- - Friday, January 31, 2014

Commentator Charles Krauthammer produced a wickedly provocative piece recently given the headline “Stop the bailout — now.” He was talking about the looming bailout for the big insurance companies that are looking more and more like saps in their support of President Obama’s health care law.

It seems the insurance pools for the health exchanges created by Obamacare are probably going to be unbalanced — too many older people with expensive health care needs and not enough “young healthies,” whose inflated premiums were supposed to help underwrite health care for the oldsters.

The fear is a “death spiral,” wherein the young healthies jump ship, expanding the gap between insurance companies’ costs and revenues.

The law promises the insurance companies a bailout from any death spiral, though. One provision created a “reinsurance” fund plenished by a $63-per-enrollee tax collected from insurers and self-insuring employers.


It will generate an estimated $20 billion to help cover insurance company losses. Another provides for a massive infusion of taxpayer funds if the insurance companies lose money on Obamacare.

Mr. Krauthammer urges the Republican House to repeal those bailout provisions and dare congressional Democrats to fight for the bailouts. Without them, he suggests, the insurance companies will cut and run, and Obamacare will wither away.

“Such a bill would be overwhelmingly popular,” writes Mr. Krauthammer, “because Americans hate fat-cat bailouts of any kind.”

A fine point. However, why should Republicans stop at the insurance companies? Republicans too often rail against big government but then give big government a pass when it aligns itself with big business.

Consider Wall Street and the big banks, which played a prominent role in creating the real-estate bubble that gave us the financial crisis of 2008-09. One reason the recovery from that crisis has been so sluggish and protracted is that the big banks applied political muscle to coax the federal government and the Federal Reserve into providing bailouts, stimulus packages and other financial props.

This was provided in the name of helping mortgage holders, but the real beneficiaries were the big banks.

Instead of using federal resources to remove toxic assets from the banks’ balance sheets (which would have necessitated a restructuring of the banks and upended a few lofty careers), the government used those resources to buoy bank stock prices.

One result was that it took much longer than necessary for the housing market to “clear” and for an organic recovery to begin.

Then the Fed added another huge boost by keeping interest rates near zero for years. This practically guaranteed huge bank profits as they borrowed from the Fed’s discount window for next to nothing in order to buy much higher-yielding government paper (with no need to add to their reserves, as they would have had to do with big private-sector loans).

Meanwhile, ordinary Americans saw their money-market funds and other fixed-income investments plummet. Financial consultant David Smick has called this “the greatest transfer of middle-class and elderly wealth to elite financial interests in the history of mankind.”

Or consider Fannie Mae and Freddie Mac, the mortgage giants that thrived through special loan backing from the federal government. These “government-sponsored enterprises” helped inflate the housing bubble by generating what The Economist calls “a gusher of easy credit” during the boom years, when housing prices skyrocketed — owing, in significant measure, to the Fannie-Freddie spree.

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