Three things I think I think:
1) It’s too late now, but come to think of it – Robert Shiller would have made for a great replacement at the helm of the Fed. He has shown an uncanny knack (for an economist) to understand markets and psychology. His predictions of the dotcom bubble and the housing bubble show that he isn’t just another reactionary professor who is well versed in the scientific method. Plus, he leans just slightly left so he would have had no problem getting confirmed. Alas, there is no point thinking about it now. I hope Obama knows that he has put his re-election hopes in the hands of Bernanke. He better pray the reflation trade holds up in 2012. Otherwise, he has no shot.
2) I just have to wonder what would have happened if AIG had failed. Everyone is saying: “If we hadn’t saved AIG the whole world would have ended”. How true is this statement? Considering it can’t be proved at all I just have to wonder how things would have played out. Are we better off now that we rescued the U.S. banking system or did we simply inject a short-term pain reliever when we needed a long-term cure? Did we mortgage our future all so the bankers could stay at the top of the economic food chain? Or was the AIG bailout truly necessary and good for not only the short-term, but also the long-term health of the United States economy?
It’s interesting and sad to go review the words of the late great Bill Siedman who ran the RTC during the S&L crisis. He begged the government to form an RTC like unit and take their time in winding down these companies so as to avoid mistakes made in haste. How right was he?
In March 2009 Seidman wrote an excellent piece in the Washington Post:
The AIG episode proves that the government should take over and run failed financial institutions rather than be a part owner while trying to have the institutions run themselves. It also shows that the government should take more time. We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We honored AIG’s bonus agreements, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do. That kind of haste with that kind of taxpayer money is ill-considered.
The government is a long way down the trail now, and at this point there’s not much we can do differently. We have already committed to buying AIG’s assets. We have already paid out all the swaps to foreigners. The big lesson? Don’t rush into these disasters.
I just have to wonder if his idea to nationalize the banks in an RTC like fashion would have worked out better….My guess is we’ll look back in 10 years and wish we had listened to Seidman.