Matt Yglesias makes an important point that’s not being discussed enough. Of the de-privatization of Fannie, Freddie and AIG, he says,
I’m a little surprised to learn that this is legal without some kind of legislation. It seems pretty far afield from the Fed’s traditional domain. I guess in a storm people don’t care about the niceties. … It seems to me that there this step has uncertain implications far beyond the world of high finance.
I’d like to see commentary on what the feds’ options were regarding AIG. In other words, what kind of ripple effect would we be looking at had it gone under? I honestly don’t know. Certain persons on the right blogosphere are screaming about “bailout-palooza,” and I agree that government takeover of the finance and insurance sectors is, um, way bad. I don’t like it at all. But given the circumstances, what alternatives were there?
Q. And who got us into this mess, anyway?
A. Reaganites and “small-government” conservatives who called for more and more deregulation in the name of “getting government off our backs.”
Nancy Pelosi denied that Democrats had anything to do with the financial crisis. I disagree with that. Plenty of Democrats went along with the deregulation craze without a murmur, and some actively bought into it.
But the mess originated on the Right, and it was the Right that made “regulation” a dirty word. You can argue that some Dems who probably knew better went along with deregulation because they would have lost elections otherwise. But essentially we’re looking at a mob mentality that began on the Right and spread throughout the land in all directions.
Can we, as a nation, learn anything from this? Um, wake me up when it happens. If real-world experience could have taught the “get government off our backs” crowd anything, it would have happened after the saving & loan crisis in the 1980s.
Granted, it probably was written last week, but George Will’s latest column in Newsweek is all about the beautiful natural balance of markets. “[The] point is that markets allow order to emerge without anyone imposing it. The ‘poetry of the possible’ is that things are organized without an organizer.” And there’s a lot of truth in that, especially if you’re talking about consumer goods. The overall experience of centrally planned Communist-style economies is that they are utterly dysfunctional. It is more efficient to allow supply and demand to determine how much bread to bake or how many flashlights to manufacture.
But the Right assumed that if one extreme is bad, the other extreme must be good. They insist that free market theories will somehow fix public schools and the health care crisis, even though competition, supply and demand for these services do not function the same way they function for consumer goods.
The fantasy is that “free markets” will always balance without human intervention, and problems will correct themselves. In a perfect world, that might be true. In this world, the forces of greed, hubris and just plain stupid will outweigh everything if not kept in check.
What we’re seeing now is how “natural balance” really works. Years of moving in one extreme direction — reckless deregulation and privatization — have created a crisis, causing the government to swing to the opposite extreme — nationalization — to correct it
Pursuing a middle way is more likely to keep one from swinging in extreme directions. This is essentially what us barking moonbat loony liberals and crackpot progressives have been saying for years, while the sensible and adult conservatives have been pushing us to extremes.
The other worrisome matter is that the executive branch is acting without even pretending to consult Congress. Like Matt, I question whether this is constitutional. It shows us that the Bush Administration, incompetent as it is, has done a heckofa job dismantling the Constitution and the checks and balances of the federal government.
De-regulation is little more than a means of legalizing what would be a crime under regulation.
When congressmen have to change a pending money bill in the dead of night to get away with something they know will never pass in the light of day, you know they’re up to no good. Thus it was when government guarantee on deposits at Savings and Loan Cos. went from $10,000 to $100,000 thus paving the way for the Savings and Loan crisis in the ’80’s. Not an example of de-regulation necessarily but a good example of legalizing a practice which should have been illegal.
Then, of course, hardly had the dust settled on that crisis when a bill came before Congress to allow banks to operate like Savings and Loan Corps. Like, well that worked so well before, let’s get banks in on the kill.
It’s really numbing that what used to be done in the dead of night is now done openly all in the name of sanctioned de-regulation.
I’ve been racking my brain the past couple days, trying to understand why the administration agreed to bail out some failing institutions and not others. After considerable thought, I’ve come up with the following scenario:
Henry Paulson phones the Oval Office on his cell:
HP: Mr. President, Fannie Mae and Freddie Mac are in deep, deep trouble. It’s risky… but we could bail them out.
GWB: Fannie and Freddie! How the heck didya know?! That’s what I wanted to name the twins… until Laura pointed out they were both girls. Well, even then. Awful cute names. Bail? Heck, yeah. Let’s do it. Make sure they get good lawyers, too.
Not much later….
HP: Mr. President, I’m sorry to trouble you so soon after our last conversation. More bad news, I’m afraid. Now Bear Stearns is going belly-up. Another bailout, sir?
GWB: The Bear’s gone belly-up?! Hell, we can’t let that happen to the greatest college football coach of all time! Give him whatever he needs!
HP: Uh… yes, sir. Thank you, Mr. President.
At the culmination of a long, tedious weekend….
HP: …But, sir, as I mentioned before, Lehman Brothers has been around for 160 years! It’s survived the Civil War, the Great Depression–
GWB: Henry, what part of ‘NO’ don’t you understand? Every fall, right before school started, my mama drug all five of us down to that place. New suits, new neckties, new shoes, all down the line. And their shoes didn’t fit worth a damn. I hate that place! Let ’em sink!
Just last evening….
HP: Mr. President? Hello?
GWB: Hang on, Henry, lemme grab the remote. [aside] Say, Barney, whaddaya think of that? That deppity down in Stephenville says that ol’ flyin’ saucer was headed straight for the ranch at Crawford! You wouldn’ta let them little green men kidnap your ol’ Boss, now wouldya? No… that’s a good boy! OK, Henry, what can I do ya for?
HP: Um, sir. Remember Fannie and Freddie, and Bear Stearns?
GWB: From last week, week before? Sure I do.
HP: Well sir, now it’s AIG.
GWB: Barney, git down! Huh. A – I – G. AIG.
HP: Should we save them too?
GWB: Save ’em? Whaddaya think, Barn? The Boss sure does like ham ‘n’ aigs for breakfast sometimes! Should we save ’em? Izzat a yes? Good boy! Henry… you still there?
HP: Yes, sir.
GWB: It’s a go. Now, lemme get back to my program. Did you know I was almost kidnapped by little green men back in January? [click] Henry? Henry?
This is related & informative:
http://lefarkins.blogspot.com/2008/09/masters-of-universe-to-rescue.html
http://www.lewrockwell.com/rozeff/rozeff220.html
This is the libertarian point of view, interesting observation….
Why is NO one asking the republicans the big question
If we had followed Bush’s plan to privatize Social security, what would have happened to all the money that the seniors and disabled would have lost?
Would the government bail them out? OR would we be worse then just whining about our loses?
I, too, want to know where the Feds get off making unilateral decisions about baling these companies out without any input from Congress AND WHERE IS THE MONEY COMING FROM????
erinyes — regarding the Lew Rockwell post, I agree that the Fed is throwing good money after bad and is only postponing the bust. My question is, what would the ripple effect be if AIG simply had been allowed to crash? Would the bust have come quicker, harder, and bigger? Or will it make any difference in the long run? I honestly do not know.
And it would have been nice if the writer had acknowledged that libertarian economic philosophy got us into this mess. Excuse me if I don’t take anything about economics published at Lew Rockwell very seriously.
I was OK with the long-ago assistance the government gave to Harley Davidson (they asked for import restrictions to be ended early, as I recall) and Chrysler (yes, they got caught with their pants down with a bad product, but it wasn’t risky speculation that threatened to kill them).
These financial bail-outs are something else. To paraphrase Paul Krugman the other night on MSNBC, we’ve been operating in private profit / socialized risk mode for far too long. “I keep my profits, you cover my losses” is a great gig if you can get it, but it’s the middle-class taxpayers that are covering the losses. That has to stop. If a few
We should have learned something from the S&L crisis. If a few big financial institutions fail, maybe we will FINALLY learn the market-forces lesson, once and for all. Btw, I lost three S&L’s and my mortgage changed hands five times during that one. Thank God for FDIC, but I didn’t give a damn about Keating and company going down. They earned their fall and more. I can’t believe McCain survived that one.
The nut of it is that free markets work best when customers have the option of just not buying any (fill in the blank) at all. When companies have to convince people to buy something, they work hard (that “incentive” they’re always threatening us with). When all companies have to do is compete with each other, they basically don’t. Or they try to game Capitol Hill to regulate their competitors out of business, but not them.
I think the white house will prop up as many companies as it needs to so the biggest problems will come after the election. It’s coming out of our pockets. One more reason to fight privatizing social security. The government would just call us whiners if all of our invested security went down the toilet because of some multi-million dollar ceo playing fast and loose with our squeezed out pennies.
Regarding your question, this entry from bondad’s blog outlines the risks of an AIG failure. This excerpt might give you some insight as to why it’s too big to fail:
“…This led to the rise of the “credit default swap” (CDS) market. These are simply options on bonds, or an option to sell x amount of bonds at a certain price at a certain time. They are a great development because they allow fixed income managers to hedge downside risk. But (and here’s the big but) the market is off balance sheet and unregulated. Because the market is private there is no way to limit its size to an appropriate size. Put another way, suppose you had $10,000,000 in bonds that you wanted to insure. There is no reason for there to be numerous contracts on this bond position — one will do. But because this is a private market there is no way to know if there are multiple options on the same bonds. This is one of the reasons why the CDS market is currently dangerous. Because AIG is so intimately involved with this market they have essentially become “too big to fail”.”
Bondad references another blog, Mish’s Global Economic Trend Analysis, who also talks a lot about AIG and other matters. Mish is pretty well respected, but is a hard core “let em fail” advocate. He has almost no respect for Bernanke and Paulson. He’s big on Ron Paul and getting back to the Constitution, and yet has come out for Obama. I like his acerbic, insightful writing. He is often right before anyone else.
All of this is happening outside the purview of Congress because the financial house is on fire – for a number of reasons – and the Fed is the only one remotely able to coordinate putting out the fire. One of the root causes of the fire, is that a large, unregulated financial system has developed over the years in parallel to the traditional regulated one. Our institutions, not withstanding the pervasive anti-regulatory enthusiasms of the far right, haven’t kept up with this development, and that’s how we’re in the mess we’re in.
When the dust settles, you’re going to see a move in government toward changing the role of regulatory agencies to move into these new areas. Many suggestions/encouragements along these lines are coming from players in the financial arena themselves.
A larger issue is the irrelevance of Congress and the expansion of the Executive – talked about repeatedly by Glenn Greenwald and others – abetted by the brazen contempt of the current occupants for the “branch that represents the people” – but this has been going on for decades.
Hey Maha,
I’m with you on the “I don’t know what would have happened if the fed let AIG fail” question, and I’m not much of an expert on economics, let alone the “Austrian” model promoted at Lew Rockwell (I go there to massage my anti war sentiments), HOWEVER, one guy named Gary North that posts there regularly has been right on spot in predicting this current mess.
I also agree with you that a total lack of oversight put us into this mess. All them damned Bush “Rangers” and “Pioneers” ( Along with the presidential prayer team, Jeesh!)
http://www.guardian.co.uk/business/2008/sep/17/merrilllynch.executivesalaries
Ain’t life a bitch?
re: perfect worlds and free markets, you’re right.
Here’s a good example. There’s money to be made in new anti-malarial drugs. Okay, but there’s more money to be made in drugs to fight heart disease, or, heaven help us, erectile dysfunction. So, that’s where the money will go. If there were enough investment dollars to go around, sure, someone would say “heart pills and boner pills are a flooded market; let’s do something that no one’s doing, and fight malaria. No one’s doing that, yet.”
But as long as there’s another place to invest money that offers bigger returns, anti-malarial drugs will go without investment. The idea that the free market will solve everything assumes that there’s always going to be more capital to invest in every problem… and there simply isn’t going to be.
The free market doesn’t solve problems… it makes money. It needs direction to solve problems, which means someone sometimes has to make it worth the market’s while to do something good, or not do something bad. It’s the most obvious thing in the world, but it gets forgotten by free market fundamentalists.
“The ‘poetry of the possible’ is that things are organized without an organizer.â€
Funny how the conservatives always accept that argument in economics but never in biology. If there has to be an “intelligent designer” in one area, why not the other?