Further & More


How to Bank on Private Insurance

Why should the government be in the business of providing deposit insurance for banks? As noted in various Trends reports, analysts from the Heritage Foundation to Harvard Law School have recently pointed out how the Federal Deposit Insurance Corporation, free from the real-world constraints of private insurance, fails to restrain foolhardy bankers and penalizes the prudent.

Now, two economists with the Federal Reserve Bank of Dallas have broached the same conclusion. In an article in Dallas Fed late last year, Eugenie D. Short and Gerald P. O'Driscoll decried the FDIC's one-size-fits-all premiums for banks. "Sky divers and race-car drivers pay more for accident and liability insurance than do bankers and accountants," they noted, whereas the FDIC charges the same premiums to banks regardless of the risk the banks are taking.

The agency has proposed a reform, noted Short and O'Driscoll: basing premiums on three risk categories—normal, high, and very high. But they suggested that this isn't adequate, since regulators still wouldn't face the incentives that the market provides private insurers to determine realistic insurance rates.

The two Fed economists proposed several policy changes, including the introduction of coinsurance, eliminating the legal requirement that banks purchase insurance from the FDIC, and requiring the FDIC to cover its own cost and earn a reasonable return on capital. While private insurance companies are not able to provide substantial amounts of deposit insurance immediately, "an environment could be created to enable firms to enter gradually as competitors to the FDIC."

Calling Up the Future

"Wondrous advances in solid-state physics have conjured up a profusion of technologies providing new means for circumventing—or 'bypassing'—the local phone company." Thus wrote Peter Samuel in REASON's October cover story, "Hanging Up on Your Phone Company."

That future world of greater telecommunications freedom is edging ever nearer. Three recent developments are especially noteworthy.

First, several major car-rental firms have installed cellular radiophones in some of their rental cars in Chicago, where the nation's first cellular system went into operation in October. (Such systems are expected to be operating in 30 cities within two years' time.) Hertz and Budget each have 100 phone-equipped cars available in the Chicago market, and National has 10.

Second, both AT&T and MCI Communications Corp. are installing in airports credit-card-operated public phones for making long-distance calls. (By federal regulation, only local phone companies are permitted to operate coin phones.) The MCI phones take Visa and Master Card charge cards—thus allowing holders of these cards to use the phones even if they are not subscribers to MCl's discount long-distance service—while AT&T's phones, which use a special AT&T card, are available only to those with AT&T accounts. Both companies are likely to install more of their credit-card phones in bus and train stations and in convention centers as well as in airports, areas where public-phone use is high.

And third, in November New York City's second-largest office-space landlord, Olympia & York, announced plans to set up a satellite communications network linking tenants of the firm's buildings (and thus bypassing the local phone monopoly, New York Telephone). The private network will provide local and long-distance voice communication as well as computer-data communication.

Olympia & York's partner in the communications venture is United Telecom, the nation's third-largest telephone company (after AT&T and GTE Corp.). While New York Telephone is fretting that such a bypass network will significantly cut into the monopoly's revenues by taking away NYT's high-use business customers, United Telecom has realized that bypass is a thing whose time has come. Quoted in the New York Times, United Telecom chairman Paul Henson remarked: "We are joining the other side now."

Blazing Battle Lost

In Dover, New Hampshire, the chances of contracting out fire-fighting services have gone up in smoke.

Shortly after we reported on the bitter political struggle in the small New England town over the issue of hiring the Wackenhut Corporation, a private firm, to handle the city's fire fighting ("Blazing Battles," Nov.), Dover held its municipal elections. Of the five city council members who had voted for the contract the previous summer, only three were reelected, shifting the council from a 5–4 majority in favor of contracting to a 6–3 majority against.

At the same time, Dover's voters approved a city charter amendment that effectively prohibits contracting out. It says that all public-safety employees, including police and fire-fighting personnel, must be on the city payroll. The amendment was approved by a vote of 3,688 to 1,971—almost a 2–1 margin.

A few days later, the New Hampshire Supreme Court chipped in with another nix on contracting. The court had been considering two issues: whether the contract between Dover and Wackenhut Corporation was in accordance with state law, and whether local governments generally have authority under the state constitution to contract out for fire fighting.

On the first question, they said that the contract was invalid because Wackenhut had not been certified by the state fire marshal at the time the contract was signed. Wackenhut was certified after the signing of the contract, but the court said that was not enough.

The court said that it was thus unnecessary to address the second and more important question—the constitutionality of contracting for fire fighting.

"They avoided it as best they could," said Scott Woodman, the disappointed city attorney for Dover.

Chalk one up for the fire fighters' union, which was bitterly opposed to a private contract that would have saved Dover's citizens $350,000 in the first three years and put the town on the map with the first privatized fire service in New England.

Following the Satellites' Path

For nearly a year, Congress and the media had been waging a public-relations campaign against the Reagan administration's proposal to denationalize the government's weather satellites (see "Fair Weather," June). Now Congress has passed a Commerce Department appropriations bill forbidding the sale of the weather satellites. But plans to sell off the Landsat remote-sensing satellite system are still on, and competition in remote sensing is heating up.

The original idea, proposed by Comsat Corporation, was to sell both sets of satellites as a package and let income from the weathersats offset projected losses on Landsats. It is somewhat ironic, then, that several firms are now eagerly vying to serve what they see as a commercial market for remote sensing from space.

As reported in Trends in December, one of these firms is Space America, a consortium including private rocket developer Space Services, Inc. Late last year Space America added an impressive new partner to the consortium: Bendix Corp., the giant aerospace firm. Space America still plans to submit a bid to take over the existing Landsat program while continuing development of its own, follow-on remote-sensing satellites.

In November, another consortium entered the picture. Called Sparx Corporation, it is a joint venture of Comsat Corporation, the Stenbeck Group (a New York investment firm), and West Germany's Messerschmidt-Boelkow-Blohm. Sparx intends to compete with Landsat, rather than bidding to take it over. The company plans its first test launch on the space shuttle in August and expects to have its system fully operational by 1986.

Sparx plans to offer images with 65-foot resolution, sold to customers—mineral and petroleum organizations initially—on a proprietary basis. By contrast, Landsat's images are nonproprietary and limited to 80-meter resolution. Thus far Space America plans to stick with 80-meter resolution for its follow-on satellites, too, though it also hopes to offer images on a proprietary basis.

They Built Their Own Highway, Part II

In mid-November, San Diego's 1½-mile, two-lane Fanita Parkway was opened to traffic. Construction of the $1.3-million artery, also known as Santee Lakes Boulevard, was entirely financed by the Carlton Santee Corp., a residential developer.

As Tom Hazlett pointed out in REASON's November cover story ("They Built Their Own Highway…"), which detailed the ins and outs of private land-use planning in nonzoned Houston, things like privately financed (but freely accessible) roads are supposed to be impossible. The "free rider" problem—that is, the owner's inability to exclude users from the particular good—cannot be surmounted, says the conventional wisdom.

But the Carlton Santee Corp.—like the West Houston Association—apparently hadn't heard about the free-rider problem, so they went ahead and built the parkway. The new boulevard, which has been landscaped with 1,000 trees and 3,000 bushes, is intended to provide access to and from Fanita Ranch, a planned community that Carlton Santee will soon develop.

And More

Deregulation fallout. In December's editorial we stated that "since [airline] deregulation, no community has lost all airline service." We stand corrected. Our source was Air Transport Association congressional testimony pointing out (correctly) that of the 555 communities receiving Civil Aeronautics Board–certified service in 1978 (the year the deregulation act was passed), none has been left without airline service. But we have learned that in addition to those communities, another 165 small communities were also receiving some form of (noncertified) air service in 1978. Of those small localities, about 100 currently have no airline service at all. But, according to Patrick J. Murphy of the cab, many if not most of those 100 towns are within an hour or two's drive of an airport with airline service.

Comrade Shareholder. Romania, following the precedent of its neighbor Hungary (Global Trends, Jan.), is now selling stock ("social shares") in factories to workers. But don't the workers in the communist state already own the means of production? They're "contributing additional investment funds," replies one union official.

Trust in the market. While the US Congress is considering the relaxation of antitrust restrictions on joint research and development by private firms (Trends, Oct.), the Common Market may well do the same. The European Community's executive commission is asking member governments to permit some research agreements that would otherwise be outlawed by anti-cartel rules.