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AIG and the Free Lunch Myth

What you describe AIG as doing isn't a Ponzi scheme. The classic Ponzi / pyramid scheme has payouts to earlier joiners coming from later joiners. e.g. Social Security, Medicare

What you describe above is fraud, taking money from customers without providing the value you promised for it. Obviously, AIG had no intention of honoring these contracts if they didn't make provision for them. They were selling empty promises based on the value of their name.

Putting the Perception and Reality of the Financial Crisis Into Perspective

Honest John,

You know, given the candidates we have in front of us, it wouldn't take much for me to take you up on your offer. When confronted with lesser of two evil choices, people are wont to take a chance. And given the usual function of the Vice President, one of your cats would probably do.

Too bad there isn't a viable third party candidate. But the parties have removed that option. They know all too well that people are likely to grab at straws when given the kinds of choices we are.

As far as the original article and chaos theory goes, you need a model to use it. Have you got such a model? It can't be very good if it didn't see this coming. I had coworkers, working stiffs who aren't in finance, predicting this was coming years ago. They weren't using chaos theory, just common sense. They saw the flipping, people being priced out of the market, the mortgage sales mania, reverse mortgages, ARMs. Already ten years ago this was starting. I knew a guy who was selling mortgages, doing gangbusters business. He thought the sky was the limit. It reminded me of the traders doing the dot com mania thing at the time.

Going to Hell in a Handbasket: The Rush To Protect More Stocks

User 138602 wrote:
... definition of CAPITALISM: a small so called select group controls the money and the lives of every single one of us. ...

This is complex. Capitalism is a form of meritocracy. It guarantees that the people best able to produce with capital use it. For instance, the economy of the US has increased by 40% in size over the last 7 years. That equates to roughly the entire output of China (actual output is difficult to gauge because of their communism) or 4 times the output of India. In 7 years! And there was the crash of the dot.com mania and 9/11 in there.

On the other hand, laws are required to protect the rest of us from those wielding such power. They can never protect us fully, money is power and will bend the rules for its possessor. But on the whole they have worked fairly well in the US. When excess has grown exorbitant, the system has tamed it. The one place I think really needs reform is in the inheritance of wealth. Those whose ancestors had merit are still exerting control, control they haven't earned. A couple of recommendations are either a very high death tax (90 - 100%) or a small annual tax on assets, on wealth (set at the rate of GDP growth). In the first case, the playing field is levelled, and those able to use the capital most efficiently are able to buy it. In the second, the capital is sold off to finance the tax if it isn't generating at least a GDP growth in rate of return, so it ends up in the hands of those more productive.

I like the first one, though the second one is the one more likely to pass.

Incidentally, while we speak of a small class of controlling capital owners, the top 1% of wealthy adults in the US would be around 2 million people. They definitely won't all know each other, and any effective cabal would be difficult to set up. In fact, they are probably at odds on many issues as much as the general population. So while there is some truth to your statement, it think it is still hyperbole.

Going to Hell in a Handbasket: The Rush To Protect More Stocks

You wrote:
... Ah, unintended consequences - they always crop up when the not so invisible hand muddles into the stock market. ...

Yes, looked at as unintended consequences, the attempt to mitigate the crash when the dot.com mania ended via easy money had the unintended consequences we see today.

The operators on wall street, the fast buck artists, have used financial chicanery to convert tax dollars into personal compensation. Now that is alchemy.

I don't know about you, but it gives me a warm fuzzy feeling to know that my tax dollars will be used to maintain the lifestyle of the operators on wall street at the level to which they are accustomed, nay, have a right.

The sad thing is that it is possible those tax dollars are actually being used for something more productive than they would be by the government. Try to think of the most outrageous and absurd programs you can. They are probably being funded by congress.

This crisis and the savings and loan crisis were created by congress. Not deliberately of course, but as unintended side effects. I've read a comment somewhere on the web, that congress creates problems quietly and then claims great credit for solving them.

It is clear from the output, that congress is ignorant of control theory, systems theory, complexity theory, risk theory, optimization theory, and many others pertinent to large complex systems. They don't have to be experts, but they should be aware that actions have effects that aren't always intended so they can ask the right questions when solutions are proposed. Maybe it should be a requirement that you have to be able to play SIMS before you can run for congress.

What Should the Government Do About AIG?

From the table at the link provided by Reinko above, it looks like the notional amount for CDS is in the 60 trillion dollar range, but the actual underlying amount from the right is in the 2 trillion dollar range. Or, stated another way, the notional amount includes contracts on the same underlying approximately 30 times. How much of that will actually go bad, or is bad? No estimate of that in the table, but let's say 10% is currently bad or at risk, 200 billion.

That doesn't seem to be unreasonable for the firms themselves to work out. Put AIG in bankruptcy, sell the going concern parts to highest bidder. Then let the CDSs unwind. And learn.

There is little systemic risk here. Just a bunch of investors and managers who don't want to pay for their folly and lack of understanding of what they were doing. They certainly didn't exhibit fiduciary responsibility.

Even if the fed intervenes, AIG should be dismantled and sold off. As should any other firms that have to be rescued by the fed. They have failed in their responsibility to their shareholders and society; let the institutional knowledge embodying that incompetence pass away and allow someone else to take the responsibility they couldn't handle. An object lesson for the future as well.

The U.S. on the Precipice

TonyC-SA wrote:
...Yes, I know they are not actually saving and their contributions are redistributed to the elderly. ...

This is another way of describing a ponzi scheme. If you have any mathematics at all, you know what happens to a monotonically increasing series - it tends to infinity. That is why ponzi schemes are illegal, they are guaranteed to reach a collapse point.

So I agree with huangjin on this. They should have been abolished by someone with insight a long time ago. Currently they have put us on the hook for 54 trillion dollars in unfunded liabilities. What is going to happen when those liabilities aren't met? Will it be worse than what would have happened if all those people got to keep the ponzi payments they made to others and spent them in the economy?

SS and medicare looked like they worked for a long time. But all they were doing was making the eventual collapse more severe. A ponzi scheme is a ponzi scheme, whether it is run by the government or a private entity. No net good can come of it.

As far as people not taking responsibility for their lives, well, that is what they were promised; life, liberty and the pursuit of happiness. And you exaggerate. Many people *do* think to the future, and *do* provide for themselves in old age. Under the current system, they pay not only for themselves, but for the irresponsible too. Kind of like the way the responsible are paying for the speculators in the mortgage meltdown with the federal bailouts. Of course, the death of SS and medicare would be the death of unbridled consumerism as well.

If society wants these benefits, make it explicit. Put in place a death tax of 100% and use the proceeds to fund programs like social security and medicare. That fixes the level of funding. No ponzi scheme, no guarantees. Everyone knows that whatever they leave behind when they die goes to support other people at the end of their lives, and that the only support they can expect is what those who die leave behind.