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What harm is there in letting a company that made bad decisions go bankrupt? I don't see how it's pragmatic to pass this burden on to tax payers and the general

by jmatt 18y ago

What harm is there in letting a company that made bad decisions go bankrupt? I don't see how it's pragmatic to pass this burden on to tax payers and the general public. I admit that I am idealistic about such things. I don't see how government is going to solve any of these problems. The government will lessen the pain but that same behavior will also slow any rebound and future growth. It seems naive and narrow minded to think another company won't step in if there is a continued need for the services that AIG provide{d|s}. This new company is likely to make better decisions. First, because they saw AIG fail. Second, because they didn't fail and thus were stable enough to exist while other giant financial companies failed.

netcan 18y ago
In the long run we're all dead.
- eru 18y ago
  You and Mr. Keynes, maybe. Ray Kurzweil, no.
  - eru 18y ago
    At least that's his planning assumption.
dpapathanasiou 18y ago
It seems naive and narrow minded to think another company won't step in if there is a continued need for the services that AIG provide{d|s}. But it's unrealistic to think that the vacuum could be filled fast enough to prevent a wave of failures among AIG's clients (banks who bought credit insurance to get around regulatory limits). There's more detail here: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/how_banks_depend_on_aig.html http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09...
- jmatt 18y ago
  Thanks, this is the first reason that I've heard that makes sense. It's part of the world financial infrastructure.
  - davidw 18y ago
    Mark Thoma has quite a bit of coverage from economists and other people who are more knowledgeable about these sorts of things than you get in your average newspaper article: http://economistsview.typepad.com/ http://economistsview.typepad.com/
- netcan 18y ago
  So is this a reasonable system for insuring against the collapse of insurers (and the world's financial infrastructure)? Government rescues? How about limiting the size of companies that are not allowed to die for damage control? Or limiting their ability to become companies not allowed to die?
  - dpapathanasiou 18y ago
    How about limiting the size of companies that are not allowed to die for damage control? Or limiting their ability to become companies not allowed to die? This article sums up the dilemma Treasury faces, including the whole "too big to fail" problem: http://dealbook.blogs.nytimes.com/2008/09/17/henry-paulsons-frankenstein/ http://dealbook.blogs.nytimes.com/2008/09/17/henry-paulsons-...
  - nradov 18y ago
    It's not the absolute size that's a problem but rather the degree of leverage. If you've borrowed $30 for every $1 in capital (like Bear Sterns did) and your assets all drop by about 3% then you immediately become insolvent. They thought they could prevent that from happening through clever hedging and diversification but it didn't work. A possible solution might be to set hard legal limits on size versus leverage for financial companies. But in practice I'm not sure how practical it would be to write regulations to enforce that.
vitaminj 18y ago
So far the blood on the streets is almost exclusively from the financial sector, ie. investment banks, hedge funds, etc. They may affect your pension funds but it's mainly institutional investors and others with big stakes in these companies that'll pick up the tab. However AIG obviously isn't an investment bank. A failure of AIG would affect people outside of the financial sector who have purchased AIG insurance products (including me). The pragmatism of the fed bailout is to prevent the financial meltdown from spilling over into the real economy. Believe it or not, GDP growth in the US is surpassing projections (3.3% in 2Q 2008 ahead of a 1.9% estimate - see http://www.iht.com/articles/2008/08/28/business/usecon.4-326710.php http://www.iht.com/articles/2008/08/28/business/usecon.4-326...). The real economy isn't doing that badly, and the pragmatic choice would be to protect that.
- quasimojo 18y ago
  the 3.3 - 1.9 = 1.4% difference is precisely reflected in the oil bubble. now that oil is backing down, this number will also fall
  - eru 18y ago
    And you should look at GDP per person. The US population is still growing strong.
- huherto 18y ago
  I also have life insurance with AIG. How does it affect me? I only have to cancel and buy it from another company. right?
- nradov 18y ago
  That isn't fully incorrect; individual insurance policy holders are not at (much) risk. Their policies are controlled by regulated subsidiaries in each of the several states. Even if the parent goes bankrupt the subsidiaries will continue to operate and pay claims. And even if one of those goes down, the policies are guaranteed by state-operated reinsurance funds. There are some dollar limits to the reinsurance coverage but they are generally pretty high.
helveticaman 18y ago
It all comes down to the government intervention paradox: whenever something bad happens, people ask for intervention, which implies the only entity willing to do such things, the government. The sad part is, to my knowledge, this intervention never works out for the best. When is the last time you heard the phrase, "thank goodness the government intervened! It did such a good job, and now everyone's happy!" with regard to the economy?
- evgen 18y ago
  1933.
- MaysonL 18y ago
  Let's see: the GI Bill, the Internet, Social Security, NASA's and DOD's funding of computer and semiconductor R&D all seem to have worked out fairly well. Not perfectly, but better than their non-existence would have.
  - aswanson 18y ago
    I think helveticaman must have developed his own networking stack and routing architecture, not this government sponsored crap we all use: http://en.wikipedia.org/wiki/Tcp/ip http://en.wikipedia.org/wiki/Tcp/ip

by jmatt 18y ago

netcan 18y ago

In the long run we're all dead.

eru 18y ago
You and Mr. Keynes, maybe. Ray Kurzweil, no.
- eru 18y ago
  At least that's his planning assumption.

dpapathanasiou 18y ago

It seems naive and narrow minded to think another company won't step in if there is a continued need for the services that AIG provide{d|s}. But it's unrealistic to think that the vacuum could be filled fast enough to prevent a wave of failures among AIG's clients (banks who bought credit insurance to get around regulatory limits). There's more detail here: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/how_banks_depend_on_aig.html http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09...

jmatt 18y ago
Thanks, this is the first reason that I've heard that makes sense. It's part of the world financial infrastructure.
- davidw 18y ago
  Mark Thoma has quite a bit of coverage from economists and other people who are more knowledgeable about these sorts of things than you get in your average newspaper article: http://economistsview.typepad.com/ http://economistsview.typepad.com/
netcan 18y ago
So is this a reasonable system for insuring against the collapse of insurers (and the world's financial infrastructure)? Government rescues? How about limiting the size of companies that are not allowed to die for damage control? Or limiting their ability to become companies not allowed to die?
- dpapathanasiou 18y ago
  How about limiting the size of companies that are not allowed to die for damage control? Or limiting their ability to become companies not allowed to die? This article sums up the dilemma Treasury faces, including the whole "too big to fail" problem: http://dealbook.blogs.nytimes.com/2008/09/17/henry-paulsons-frankenstein/ http://dealbook.blogs.nytimes.com/2008/09/17/henry-paulsons-...
- nradov 18y ago
  It's not the absolute size that's a problem but rather the degree of leverage. If you've borrowed $30 for every $1 in capital (like Bear Sterns did) and your assets all drop by about 3% then you immediately become insolvent. They thought they could prevent that from happening through clever hedging and diversification but it didn't work. A possible solution might be to set hard legal limits on size versus leverage for financial companies. But in practice I'm not sure how practical it would be to write regulations to enforce that.

vitaminj 18y ago

So far the blood on the streets is almost exclusively from the financial sector, ie. investment banks, hedge funds, etc. They may affect your pension funds but it's mainly institutional investors and others with big stakes in these companies that'll pick up the tab. However AIG obviously isn't an investment bank. A failure of AIG would affect people outside of the financial sector who have purchased AIG insurance products (including me). The pragmatism of the fed bailout is to prevent the financial meltdown from spilling over into the real economy. Believe it or not, GDP growth in the US is surpassing projections (3.3% in 2Q 2008 ahead of a 1.9% estimate - see http://www.iht.com/articles/2008/08/28/business/usecon.4-326710.php http://www.iht.com/articles/2008/08/28/business/usecon.4-326...). The real economy isn't doing that badly, and the pragmatic choice would be to protect that.

quasimojo 18y ago
the 3.3 - 1.9 = 1.4% difference is precisely reflected in the oil bubble. now that oil is backing down, this number will also fall
- eru 18y ago
  And you should look at GDP per person. The US population is still growing strong.
huherto 18y ago
I also have life insurance with AIG. How does it affect me? I only have to cancel and buy it from another company. right?
nradov 18y ago
That isn't fully incorrect; individual insurance policy holders are not at (much) risk. Their policies are controlled by regulated subsidiaries in each of the several states. Even if the parent goes bankrupt the subsidiaries will continue to operate and pay claims. And even if one of those goes down, the policies are guaranteed by state-operated reinsurance funds. There are some dollar limits to the reinsurance coverage but they are generally pretty high.

helveticaman 18y ago

It all comes down to the government intervention paradox: whenever something bad happens, people ask for intervention, which implies the only entity willing to do such things, the government. The sad part is, to my knowledge, this intervention never works out for the best. When is the last time you heard the phrase, "thank goodness the government intervened! It did such a good job, and now everyone's happy!" with regard to the economy?

evgen 18y ago
1933.
MaysonL 18y ago
Let's see: the GI Bill, the Internet, Social Security, NASA's and DOD's funding of computer and semiconductor R&D all seem to have worked out fairly well. Not perfectly, but better than their non-existence would have.
- aswanson 18y ago
  I think helveticaman must have developed his own networking stack and routing architecture, not this government sponsored crap we all use: http://en.wikipedia.org/wiki/Tcp/ip http://en.wikipedia.org/wiki/Tcp/ip