Over on the main site, I have a piece up about Warren Buffett’s warnings about the dangers of derivatives. Just wanted to offer a few mixed thoughts about the stunning $85 billion AIG bailout.
–I don’t think conservatives have truly grasped what these means for the big picture. The fact that federal authorities had to essentially nationalize the largest mortgage companies and the largest insurance company within weeks makes the government’s role in our financial markets unprecedented.
My former employer, Reuters, estimates that when you combine all of the bailouts and other rescue deals orchestrated in the past year, taxpayers could be on the hook for up to $900 billion. Now, all of those people who are always clamoring for more regulation of the free market can argue that if taxpayers are going to come to the rescue anyway, why don’t we place more restrictions on private enterprise to protect taxpayers from huge market failures? On this, McCain and Obama both agree — regulation needs to be overhauled — there’s no stopping it now. The only question is how intrusive.
–Beyond that, liberals now can point to this huge rescue of Wall Street, and ask, what will we do for “Main Street”? They’ll argue that if we have hundreds of billions of dollars to dole out to Wall Street finance companies that mess up, how come hard working Americans can’t get government health care? They can fill in the blank for any government program that choose.
–More specifically, as far as this instance, the Fed really gave mixed signals. On Friday, it seemed to draw a line in the sand, and say, no more bailouts were coming. It held its ground with Lehman, and then it caved on AIG. So basically, there’s no way to avoid the moral hazard problem. Any American company knows that if they’re big and interconnected enough, the government will come its rescue, no matter how much it screwed up.
— But with that said, was it necessary? If AIG went bankrupt, it would have been a major financial disaster of global repercussions, and I don’t think conservative commentators truly appreciated that. AIG was the backstop, essentially insuring a lot of other financial firms that owned mortgage debt, so it’s collapse was much more likely to set off a negative chain reaction than an average bank. This op-ed, I think, does a good job of explaining why the collapse of AIG would have been so damaging.Â