Ceci n'est pas un post.
I don't have time to post right now, and besides, I promised myself that the next post would be a disquisition on regulation, in response to Dani Rodrik. (My two neurons are working real hard on that.)
But, today I am white-hot mad over AIG, and I need to vent. Yves Smith has done a beautiful job of describing the ridiculous awfulness of Monday's "restructuring". More importantly, she uses words with the appropriate intensity and valence: "banana republic", "looting", "Mussolini-Style Corporatism".
For so many years, Milton Friedman passionately argued that there is a relationship between economics and political life. In particular, he believed capitalism to be uniquely compatible with a free society.
What kind of society is compatible with an economy managed by a cadre of large, politically connected firms whose operations and those of the state are intimately connected, and which cannot be permitted to fail since that would bring "chaos"? Friedman would have remembered. "Mussolini-style corporatism" can't be quarantined at the corner of Liberty Street and Maiden Lane. Trillion dollar bailouts represent claims on scarce resources. If times get hard, the idea of scarcity will become a lot less abstract. The state will be called upon to enforce "property rights", including rights to the property that the state is right now giving away (and which in turn are being given away to the truly deserving). First there are economic emergency measures. Later there may be emergency measures of a different sort. Mixing my libertarians, there is more than one road to serfdom.
It is so odd, how we are becoming inured to these sums, $150 billion for AIG, $140B in tax breaks to encourage consolidation into bigger and more dangerous banks, the hundreds of billions in equity infusions under the modified TARP plan, etc. The Fed's balance sheet has expanded by more than a trillion dollars over the course of several weeks, almost all of which is used to offer one form or another of covert subsidy to financial firms. A bit hyperbolically, I thought, I once compared the scale of the Fed's interventions to the direct cost of the Iraq War. Now that seems quaint. The scale of the government's response to the financial crisis now completely dwarfs the direct costs of that war, as well as any plausible estimates of the indirect (financial) costs. (Obviously, the real costs of war are not financial, and run much deeper than our economic problems. I hope the comparison doesn't seem flip.)
Of course, we are constantly told, all of this is an "investment", no money has been spent, the taxpayer may even turn a profit.
That's an argument that sounds reasonable only until you give it a moment's thought. Nearly all "government spending" (outside of entitlement transfers) is investment. When we build schools, run head start programs, buy fighter jets, and fund our court system, that is not "consumption". We don't do those things because we enjoy them, but because they create ongoing payoffs that we believe outweigh the opportunity cost of our funds.
When a firm purchases inventory, when it installs new machinery or operates a research lab, we don't claim that it has "consumed" its wealth. Investment is something we do in the real world. Financial claims are only faint, imperfect echoes of real investment. There is a bitter irony in the fact that, precisely when bankers have profoundly debauched the value of paper claims, taxpayers are being told that they are not spending, they are investing, when they buy unmarketable securities. Of course it would be "spending" to build a power grid or an airport.
Now, perhaps the government is a very poor investor. But do we have reason to believe that it is more skilled or less corrupt when it invests in financial claims rather than real projects? I find the case for a 16% real return on early childhood education far more compelling than the case for a 5% nominal coupon on Goldman (GS) preferred stock.
It is likely that taxpayers will turn a paper profit on their paper claims against financial institutions. But that's not because they are good "investments". What's making these investments good is now a constraint on government action. The Fed cannot behave in ways that would compromise the value of the trash on its balance sheet. Once AIG was too big to fail, it cannot fail, no matter how big the black hole grows. Once GM enters the penumbra, very soon now, it also must not fail. Of course, we will not count this terrible loss of policy freedom as a cost.
That cost may be quite large. A commonly held view is that yes, the Fed's interventions are extraordinarily expansionary, and yes, that could lead to inflation sometime far in the future. But for now we have D-leveraging, D-flation, D-pression to worry about. The Fed retains its traditional tools to fight inflation, when the time comes. It will be able to sell Treasury bonds for cash and "mop up" all this "liquidity" it has "injected" into "the system".
But wait. The Fed doesn't hold very many Treasury securities anymore (see Kady Liang). It would have to sell off some of the other stuff. Maybe we get lucky, and by the time we need to fight inflation, all those "money good" CDOs turn marketable again. Maybe not, though, and then the Fed will have little choice but to tolerate a great inflation or watch its own balance sheet implode. When the inflation comes, bright investment bankers will have already converted the bonuses we paid them into real property. It will be ordinary savers, and especially workers without bargaining power, who will be stiffed with the bill.
I think either a great inflation or a catastrophic deflation are pretty much unavoidable. It's the distributional effects that have me white hot with rage. We are sowing the seeds of inflation by making those most deserving of catastrophe whole, while doing nothing for those whose wages may soon achieve purchasing power parity with the emerging world. I'm actually cool with inflation — hey, all my money's in gold. A sharp inflation would be a kind of large-scale Chapter 11, a systemic debt-to-equity cramdown, debtholders get their claims devalued but the firm's nation's economic life goes on. However, inflation is a wealth transfer, and we should be conscious of from whom and to whom. For every dollar of Federal largess that goes into the Wall Street bonus pool, three dollars should go into extremely generous unemployment benefits, paid sabbaticals for workers to return to school and retool, anything and everything to give people bargaining power to negotiate higher wages without all the hassle of a union. Let's pass the "Take this job and shove it act of 2009".
Because the only thing worse than a great inflation with a wage/price spiral is a great inflation without one.
This article has 12 comments:
Basic point is that AIG wrote all those Credit Default Swaps that are now being called. If you were the Fed and wanted to avoid further liquidity problems, then you would look for those CDS and pay them.
AIG is finished, but the stuff on its books lives on.
We were told by the Senators and Congressmen that opinion subsequently changed, but were given no evidence for this.
This scam is being carried out in broad daylight, with the connivance of the whole establishment.
We're totally terrified that we will have to lower our standard of living to the standards of the rest of the developed world: No more Starbucks lattes, no more 15 mpg SUV's, no more 3,500 sf McMansion, no more spa treatments for the dog. In a futile attempt to hold onto these things, we will allow the government to pile up unpayable debts and take over the economy. Yea, that always works out well for democracy. Visit Russia, Saudi Arabia, Nigeria, or Venezuela for examples of what happens when governments no longer depends on taxes from citizens for funding.
Perhaps if we had half the balls of the generation that fought the Revolutionary War, we would take our lumps, start living sustainable lifestyles, and invest in rebuilding our country rather than junk mortgages on cheaply built mini-mansions. As it is, we are a nation of cowards, eager to give our freedom away to anyone who offers to soothe us (e.g. the "Patriot" act).
On Nov 11 09:53 AM Chris B wrote:
> The problem is, we're a nation of wusses.
>
> We're totally terrified that we will have to lower our standard of
> living to the standards of the rest of the developed world: No more
> Starbucks lattes, no more 15 mpg SUV's, no more 3,500 sf McMansion,
> no more spa treatments for the dog. In a futile attempt to hold onto
> these things, we will allow the government to pile up unpayable debts
> and take over the economy. Yea, that always works out well for democracy.
> Visit Russia, Saudi Arabia, Nigeria, or Venezuela for examples of
> what happens when governments no longer depends on taxes from citizens
> for funding.
>
> Perhaps if we had half the balls of the generation that fought the
> Revolutionary War, we would take our lumps, start living sustainable
> lifestyles, and invest in rebuilding our country rather than junk
> mortgages on cheaply built mini-mansions. As it is, we are a nation
> of cowards, eager to give our freedom away to anyone who offers to
> soothe us (e.g. the "Patriot" act).
These guys make a ton of money - $60 mill in '07 for top execs
We can already see some of the depth of this crisis. Are we anyway close to the end? Would it be better and/or cheaper if we just let them all fail? Did anyone note how the world credit market froze up AFTER Lehman brothers went belly up? Do you really think Lehman was THE big player? How much cheaper would it be if we let AIG fail? Surely less than $150 billion, eh? And if it turned out to be much, much, much worse...surely we wouldn't blame the government for having allowed them to fail. That's just the capitalist way.
These firms won't get off scot free. They blew up their companies, and will have to deal with the ensuing mega-regulation, litigation and resultant slow, slow growth for decades to come. These firms will never employ as many people as they have the last few years. They won't make money like they had earlier this decade, for years and years to come. They will never attract investor money as they once had. They will pay, but unfortunately, we have to pay first if we want to have any chance of avoiding the kind of unemployment, bankrupt businesses and overall economic turmoil that our initial and likely, additional capital infusions, may possibly ward off.
Traded it to the Chineses for what The United States owes them.
Then We would be better off.
If they couldn't make it fly with $85billion adding another $65 billion won't help either. Divide it among the people for the most benifit possible.
Or are you seriously looking forward to low unemployment, few bankruptcies, and no economic turmoil in the next few years? All thanks to the organized looting of our treasury.
do you seriously believe my life is better thanks to thsi $150 billion - I hear news AFTER you, I am vilified in the street if anyone recognises me as an AIG employee, I have no idea if my job will last 1 day, 1 week or 1 year (though 1 hour after writing this is more likely) - I see NONE of that money, I gain no benefit fro ANY of that oney, I (and many thousands like me) am the smallest mushroom, under the darkest tree, feeding on the most manure waiting for the harvester to arrive. I never earned big bonuses, and probably never will, I never invested AIG's money unwisely and yet ultimately I - and the thoudsands of everyday underwriters, administrators, trainers etc like me - will be the ones who pay the price - so HELL YES, stop paying off the execs - how much extra in my package would the cost of a "corporate restructuring officer" and a corporate transition executive" create? Get a grip AIG it is shameful that CV Starr's words that our employees are the most important people we have appear to have fallen so far from the deaf ears of some of our executive teams