Wednesday, September 17, 2008

Socialists Might Not Need a "Pres. Obama" After All

What the heck is going on? I'm not big enough on economics to understand; what does it mean for the Government to have a "stake" in a compnay?

Can anyone say FDR? New Deal? Can any of us actually be thrilled that this is happening? All I know is that this sets a dangerous precedent, and that we'll be living with the direct consequences of these takeovers and super-assists by the Government for years.

Why can't a company fail? Isn't that part of free market capitalism?

Please leave comments, all those who can fully understand the implications.


Darragh said...

I know < 0 about how money works, but from a cause-and-effect standpoint, doesnt this latest market news seem a little self-induced?

Let me explain. For months the news reports the economy is going downhill faster than a downhill skier. People are, naturally, concerned. They stop spending as much and trust their banks. Which makes the economy slow even more. Which makes them more cautious. Which slows the economy - etc. When enough people have stopped spending and trusting their banks, things really hit the fan, ie, whatever happened earlier this week.

I know it wasn't 100% media hype, but I'm sure the media didn't make it better.

Am I anywhere near close with this?

Tom B. said...

Not entirely sure how this affects the situation, but the Federal money is loaned at 8.5% over prime, and prime is about 3%, I think, so you're looking at 11.5%, which is pretty high. A Stafford loan from the government, on the other hand, is flat at about 6.8%. So the money is given to AIG, yes, but it's not cheap money. In fact, it's one the expensive side, as borrowing money goes.

Dan Amiri said...

So, the government is investing tax payer dollars, banking on the success of AIG? I still don't really understand how this isn't one step closer to socialism, or even socialism itself.

Tom B. said...

Basically, since AIG is an insurance company, there existance insures that, should someone need to activate their insurance policy, money will be there for them. I believe that AIG is the biggest insurance company in the world. Were they to go up, the government believed, the loss to individual and institutional policy holders would have been so great as to merit a loan.

Whether or not this justifies the action, I think that was a very basic reasoning of the government.

Rachel said...
This comment has been removed by the author.
Rachel said...

I just got an email from the ND Career Center inviting me to an info session on interviewing for careers in investment banking.

As Morgan Stanley is now in danger of collapse (it's one of the last two US investment banks "left standing," I've been told by an article in Der Spiegel), could there possibly be WORSE timing? Does anyone think that NOW is the time to be even thinking about going into I-banking? There's absolutely no guarantee you'd even have a job com May.

Liz Larkin said...

The demise of AIG went beyond loss to the institution and shareholders. The fact that AIG is so globally invested, their fall would have rocked all of the global markets. It would have been devastating beyond the US economy.

The strange thing with the markets right now is that investors have money, but they have no idea where to put it. Many pulled out of higher-risk markets and suddenly there was a run on 3-month bonds that have (literally) 0 return and commodities like gold. It's a good and bad thing. Companies are taking risks and using the non-invested capital to purchase at extremely low cost. Many people are going to come out on top as a result (look at Bank America purchasing Merryl Lynch). And individual investors with some cash, a strong stomach, a good idea, and some time to kill can make a killing in this kind of market. Buy low, sell high... it's how you make money with investing.

Unfortunately, the idea of a company failing in free market capitalism doesn't work the same way when it comes to banks (which is why there have been government bailouts). If a bank fails and goes under, all of their debt has to be honored and to cover it, they call in all of their loans. They normally take out loans from other banks to cover the difference while they wait for people to pay. And that normally results in further mortgages and loans from the individual (which in turn are harder to get). The real issue comes from banks not loaning to each other (especially on the global scale). Capital for investment in business dries up, industry and growth slow down, economy falls further into a recession, people hide money in their mattress. If the government wasn't able to bail out these banks... things would be MUCH worse.

And the really crazy/crappy part: the people who set the country up for this disaster are going to make a whole pile of money as we try to fix it.

Joseph Lawler said...

Dan, nobody fully understands what's happening right now. However I think you're right to say that the bail-outs so far have smacked of, or could create a dangerous precedent for, socialism.

The first bail out was of Bear Stearns, a bank which the Fed didn't want to see fail for the reasons Liz enumerated above. They made the gamble that they could step in with a one time market intervention in order to forestall contagion.

But that strategy failed, and the Fed at first tried to hold the line (letting Lehman fail) but then the dominoes continued to fall.

One thing worth noting: AIG is not a bank, it's an insurance company. The precedent is there to bail out automakers and airlines... this is definitely being discussed in DC.

The moral that most conservatives want to take away is that if you allow some smaller market interventions (Clinton's housing act, loose monetary policy under Greenspan) you place yourself in the tricky position of much bigger market interventions down the line when things go bad. That is why you see Bernanke (to some degree a free-marketer) coming round to market interference on the trillion dollar scale.

Joseph Lawler said...

(Those are the most simplistic and reductionist attempts at explanation I could come up with)

Dan Amiri said...

Thanks Joe for those comments.

It seems true that no one really understands our fiat economy. It's times like these that make me long for the gold standard which I never knew.