AIG Bailout Shortens Path to Socialism

by Sal on September 17, 2008

in Economy

The AIG bailout by the Federal Reserve involves the FED “loaning” AIG $85 billion in exchange for nearly 80% equity in the company.  Now, it is within the Fed’s charter to loan money;  however, the fact that the Government has now nationalized a major private insurance company (although the Fed denies that this is what was done) is tantamount to socialism.  There seems to be a gradual move for the government to take over these large companies and run them, when it was government “oversight” and regulation that caused this crisis to begin with.  There is simply no legitimate reason that AIG should have this and not Lehman Brothers.  The move is may have been necessary from a practical standpoint, as the failure of AIG would probably have caused several other major U.S. companies to fail as well, but it is a dangerous road we as a nation are embarking on with this new corporate socialism.

{ 2 comments… read them below or add one }

rightonoz September 19, 2008 at 11:13 am

Hi Sal,

Have to disagree slightly in that I don’t think it was the government oversight that caused the problem, rather the lack thereof. Our banks have to meet strict government mandated liquidity ratio’s and following the spectacular Insurance co crash fo a few year’s ago, insurance companies are also regulated in a similar manner. It doesn’t stop them all operating as competitive institutions, just makes certain they are no allowed to run riot and take down an entire economy and the US banks tried their damndest to do.

A US friend of mine who is somewhat to the right of me (he’s a big George and Jeb fan) blames the banks squarely for lending money to people they knew could not repay on the premise that with rising property values, when the inevitable foreclosures came they would do so an come out with money in pocket. As everyone was making the same lousy loans, the sheer number of foreclosures and the resultant slump in values turned the whole thing on it’s head.

Now you could say that the people taking out the loans should have known better, however, according to him, the banks (and maybe lawyers etc) were targeting the very people who did not have the skills to know they were getting in over their heads. Sometimes it is necessary to protect some people from themselves.

I can see some logic in what he is saying, however I’m over here and not in the US so don’t know first hand.

Similar happened over here in the 80′s with banks and the fancy accountants they seduced with commissions running round convincing farmers to take out foreign exchange hedges that failed spectacularly and caused the banks to be slapped back into line, especially when one bank was held liable and had to waive an entire mortgage based on evidence that they knew they were getting the customer in over his head. Hasn’t stopped our largest bank from being exposed to over $1.5B of potential losses in the US, but then their profits are in the 10′s of $B

In terms of AIG, it’s international reach is such that it’s failure would have put large sectors of the worldwide insurance industry under. In the last 30 years, governments in England and New Zealand have stepped in to save companies in this manner when the national impact was so great that there was no real alternative, returning the companies to private ownership one the incompetent boards had been swept out and the companies back on the right footing. Goes against my basic philosophy, but sometimes the national good in more important.

Of greater note are the billions injected by governments worldwide to stop the market crash over the last few days.


Sal September 20, 2008 at 12:26 am


I don’t think that we are far off. First, it was percicely because of government that the mortgage industry was issuing bad loans. The Clinton Administration in the 1990s created a program which required lenders to give a certain portion of their loans to “low-income” individuals for the purpose of trying to give the opportunity of home ownership to those who may not be able to afford it otherwise. This is what artificailly drove up home prices, and created billions in bad debt. So in this case, it was excessive government intervention and regulation which caused the problem to begin with. IT wasn’t oversight regulation (which has its place) but rather government deciding that it knew better than the private sector on who should be granted loans for social reasons, rather than letting the market run its normal course.

On AIG, I think I agree (though I’m still not 100% sure) that it was necessary — it is just a very unfortunate step that the taxpayers of this country have to bail out a massive failure of a critical company. THe danger, however, is that this leads to more reckless behavior on the part of business executives, with the idea that if they fail, government will bail them out. So while I recognize that the AIG bailout may have been the best we could do with a bad situation, I still don’t think that it is an ideal solution, although it may be the only one possible.


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