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The New Rules: The End of the U.S. Security Backstop

Monday, Nov. 22, 2010

The global financial crisis was a true system perturbation, revealing the gap between widely perceived risk and actual underlying risk in the world's increasingly integrated financial system. As with any such vertical shock, the resulting horizontal waves continue to be felt long after the initial blow. When gaps in capabilities and rule-sets were subsequently discovered, the world's major economies effected changes, like shifting economic oversight from the G-7 to the expanded G-20 and updating the Basel banking accord. In a world without true global government, these surges of great-power cooperation constitute a critical reassurance function, letting us know that an international commitment, however vague and informal, exists to backstop each nation's individual backstops already in place.

That reassurance function is akin to the role reinsurers play in the insurance industry. Simply stated, reinsurance companies provide policies to front-line insurance companies, who in turn provide policies to their thousands or millions of customers. If your family's system is perturbed, you turn to your insurance company as a financial backstop. But if enough families turn for help to the same insurance company all at once, that company may end up turning to its reinsurance company as an ultimate backstop. Think of it as layered defense. ...

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