11 April 2011

Financial Risk and Insecurity

A few stray thoughts on risk.

1. One of the core organizing principles of bankruptcy law, securities law, the policy analysis of appropriate debt-equity levels in corporations, the regulation of gambling, Social Security policy, mandatory insurance regimes and more is the notion that generally speaking, people should only be putting at risk money that they can afford to lose.

For example, SEC private offering rules limit allow only "accredited investors" to invest significant sums of money in investments that are not subject to the disclosure regimes that applies to publicly held companies. Generally, qualification for this class of investments is some combination of wealth and sophitication, and criticism of the rules often argue that they are insufficient because they don't adequately protect the unsophisticated wealthy. But, part of the reason for a purely wealth based restriction on investments that pose potentially higher risks than the ordinary investment is the notion that the wealthy can afford to lose the money and go on in life, while widows, orphans and middle class families cannot.

2. One of the common ways to define the line between the rich and the merely upper middle class is that the rich don't have to work to meet their needs, and instead, can rely on their wealth to support themselves.

One can imagine a similar tack in defining other social classes. The poor are those who cannot support themselves from either their property or their labor. The working and middle and upper middle classes, together, can support themselves through their labor but need to work to support themselves, with the differences between those classes being mostly the level of comfort that they can afford themselves and the kind of work thath they do.

But, another way of thinking about social class in the middle range is in terms of security. How secure is one's job? Do you have adequate life insurance if you died? Do you have adequate disability insurance if you were disabled on a temporary or permanent basis? Do you have health insurance to allow you to receive medical treatment if you are sick or injured? Do you have adequate insurance to deal with a serious casualty to a car or a home or a tort lawsuit against you? Do you have adequate insurance to avoid ruin if you were sued for professional malpractice? Do you have sufficient savings or access to credit to defend yourself or a family member adequately in the event of a criminal prosecution? Could you take advantage of an opportunity to send a child to a good quality, expensive private school or college? How long could you afford to be unemployed before your life would fall apart? Could you economically weather a drug addition for you or your family and pay for treatment?

One of the reasons that the financial crisis crept up on us is that while a lot of people were able to maintain their lifestyles on a day to day basis, that the insecurity and fragility of their lifes increased.

There are a lot of people who are on the brink of disaster. A money without income would cause them to default on their credit cards, their lack of health insurance or inadequate health insurance means that they could afford to pay for the medical bills in a major illness or injury, they have no savings to prevent even a small financial misstep in revenue or expenses from leading to the loss of a home to foreclosure, eviction from a rental home, or repossession of a car.

A large share of these individuals get lucky and manage. They do get in enough money to pay the bills by happenstance and good luck and clever financial juggling. They don't get sick when they don't have health insurance. The avoid criminal prosecutions. They find a job swiftly after losing their old one before it all falls apart.

One can have a modest income and not be insecure. A lot of low ranking civil servants (e.g. postal workers, school janitors, parking enforcement agents, pre-school teachers, and library assistants), enlisted soldiers, military veterans, union employees (e.g. many grocery workers), clergy and simply thrifty prudent people who have never had very high incomes fit in this category, for example. This class of the low income but not insecure also includes a lot of bohemian trust funders often toiling away in "glamorous" but low paying positions - as ballet dancers, artists, poets, performance artists, non-profit professionals, eternal graduate students and post-docs, and lower tier politicians.

There are also reasonably high income earners who are fairly insecure. Many athletes and entertainers can be expected to have brief careers that produce high but intermittent incomes. Properous prostitutes and drug dealers are in much the same situation. Some farmers and fishers and foresters and miners make good incomes when commodity prices are high and yields are good, but have the thin safety net of the self-employed and if they have significant leverage may risk losing it all in less good times. Personal injury lawyers can make a lot of money in one case and then have long dry spells. Also prone to bursts of wealth between slow periods are commission salespeople and employees of high end establishments who are compensated mostly with tips. There is a significant shift from having enterprises meet their needs from employees to having them meet their needs from a disorganized safety-net free class of one job at a time independent contractors that has increasingly moved up their income ladder.

A step down from those on the brink of disaster is the growing class of people who aren't entirely destitute but also can no longer afford to "play by the rules." They are in default on one or more debts. They didn't pay their car registration or the taxes they owed. Their mortgage is upside down in a recourse mortgage state and they have no realistic hope of selling their home in anything other than a short sale for the foreseeable future. They are missing tuition payments at private schools or colleges. The numbers over at Calculated Risk every month suggest that the percentage of people in this situation is soaring. Rather than being chronically poor, they are the formerly middle class and working class but are in the midst of the long fall without a safety net that American society makes possible

There has always been a class of people who are prone to intermittent unemployment, but this class of people has grown, and the class of people who are intermittently underemployed has has grown invisibly but dramatically: skilled tradesmen who become day laborers in bad times; teachers who become substitute teachers and retail workers in bad times; farmers who do handyman work when crop revenues are modest and more skilled construction work isn't available in the off season; construction business owners and engineers who do ordinary construction work rather than managing others when the industry is weak; CPAs who do simple book keeping when more sophisticated employment is not available.

Public policy has a few nods to these classes of people - the right to cure a mortgage or rent payment that is in default, the Chapter 13 bankruptcy, COBRA, the right to emergency stabilizing treatment at emergency rooms, credit counseling agencies, offers in compromise and installment payment tax plans, personal recognizance bonds and probation sentences for criminal defendants, and unemployment insurance, for example, but the effort isn't very comprehensive or thoughtful.

1 comment:

Wilson O'Doyle said...

A good way to side step risk and be financially secure in the future, is to get Disability Insurance. It is a good investment when you want to prepare for life's little twists and turns.