In my opinion, actually it did, but stated implicitly, in the second paragraph under the heading "Do the banks operate in a competitive market?".
The "information asymmetries", manifested in "gotcha clauses" and other things hidden in the "pages of small print" is a factor that enables toxic products to be sold to clients because they hide the true nature of the toxic products from the clients. Also due to this factor, clients cannot properly "understand" or "price" such products.
" It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Quote from Henry Ford(1863-1947) Founder of Ford Motor Company
I refer to annonymous 7.45pm about insurance companies baffling people.
What do insurance companies do? - It works the same way as a casino.
Example: I once insured myself for $400K in a term life policy. Every year my premium was $770.
I bet $770 every year that I will die during the insured period.
If I die, I (or my beneficiaries) win the bet and receive the $400K which is the insured amount.
If I don't die, I lose and the insurance company keeps my bet (premium) of $400.
Now, here's the part where financial executives get to make millions of dollars in salaries.
Let's say I'm an insurance company. But I only have $1 million dollars in funds to pay in case one of my insured clients die.
Using the same example above, instead of insuring just one person for $400K, the insurance company insures 10,000 people for $400K each. So 10,000 people pays $700 each = $7 million in insurance premium every year. But my asset base is only $1 million. This is better than printing counterfeit money!!
In real life, there are of course laws limiting the number of policies an insurance company can write against an asset base of $1 million.
The point being that this is how financial companies can create money from thin air.
During the recent financial crisis, a very big insurance company (I can't name them for legal reasons) sold a lot of insurance policies called credit default swaps.
For example, if a speculator thinks that Citibank will go bankrupt, he will buy a credit default swap from this insurance company. Speculator is betting that Citibank will go bankrupt. The insurance company is betting that Citibank will not go bankrupt.
The problem was that this insurance company sold a huge amount of credit default swaps against a very small (by comparison) asset base.
And there were no laws at that time to limit the amount of credit default swaps that could be sold against the asset base. Unlike regular life insurance policies.
So the financial executive who devised this scheme made millions in bonus and salary ... at no risk to himself.
Just like printing money ... and it was all legal too.
When the chickens came home to roost a few years later, the insurance company, shareholders and policy holders was left holding the bag.
As for me, I'm left with a moral dilemma. Should I aspire to be like this irresponsible executive and make millions?
Or should I continue to work like a worker bee at an ever cheaper, better and faster rate for my ungrateful employer?
"High stress but earns super lots of money. What I earn in 5 years takes 90% of the population a lifetime to slog for. We are the ones that make most money, most respected, and greatly desired, in good times and bad times. I am sure every one wants to have banker friends. You can be complaining about the products, but hey money speaks loud and clear."
The above are comments made by an anonymous.
I wonder how our MM, SM and PM feel when they read this.
In my opinion, actually it did, but stated implicitly, in the second paragraph under the heading "Do the banks operate in a competitive market?".
ReplyDeleteThe "information asymmetries", manifested in "gotcha clauses" and other things hidden in the "pages of small print" is a factor that enables toxic products to be sold to clients because they hide the true nature of the toxic products from the clients. Also due to this factor, clients cannot properly "understand" or "price" such products.
Here's a 90 year old quotation:
ReplyDelete" It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Quote from Henry Ford(1863-1947) Founder of Ford Motor Company
http://quotes.liberty-tree.ca/quote_blog/Henry.Ford.Quote.BD91
This can be applied to the life insurance industry. It still baffles people.
ReplyDeleteI refer to annonymous 7.45pm about insurance companies baffling people.
ReplyDeleteWhat do insurance companies do?
- It works the same way as a casino.
Example:
I once insured myself for $400K in a term life policy. Every year my premium was $770.
I bet $770 every year that I will die during the insured period.
If I die, I (or my beneficiaries) win the bet and receive the $400K which is the insured amount.
If I don't die, I lose and the insurance company keeps my bet (premium) of $400.
Now, here's the part where financial executives get to make millions of dollars in salaries.
Let's say I'm an insurance company. But I only have $1 million dollars in funds to pay in case one of my insured clients die.
Using the same example above, instead of insuring just one person for $400K, the insurance company insures 10,000 people for $400K each. So 10,000 people pays $700 each = $7 million in insurance premium every year. But my asset base is only $1 million. This is better than printing counterfeit money!!
In real life, there are of course laws limiting the number of policies an insurance company can write against an asset base of $1 million.
The point being that this is how financial companies can create money from thin air.
During the recent financial crisis, a very big insurance company (I can't name them for legal reasons) sold a lot of insurance policies called credit default swaps.
For example, if a speculator thinks that Citibank will go bankrupt, he will buy a credit default swap from this insurance company. Speculator is betting that Citibank will go bankrupt. The insurance company is betting that Citibank will not go bankrupt.
The problem was that this insurance company sold a huge amount of credit default swaps against a very small (by comparison) asset base.
And there were no laws at that time to limit the amount of credit default swaps that could be sold against the asset base. Unlike regular life insurance policies.
So the financial executive who devised this scheme made millions in bonus and salary ... at no risk to himself.
Just like printing money ... and it was all legal too.
When the chickens came home to roost a few years later, the insurance company, shareholders and policy holders was left holding the bag.
As for me, I'm left with a moral dilemma. Should I aspire to be like this irresponsible executive and make millions?
Or should I continue to work like a worker bee at an ever cheaper, better and faster rate for my ungrateful employer?
There's an old joke:
ReplyDeleteJudge: Why did you rob the bank?
Robber: Because that's where the money is.
"High stress but earns super lots of money. What I earn in 5 years takes 90% of the population a lifetime to slog for. We are the ones that make most money, most respected, and greatly desired, in good times and bad times. I am sure every one wants to have banker friends. You can be complaining about the products, but hey money speaks loud and clear."
ReplyDeleteThe above are comments made by an anonymous.
I wonder how our MM, SM and PM feel when they read this.
Fractional Reserve Banking. Period.
ReplyDelete('print money')