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Great Depression Not Imminent, But Inevitable

Rakesh,

Several comments, and though i will focus on points of disagreement / over-generalization, i do agree that insurance (or assurance) is one (vs the only) ingredient.

1. Inevitability. Suggests certainty, though tht is one scenario...another scenario could be a long drawn out recession.

2. Depression. One government (USA) has stated they will do everything in its ability to prevent certain crises. Seems they will do just about anything to avoid the "D" word, even providing a credit guarantee.

3. Who is the insurer or guarantor of last resort? I asked this question at an industry meeting in 2005 as there was fast consolidation in the reinsurance market. Investment banks had stepped in for some aspects of risk. Really what is needed is an entity to cover all risks of an enterprise (Enterprise Risk Management). Well, not even a government is a guarantor, technically, but entities do put some faith in some governments. So, although market forces/risk pricing would suggest otherwise, governments will find a way...and defer the problem to future generations.

4. Discussion of "non-actuarial" risks. Actuaries (some) are quite versed in analyses/calculations of investment risks, particularly within the past 10 years. Actuaries may not be as prevalent within the investment banking / pricing market, but they do possess knowledge to be so.

5. Pricing of CDS's and other derivatives. These securities are rather illiquid., and with relatively few transactions, pricing may vary widely. Pricing based on a computer/statistical distribution model over several scenarios might be great in theory, but what we are dealing with here are events (and economies) beyond those 2 standard deviations or 95/99% confidence intervals. We have these 'extreme' events which are now moreso the norm (extremes vs norms in weather/climate patterns is an analogy). Pricing needs to be done on an extreme event/scenario basis.

6. Economies will not function without insurance? Yes, insurance is needed for international trade and for certain industries. But some industries in domestic economies may not have such requirement.

7. Credit economy vs Cash economy. Have you visited developing nations? Many of these nations work on a cash basis, and those economies function. Insurance (or assurance) is provided via substantial funding of actual cash/cash equivalents vs. trade credit/ credit derivatives. Yes, there would be a significant hit to economies transitioning to lower-leverage environments and significant change in standard of living, but it may not lead to a Great Depression.


Though i've focused more on points of disagreement, your article is informative, and therefore appreciated.

Always good to hear both sides, and with all these people on CNBC, etc saying, the market has bottomed (and repeating it seemingly several times per hour), there still are significant issues out there. Governments may continue to pump money at the problem, but they haven't resolved the underlying causes, and the problems will be passed to future generations.