This Day - 9/11 - and the Knell of the Free Trade Fantasy

September 11, in the UK and many other countries, is summarised as 11.9.17. But in the USA they put the month first, hence 9.11 or 9/11. The date 9/11 has become even more rooted in folklore and the media as the descriptor of the terrorist attack on New York than is 'ground zero' as a synonym for the site at which the destruction was centred. It is purely coincidental that on this same date in 2017 an unprecedented storm has struck the mainland USA in Florida.

Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.

Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.

Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.

The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.

It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.

The Econocratic idea that there should be free trade in every field simply does not work in this area.

What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book'  - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.

Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.


Both insueBoth insurers and reinsurers

Council and Congress

One of the most important aspects of the present economic crisis, though it has had little media coverage, is that the most-troubled countries are 'parliamentary democracies'. The resolution of the crisis will   be as important in terms of politics as it will be in the economy: and it will be harder to resolve in some countries because the workings of their democracies may generate stalemate that will be extremely difficult to dissolve.

The German Chancellor has become much more constrained by Bundestag reluctance to opening the coffers to the rest of Europe than she would have been in the first half of this year. The obvious fury of many millions of Germans at the mere idea of keeping the Greeks on their fantasy feather-bed will surely be reflected in the voting in the elections early next-year, so deputies seeking re-election have clamped down on the government. German democracy has limited the options for a resolution of the Euro crisis.

In Britain a more complex situation is being illustrated today by a parliamentary vote on the question as to whether or not there should be a Referendum on Britain's future membership of the European Union. The politics of this matter are clear: a Sunday Times opinion poll published on 23 October showed that about two-thirds of the electors in the sample would have favoured the Referendum, which was called for by a Petition of more than 100,000 people. If Britain were a 'real' democracy the way forward would be clear. But Britain is not such a democracy. Britain is governed by the Privy Council, of which most voters have no knowledge at all. After each General Election the Sovereign invites the party leader who is most likely to command a majority of votes in the House of Commons to become Prime Minister: and a member of the Privy Council if he or she is not a member already [which would be most unlikely as it has not happened since the improbable emergence of Labour as the leading party in the Commons in the early 1920s]. The Prime Minister then invites colleagues to become members of his/her Cabinet, which is a Committee of Privy Councillors: so any chosen members who are not sworn of the Council are quickly admitted. Any Cabinet is bound by all the decisions and commitments of its predecessors, however far apart the political stance of successive Cabinets may be.

For reasons that are not disclosed to the electorate at large, the Council is determined to suppress any real debate on Britain's membership of the EU. It may be the consequence of a major pledge to the USA: it is clearly not driven by the Monarch herself, whose preference for Commonwealth links has been unequivocal for the whole of her reign. Whatever the cause of the ban, it is very firm. Privy Councillors Clegg and Milliband {Ed] have joined Councillor Cameron in insisting that their Members of Parliament must ignore the manifest preference of the electorate and vote against the idea of a Referendum. Cameron has even descended to the old rogue's argument of 'unripe time' to escape the fact that he has made his career by indicating a general Euroscepticism. Other conspicuous issues are also placed beyond democratic resolution: 'human rights' legislation, immigration, energy policy and capital punishment are prominent among them. This pattern of suppression has seemed to be the constitutional norm for so long that the dominance of the Privy Council seems unshakable: but an economic collapse could suddenly precipitate the end of the charade. Councillor Cameron could just have allowed a minority of Tory MPs quietly to enjoy their day, with no urgent threat to membership of the EU: foolhardily, he has drawn attention to the sham of democracy.

In the USA, where the Constitution reigns supreme, the division of powers between the Executive, Legislative and Judicial wings of the Federation is seen as essential to the functioning of their democracy. Such a system requires effective articulation between the Congress and the White House, and between the two Houses of the Congress. That is now failing, and may freeze into rigid incompatibility. As unemployment remains stubbornly high, and massive state spending.appears not to be stimulating the economy sufficiently to change the situation, the basic economic policy pursued by the Obama Administration is increasingly incredible. The hugely expensive but functionally questionable Medical Care system that the Democrats have introduced is increasing costs on employers and on taxes. The level of vituperation between increasingly-radical tendencies in both Democrat and Republican parties is reaching historically exceptional levels. The Democrats face a huge dilemma as to whether or not to support Obama for a second term, or look for a candidate who might better achieve a national consensus. The risk of loosing the black vote may well secure Obama's selection: but however much money Obama might raise for his campaign his overall failure to galvanise the country must count against him. The Republicans' problem in finding any satisfactory candidate has been painfully obvious: but that does not affect the fact that around half the electorate is open to persuasion that the Republicans cannot be as disastrous as Obama has proved over the past four years. There is all to play for in the 2012 General Election: in that sense, democracy will triumph. But in the important area of achieving functionality of Government in concert with Congress, there is no clear indication that either of the eventually-selected candidates will be able to succeed sufficiently to create a new economic environment in the USA.

It is too soon to pronounce the end of democracy: but the threat of dissolution is palpable.