The AIG bailout keeps getting bigger. We gave them $85 billion to start. Upped it to $150 billion in November. And are adding another $30 billion now. Justin Fox explains what's going on:
Essentially, AIG got into the business of insuring much of the world's financial system against the consequences of a global financial meltdown. It turned out to be incapable of delivering on that insurance—no private company could deliver on it, which is one reason why AIG's business of selling credit default swaps was a scam. And so government has stepped in as the ultimate insurer.Providing insurance where private institutions can't is one of the most important and essential roles of government. Washington's failure to understand its role as insurer that was one of the key things that made the Great Depression great. But there's insurance that follows proper underwriting standards and insurance that does not. Our government's current experiment in insurance provision most certainly does not.The fault there lies mostly in the past: Regulators had procedures in place to wind down banks in an orderly fashion and partially protect their depositors, plus a mechanism to collect insurance premiums to pay for all this. But they allowed a few non-bank institutions, and non-bank parts of banking companies, to grow so large and entwined that they couldn't fail without threatening a broader financial meltdown. And so now we're getting this muddled, hugely expensive bailout/takeover.
Another way of thinking about this is that AIG made a lot of bets arguing that there would never come a day when AIG couldn't cover its bets. And they made enough of those bets that if they can't pay up, the financial system becomes insolvent. And so the government -- which is to say, the taxpayer -- is paying in their stead. And that will happen every time a company likes AIG go bust. The government isn't willing to keep companies from becoming "too big to fail" and isn't willing to let companies that are too big to fail take down the economy. But once the company fails, the government can't recoup the money it spent resuscitating the mortally wounded giant. Which means the government is in the odd position of acting as an insurance company that doesn't charge premiums. Justin suggests changing that. "Charge financial system participants appropriate premiums for the insurance that government is providing them. That has to be a major part of any new financial regulatory structure." Sounds good to me. But how do we figure the rates?
