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I agree with most everything...Solyndra...definitely..that was gov't interferring with the markets at its worse. GM, I definitely agree...much better to go thro

I agree with most everything...Solyndra...definitely..that was gov't interferring with the markets at its worse. GM, I definitely agree...much better to go through a 'controlled bankruptcy' and have new mgmt negotiate with the UAW on more amenable pension & health arrangements. They are already making good progress there. As for even AIG getting a 'bailout', I don't quite agree with that. Yes, they did get a ton of money, on seemingly 'cheap terms', but the logic is the same. If the insurer of all these financial instruments can't honor it's contracts...imagine the implications for the economy as a whole. Not only would they be reneging on contracts, enshrined in law, but many firms that purchased all sorts of insurance (not just on CDOs) - GE, Walmart, etc - on various assets/products would instantly be SOL. So even if you take just the financial firms and their tanglings there out of the picture, in terms of getting back 100 cents on the dollar on their CDS Swaps, if AIG can't honor ANY of their contracts at a time when companies (all throughout the country in hundreds of industries) are experiencing softer aggregate demand and falling revenue, just that alone would be catastrophic beyond anything we have ever seen. So I don't see it as an 'AIG bailout', but rather saving the US economy. Besides, they will be able to recoup their investment once they finish selling the useful assets and repairing the balance sheet over the long term. Also, it's not just Fannie and Freddie that are to blame - as Bernanke said the exhorbitant global imbalances with countries running massive current account surpluses that creates an incentive for investors to put money to work. China doesn't want it's $3T sitting in cash, even just $100B sitting in cash could cost China about $2B - $10B/year depending on where it is sitting (just in inflation alone). So the pressure to at least do something to protect it against inflation is immense and that's just China. Suffice it to say, there are many factors (from the mortgage tax credit to Fannie & Freddie to global imbalances to misaligned incentives on Wall St.) that are to blame. The damn media likes to play on the most populist and it's annoying. One of the things I can say, is that I am impressed that people like Bernanke and Paulson can hold their nose and go against EVERYTHING they believe in (i.e. non-intervention in markets) and everything they have been taught and learned over their entire professional careers and completely violate these beliefs in a matter of days/weeks. It's easy to sit on the sidelines and vilify these people for their actions, when you don't quite understand the implications of non-action and even how tough it was for them to make those decisions. The fact is, these people ignored their beliefs and acted in the country's interest. I am not even American and I can admire their actions. Edit 1: To put their actions into perspective, it's the equivalent of being a 'pro-lifer' your entire life and in order to save the entire country you have to personally sanction wide-scale abortions. How many people would be able to do that? Might be a little dramatic, but I believe the parallels are similar.

HilbertSpace 15y ago
No, sorry to say this, but we are in 100% agreement! :-)!!! I was 100% for the AIG 'loan' for just the reasons we both explained. But since it was not clear that AIG would ever be able to pay back all the loan, I was willing to call the loan at least in part a 'bailout', that is, 'help' or a 'gift' that might not get repaid. It's too bad the media wants to use the Paulson, Bernanke, etc. excellent efforts to save the US and most of the world as a source of a coveted scandal by screaming "bailout", but, again, I fully agree with you that what the US did for (with) AIG was just essential. I will insert: The stuff about a 'balanced budget amendment' and, much worse, Ron Paul's desire for essentially a gold standard instead of a Fed, would mean that there would be no Federal 'lender of last resort' which would force us back to the results we got in the 1930s when we were far too afraid to print money until people started shooting at us. In addition we would not be able to fight any major wars at all; we might as well shut down most of the DoD. Paul seems to believe that the Fed is the cause of all bubbles and that with a gold standard we would have no bubbles; history clearly shows otherwise. Even with a gold standard, there still is 'fractional reserve banking' and the possibility of bubbles, crashes, financial 'panics', etc. As I recall the history, at one point J. P. Morgan personally saved the financial system, and that situation was much of the motivation for creating the Federal Reserve. Moreover, I'd go farther: A comparatively few bucks would have kept Lehman afloat long enough mostly to 'unwind' slowly. That is, there is a good chance that Lehman was mostly the victim of a 'run on their bank', some of it urged on by some short sellers. Sure, I would have expected that the Lehman stockholders would still have lost their shirts, but keeping Lehman going for their 'counter parties' might have greatly reduced the effects that gave us the Great Recession. Houses would still have gone underwater, CMOs and CDSs would still have been in trouble, but some of the intensity and volatility would have been reduced. Alas, the media was so eager to scream 'bailout' that it would have been politically too hot to 'save' Lehman, even if all the owners lost all. For Paulson and Bernanke going against their beliefs, that shouldn't be too difficult! No one should ever have taken all that simple minded stuff as always 100% true anyway! Besides, Bernanke was a leading Great Depression scholar. Also, Paulson saw instantly the threat of 'bank runs' and 'cascading contagion'. I do fault Greenspan for drinking too much Ayn Rand Russian Kool-Aid! Of course eventually he admitted before Congress that his belief that the firms would do the right things was expecting too much. I do have some remaining questions: (1) I can understand what Country Wide and Fannie and Freddie did. But I don't fully understand the other flows, e.g., through the ratings agencies and the 'tranches' and to the CMOs and their CDSs with AIG, etc. I don't have any good data on how much of the paper was held in small banks, large banks, outside the US, or where. Just why the problems were mostly just in Florida, Arizona, Nevada, and California but not the rest of the US I don't get. Just why the problems in just those four states did so much damage to housing and the economy nearly everywhere in the US I don't get. Just what happened to routine commercial banking and why I don't have either good data or good understanding. (2) Actually there were some surprisingly similar housing bubbles outside the US, at least in Australia. So just how the US housing bubble made it to Australia I don't get. Then Canada was largely immune; just why Australia got sick but Canada didn't I don't get. We should ALL have GOOD data and answers to these and other questions and should have had all along during the bubble blowing over the past 10 years. We didn't. At least this time we're not at much risk of a Hitler, but we've come close and are not fully out of the woods yet.

HilbertSpace 15y ago

No, sorry to say this, but we are in 100% agreement! :-)!!! I was 100% for the AIG 'loan' for just the reasons we both explained. But since it was not clear that AIG would ever be able to pay back all the loan, I was willing to call the loan at least in part a 'bailout', that is, 'help' or a 'gift' that might not get repaid. It's too bad the media wants to use the Paulson, Bernanke, etc. excellent efforts to save the US and most of the world as a source of a coveted scandal by screaming "bailout", but, again, I fully agree with you that what the US did for (with) AIG was just essential. I will insert: The stuff about a 'balanced budget amendment' and, much worse, Ron Paul's desire for essentially a gold standard instead of a Fed, would mean that there would be no Federal 'lender of last resort' which would force us back to the results we got in the 1930s when we were far too afraid to print money until people started shooting at us. In addition we would not be able to fight any major wars at all; we might as well shut down most of the DoD. Paul seems to believe that the Fed is the cause of all bubbles and that with a gold standard we would have no bubbles; history clearly shows otherwise. Even with a gold standard, there still is 'fractional reserve banking' and the possibility of bubbles, crashes, financial 'panics', etc. As I recall the history, at one point J. P. Morgan personally saved the financial system, and that situation was much of the motivation for creating the Federal Reserve. Moreover, I'd go farther: A comparatively few bucks would have kept Lehman afloat long enough mostly to 'unwind' slowly. That is, there is a good chance that Lehman was mostly the victim of a 'run on their bank', some of it urged on by some short sellers. Sure, I would have expected that the Lehman stockholders would still have lost their shirts, but keeping Lehman going for their 'counter parties' might have greatly reduced the effects that gave us the Great Recession. Houses would still have gone underwater, CMOs and CDSs would still have been in trouble, but some of the intensity and volatility would have been reduced. Alas, the media was so eager to scream 'bailout' that it would have been politically too hot to 'save' Lehman, even if all the owners lost all. For Paulson and Bernanke going against their beliefs, that shouldn't be too difficult! No one should ever have taken all that simple minded stuff as always 100% true anyway! Besides, Bernanke was a leading Great Depression scholar. Also, Paulson saw instantly the threat of 'bank runs' and 'cascading contagion'. I do fault Greenspan for drinking too much Ayn Rand Russian Kool-Aid! Of course eventually he admitted before Congress that his belief that the firms would do the right things was expecting too much. I do have some remaining questions: (1) I can understand what Country Wide and Fannie and Freddie did. But I don't fully understand the other flows, e.g., through the ratings agencies and the 'tranches' and to the CMOs and their CDSs with AIG, etc. I don't have any good data on how much of the paper was held in small banks, large banks, outside the US, or where. Just why the problems were mostly just in Florida, Arizona, Nevada, and California but not the rest of the US I don't get. Just why the problems in just those four states did so much damage to housing and the economy nearly everywhere in the US I don't get. Just what happened to routine commercial banking and why I don't have either good data or good understanding. (2) Actually there were some surprisingly similar housing bubbles outside the US, at least in Australia. So just how the US housing bubble made it to Australia I don't get. Then Canada was largely immune; just why Australia got sick but Canada didn't I don't get. We should ALL have GOOD data and answers to these and other questions and should have had all along during the bubble blowing over the past 10 years. We didn't. At least this time we're not at much risk of a Hitler, but we've come close and are not fully out of the woods yet.