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Global Scale by Coletta Kemper Free-For-All

The time is ripe to look at global solvency standards along the lines of the EU’s Solvency II plan, which requires insurers to account for all their risks.

By  Coletta Kemper

Back in the 1990s I jumped on the technology bandwagon like a lot of people. A friend told me about an exciting new technology upstart that would use the Internet to revolutionize the way we learn. She had a good friend who knew the people starting the business. This was a good way to get in on the ground floor. (Sound familiar?) Icons of the tech industry were on the board of directors, and the stock was priced right at 35 cents per share. With promises of doubling, tripling, quadrupling my investment quickly, I plunged in. Well, you can guess the end of the story. The stock soared briefly and hit $25 a share, then fell as quickly as it rose. Fortunately, I invested only a modest sum.

Later I learned that the investor who had tipped his friend off to this great deal was smart enough to sell at $25. About a year later, I attended a party at their brand new $1.2 million house. I went out of morbid curiosity to see where my money had gone.

After this tough lesson, I told a friend that capitalism was nothing more than a giant Ponzi scheme. Those who get in early make a lot of money. Those who get in last are left holding the bag when the bottom drops out.

John Maynard Keynes voiced this view nearly a hundred years ago. He said, “The actual, private objective of the most skilled investment today is…to outwit the crowd and to pass the bad, or depreciating, half-crown to the other fellow.”

I got the half-crown in the tech deal.

Fast forward to 2008. Today’s financial crisis is worse than the tech meltdown in the 1990s and worse than the savings and loan crisis in the 1980s. We have to go back to the 1929 financial collapse that led to the Great Depression for perspective.

It, too, was a global crisis brought on by unfettered market economics, greed and panic. Despite what Archie and Edith Bunker sang in the popular ’70s TV show “All in the Family,” those were not the days, and I don’t think anyone is longing for Herbert Hoover again.

We thought we had learned from the ’29 crash. Government stepped in and put in new safeguards to prevent a future wholesale sell-off on Wall Street. But as time passed, lessons were forgotten and so was Keynes—replaced by the laissez-faire attitude that prevailed over the last two decades. As a result, government oversight was relaxed, the financial sector was deregulated and we set ourselves up for another tsunami of a crash when the time was right.

“It is of the nature of organized investment markets,” Keynes said, “…that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and even catastrophic force. Once doubt begins, it spreads rapidly.”

Keynes didn’t believe that the market could always right itself. He believed government had a role when markets failed. Of course, market failure on a global scale is what the Fed was trying to prevent when it bailed out Bear Stearns, Freddie and Fannie and AIG—and then proposed a $700 billion rescue package to shore up our financial institutions and prevent a worldwide collapse of the financial system.

Through the debate, economists clashed over whether the government should intervene. Only time will tell if the right decision was made.

The near collapse of AIG sent shockwaves through the global insurance market. The breakup of AIG’s vast organization will change the insurance landscape for a while to come. Insurance regulators around the world are looking closely at what happened to AIG and reviewing ways to prevent it from happening again.

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