Government Is Furiously Dancing the Two-Step
Today’s news brings us a perfect illustration—one of many during the past year of financial debacle and worsening economic recession. According to an AP report, “Treasury Secretary Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies.” Geithner, of course, earnestly expressed the finest motives: “We must ensure that our country never faces this situation again.” Geithner’s partner in crime, Fed chief Ben Bernanke, joined him in “calling for greater governmental authority over complicated and troubled financial companies.” These rulers of the universe want the legal power “to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.” (Extra-credit question: haven’t they been taking precisely such actions for the past year or so?)
Given what a manifestly big deal this bureaucratic power-grab appears to be, why would anyone in Congress want to go along with it? Simple: failure to hand over these powers to the apparatchiks might result in the complete destruction of civilization. Speaking of the government’s having already poured more than $180 billion into AIG, Bernanke told the House Financial Services Committee that the big insurance company’s “failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.” You heard him — catastrophic implications for jobs. That’s all that members of Congress needed to hear. Faux job creation is their very lifeblood when they run for reelection.
Since the onset of the current financial troubles, government officials have made repeated use of a new mantra to justify shoveling mega-tons of the taxpayers’ money to favored firms: systemic risk. So, naturally, at today’s hearings, Geithner trotted out this new hobby-horse: “As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can.” But did we really see systemic risk hovering over AIG, or have we merely been told repeatedly that it was hovering? One wonders whether Bernanke and Geithner are also on record as having reported that they have definitely sighted flying saucers.
In the true spirit of neoclassical economic scientism, I say let’s stage an empirical test: let AIG or Citi or B of A or some other giant, mismanaged financial institution go down, and then let’s see whether the world comes to an end. If it does, we’ll know that these transparent power-grabbers were right about systemic risk; but if it goes right on spinning more or less as before, we’ll know that they’ve been selling us a bill of goods. I think the odds are so greatly in our favor that I’m more than willing to see the experiement carried out. After all, it’s not as though these financial geniuses have demonstrated a great deal of prowess so far, despite having tossed more than $8 trillion to the wind.
It’s possible, of course, that some people failed to see what was going on at today’s hearing, because, as usual, all parties tried to throw the bloodhounds off the scent by dragging a red herring across the trail. This time the rotten herring is the $165 million in bonuses that AIG recently attempted to pay certain employees to retain their services. Joe Sixpack got mighty hot under the collar about these bonuses, of course, goaded by the news media’s usual efforts to make their emphasis inversely proportional to an event’s actual importance. Yes, people are furious about the bonuses; these payments are the populist outrage d’jour. People seem not to have noticed, however, that the $165 million scheduled to be paid in AIG bonuses amounts to approximately 0.00002 of the total amount the government has dispensed in its recent commitments for loans, capital infusions, “stimulus” spending, loan guarantees, asset swaps, and other utter (and utterly destructive) wastes. The public might just as well have become inflamed about how Tim Geithner combs his hair.
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Robert Higgs - 3/26/2009
I don't understand your claim, Bill. What liability of Bear, Merrill, or Lehman served as a generally accepted medium of exchange (that is, as money)?
Bill Woolsey - 3/26/2009
As I see it, AIG just guaranteed lots of securities against loss. It cannot meet that committment because the losses were too great. By bailing out AIG (lending it money and making stock investments) the U.S. government is providing those guarantees and fulfilling them.
What would happen if those holding the securities no longer had the guarantees and had to take the losses as they actually occurred?
While things are pretty bleak for AIG even with this "bailout," those who are being protected by the U.S. taxpayers are getting bailed out with little scruitiny. (It seems to me.)
The investment banks, like Bear Sterns, Merrill Lynch, and Lehman Brothers were different. They were all operating what amounted to depostiory institutions and faced a run. They were creating money, much of which may not have actually been measured at all. These runs did have the usual "systemic" effects resulting from the fact that the "price" of money is its pruchasing power and can only be adjusted by just about everyone in the economy changing their offer prices.
Operating banks in a shadow realm to avoid regulation seems like a bad idea. I think special bankruptcy rules are necessary for private institutions that create money.
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