Quote of the Day:

Haven’t we seen this movie before? Didn’t lowering capital standards in the mortgage industry have a bad ending? Remember the subprime-mortgage meltdown and the 2007-08 financial crisis?

–former senator Phil Gramm in an article on "the subprime superhighway" in today's Wall Street Journal


Increasing spending on infrastructure is very popular, and there are only two impediments: governments are broke, and the returns on infrastructure investments aren't that great.

What do do? How about a path that risks another subprime meltdown and associated financial crisis?

As former senator Gramm writes, governments are coming up with a plan that gets around the roadblocks but will likely be a disaster reminiscent of 2007-08:

With infrastructure spending so popular and government coffers so empty, the appeal of subverting private wealth to serve government objectives has become even more attractive. The latest scheme to do so is the European Union’s attempt to “incentivize” more insurance investment in public infrastructure as part of its “Solvency II” regulatory regime. . . .

The U.S. seems set to follow Europe’s lead. The Treasury Department’s new Federal Insurance Office released a report last year encouraging “state insurance regulators to assess the current [risk-based capital] approach and explore appropriate ways to increase incentives for infrastructure investments by insurers.”

In order to get more private money into infrastructure, standards capital standards for infrastructure investment are being lowered. Lowering standards will sound familiar to those who weathered the meltdown at the end of George Bush's second term. It was largely caused by lowering standards for housing loans. In this instance, the government is interested in getting insurance companies to invest your money in roads.

The Clinton administration tried to make a run at private pension funds, asking them to "invest" in government projects such as affordable housing. As Gramm puts it colorfully, then-Labor Secretary Robert Reich "drooled" at all the money in those pension funds. The unions wisely, and despite their affinity for Democrats, balked at the idea of putting their vast pension funds at risk.

Having lost the battle for pension funds, the Clinton administration turned its attention to another way supposedly to increase the amount of affordable housing. The then-obscure Community Reinvestment Act (CRA), which stipulated to require banks to make subprime loans to accomplish the goal of more minority housing. It was subprime loans (which could not be repaid and would never have been made without government pressure for quotas) that triggered the meltdown at the end of George W. Bush's second term.

We could go down this road again:

The EU and the U.S. seem determined to repeat this sad history, only this time lowering capital standards and providing “incentives” for insurers to invest in roads, railways, airports and bridges. If U.S. insurers push back, it isn’t hard to imagine a future Treasury secretary questioning their “economic patriotism” and pressuring them to fund infrastructure.

Thanks to the 2010 Dodd-Frank financial law, the Treasury Department already claims power over 30% of the insurance industry. This authority will expand as the Treasury and Federal Reserve work with international regulators to impose the G-7 Financial Stability Board’s international capital standards on U.S. insurers.

Those who question the threat faced by insurance policyholders need only remember that imposing Community Reinvestment Act on the insurance and securities industries was the greatest unfulfilled demand by Democrats in the debate on the 1999 Gramm-Leach-Bliley Act. Had they succeeded, the misery caused by the subprime crisis would have been even deeper and more widespread.

. . .

Wealth cannot serve two masters. Individuals buy insurance to promote the well-being of their families. Pressuring or “incentivizing” insurance companies to do anything other than to protect policyholders steals wealth from its rightful owners. Now regulators want to gamble the insurance policy you purchased to protect your loved ones on the profitability of projects like the California High-Speed Rail Authority. We already know how this story ends.

Yes, the government may try to sell you a bridge. The Bridge to a Meltdown.