Wonderful Rant On AIG and The Other Bailouts

Here is a very insightful rant from the Interfluidity Blog. In this piece Steve Waldman does a good job of identifying future economic problems which Americans may (very likely) face.  Click Here To Skip The Intro and  Read The Full Article on AIG and The Other Bailouts

Article Introduction (Via Interfluidity)

…Today I am white-hot mad over AIG, and I need to vent. Yves Smith has done a beautiful job of describing the ridiculous awfulness of today’s “restructuring”. More importantly, she uses words with the appropriate intensity and valence: “banana republic”, “looting”, “Mussolini-Style Corporatism”. For so many years, Milton Friedman passionately argued that there is a relationship between economics and political life. In particular, he believed capitalism to be uniquely compatible with a free society. What kind of society is compatible with an economy managed by a cadre of large, politically connected firms whose operations and those of the state are intimately connected, and which cannot be permitted to fail since that would bring “chaos”?

Article Excerpts (Via Interfluidity)

“The Fed cannot behave in ways that would compromise the value of the trash on its balance sheet. Once AIG was too big to fail, it cannot fail, no matter how big the black hole grows. Once GM enters the penumbra, very soon now, it also must not fail. Of course, we will not count this terrible loss of policy freedom as a cost.”

“But wait. The Fed doesn’t hold very many Treasury securities any more (see Kady Liang). It would have to sell off some of the other stuff. Maybe we get lucky, and by the time we need to fight inflation, all those “money good” CDOs turn marketable again. Maybe not, though, and then the Fed will have little choice but to tolerate a great inflation or watch its own balance sheet implode.”

“I think either a great inflation or a catastrophic deflation are pretty much unavoidable. It’s the distributional effects that have me white hot with rage. We are sowing the seeds of inflation by making those most deserving of catastrophe whole, while doing nothing for those whose wages may soon achieve purchasing power parity with the emerging world.”

“However, inflation is a wealth transfer, and we should be conscious of from whom and to whom.”

Click Here To Read The Full Article on AIG and Other Bailouts