Home' Trinidad and Tobago Guardian : August 1st 2013 Contents BG30 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 2013 • WEEK ONE
Large and often sleepy, insurers have long
claimed to be the financial world s shock
absorbers, there to contain the carnage peri-
odically unleashed by their banking brethren.
Regulators have left them on the fringes of
sweeping post-crisis reforms that have
reshaped much of the financial sector. Until
On July 18 nine global insurers---Allianz,
American International Group, Aviva, AXA,
Generali, Met Life, Ping An, Prudential and
Prudential Financial---were branded "system-
ically important" by the Financial Stability
Board, a global watchdog. They now face the
prospect of closer regulatory scrutiny and
tougher capital standards.
Insurers do not much like this new approach.
They insist that they are nothing like banks,
subject to periodic runs from fickle customers
and liquidity crises when capital markets dry
up. When insurers falter, they quietly run down
their books with little collateral damage. In
contrast, the mere risk of a bank failure has
to be mitigated lest it cause financial Armaged-
In truth, regulators are more worried by
non-insurance activities carried out by insur-
ance groups than by their core activities. That
makes sense: The only big insurer to blow up
in the crisis was AIG, which got a US$182 bil-
lion bailout in 2008 because a berserk sub-
sidiary had built up huge exposures to Amer-
ican subprime mortgages.
It is not clear, however, which activities the
FSB considers core and which it thinks are
too racy for insurers. Regulators---and oth-
ers---worry about some annuities, savings-like
products which offer guaranteed returns to
customers. Many insurers also have big invest-
ment-management arms that help them accu-
mulate the assets they need to match against
their liabilities, but which also invest money
for outsiders. Allianz, a German firm on the
FSB s list, owns Pimco, a bond-trading giant
with US$2 trillion of assets under manage-
"The line between traditional and nontra-
ditional activities is blurry," says Rob Jones of
the ratings agency Standard & Poor s.
That blurriness explains why the FSB s
measures also target the underlying insurance
businesses of the systemic firms. It wants
backstop-capital ratios to apply to all group
activities, not only the nontraditional bits.
That would dent profits and potentially put
the largest insurers at a competitive disad-
vantage against smaller rivals. For an industry
in which diversification -- and therefore lower
risk -- comes partly through size, this seems
odd. Even more perversely, insurers under the
new regime may use the "systemic" tag to
imply a state guarantee.
Insurers say that the immediate impact on
them will be less disruptive than locally devised
regulations such as Solvency 2, a clunky,
repeatedly delayed set of European rules. For
now those on the list are meant to design "liv-
ing wills" that would be used to wind them
up should the need arise. Capital charges will
not come into effect until 2019.
Some probably will conclude that spinning
off nontraditional assets before then would
be better than facing an additional regulatory
burden. That would make them less like the
banks they bristle at being compared to.
@2013 Economist Newspaper Ltd. (Distributed
by the New York Times Syndicate.)
In 2005, when a little-known senator from Illinois named
Barack Obama gave a speech at Knox College in Illinois, he
ripped into President George W Bush s policies as "Social Dar-
winism" that left workers jobless and families unable to afford
college or health insurance. Bush s ideas, he claimed, were at
odds with the "decent wages, benefits and public schools"
that had created a "massive middle class" in America.
Since then Obama repeatedly has returned to this theme.
He nearly always describes his policies as being good for the
middle class. Nonetheless, when he returned to Knox College
on July 24, he admitted that, four years into his presidency,
the middle class may be worse off.
Private-sector employment is closing in on its pre-recession
peak, but real household incomes remain 5 per cent lower
than in 2005. The share of all income going to the richest 1
percent of households remains near what it was in 2005, which
was the highest level since the 1920s. Manufacturing and
exports, two sectors Obama long has hoped would be a source
of good new jobs, have stalled. Fewer Americans consider
themselves part of the middle class than in 2008, according
to polls by Pew Research.
Wages are stagnant because the recovery has been slow.
Globalisation and technology allow foreigners and machines
to compete for jobs once done by Americans. This week, how-
ever, Obama focused the blame on his political adversaries
and their "endless parade of distractions, political posturing
and phony scandals."
His heavily promoted speech, the first of a series, mixed
old slogans such as "morally wrong" inequality with new ones
such as "middle-out," rather than top-down, growth. It was
short on substance, however. Its aim was less to drum up sup-
port for specific bills than, as one official put it, "(to lift) the
conversation to a higher level"---that is, away from touchy
topics such as the Internal Revenue Service s misdeeds and
the National Security Agency s snooping.
In theory this should help Obama politically: Middle-class
voters are more likely to blame Congress for their troubles
than Obama. The power of Obama s bully pulpit is limited,
however. It helped push through tax increases on the wealthy
in January, but failed utterly to stop implementation of the
sequester, roughly $900 billion in spending cuts during coming
decade, in March.
Obama held out the prospect of using his executive powers
to do some small but attractive-sounding things, such as con-
necting more schools to the Internet. Most of his goals require
the cooperation of Congress, however, including $66 billion
for universal preschool education, US$50 billion for infra-
structure, $9 billion for an "infrastructure bank" and so on.
Such plans stand little chance in a House of Representatives
controlled by Republicans united in their loathing of government
Some ideas that require no taxpayers money, such as raising
the federal minimum wage from US$7.25 an hour to US$9,
also have run aground. Republicans argue that high minimum
wages destroy jobs. Partisan warfare delays even uncontroversial
steps such as renewing cheap interest rates for student loans.
Obama s skills at working a crowd may help him, however,
in coming battles over whether federal spending will exceed
or fall short of the sequester levels come October 1, and under
what conditions the federal debt limit will be raised soon after-
ward. These battles raise the threat of a government shutdown
or, worse, default.
White House officials looking for any sign of a break in the
opposition ranks took heart on July 23, when a group of Repub-
lican senators supported increased spending, albeit only for
transportation and only in a procedural vote.
Such things will not revive the middle class, but for Obama
these days, any victory is worth celebrating.
@2013 Economist Newspaper Ltd. (Distributed by the New York
The pluses and
minuses of being
Obama and the middle class: striking up an old tune
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