Saturday, 5 April 2008

Present at the Destruction

If you live in the US, you are familiar with the Geico lizard. Thanks to saturation advertising on TV, Internet and in the print media, there is no escaping the talking reptile that pushes Geico car insurance with an Australian accent.

The hook is lower premium–music to ears of the mortgage-ridden US drivers in the age of high gasoline prices. But how could Geico charge less, spend millions on advertising and still make money? What gives?

Credit the company’s business model, most unorthodox for an insurance company but of the kind that these times simultaneously demand and create.

Geico refuses to pay the claims. Of course, it cannot do so openly and directly. So it opts for the next practicable solution: it discounts the claims with a vengeance. The damage to your car is $1000? Geico offers $150. If you refuse the offer and sue, the company fights through repeated appeals until the time and expenses of litigation wears you off. This is done openly. So the contingency-fee lawyers are also put on notice that taking on Geico would be prohibitively expensive. At the end, the discouraged drivers give in. Geico wins.

At the level of a damaged car, the harm of this strategy remains local. When taken into more universal area, say health insurance, damages reach far and wide. The New York Times, April 1, 2008:

The Social Security system is choking on paperwork and spending millions of dollars a year screening dubious applications for disability benefits … Insurance companies are the source of the problem… The insurers are forcing many people who file disability claims with them to also apply to Social Security – even people who clearly do not qualify for the government program…

Forcing people who are injured to apply for Social Security before paying their claims appears to bolster insurers’ profits in several ways. If claimants refuse to apply, the insurers can simply stop paying their benefits…

More typically … people apply for Social Security when an insurer tells them to. That allows the insurer to reduce its claim reserves, money that is kept in conservative investment for benefit payments. And in the insurance industry, smaller reserves mean bigger profits. …

Finally, disability insurers tell many of their claimants to appeal Social Security’s rejections again and again, until some are finally accepted. Then the insurers can take those people off their rolls, shifting the cost to the government.
What we are witnessing here is the breakdown of the “business ethics” – not of the kind taught in the business schools, as only fools believe in that nonsense – but the set of rules that, like morality, is developed to preserve the system by putting it on the right. For the insurance “industry” to be viable in the long run, its payouts must approximately correspond to actual losses.

The erosion and violation of this code is not due to some newly discovered need for sharp business practices. (The subject of finance is not people.) It is, rather, due to the impossibility of conducting business-as-usual within the confines of the old code – the evidence of the structural turn of the conditions for the worse.

So the old codes give way, whether through legislatively sanctioned “reforms” or the downright deceitful and misleading practices – an impossibly small fine print here, a less than full disclosure there.

This trend is visible at the government level as well – the US government weakening and destroying the international institutions put in place by the US government for the purpose of preserving the supremacy of the US government because they stand in the way of the immediate objectives of the US government.

Or take the Federal Reserve, forced to repeatedly trample on its own rules to avert systemic shocks. Under such conditions, naturally, out goes the “doctrine” of moral hazard that has kept many court philosophers and economists gainfully employed. The New York Times, Mar 17, 2008:
In Washington, the Treasury secretary … signaled strong support for the Fed’s role in supplying a lifeline to Bear Stearns during crisis negotiation, saying his priority was to stabilize the financial system and to worry less right now about the problem of avoiding a “moral hazard” by bailing out errant institutions. “We’re very aware of moral hazard,” Mr. Paulson said in a television interview … “But our primary concerns right now – my primary concern – is the stability of our financial system, the orderliness of the markets. And that’s where our focus is.”
In a crisis, there is no room for pretense.

So, it is in this way, one conceptual destruction at a time, that an economic system, like the political system representing it, approaches the point of exhaustion.

Speculative capital is not the only element of the system that is self-destructive.