no third solution

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On Being Too Big to Fail

September 17th, 2008

Although I’ve kept silent on the stories, there has been a lot in the news and in the blogs lately about giant companies failing: Merrill Lynch. Lehman Brothers. Fannie & Freddie. &c. Some have called it the endgame of economics as we know it.

Then, the government nationalized AIG.

Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer, if the existing shareholders approve. All of the company’s assets are being pledged to secure the loan.

Some people wonder how a company which is so large, and presumably so important, can be allowed to fail. But the real question ought to be, if the company is really that large, and really that important, how could it fail.

I like to wonder about the individuals and companies that are so small that nobody cares whether they fail. As in: most of them. Businesses fail all the time. And each failure ripples through families, partnerships, stakeholders, etc. Nobody bats an eye when the restaurant down the street closes, and the proprietor whose house was mortgaged to the hilt, loses his homestead. Nobody seems to care that this bailout will cost me, you, and every other taxpayer in the country, an average of about $600 (and that’s just the explicit cost of the bailout). But when the company who financed that loan, or insured that bond package of second mortgages, when they start to falter, everyone panics.

If you go out of business, they take your fucking house. When they go out of business, you bail them out, prodded of course, by the cold steel barrel of a government gun. Am I the only one who sees something fantastically wrong with this arrangement?

Floyd Norris hits the nail on the head, in “Socialism, 21st Century Style:

The official line is also that taxpayer money is not being put at risk, since the $85 billion loan is well collateralized. No group of banks was willing to make such a loan, so you have to wonder if the collateral is really that good. And the government will not say if it will loan more should that be needed to keep A.I.G. from collapsing. (emphasis added)

Right-o. If, as many headlines are touting, AIG has “many profitable businesses,” and if these businesses are sufficient collateral, then they should have no trouble finding a lender. The fact that they essentially had to beg the government for a bailout speaks volumes.

Elsewhere, as per usual, the “free market” is cast as the scapegoat.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. Paulson and Mr. Bernanke had not requested any new legislative authority for the bailout at Tuesday night’s meeting. “The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”


Let’s cut the crap, and call a turd a turd. Frank is playing extremely fast and loose with that old Reagan quote, considering the decade or so of “help” (in the form of simultaneous monetary expansion and debt expansion) that the government foisted on all of us.

As usual when politicians discuss matters of economics, they’re either lying on purpose, or they’re too stupid to know better. In either case, Frank has demonstrated that he’s unfit to govern anyone. [T]he true culprit for economic woes is the Federal Reserve, which is never blamed. This is a lie by omission, on behalf of all media outlets. Mainstream media outlets are all accomplices to the economic war that rages silently, uncovered and unexamined.

AIG “through its subsidiaries, provides insurance and financial services in the United States and internationally.” Insurance and Financial Services are some of the most heavily regulated industries here, and abroad. The U.S. economy might be one of the freer markets in the world, but it is definitively not a “free market”, and it is even more patently false to describe the market for financial services as “unregulated.”


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no third solution

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