Wednesday, January 27, 2010


Okay. This is the very last time. If I see one more bullshit gotcha story about how everyone is shocked, shocked that the government takeover of AIG, "amounted to a secret "backdoor bailout" of banks who were made whole on $62 billion of troubled insurance contracts they had with AIG", I'm going to puke. The mixing of finance and politics, rationality and spin to this degree just drives me nuts. No one wants to just look at how the machine works anymore -- it's like we've become snow-blind to reality and can only see the white-out of our prior convictions.

Anyhow, philosophy aside, let's do this just one more time. The rescue of AIG was NOT NOT NOT a backdoor bailout of Goldman, , Morgan, JP, etc ... IT WAS A FRONT DOOR BAILOUT. This was not secretive for anybody who had a clue. The whole point was that AIG failing would take down everyone. The reason for this is that people who thought they were hedged would suddenly become unhedged. As a result they would have to come up with money for the losses that they knew they had, but which they assumed AIG was going to pay for. Which means that they would have had to sell something else. In a hurry. Which would have driven down the price of whatever that something else was (pretty much everything at that moment). Which would have made the losses that needed hedging, and which were no longer covered by AIG, even larger. Lather, rinse, repeat, depression.

They decided they wanted to prop the financial system up. You can question this decision. Not propping it up would have resulted in a total financial collapse. Eventually, the country and the world would have recovered. In my opinion the brief tour through barter we would have been forced to make would have involved a lot of needless suffering. Call it cathartic if you want, but admit that that revolution wouldn't have been televised -- the only way you get electricity without money in the short term is martial law.

They also decided to prop up the financial system in more or less the form it then existed. That is, they did not just nationalize the whole works outright. Again, you can question this decision. I think the arguments against it are more compelling than the arguments for doing nothing. It's still not an easy call. If you think so, consider Venezuela for a moment. Still, there may have been a way to seize a large chunk of the financial system without causing even more panic in the economy at large. This would have involved a lot more politics at the time though, or central bank action that obviously opened itself to legal challenges. In this case the money might have continued flowing, but the political system would have come to a sudden halt.

However, if you have accepted one and two here, you cannot gripe about the logical and inevitable consequences. You bailed out AIG precisely in order to keep the current banks functioning in their current form. Punitively sucking capital out of them right at the moment everyone is concerned about their solvency is simple suicide. The bailout of AIG was a bailout of the banks. Everyone knew that. That was the point.

You can turn around now that things have calmed down a bit and say we want our money back. Fine. Great idea. Tax, regulate, partially nationalize (ie. tax some more), do whatever you want. Consider what's fair in the past, and what the consequences will be in the future. Have yourself a real debate. But do not claim that you were confused about what happened. Don't give me this kabuki political theater shit where you go out and hang the messenger for delivering your own letter.

You wanted a private financial system? Well, you fucking got one. Shut you pansy-ass politician piehole until such time as your willing to change your mind about that. Without somebody growing the cajones necessary for real structural reform, the options remain the same -- have a financial system OR have it private.

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