Whoa
September 17th, 2008 . by economistmomRegarding 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.“
But then this morning came the breaking news of the Treasury Department announcing:
…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?
If the Treasury/Fed were unwilling to step in and bridge the yawning gaps between the private and social costs of risk-taking behavior by, e.g., the likes of the GSEs and AIG (i.e., consider the social cost of intervening today vs tomorrow), I’m not really sure it’s worthwhile to have a treasury or central bank at all.
The resource cost of the AIG takeover to taxpayers essentially is a pittance compared with the potential cost (to everyone) of letting credit markets run off a cliff.
At the moment, the one thing more volatile than economic/financial conditions appears to be McCain’s characterization of same.
If the gov’t can bail out big money, why not bail out all the little people who are facing foreclosure on their homes? Would that not stimulate the economy as well? Forgive foreclosures, get people into proper fixed rate mortages with payments they can afford and a new beginning. There would need to be some form of accountability, but this seems like a win/win for the individuals and for the economy and for banks. Otherwise, the market will be flooded with people with bad credit, as well as an influx of vacant and devalued properties, and there just aren’t enough rental properties in many communities to serve all the potential need. Plus, when your credit is bad, it’s pretty difficult to get a lease. So where does that leave people? Homeless! THIS is, or perhaps additionally is, the bail out that needs to occur in my opinion.