate of incidence, than pure random-loss insurance is not viable, which is a relatively good point, but in practice is mitigated my Bonus-Malus (next time, your premium rate goes up/down in response to your ‘performance’ last time). But I see you mean something else. Could you elaborate, as I don’t follow.
In both cases companies refuse to fulfill their explicit contractual obligations simply because…what they where told would happen happened? The bank goes bust because clients want their money, as they told the bank they would. The Insurer goes bust because, say, asbestos claims where not properly reserved for, while asbestosis protection was the whole idea of the policy. It’s the same thing. The only difference I can discern, is that FRB variations tend to be huge, while insurance claim variances tend to be more contained. But otherwise the idea is the same.
As for the meteor scenario, there is a difference (in theory, in practice it will hardly matter) if, say, some theater is destroyed by the ensuing fire and doesn’t deliver the performance promised, and an insurer failing due to, say, massive floods (or a nuke-sized explosion in the industrial heartland of some country). The difference is that the contract of the theater spoke nothing of meteors, while the insurer contract was all about the flood. This is why FRB and insurance are in the same ‘moral’ category. They only change in actuarial term, i.e. than in FRB one must use models to take into account the huge variance in ‘claims’ (I’d say a Generalized Pareto would do). So they are the same and they should both be ‘legal’ (whatever that might mean in ancap) as long as, as you say, the terms of teh contract are clear.
That must be the best FRB analogy I’ve ever heard.
It’s not the same thing and it’s not merely a matter of degree (of variance). The bank’s contractual obligation is to provide 100% LIQUIDITY (access to ‘parked’ property) to every depositor and at all times, and contingent on nothing. The concept of liquidity is very important here: I don’t have to USE liquidity in order to HAVE it. A FRB bank can NOT offer (give) 100% liquidity to ALL clients, by definition – only a 100% reserve bank can – so the FRB bank is lying and is insolvent TODAY. Even when only a small part of its clients actually USE their promised liquidity, they can’t possibly ALL have it. The FRB simply does NOT have what it says it has – right now!
The insurer’s contractual obligation is contingent on a given event. The promised $1mil payout in my policy never was mine, and is not mine today. I can only claim it when the insured event happens. At it’s core, an insurance contract is the same as ANY other contract between two parties. You are well advised to check the credit and record of the business owner from whom you just got an order for 1000 custom chairs, as there’s always a chance he may not be able to pay at delivery and now you’re stuck with 1000 pink chairs that took months to build and no one wants. This, and insurance, has nothing to do with FRB.
Thanks. Too bad the analogy doesn’t work for 1000 pink chairs or insurance contracts.
Hair splitting: I must only add a distinction. If your contract with the bank explicitly writes :” these funds shall be held safely at all times by the bank and shall not be moved without prior permission” that is indeed lying, and I believe no one here would condone that. I’m certainly not talking about that kind of FRB. The difference between such a FRB and insurance is indeed immense as you rightly point out.
The contact I have in mind as being legit would run along such lines: “the value of the funds shall be payable to the depositor at request”. Now, it might not seem a huge difference, but it is. For when you do this, you are not lying, neither do you break any promise (yet) when you use the funds. As long as you pay them on demand you’re within you contractual rights. So, in this contract the bank assumes totally upon itself the risk of meeting the payment, but it does not infringe any obligation when simply using the fund. Only in failing to redeem on demand a claim can be brought to court. The claim is, thus, overhead, latent if you will, but not material. It could but has not yet materialized. A typical ‘reserve’ situation.
Thus insurance: the liability for the company is latent, i.e. it could arise and is not present. But is still is a liability nonetheless. It’s the exact same situation with a legit FRB: the company assumes upon itself a calculated risk, without even infringing its obligations by writing the contract alone. It’s a very fine difference, but I believe its well weorth grasping.
Me to. As for the clause what I can say is that, if such a contract was brought before me as an arbiter by the client who wishes to sue the bank because it has invested the money somewhere, I would turn him down. I believe a free arbitration market would do the same, but that is speculation.
Allow me to furnish my idea as to why I would find nothing wrong with that.
1.”The value of funds” not the funds themselves. This is important, for if I where to promise to deliver the funds themselves it would pretty much go by itself that I would need to hold them in reserve all times, since once lent it is preposterous to think that the very same banknotes can be delivered on demand. On the other hand, the value of fund, means that I’ll deliver equivalent mass of paper (or gold) which implies that the original fund will not be held in reserve.
All that I’m promising is that, when you request you funds, I’ll deliver an equivalent sum. So, it seems clear to me that I put myself under scrutiny when and only when the request is actually made. The wording seem to indicate that, short of actually asking for the equivalent sum, I have no business at all with the bank.
This is the idea that I, as some arbiter, would get from the contract.
Got it. Legality of it aside (as it eventually devolves into semantics), this is why I think that in a free market – without a central bank and FDIC – FRB (under contracts, clauses, and assumptions as we know them today) would be non-existent. Everyone would divide their assets into (1) liquid and (2) investment parts, then store (1) in a vault or a 100% reserve ‘bank’, and allocate (2) between stocks, bonds, funds, advisors, etc. where title to capital (and exposure to risk/reward) is simple and clear. In such a world, no bank, agent, or institution would be too big to fail, due to the non-existence of any ponzi-like entanglements. Z.
This is a valid point, and I can say that would be precisely my own investment strategy when I’ll be in charge of my own company. But we must see that there often is a difference, and perhaps in this case too it would persist, among small invenstors and large firms. A small investor usually prefers to have the cake and eat it too and that’s why I believe FRB would get them: its liquid, profitable and , of course, has a risk degree. And it’s simple to understand. If we start discussing alternate investment vehicles, like unit-linked funds in insurance and all that stuff, we’d pas out from complication. Ancap would offer limitless profit for financial advisors, I can tell you that much.
But ours are speculations. We cannot know in advance. Thank you for the fine discussion.
Yes, at the core, the principle behind the FRB, Fed, and the FDIC is that freedom and responsibility for own decisions is just too much to handle for the average Joe.
“Fiduciary media and money substitutes are not the same thing. Fiduciary media corresponds to the amount of circulating notes that were issued beyond the quantity of specie available in the reserves.”
ok..that makes sense.
this aexcerpt says “To say the same thing in different words, there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.”
the ‘standard money’ referred to in the above excerpt..is that paper dollars and base metal coins??? current quarters, nickels, pennies and such??? is that the same thing as specie?
paper dollar-fed notes and current coins???
is the fiduciary media spoken of in the above excerpt really a note at all??? or just a ledger entry???
is what occurs in the above excerpt that the rothbard and others claim causes economic harm???
is it now ledger entries in excess of paper-dollar-fed notes???
or was rothbard specifically referring to earlier times when i was told that notes said redeemable in gold/silver but really didnt have any gold/silver to be redeemed with???
