Friday, March 9, 2012

We Might Make Money on the AIG Bailout

AIG seemed like the worst of all the improvidence gamblers who nearly wrecked the world financial system. They wound up owing more than $150 billion that they could not pay, most of it to other financial firms that were in no great shape themselves, creating a worry that AIG's collapse would take many other firms down with it. So the Fed and the Treasury Department stepped in and offered $182 billion to cover AIG's outstanding debts, in return for 70% ownership of the company.

The Obama administration has taken a lot of grief from both the left and the right over its strategy to rebuild the financial sector, which basically amounted to guaranteeing the solvency of the key firms and then letting them earn their way out of debt. It was a scandal in that it left the same criminal or near-criminal operators in charge of these firms -- one of the ways we helped these firms return to profitability was by not suing them or prosecuting their leadership -- but on the other hand it prevented economic collapse and has ended up not costing us much at all. Most of the financial firms involved have already paid back their US loans, with interest, and if the price of AIG stock holds up we may even make a profit on the AIG turnaround.

It turns out that with a guarantee of financial support from the US Treasury, it is possible to make vast amounts of money in the financial markets. Firms that looked dead four years ago are back to making record profits.

How we should feel about this, I do not know. The amounts of money involved in the bailout were big enough to have a real impact in budgetary terms, and that we are getting almost all of that $700 billion back surely counts for something. Would it have been worth hundreds of billions for the satisfaction of seeing some Wall Street guys go to jail?

Would it have been worth a worse recession, perhaps even a terrible depression, to let these firms fail? That might have made us feel some degree of grim satisfaction, but I don't think it would have been worth putting a single extra person out of work, especially since the record of financial failure in discouraging speculation is bad. People always think that this time is different.

The deeper truth, I think, is that with so much money sloshing around the financial markets, finance is still the place to make big money. But why can't some of that money be invested to expand businesses and create jobs? So far as I can tell, the business world simply cannot find ways to use the money they could easily raise. I just refinanced my house for 15 years at a rate of 3.25%, which I think represents a mind-numbing failure of capitalism. Essentially, investors are giving me that money because they can't think of anything better to do with it.

I lean more and more toward a left-liberal stance: if rich investors can't find anything productive to do with their money, we should take it from them with high taxes and use it to build new infrastructure. We need hundreds of billions worth of new roads, sewage treatment plants, and subways, and I would love some high-speed trains. There is simply too much money in the financial markets, and I can't think of any other way it might be put to good use.

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