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The culture that is French, a continuing series
“I fear the government has passed the point of no return,” said Ron Chernow, a leading American financial historian. “We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams.”
While they acknowledge the shock of the collapse of Lehman Brothers, the bailout package for A.I.G. on top of earlier government support for Bear Stearns, Fannie Mae, and Freddie Mac has stunned even European policy makers accustomed to government intervention in the economy.
“For opponents of free markets in Europe and elsewhere, this is a wonderful opportunity to invoke the American example,” said Mario Monti, the former antitrust chief at the European Commission. “They will say that even the standard-bearer of the market economy, the United States negates its fundamental principles in its behavior.”
In France, where the government has long supported the creation of national champions and worked actively to protect select companies from the threat of foreign takeover, politicians were quick to point out the paradox of what is essentially the nationalization of the largest American insurance company.
“Today the actions of American policy makers illustrate the need for economic patriotism,” said Bernard Carayon, a lawmaker of President Nicolas Sarkozy’s center-right governing party, UMP. “I congratulate them.”
Here is the story. Since I am not a policy maker, I cannot claim that I am being congratulated personally. Still, I believe I am receiving a kind of indirect congratulations.
The economic fallout from these events is dominating the headlines. The intellectual and ideological fallout we are just beginning to contemplate.
Posted by Tyler Cowen on September 18, 2008 at 07:03 AM in Current Affairs | Permalink
Comments
But this is quite different than the 'national champions' way of thinking. The recent rescues have been motivated by a desire to try to prevent the collapses from spreading, not to preserve iconic American companies. If not for the fear of ripple effects, the U.S. government would have been willing to let AIG disappear. As, in fact, it will, but more slowly -- as the company is 'parted out' and sold off. The rescue does not mean AIG will remain as anything like a 'national champion'.
Posted by: Slocum at Sep 18, 2008 7:50:25 AM
Oh dear. Regulation is coming, and lots of it. Will anything save us now?
Posted by: Nick at Sep 18, 2008 7:57:23 AM
Republicans certainly talk the talk, but when it comes down to it, they are only slightly more free market than leftist Democrats. If Kerry had won the previous election, I imagine the same bailouts would have happened.
Posted by: Horatio at Sep 18, 2008 8:03:21 AM
Oh dear. Regulation is coming, and lots of it. Will anything save us now?
No, not if more regulation is coming. If you believe, as I do, that both Obama and McCain (like most politicians) are clueless as regards the U.S. economy and financial markets, you're really going to enjoy the coming Congressional theatrics. Ai yi yi.
Posted by: at Sep 18, 2008 8:08:20 AM
What am I doing in this basket? Why do I smell sulfur?
Posted by: Christopher Rasch at Sep 18, 2008 8:09:47 AM
As a former resident of France, let me remind you that objectively French dirigisme brought 30 Glorious Years of 4.5% growth. The quality of life was really superb for the average person. The spirit of volontarisme is actually something we Americans could use now. It got the French onto nuclear energy, a decision that is looking smarter all the time.
Posted by: BelleAmericaine at Sep 18, 2008 8:16:51 AM
It is easy to get 4.5% growth when you're way to the inside of your production possibility frontier, like France. There is very little (if anything) to copy from the French rules on the economy.
Posted by: Justin Ross at Sep 18, 2008 8:34:47 AM
It seems to me that the fundamental difference is not intervention or potential for new regulations but rather the tolerance for 'creative destruction' -- for the shrinking and disappearance of large corporations. The recent interventions seem to me to be about trying to make the shrinkage, disappearance, and dismemberment orderly and somewhat contained, but not preventing the process from occurring. If standalone investment banks are no longer a viable business model, well then that's the way it's going to be -- the government is not going to try to preserve the status quo. If this means that Wall St is going to lose some of its heft in the nation's financial markets, well again, c'est la vie.
Posted by: Slocum at Sep 18, 2008 8:47:58 AM
As slocum said this is very different than national champion type thinking. The real test is how the Fed unwinds its position in AIG. If it is not totally out in less than two years then I will worry.
Two me this decsion needs to be separated into two parts.
First, do you bail out AIG or not? The Fed seemed to believe that there was substantial systematic risk in letting them fail. They did not want to bail them out and if they thought there was less risk (Lehman) they would have let them fail. I don't have the info to know if the risk justified a bail out or not, but Bernanke and Paulson are privy to some of that information so I have to trust them on that. Since they let Lehman fail and waited to the last minute on AIG I feel that they do not want to bail out companies if it can at all be avoided.
Second, once you have decided to insure the risk of a company shouldn't the government be the one to benefit if there is a recovery? So if you are going to bail them out you need to take a stake in almost all the equity. If they didn't they would be giving AIG's shareholders a free option. Thus if you are going to bail out it is probably best to "nationalize"
The real test is if AIG is quickly unwound and the governments equity stake sold off and if the company is run by politicians rather than in a value maximizing way. Since it is the Fed who has the ownership stake I am inclined to think it will be unwound quickly and not be used for political purposes.
I hate the fact that this had to happen, but it is not similar to national champions or control of the comanding hieghts of the economy. The motivation was entirely different and I hope that the transition of AIG into dissolusion or private hands will be handled quickly and without political influence. But the fact of the matter is when you decide to cover a company's potential losses you deserve to get all of the potential gains in the company.
Posted by: eccdogg at Sep 18, 2008 8:57:16 AM
This comes out the same day Constellation Energy is reported to be in negotiations for a sale to Electricite de France SA. So, we're obviously not that protectionist yet. And I really doubt Europe would be happy if we became as "economically patriotic" as they are.
Posted by: Ted Craig at Sep 18, 2008 8:59:58 AM
Damning by French praise
There is a difference between nationalizing good businesses and bad businesses.
If we provide competitors with left cover (or right cover, if you prefer fascism), good for us, sort of, I guess.
I wonder if gold went up yesterday due to increased parachute production.
Posted by: Andrew at Sep 18, 2008 9:00:11 AM
http://lawprofessors.typepad.com/legal_profession/2008/09/the-aig-deal-an.html
Very good article on AIG bailout. This is how I understood the deal. "Nationalization" may be a little strong to describe what the Fed is doing.
Posted by: eccdogg at Sep 18, 2008 9:07:48 AM
I wondered how our misadventure would affect other markets. My concern is that we may see even more pronounced rejection of free markets in developing, weaker markets. I still wonder how much we were pressured to bailout AIG by China and other foreign investors. Thoma had an article recently noting that we have lost our financial sovereignty. I believe Poulson was sincere in not wanting to bailout AIG, but had his arm twisted.
Steve
Posted by: steve at Sep 18, 2008 9:35:06 AM
"We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."
Can anyone point out to me when exactly in history there was such a thing as a free market?
Posted by: Mark at Sep 18, 2008 9:57:32 AM
I'm waiting for the French to start auctioning off their national champions to China.
The ideological consequences are true, though, since the details will be lost on the press and politicians. Overseeing the orderly unwinding of a bad company will be viewed as equivalent to propping up a bad company for 30 years.
Posted by: DK at Sep 18, 2008 10:01:19 AM
A few tongues wagging in Europe aside, do we really think this will have a big impact on economic decisions elsewhere? I think the market-driven growth examples of China, India, and even Brazil these days still make a much stronger narrative for developing countries to follow. On top of that, consider the implosion of the Russian market and the difficulties Venezuela is experiencing. There's still a very strong case to be made for more or less market-driven development. Sure, a few countries will opt for state-run economics, and perhaps people will blame the supposed US example. But I think that will largely be an excuse - some unfortunate countries were going to go that route regardless, now they just have better talking points.
Posted by: Greg at Sep 18, 2008 10:33:11 AM
at the objective level it is quite clear that the fed 'bail out' is not the same as nationalization or the french national champions model or validation of the idealogy behind the french/c-european model. But the bigger issues is the fact that in the court of public opinion, this a god-send to the leftists. they probably know the fundamental difference between what the US/Fed is doing and what they claim to be america's anti-free market policies, but that is not going to stop them from using this episode to score political points. the conservatives and other rightists might have solid arguments againt the left's claims, but they are essentially about clearing technical points and non-trivial theoretical issues, which are crucial, but are not going to win popular debates. The conservatives/libertarians should know that a big idealogical/polemical assault from the left is on the way -- time to start preparing. Also keep in mind, this is important for not just the west but also for the developing countries who take their policy cues from the west.
Posted by: gbz at Sep 18, 2008 10:43:21 AM
The association between free markets and Republicans (and their foreign policy, and their corruption, and their social conservativeness) is absolutely toxic. Republicans are the party of lip-service, not the party of free markets. The Democrats aren't the party of free-markets, either, but at least they don't pretend to be.
Story after story keeps linking the current economic crisis to the "lax" regulatory philosophy of the Bush Administration. Sure, that's an oxymoronic statement (as Tyler illustrated here), but as long as Republicans are not punished for talking the talk without walking the walk, such conflations will continue.
Posted by: Christopher Monnier at Sep 18, 2008 10:54:15 AM
As the voting record, platform, advertising, and public statements of the nominee of the Democratic Party, and the likely next POTUS, demonstrate a commitment to economic nationalism, it is no surprise that the French feel congratulations are in order.
Posted by: RW Rogers at Sep 18, 2008 10:55:08 AM
This is nonsense. People seeing what they want to see. We're dismantling national champions - the plan (let's see if it survives the next administration) is to gut Freddie & Fannie and break them up as soon as the pall in mortgages passes. What could be more of a standard bearer and champion of American industry than AIG, up until last week? We're wiping out the equity holders (79.9% ownership is just to keep their employees from becoming public employees by law) and are setting up to auction off the pieces of the company. Foreign bidders will almost certainly be welcome. Witness Barclay's buying parts of Lehman.
And let's not get too crazy about French economic glory. We have a $45.8k PPP per capita against their $33.2k.
Posted by: Anthony at Sep 18, 2008 11:21:38 AM
There is very little (if anything) to copy from the French rules on the economy.
Too late for that, Justin Ross. Because we're all living dirigisme now. The upside is that the face you see in the mirror is Isabelle Huppert.
Posted by: BelleAmericaine at Sep 18, 2008 12:20:26 PM
Dear Sirs,
Is the protection of national champions by the government so different of having the government assuming the task of avoiding the creation of (a lot of) national losers?
I mean, philosophically the same mindset that is critic of national champions sponsored by the government should be critic of actions by the government that spreads moral hazard.
Under both propositions (protect national champions and infant industries, avoid systemic risk) lurks the specter of market failures, if you think of it.
Posted by: Hermenauta at Sep 18, 2008 12:29:43 PM
There's a world of difference. Taking over Freddie & Fannie was about guaranteeing the agency paper and not causing our foreign creditors to abandon us and possibly trigger a catastrophic dollar rout. Lehman, Bear, AIG were about mitigating counterparty risk, trying to lower the risk of collapse in lending during a contraction. US gov't isn't trying to protect specific jobs and firms within its borders. Forging national champions is about preventing the failure of firms and the local components of industries, not markets.
Posted by: Anthony at Sep 18, 2008 1:27:38 PM
Lehman, Bear, AIG were about mitigating counterparty risk, trying to lower the risk of collapse in lending during a contraction.
Merrill Lynch, WaMu and more on the way, all run by frauds and incompetents. And so these "counterparties" knew they were protected from risk by the American taxpayer?
The government should bend over these "too big to fail" private institutions and ream them with regulations.
Posted by: Peter K. at Sep 18, 2008 2:11:08 PM
Not defending those firms but I agree with you in principle. We need some counter-cyclical asset requirements (like they have in Spain) to keep management from extracting big rewards out of bubbles and passing the cost onto us. Fed may want to pre-empt bubbles as well with more regular tightening, even if Greenspan was theoretically correct that they can only be rarely detected with absolute certainty. Not sure how more, rather than better (discussed in previous posts) regulation will help when spending on it has increased every year under Bush.
Posted by: Anthony at Sep 18, 2008 2:59:22 PM
