Regarding the AIG bailout, this morning I was just explaining to a reporter why the takeover by the Federal Reserve is quite different from a takeover by the Treasury Department and very different from Congress enacting additional fiscal stimulus, in terms of the “cost to taxpayers.” I was saying that when the action is taken by the Fed, it’s a monetary policy intervention (suggesting only the risk of an “inflation tax” from the injection of Fed money into the economy), rather than a fiscal policy intervention through an increase in the budget deficit (implying necessary tax increases or spending cuts down the road). This distinction is what allowed the Federal Reserve, in their official statement last night, to reassure Americans that (emphasis added):
The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers…The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries…The loan is expected to be repaid from the proceeds of the sale of the firm’s assets.
…and led Treasury Secretary Paulson to concur:
“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy,” said Treasury Secretary Henry Paulson. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.“
…the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.
In other words, the Treasury will be issuing new debt to help finance the Fed’s takeover of AIG–an action that the AP story describes as “an unprecedented action in which Treasury will be selling debt securities in the form of Treasury bills for the nation’s central bank.”
Uh oh… Never mind what I said earlier. The lines between monetary intervention and fiscal stimulus (and exposure to American taxpayers, current or more likely future) have just been blurred.
And have you checked out what’s happening to the stock market today?
Whoa. This is the real deal. Are you paying attention to what the candidates have to say about it?