Chris Hardie's Blog

It's even worse though because we know what happens when the government props up insolvent banks--Japan did it in the 90s and they lost a full decade of GDP growth. But everyone says that this is the US and somehow its different here. If we prop up our zombie banks its going to somehow magically work but of course, our banks are too important to fail.

Passing this on from a friend in Philly. There are alternatives, but the US doesn't always seem interested in learning from others.

NORWAY AND THE CURRENT FINANCIAL CRISIS
– news brief from George Lakey, Lang Visiting Professor 9/18/08

OSLO, Sept 16 (Reuters) - Norway's economy has so far been sheltered from any direct impact of the U.S financial crisis and the government will not change the line of its 2009 draft budget because of the woes, Norway's finance minister said on Tuesday.

How Norway handled its ‘90s bank crisis:

[From 1991-93 the Nordic countries faced a financial crisis that brought the region’s economy to its knees.] Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.
"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

[The cause of the crisis in Scandinavia had parallels with the US crisis, involving speculation on property.] The Nordic banks were nursed back to health and refloated or merged.

[Norway’s nationalization of major banks that did wrong was intended to send a clear message to remaining managements to clean up their act.] In the U.S., the bail-out of Bear Stearns amounts to a huge subsidy for JP Morgan, according to Christopher Wood, chief strategist at brokers CLSA, and leads to “appalling moral hazard.”

Amen, Chris! I don't understand economics or complex business stuff at all, but I know how I was trained: you don't have it, you don't spend it. I never read Small is Beautiful, but I'm thinking it's time to dust off the copy that's been sitting on our shelves for 30 years. And maybe pass it around!

Oh I just love how you acknowledge that you know nearly nothing about the subject, but don't think it's any of your fault.

I think you'd make fun of that trait in others, especially since it's most commonly found in Republicans.

AIG insures the whole world's banks. It is intimately involved with nearly every financial system in the US.

Have you seen "It's a Wonderful Life"? Then you know what a bank run looks like. Imagine that happening worldwide. That's a financial catastrophe. This only happens in finance, and maybe epidemiology--when was the last time you saw a run on a web developer?

This is a short-term problem, with very long-term implications. What we've tried hasn't failed yet(except in the cases of Lehman Bros and Bear Stearns), and so far I've only become more convinced that we need to do whatever is necessary to get banking working again.

Besides that, these bailouts are taking the form of loans or equity, not cash grants. Of course it still has value, and technically they were "given" the amounts you mention, but you're totally misrepresenting the situation by leaving out the fact that we got something back for that money.

By "fail", they mean to become unable to be a dependable counterparty to their ongoing financial commitments. IE to go bankrupt. That's what they're too important to do. Obviously they should have never been allowed to become so important or to have so much exposure to these risks, but it's too late to fix that at this point.

If you have no idea what you're talking about, it's best to go learn about it. It's not the government's job to explain every little action to every single taxpayer. In fact, reading the Bloomberg article you linked I'm having trouble figuring out what's so confusing!

Have you forgotten Lehman Bros? This is serious stuff.

By "you don't think it's your fault", I mean that you blamed your ignorance on others. Of course the financial mess isn't any one person's fault, except perhaps Bernie Madoff. Your ignorance, though, is in your own hands.

It's not as though AIG is continuing the same business practices as in the past. The continuing losses are from past decisions. Most if not all banks had similar exposure to these risks.

The fact is that in the near-term, nearly any business can in fact be saved from bankruptcy by a large cash infusion. Your car crash analogy does not apply.

Really, if you want something to be mad about, the bailout of the Big Three automakers is much more similar to what you're talking about. That's a long-term open-ended commitment to AIG.

The way I see it, it's like you're yelling at a fireman, "Hey! It's no use! They'll just burn it down again!" Of course that's not the point. The point is to save the perfectly valuable houses NEXT to the burning house, which would otherwise go up in flames. AIG is a house with a huge bomb in it, in a city full of wooden houses with thatched roofs.

The continued existence of AIG in the short term cannot be replaced for any sum of money. If it goes down, we'll all be losing much much more than a few hundred billion. If today it's AIG, tomorrow it could be the US Treasury. How much do you suppose that will cost to fix?

Finally, do you really think Obama would like to bail out the financial sector just for fun? He actually has an ambitious social agenda that costs serious money, and every dollar he spends on AIG cuts into the money available for the stuff he'd really like to do. But he and his advisers understand that this is a very dangerous situation, and the full commitment of the United States is required to restore normal market functioning.

If your theory is that they're insane or dumb, what other pieces of evidence do you have for that? If AIG is the only piece of evidence, then it's a circular argument. If, on the other hand, you must admit that generally Obama seems to know what he's doing and to be a fairly sane dude, then you must rule out the insanity defense.