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The banking crisis as a foreign policy issue
Here is some simple background:
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
No one wants to say it, but essentially the Fed has been bailing out European banks.
The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars. If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan? (I do not, by the way, think that central banks ought to treat foreign creditors differently.)
One attempt to formulate a bailout plan for eastern Europe just failed. This is round one in a series of longer negotiations. As the European financial crisis worsens, and Germany asks itself whether it will bail out Ireland and Hungary and maybe others, it will become increasingly clear that major foreign policy crises are afoot.
The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.
I wish to thank Michael Mandel for a conversation related to these topics.
Posted by Tyler Cowen on March 2, 2009 at 07:51 AM in Current Affairs | Permalink
Comments
Tyler, the NYT article you refer to does not provide any background on what the Fed and the Treasury are trying now to do. The article is largely about the many mistakes AIG'd have made to become "too big to fail". I have not been able to find any reference about the Fed&Treasury's plan. Whatever that plan is, and let's hope there is one, it is important to know what they are trying to achieve and how. Indeed AIG is a prime example of "too big to fail" and has to be broken down as soon as possible. According to the Wikipedia's entry
(see http://en.wikipedia.org/wiki/American_International_Group )
that's what the government is trying to do, but there are not details of any plan. I hope you're able to get more information.
Posted by: E. Barandiaran at Mar 2, 2009 8:36:18 AM
Earlier today the US Treasury has posted this press release
http://www.ustreas.gov/press/releases/tg44.htm
about the Fed&Treasury's intervention in AIG. There are some details but not enough to really know how they are going to restructure AIG. The two relevant paragraphs are
"AIG operates in over 130 countries with over 400 regulators and the company and its regulated and unregulated subsidiaries are subject to very different resolution frameworks across their broad and diverse operations without an overarching resolution mechanism. Within the options available, the restructuring plan offers a multi-part approach which brings forward the ultimate resolution of the company, has received support from key stakeholders and the rating agencies, and provides the best possible protection for taxpayers in connection with this commitment of resources."
"Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible. This restructuring is aimed at accelerating this process."
So the ultimate resolution of the company does not imply its liquidation but its restructuring into a new viable entity. What this means is not explained. In the meantime, we should expect a lot of taxpayers' money to be used to support this restructuring.
Posted by: E. Barandiaran at Mar 2, 2009 9:10:28 AM
"No one wants to say it, but essentially the Fed has been bailing out European banks."
The other major bailees are Goldman & Merrill. Oh, and everyone has been saying it since Sept.
Posted by: d4winds at Mar 2, 2009 11:49:13 AM
who relies on wikipedia.org for information on this stuff...but that is beside the point.
there are two things coming down the pike that Treasury is hiding: 33 Bernie Madoff ponzi schemes coming from Wall Street. and number 2: Fed bailouts of commercial and investment banks overseas that have been buying US paper....you know, the guys that represent the Big Panda and the Rising Sun?
Big time troubles. They can sell the paper and take a hit converting currency out of the dollar to something "more stable"....(like salt or fish hooks perhaps?)..... but the printing presses for Geithner are coming to a halt. See that flake later.
And with any luck his ineligible Boss, the first "african american" Bag Man to get elected POTUS.
Bear1909 out.
Posted by: bear1909 at Mar 2, 2009 3:37:51 PM
who relies on wikipedia.org for information on this stuff...but that is beside the point.
there are two things coming down the pike that Treasury is hiding: 33 Bernie Madoff ponzi schemes coming from Wall Street. and number 2: Fed bailouts of commercial and investment banks overseas that have been buying US paper....you know, the guys that represent the Big Panda and the Rising Sun?
Big time troubles. They can sell the paper and take a hit converting currency out of the dollar to something "more stable"....(like salt or fish hooks perhaps?)..... but the printing presses for Geithner are coming to a halt. See that flake later.
And with any luck his ineligible Boss, the first "african american" Bag Man to get elected POTUS.
Bear1909 out.
Posted by: bear1909 at Mar 2, 2009 3:40:08 PM
This is correct, Tyler, AIG is horribly entwined with so much of the world financial community.
That was why its near failure was what brought the Minsky moment during Sept. 17-18, culminating
in Gentle Ben reportedly screaming into a phone at Paulson.
Another aspect of this that is lurking in the background but that nobody seems willing to do
anything about is the mark-to-marketing rule. Many have commented on how destabilizing it is in
this current crisis, but this becomes very clear with this AIB situation. Any discussion of its
situation makes it clear that M-to-M is playing a central role, with the decline of asset values
in various markets triggering further sales of assets by AIG because of the rule. This has had a
lot to do with why the bailouts of AIG have not taken, although the depth of the mess of its CDO
deals has not really been fully plumbed and is at the real heart and bottom of this.
Posted by: Barkley Rosser at Mar 2, 2009 10:00:51 PM
Err, its a bit rich for any American to complain that US funds are propping up some of the European finance sector just a week after the Chinese pointed out that they have propped up American consumption for years and will have to continue to do so for the foreseeable future ...
Posted by: derrida derider at Mar 3, 2009 1:01:01 AM
Why mention European banks and not U.S. banks Goldman and JP Morgan? Why not mention that this funding is going to trading rather than hedging or investment?
This omission changes the post into a piece of propaganda rather than a informative article. It is not just incorrect to omit Goldy and JP, it is misleading.
Without AIG being propped up, all of our major investment banks trading operations would be unquestionably bankrupt. We are shoveling U.S. taxpayer money into hedge funds and hedge fund like structures. How is this less offensive than supporting the trading of European banks? Both cases are massive wealth transfers from U.S. taxpayers to rich people.
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