An insurance product is a “swap.” The exchange of value is “the risk.” If default on loan products is expected, for example, then the lender needs protection, shifting all the risk to the buyer of the loan. Without credit protection the lender assumes all the risk.
Even though there is every incentive for lenders to ensure borrowers have the means to pay the debt, that is not what happens. Economists call this a misalignment of incentives.
Remember that big banks and insurance interests claim the default rate after the financial crisis was way too big because people bought homes with no money down and overstated income. The loans were made, however, knowing they would default. The result is what financiers call a “default risk premium,” and the premium is monetized (paid on demand) in credit-risk, derivative markets.
When TBTF financials were bailed out, leaving debtors with all the risk, they were allowed to survive to collect the reward (the premium) in late order. Debtors and homeowners were left with all the risk and no reward, and the reward is still paying off in the form of declining median income and rising economic desperation.
Working, then, more for less, people are forced to “demand” even more debt, and the debt is insured to be paid in late order, not ensured to be paid in priority. Expectation of the risk premium is then a simple timing function (a command function) using market mechanics, buying and selling risk-protection products described as too “arcane” (proprietary) to be a political issue.
Dealing with derivative value requires the secret knowledge of how things really work from the inside out. Looking from the outside in is not an objective perspective because it does not understand the propriety of managing the risk.
Risk is a property (a measurable quantity) that generates income (an Equivalent Coercive Value). The value derived from it (working more for less, for example) is the private property of the user–the creators (the “makers” who create value from the risk). Productivity gains, derived from risk-protection products, are then the property of the creators, gained at the expense of the losers who are naturally indebted to the creators, who provide all the jobs and take all the risk.
The problem with the proprietary-risk theory of capitalism (essentially Objectivist philosophy) is that the “job creators” have rigged the financial system so that “they” don’t take all the risk.
Saying capitalists take all the risk, and so earn all the reward, is a BIG FAT FRAUD–and saying so isn’t communism!
A free-market advocate comes to the same conclusion–but without advocating for consolidation of the risk.
Just because risk has been “made” to diverge from accumulating the reward does not mean the values have been “alienated.” Quite the contrary. The values are integral and the expected result is categorical. It is imperative. Inevitable!
The moral imperative of knowing why, and not just when things happen, is the difference between knowing what the risk is, and then just letting it happen.
How smart is that!
Doing things because there is no prior, moral measure, but because the fates determine it, is not the reality of an objective existence.
It is only natural to freely will a self-protection that gains in priority on demand.
The way we actually know a limited liability is to fully fund it in priority. Let the market really decide, yielding to the priorities (the on-going empirical valuation) of an on-demand existence (freedom!), always expanding at the limit, adding measure (utility) at the margin.