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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 unrealist

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.
  - netcan 18y ago
    How many companies are in existence that are too big, too important or too interconnected to go under? Can't really be that many.
nradov 18y ago
Let it all blow up. It will be painful and disruptive in the short term, but in the long run our economy would be much stronger. Most companies in the finance, insurance, and real estate sector of the economy produce very little of real value anyway. The capital and employees could be used more productively elsewhere.

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.
- netcan 18y ago
  How many companies are in existence that are too big, too important or too interconnected to go under? Can't really be that many.

nradov 18y ago

Let it all blow up. It will be painful and disruptive in the short term, but in the long run our economy would be much stronger. Most companies in the finance, insurance, and real estate sector of the economy produce very little of real value anyway. The capital and employees could be used more productively elsewhere.