Tuesday, November 30, 2010

Designed for instability

Saw an interesting comment on an article at esr’s blog today

You want an industrial society, so you need:
- Insurance
- banks
- financial markets

All three require heavy regulations. Insurance companies and banks are insolvent by definition: The whole point of having them is to have short term liabilities and long term assets. So they can always get in a situation where they will have to pay out more than they can liquidate in cash.

I don’t agree with Winter’s conclusion (read the whole thing), or the “heavy regulation” bit. But there are useful things in there. He’s right about needing insurance, banks, and financial markets, and he’s also right about insurance companies and banks being insolvent by definition – and therefore unstable institutions. Some people say that a business that is insolvent and unstable by design is always and everywhere a bad thing. Instability, like fire, is an excellent servant, but a poor master. The trick is to light your fire in the fireplace, on the stovetop, and under the boiler, AND KEEP IT THERE.

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