McCain v. McCain: The Role of Increased Government Regulation in an Unrestrained Free Market

John McCain and Sarah Palin have spent much of the past few weeks attacking the greedy, corrupt villains behind the collapse of our financial markets. And there truly were some pretty shady characters involved in some very questionable financial dealings. But a crisis of this magnitude never is the fault of just a few rotten apples. What McCain and Palin can’t seem to grasp is that environmental factors can turn honorable people into criminals and people of questionable morality into models of probity.

Shade the truth just a bit, do this over and over again, and the possibility of weapons of mass destruction becomes a certainty. Create financial instruments that no one really understands, add a little more risk with each derivative, and all of a sudden you’ve inoculated the entire financial system with a virulent strain of almost worthless paper. But John McCain and Sarah Palin are as wedded to their mistaken notion of free market economics as George Bush is to his war in Iraq. Out of political necessity, McCain and Palin may try to sound like they understand the need for government referees at a free market football game, but in the end they simply can’t surrender their favorite theory to some stubborn little facts.

In McCain’s own words recently released in Contingencies:

“Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation. Consumer-friendly insurance policies will be more available and affordable when there is greater competition among insurers on a level playing field.”

Didn’t Wall Street, free from excessive government regulation, recently offer consumers “more choices of innovative products” in the form of derivatives? Warren Buffet warned us in 2002:

“I view derivatives as time bombs, both for the parties that deal in them and the economic system… . The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

But what does Warren Buffet know about investment?

In a 2007 speech, Senator Barack Obama stated:

“Markets can’t thrive without the trust of investors and the public. At a most basic level, capital markets work by steering capital to the place where it is most productive. Without transparency, that cannot happen. If the information is flawed, if there is fraud, or if the risks facing financial institutions are not fully disclosed, people stop investing because they fear they’re being had. When the public trust is abused badly enough, it can bring financial markets to their knees. We all suffer when we do not ensure that markets are transparent, open and honest.”

But what does a naa¯ve junior Senator from Illinois know about markets? may be correct that McCain was linking only a single provision of his health reform package to previous “reforms” in banking. However, it is flat out wrong to suggest that this single provision to remove “excessive” state regulation of health insurance in order to increase competition isn’t radical and potentially devastating.

The insurance industry has been heavily regulated for very good reasons. It is almost impossible for average buyers to know how good their insurance is until something bad happens to them. Then and only then, when they are most vulnerable, will they learn how much red tape stands between them and payment of their claim, or if what they thought was covered has been excluded in the fine print or by some arcane adjudication process.

Eliminating state regulation will permit health insurers to write policies in the state with the weakest consumer protections and then sell those policies to all Americans. National enforcement would fall to the single state that approved the policies. Free market competition may sound good in theory, but I think we’ve learned from bitter experiences to be skeptical of the wisdom of supposedly free markets where buyers have little information and limited power.

I don’t know about you but I become very uneasy when someone promises to liberate my health insurance from “excessive” government regulation. Unlike the senior who wants the government to “keep its hand off my Medicare,” I think that government, for all its failings, has my interests at least as much at heart as private corporations that have a fiduciary duty to increase the wealth of their shareholders.

Senator Obama has laid out a carefully crafted evolutionary approach to health care reform that works conservatively to preserve what is good in our current system while repairing progressively what does not serve us well. In contrast, John McCain and his running mate are proposing a health care reform package that is even more radical than the single-payer solution they attack with unremitting scorn.

I guess sometimes people behave like a mavericks simply because they do not fully understand the situation. Which may be OK for Joe Sixpack, but it is a little frightening when applied to people who claim they are ready to lead the richest, most powerful nation on earth.

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