The Ascent of Money [Part 4] – Insurance and Welfare

The Ascent of Money [Part 4] – Insurance and Welfare


The Most Basic Financial Impulse of All Is to save for a rainy day Because as we’ve Been Painfully Reminded by The recent Months of Financial Turmoil the future is so unpredictable The World Really can Be a Dangerous Place Not Many of us Get Through Life Without a Little Bad Luck Some of us get a Lot it’s all about being in the wrong place at the wrong Time Like New Orleans When hurricane Katrina hit The question is how Should We Deal with the risks and Uncertainties of the future should The onus be on the individual to ensure Against disaster Should We Be Able to rely on the voluntary Charity of our fellow Human Beings When Calamity strikes Or Should we Be Able to count on the state in other Words the compulsory contributions of our fellow Taxpayers To bail us out When the flood comes That’s a Long Way of Asking a Simple question are you Insured The British Certain They think They are Today We Pay a larger proportion of Our income on insurance Than Any Other People in the World It’s really Rather odd Because Britain Is One of The safest countries on Earth The struggle to overcome risk has Been a constant theme of the history of Money From the invention of life insurance By Too hard Drinking Scots Clergymen To the rise and fall of The welfare state to? The Explosive Growth of Hedge Funds and Their multi billionaire owners at the core of our struggle with risk Is an insoluble Conflict We want to be financially secure and so We Yearn for a predictable World But the future always Seems to come up with new and unpleasant Ways to take us by surprise We want calculable risk were stuck with Random Uncertainty When hurricane Katrina Hit New Orleans in the last Week of august 2005 It caused Death and destruction yet It’s not a Natural catastrophe that Now Threatens the survival of the City The Real Lesson of The disaster is about Money How the risk management System we Call insurance Simply Failed When Faced with a Calamity on this scale The Huracan Didn’t Hit New Orleans Directly the main Force of The storm passed to the northeast of the city But Just as the residents Breathed the sigh of relief The Real catastrophe Began This Industrial Canal Links Lake pontchartrain to the Mississippi and After The hurricane The Huge storm surge Raised the Water Level in the canal so high that It broke the levee Pouring Umpteen Gallons of The Lake Over Here into the 9th Ward of new Orleans Just to the east of the ninth Ward is st. Bernard a blue-collar community of Homeowners all on Paper at least Covered By private insurance Council or Joey de Fattah Refused Advice to leave the city Staying Put during the storm Eventually he was Forced to retreat to the roof of the town Hall as the waters Kept rising And As you can See this is the waterline That’s the waterline That’s where it came Up to The Water came in this Building in Fourteen Feet of Water in 15 Minutes Wow From The Second Floor of This building i could see coming down Judge Perez a Wall of Water in that Wall of Water Was debris Cars Vehicles Pieces of Roofs and This Wall of Water i you know you Guestimate had to be maybe 15 to 20 feet tall I’m moving fast moving Quickly Just coming down this Boulevard street and Just taking everything With It as It would come The Whole of St. Bernard Parish Was inundated in Just 15 Minutes Only five Houses out of 26,000 Weren’t Flooded More Than 2,000 people were Killed in hurricane katrina and the subsequent flooding Here in st. Bernard Parish 148 People Lost Their Lives Mostly Because They became trapped in their Houses as the floodwaters rose The Painted Signs on these abandoned Houses Say Whether Dead Bodies were found after the floodwaters Receded a Little Bit like Medieval? London in the time of Plague yet Three Years Later It’s not Flooding or plague That’s Killing New Orleans a Harsh Financial Reality Has Emerged People can’t live Here anymore Because they can’t insure their Homes One Man Made It his Mission to show the Limits of private insurance When it comes to a really big Crisis Is former Navy Pilot Richard F Scruggs One of Those lawyers That Only America Seems to produce Dickie scruggs took Fifty million Dollars off The asbestos Industry Then Two Hundred and Forty eight Billion Dollars off tobacco Companies for Failing to Warn Smokers of The Danger of Lung Cancer This Kind of Work has its rewards Scruggs Is share and Fees in The tobacco case Was one point four billion Dollars Scruggs is latest target has Been america’s insurance Companies His clients Hundreds of Homeowners whose Houses were destroyed By Katrina Argued That the companies were refusing to pay Up on genuine claims Have Viewed the insurers Disputed That Was a Sh there it Was a House here a house next to it Scruggs had a dog of His own in this fight His own home on pascagoula Beach Boulevard Here on the mississippi coast Was so badly Damaged By Katrina That It had to be demolished This is the front Door This is the front Door right Here The Edge of the slab as you grow You were slapped getting Rough Slab If you could fix the system but i have the means i’M fortunate enough that i have the means to? To lose Ice and to lose a house and build It back most People Here don’t right You had the power to change the system so that People Really were insured how would you do that is there a Way of making insurance Work Again There Is and and it’s it’s disclosure of What What What you’re buying so that You know Like Like a drug There’s a Black Box warning on there this is what it Does this is What you Should Watch Out for As Opposed to this Device Which is called a Modern insurance Policy Which no one can interpret or understand It seemed As if the insurance companies had Been well and truly Scrubbed One Of America’s Biggest Insurers Settled Hundreds of Cases Brought By Scruggs on Behalf of Clients Whose Claims have Been Turned down but in this bitter High-stakes Battle The insurance companies had the last Laugh After Winning The case Scruggs Was convicted and Sentenced to five Years for attempting to bribe a Judge and influence The distribution of Legal Fees And The Big insurance companies responded to the weight of post-Katrina claims By an effect declaring parts of The Gulf coast a no, home insurance zone Today As Counselor Joy to fatter has found out insuring a house in this Part of New Orleans is Virtually impossible They can’t get a Mortgage either That is Correct They have to make a choice do i build a House here or do i? Relocate to another area where insurance may be a little bit cheaper and i can Afford It so that Is hurting our Community It’s taking it’s taking Our People Away the Nucleus of This parish and Pulling them away Three Years After disaster Struck St. Bernard Parish Has Only a Third of ItS pre katrina Population of Course life has Always Been Dangerous The Real Lesson of Katrina or Any Big disaster is that even when we think we’re protected against Risk sometimes It Turns Out we’re not Even Making Quite Modest insurance Claims can See more Trouble Than it’s worth It leaves You Wondering Why we Bother spending so much on insurance policies Every Year What did this strange habit come from Saving Up for the proverbial rainy day Is the first principle of insurance But the trick is knowing What to do with your savings so that unlike in new Orleans after Katrina There there in the Kitty When you really Need them But to do that you Need to be more than usually canny and that Gives us a Valuable clue as to where the history of? Modern insurance Has its origins where else but in bonnie Canny scotland They Say The Scots are a pessimistic People maybe it’s the weather all Those Hundreds of rainy Days Maybe it’s the Endless Years of sporting disappointment or maybe It Was the calvinism We Picked up at The time of the reformation Certainly It’s – Church of Scotland Ministers Who deserve the Credit for inventing the first true insurance fund back in 1744 and Fathering a multi-billion Pound Industry The Kirkyard Of grave Robbers is best Known for the grave Robbers the Resurrection men Who came Here in the late 18th Century to Supply the medical School at Edinburgh University With corpses for dissection But gray Friars Lasting importance Comes From The Work of the minister Here Robert wallace and His friend Alexander webster it’s somehow Appropriate that It Was scottish Ministers Who invented modern insurance after all we Tend to think of them as the embodiment of prudence and Thrift Weighed down with an anticipation of Impending divine retribution for Every tiny Transgression but in fact Robert Wallace Was a Hard Drinker as Well As a Mathematical prodigy Who liked nothing Better Than Knocking back Magnums of Claret With his bibulus Buddies Wallace and webster were Unhappy at The way the widows and Children of Their fellow Clergymen were treated When the grim reaper struck They often Find Themselves homeless and Penniless The Plan woloson webster came Up with Was ingenious the first true insurance fund in history These are some of the Voluminous Calculations That Robert wallace did Now Housed the National Archives of scotland and you can See how he ran the numbers over and Over again Making Very Careful assumptions about The Maximum Number of Widows and Orphans That Would have to be provided for The Key Point However Was that from now on Ministers Wouldn’T Just Pay Money in That Would be paid out When one of Their Number died Rather They would pay premiums That Would be used to create a fund and the fund Would then Be invested for profitable Purposes The Widows and Orphans Henceforth WouLd be paid out of The returns on that Money Leaving the premiums to accumulate All That Was Required for the scheme to Work was an accurate Projection of How Many Widows and Orphans They Would Likely be in the future a Calculation Which wallis and webster made with extraordinary precision The Creation of The scottish Ministers Widows Fund Was a milestone in Financial History for It provided a Model Not Just for scottish Clergymen But for Everyone Who aspired to provide for life’s eventualities By 1815 the principle of insurance Was sufficiently Widespread to be Adopted for the Widows of men who lost Their lives fighting Against Napoleon at The Battle of waterloo Your Chances of getting Killed were up to one and four But at Least If You’d Taken out insurance You had the consolation of Knowing That Your wife and Children Wouldn’t Be Thrown Out onto the street Gives a Whole New meaning to the phrase take Cover The scottish Ministers Fund Grew into the World-famous scottish Widows Even Novelists Not Renowned for Their Financial prudence Could Join Walter scott to cut a Policy in 1826 to reassure his creditors That They’d be paid in the event of his Death By The Mid 19th Century being Insured Was as Much a Badge of Respectability as going to church on Sunday What no one anticipated back in 1744 was that the careful calculations of two scottish Ministers would grow into today’s huge insurance Industry As Robert wallace Understood 250 Years Ago size matters in insurance Because the more People are Paying into a fund the easier It Becomes by the law of Averages to predict how much Will have to be paid Out each Year Although no individuals date of Death can Be Known in Advance Actuaries can calculate The Likely life Expectancy of a large Group of individuals with quite astonishing precision in other words Insurance is all about trying to cope with The risks of the future if that Is Your insured in the first place No Matter how many private Funds like scottish Widows were set up that were always going to be people beyond the reach of insurance Who were either. Too poor or too feckless. To safe from That rainy day The Lot of The Poor Was once a Pretty harsh One either Dependence on private Charity or the harsh regime of the workhouse like this tyPically austere one here in the heart of edinburgh? yet By The 1880s people Began to feel that life’s losers somehow Deserved Better The Seat Was planted Of an Entirely New approach to risk a Seed that Would ultimately Sprout into the modern welfare state the State System of insurance Was designed to exploit the ultimate economy of scale By covering Literally Every Citizen From The cradle to the grave Yet What we tend to think of the welfare state as a British Invention in fact the World’s first welfare superpower Was Japan Disaster Just Kept Striking Japan in The first Half of The 20th Century in 1923 a Huge earthquake devastated Tokyo As in new Orleans private insurance policies Turned Out to be worth little more Than the Paper They were printed on a New idea Began to emerge in Japan That The State Should Take care of Risk But This Was to be state protection allied with imperial Ambition The Japanese set Up a welfare state and they did it to promote warfare It Was the Mid 20th Century States insatiable appetite for Able-bodied Young soldiers and Workers Not some Kind of Bleeding Heart Altruism That Inspired the rise of welfare State healthcare Would ensure a fitter populace and a Steady Supply of Able-bodied recruits to the emperor’s armed Forces and Deliver Him an empire The wartime Slogan all People are soldiers Was Adapted to become all People Should, Have insurance? The Only problem Was That Japan had gone to war with the world’s economic Colossus the United States Japan’s warfare State proved to be a Massive Mistake Quite apart From The Nearly 3 million Lives Loss in Japan’s Doomed Bid for empire By 1945 the value of Japan’s entire capital stock Seemed to have Been Reduced to zero by American Bombers Cities Built Largely Out of Wood were incinerated Nearly 1/3 of the urban Population lost Their Homes practically The Only City to survive intact was Kyoto the former imperial capital 1945 may have Seen The end of The japanese warfare state? but It wasn’t the end of the japanese experiment with state-sponsored welfare in Japan as in most competent countries the Lesson was Clear The World Was Just Too Dangerous a Place for private insurance Markets to cope with but the best ball in the world People couldn’T Be Expected to insure Themselves Against the u.s. Air force the Answer practically everywhere Was the Same for government to step in in effect to nationalize risk Perhaps The Most Familiar Such System of welfare from The cradle to the grave Also Born in the ruins of war Was devised by the british economist William beveridge When the Japanese came Up with Their own comprehensive welfare system in october 1947 Their Advisory committee and social Security Recommended What amounted to never rejean on Nihon Bank Beverage For The japanese and yet They went even further Than beverage had intended as This Copy of Their report Here in the library of The japanese National parliament Makes Clear It Called on the government to? provide against Every cause of Poverty Sickness and Injury disability Death Childbirth large Families old Age and Unemployment Whatever the reason That Needy Would Be guaranteed the minimum standard of Living By National assistance From Now on the japanese would no longer have to rely on the benevolence of a Feudal Lord? or the Luck of The Gods the welfare state would cover them against all The Vagaries and vicissitudes of The Modern World If they couldn’t Afford Education The State Would Pay If they couldn’t Find Work The State Would Pay if They were too ill to work the state would Pay When They retired The state would Pay and When they Finally died the state would Pay Their Dependents So What Happened after the war in Japan Was Merely The extension of the warfare welfare state? The Slogan no became all People Should Have pensions? The Japanese welfare state Seems to be a miracle of effectiveness in public Health and Education Japan Led The World by The late 1970s the japanese could Boast That Their country had become the welfare superpower Run Like This the welfare state seemed to make so much sense Japan Had Achieved Security for all the elimination of Risk While at The same time Growing so rapidly but By 1968 It at The second largest economy in the World One us economist even predicted That Japan’s per capita income WouLd overtake America’s by The year 2000 Welfare Was Working Where what Fair had Failed to make Japan? Top Nation the key Turned Out to be not a Foreign empire but a domestic Safety Net and yet There Was a Catch a Fatal flaw in the design of the post-War welfare state Just What Was it that Caused Those predictions of Japan’s ultimate triumph Have Failed to come true? The welfare state looked to be Working smoothly enough in 1970s Japan But elsewhere There were signs that all Was not well in Britain and Throughout The Western World The welfare state had Seemed had Removed the incentives without Which a capitalist economy Simply Cannot Function The Carrot Of serious Money for those who strive The Stick of Hardship for those who are idle The Result Was stagflation Low Growth and high Inflation What was to be done One Man and His pupils Thought They Knew the answer Thanks in large measure to their inference one of the great economic trends of The Past 25 Years Has Been for the welfare state to be dismantled Reintroducing People With a Sharp Shock to the unpredictable monster They thought They had Escaped from Risk in 1976 a diminutive professor Called Milton Friedman Working Here at the University of Chicago won The nobel prize in economics Milton Friedman Won His place in the economic hall of fame by restating This simple Equation n V Equals P q where n is the money Supply V is the velocity at Which It circulates P is the price level and q Is the quantity of Expenditures Friedman’s observation Was Simple if the Money Supply went up then so did the price level Hence the quantity Theory of Money But You Needed Much more Than a piece of Chalk and a Blackboard to answer the second Crucial question of Milton Friedman’s Career What had Gone Wrong with the welfare state In chile he found the perfect laboratory to test his Theories? in september 1973 tanks Had Rolled Through Santiago to overthrow the Government of Chile’s Marxist president Salvador allende? whose Attempt to Turn the country into a communist state had Ended in total economic chaos and a Call by the Chilean parliament for a Military Coup Up there on the Balcony of the carrera hotel Opponents of the ind regime Celebrated with champagne as Air Force Jets Flew Over a Head to bomb the manator palace Here in the palace ind prepared to make a Desperate last stand Armed With an AK-47 presented to him by his Cuban role Model fidel Castro Looking at The Palace Window and Seeing The tanks Literally Rolling in a Hindu realized that It Was all Over for his dream of a Marxist chile Cornered Here in what was Left of the presidential quarters He took the decision to shoot Himself Thirty-Five Years Later You can Still see the bullet Holes in some of The Buildings Around the square What Happened here in September 1973 in Many Ways epitomized a Worldwide Crisis of The welfare state and posed a Stark choice Between alternative economic Systems With output collapsing and Inflation Rampant Chile System of Universal Benefits Was Effectively Bankrupt before a nd the only Solution Was full-Blown Soviet style takeover of the entire economy but The Generals and Their Supporters Knew That They Didn’t want That But What did they Actually want Given That the status quo Was unsustainable Enter Milton Friedman In March 1975 Friedman Flew from chicago to chile to answer that question In Addition to giving lectures and Seminars Friedman came Here to the manator palace for a Meeting with the new Chilean president General augusto Pinochet Friedman Spent three quarters of an hour with Pina shet urging Him to reduce the government deficit that he’d identified As the main cause of Chile’s Sky-High Inflation Then Running At an Annual rate of Nine Hundred Percent a Month After Friedman’s Visit the Chilean Hunter Announced that Inflation Would Be stopped at Any cost The Regime cut Government Spending By 27 Percent This problem of Inflation is not of recent Origin It arises from trends Towards socialism That Started 40 Years Ago and Reached Their logical and Terrible Climax in the ind regime for tendering This Advice Friedman Found Himself Denounced for acting As a consultant to a Military dictator responsible For The executions of more Than 2,000 real and Suspected communists and The torture of Nearly 30,000 more Chicago’s Role in Chile’s New regime consisted of more Than Just a Visit by Milton Friedman However since the 1950s that Been a Steady stream of Bright Young economists Going From This Place The Catholic University in Santiago to study in chicago and They come back Convinced of the Need to balance The budget? Tighten The Money Supply and liberalize trade These were the chicago Boys Friedman’s Foot Soldiers and yet The most Radical of Their Ideas went Beyond What Friedman had recommended to panache it It amounted to a full-scale Rolling back of the welfare state The conservative economic revolution didn’T Begin in fact as Britain or Reagan’s America It Began Right Here in chile The Mastermind Behind This wholesale dismantling of The welfare state Was a Young economist Called Jose Panera Chile’s economy Was Destroyed We Have Had 50 Years of protectionism a State interventionism light Socialist Review if You want and then That Was exacerbated During The ind government we Had created a Sort of welfare state and that of Course It was going Bankrupt in chile Between 1979 and 1981 Panera and His colleagues erected a Radically New pension System for chile Giving Every Work of the chance to opt Out of the old Peers You go state system Instead Of a Payroll Tax each Worker Now could Put 10% of his wages aside into an individual personal retirement account to be managed by private competing Companies There was also a small Premium for disability and life insurance The idea Was to give each worker a sense that the Money Being Put aside Was his own property His own capital Panera Gambled he gave workers a choice Stick with the old System of Pay-As-You-Go or opt for the new personal retirement accounts It paid off Convinced By Panera’s argument 80% made the switch to a private pension Plan But Was It worth it Was It Worth The huge moral compromise that The chicago Boys and the Harvard Man made When they got into bed with a Torturing Murderous dictatorship Well The Answer to that question Very Much Depends on whether you think Their? Reforms Helped Pave a Peaceful Way back to a sustainable democracy in chile and i think They did in 1980 finish It Conceded a New constitution That Prescribed a Ten Year transition back to democracy Ten Years Later he stepped down as president Democracy Was restored and By That time The economic miracle Was under Way That Helped to ensure its survival For the pension reform Not Only created a New Class of Property Owners each With His own retirement nest Egg It also gave the Chilean economy a Massive shot in the arm These Brokers and The Banco de Chile are investing Chilean Workers Pension Contributions Into The stock Market and They’ve Been doing a Pretty Good Job of it Average returns on the personal retirement accounts has Been over 10% reflecting the fact that in the 20 Years after 1987 the Chilean stock Market Has Gone Up by a factor of 18 There is a downside to the system to be sure Since not Everyone in the economy has a Regular full-time Job not Everyone Ends Up participating in the system Which leaves a Substantial Chunk of the population with no pension coverage at All and standing in front of The communist Party Headquarters Here in la victoria a Suburb of Santiago Which Was once one of the hot Beds of opposition to the pinochet regime Because most People Here are either Unemployed or Work in the informal sector They don’t or can’t Pay Into the pension system Which means they don’t Get anything out of It this is the Kind of Neighborhood Where Che guevara is still the local hero not hosted Panera The Pool of chili may not have a private pension Plan and may have to make do with a Meager Government Handout in Their old? Age But even They’ve Benefited From Chilies Rapidly Growing economy Growth Makes a difference in the life of Everything The Poverty rate in tillich Has Gone Down from Around 50% to 13% now so this has Been Really a Huge success at the pension reform has Been a critical element in this The improvement in chile’s economic performance since The chicago Boys Reforms is Really Very Hard to argue with in the 15 Years before milton Friedman’s Visit the Growth rate Here Was a Measly 0.17% a Year in the subsequent 15 Years It Increased By a factor of Nearly 20 the poverty rate Here is down to 15% compared with 40% and the rest of Latin America and When you look down at Santiago’s Shiny new Financial district You can See Why the chilean pension reform has Been imitated right Across the region and Indeed Around The World for Britain’s Margaret Thatcher The General from chile and the professor from chicago were Heroes Who Demonstrated That Only By Rolling back The welfare state could Government’s revive economic Growth Yet One country Where This recipe has Not Been tried it’s the country That’S come to need it most Japan So Successful Was the japanese welfare superpower but by the 1970s life Expectancy Was the Longest in the World The problem Was that Japan’s welfare state was too Successful Today The programs Run Here at Japan’s Ministry of welfare rely on an ever smaller Number of active Workers to support an ever rising Population of retirees back in 1960 there Was something Like Eleven active Workers for Every one retiree but By 2025 that Number could Sink as low as two in other Words there’ll Be One old-Age pensioner for Every two bureaucrats Working Here at the Ministry in Just 30 Years the cost of social Security Benefits Has risen in Relation to japan’s National income By a factor of four Today Virtually all Japan’s Health insurance societies are in deficit and the pension Funds are Nearly Out of Money to Japan’s Once so super welfare state is threatening to bankrupt the Nation insurance It Seemed Such a Brilliant idea in the calculations of Those scottish Ministers and even more Brilliant and Japan’s all-Encompassing welfare State But as we’ve Seen the best-Laid Schemes can Be Thrown into Disarray By an Unexpected Turn of events so is there any Better Way of managing risk in an uncertain World Disasters Like 9/11 and Katrina Exposed the Limits of Both traditional insurance and the welfare state But insurance and welfare aren’t The only Ways to buy Yourself Protection against future shocks These Days The Smart Way of Doing it is by being Hedged Now everybody’s Heard of Hedge Funds but What Exactly Does Hedging Mean and Where did it come from To most of Us Hedge Funds are a mystery but the one thing we do know is that they can Make you Stupendously Rich One Hugely Successful Hedge fund manager paid sixty million Dollars for This season and he earns This dig Out – Not to mention Adjust but Jeong’s he paid eighty million Dollars for He’s also Given Hundreds of millions of Dollars to Charity? Ken griffin is the founder of the citadel investment Group one of The World’s biggest Hedge Funds Last Year he navigated his way Through The Credit Crunch so successfully that he was Able to pay Himself more Than a billion Dollars To most of us risk is Scary But all of Griffin’s vast Wealth has come because he’s found a Way of managing Risk? with a Mixture of Mathematical precision and Brilliant Intuition nothing Is Constant nothing Is the Way it’s always Been So what i find is that People Who are really good at This have Great Intuition They’ve great instinct Their gut Actually tells them something The mathematics are important because They demonstrate you understand the problem But ultimately The Decision about Whether or not to take a Given risk i think is really a Human Judgment Call in Every sense of the Word The Origins of Hedging appropriately enough Agricultural for a Farmer nothing Is more important Than the future price of His Crop after it’s Been Harvested and brought to market But That could Be Higher or much Lower Than he Expects a futures contract Allows Him to protect Himself By committing a Merchant to buy the crop When it’s bought to market at a price Agreed When the seeds are being planted The farmer gets a Floor Below Which the price can’t Sink the merchant gets a Ceiling above Which it can’t rise By Signing a Futures Contract Both The farmer and the Merchant Have Hedged Their Bets Both parties are Better off and Because of That The World As a Whole is much Better off It Encourages capital Formation It Encourages investment It Encourages People to do What is needed to be done to make the world a Better Place with the development of a Standardized futures contract Agreed Rules and an effective clearing house the first true futures Market Was Born At its Birthplace Was Here in the windy City Chicago After The City’s futures Exchange Was established in 1870 for Hedging Commodities Became Standard practice The Next step Was for a conditional Kind of future to evolve the option Some of This Really is the Financial equivalent of Rocket science but The underlying principle is simple Because They’re Derived From Underlying assets all futures contracts are Known as derivatives but an Even smarter Kind of derivative Is an option The Buyer of the call option Has the right Say to buy a barrel of oil for a Hundred and Twenty Dollars in a Year’s Time Now if the price of oil rises to a Hundred and Fifty Dollars a Barrel Then The option is in the Money and The Smart guy Makes a Profit of Thirty Dollars but if that Doesn’t Happen if the price of oil stays the same or actually declines he’s under no obligation to carry Through The Deal all he does is to write off the cost of the option itself well it’s by buying and selling Complex Smart Derivatives Like options that Ken griffin has become a billionaire In theory derivatives offer a New Way to Hedge against an uncertain future a Much Smarter Way That Boring old insurance But Much more profitable In the past decade derivatives have seemed to take Over the World of Finance? By The end of 2007 the notional value of all derivatives contracts Reached a Staggering 596 trillion Dollars That’S 43 Times the size of The American economy There are Tremendous Economic Benefits for People That Work Here 20 billion Dollars in The Hands of a Thousand People is really a 21st Century Phenomenon This never Happened 50 Years Ago Yet There are downsides to hedging too When billionaire investor Warren Buffett Described derivatives as Financial Weapons of Mass destruction he all but Prophesied the downfall of American insurance Giant Aig European Headquarters There Behind me Brought Loan Not By Selling insurance Policies but By Selling derivatives That Blew Up in its face Our Basic Human urge to protect Ourselves against risk has proved frustratingly difficult to satisfy insurance Companies Let Us down Welfare States Sink into Insolvency and derivatives Turn Out to be a Double-Edged Weapon Too and so for many Families providing for the future now takes One Very simple form an investment in a house The value of Which is supposed to keep Going Up until the day the breadwinners Need to retire If the pension Plan falls Short Never Mind There’s Always home Sweet home As a pension or an insurance Policy This strategy Has One Very obvious Flaw it represents a One-Way totally Unhedged bet on a single Market The property Market But as we’ll see in the next episode of The ascent of Money a bet on bricks and Mortar While Good old Japanese Wood is AnyThing but As safe as Houses

One thought on “The Ascent of Money [Part 4] – Insurance and Welfare

Leave a Reply

Your email address will not be published. Required fields are marked *