Do not blame the sprinklers, blame the sprinkler inspectors and the smoke detectors

Sir Joseph Stiglitz in Fannies and Freddie’s free lunch July 25 holds that “No insurance industry would provide fire insurance without demanding adequate sprinklers; none would leave it to “self regulation”. But that is what we have done with the financial system.” Wrong. Insurance companies would and should provide fire insurance even if there are no sprinklers, as long as the risk premiums are right. What happened was that the financial regulators outsourced the checking of the sprinklers, and the installation of smoke detectors, to the credit rating agencies and these fouled it all up, reporting no smoke when burning and sprinklers where there were none.