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Federal Government Plays Superman, Puffs Out Chest and Swears to Save the Country

September 17, 2008 · 16 comments

Imagine this scenario: I am a voracious spender, some would say reckless. I rack up tons of debt buying Jimmy Choo shoes (a good investment, I’d say), new furnishings for my house and iTunes. When I reach my limit, I panic. My friends panic. My family panics. But all is well when I get a phone call from the feds promising to give me the money to pay off my debts if they can occasionally borrow the shoes.

Sounds a little ridiculous right?

Not so much. The Federal Reserve yesterday agreed to give ailing insurance company American International Group, Inc. an $85 billion boost to help it climb out of trouble. In exchange, the government now owns a piece (though no one is saying how much) of the company.

Must be nice.

Yeah, I get that there are some differences between my hypo and AIG… For one, I don’t think the company owns any Jimmy Choos. And I realize that I don’t hire thousands of people that rely on me to remain economically stable (just a handful) nor do large companies look to me to provide an economic benefit (except maybe Apple because we spend far too much money with them). Tens of thousands of investors don’t stand to lose money when I make bad decisions – not even tens of investors, just my husband. But you get my point.

The escalation of the housing crisis – brought on, many argue by an unrealistic and irresponsible borrowing spree to purchase real estate in high growth areas – has resulted in a series of events that are shaking down the US economy in a big way. While in a pure capitalist society, this would result in a “wait and see” pattern, we don’t live in a pure capitalist society (really, don’t ever believe that we do for second). Our government regularly steps in to avert crisis or regulate financial markets. And lately, it’s being stepping in a lot.

How much is all of this economic protection costing taxpayers? A lot. Try $800 billion a lot. Exactly where is all of that cash pouring from the feds to the private sector going? Here you go:

  • As reported earlier, $200 billion has been pledged to save Freddie Mac and Fannie Mae.
  • As reported above, $85 billion will be doled out to AIG.
  • The Federal Housing Administration has guaranteed an additional $102 billion in mortgages for 2007.
  • The Federal Reserve’s “special” lending facilities have loaned an additional $400 billion to struggling banks.
  • A whopping $29 billion was used as a guarantee to insure JP Morgan Chase’s purchase of Bear Stearns.

A bit sobering, isn’t it? In an economy already operating at a deficit, the government continues to hand out tax dollars as if they are candy: Here, take some, we’ll make more.

Don’t get me wrong. I’m actually not opposed to the government stepping in to avert a bigger financial crisis. I do, however, wonder about the economics of these transactions. Did the CEOs and other board members of these struggling companies make any sacrifices? Did they take any pay cuts? Were any real efforts made to save these companies before asking for corporate welfare? I don’t know. What I do know is that in 2006, the CEO of AIG was paid $26 million in salary and bonus; in 2007, he received an additional $14 (source) – $40 million in two years that I am fairly certain he won’t offer to return to the company after apparently running it into the ground. The CEOs of Bear Stearns, Lehman and Countrywide also sit atop the leader boards in pay, earning hundreds of millions of dollars (source). In the meantime, many Americans are working to meet their own existing obligations with no assistance from the government. Maybe it’s not so much bail out that’s needed as for these companies as accountability…

{ 7 comments… read them below or add one }

1 Luca September 17, 2008 at 11:19 am

You missed the most important difference between you and AIG, and the real reason for the Fed’s intervention: you are not the world’s largest insurer.

Leaving countless businesses without insurance coverage would have devastating effects on all business sectors, not just Wall Street.

2 Kelly September 17, 2008 at 11:23 am

You’re absolutely right. In fact, this is the reason the feds give for bailing AIG but not Lehman.

3 JP Toto September 17, 2008 at 1:16 pm

For what it’s worth, the NYT is doing a Q&A about the AIG deal. You can post questions and they will try and answer:

http://news.blogs.nytimes.com/2008/09/17/ask-david-leonhardt-a-question/

4 Kristen King September 18, 2008 at 12:37 pm

I understand the need to protect the nation from catastrophic financial crises, but seriously, are they just bailing out everyone who’s too lazy or foolish to take responsibility for their actions now? Accountability would be nice, for sure, but I’m starting to think it’s just been wiped from the American vocabulary.

5 Stacia E. September 25, 2008 at 5:16 pm

It sounds like they are taking a “hard-money” loan from the government that tax payers will have to pay after some of these same tax-payers have lost their own homes and businesses.

Some people lost homes because of poor plamming etc., but some lost homes out of illness, death of spouse, or family tragedy(disability etc). These people are to repay this loan to “fix” the woes of this entity in the private business sector.

I agree with Kelly, we don’t want a repeat of 1929, but what up with accountability and what about the Americans that have had tough times(not just overspending).

There are widows, widowers, and simply hard-working families that are seemingly to have to pay for this. Its a little hard to swallow.

6 Rael White November 24, 2008 at 9:06 pm

I agree with Kristen where is the Accountablility, but now with the bail out of Citigroup or special backing, or what ever you want to call it, won’t all other banks have to ask for special backing to stay competitive or to do any business. sounds like they are giving Citigroup a monopoly or at least a advantage.

7 SKIP MCQUAID November 24, 2008 at 10:59 pm

Yes, AIG is a big insurer. Yes, a lot of folks would lose their jobs if AIG went under – as they would if GM, Ford, Chrysler, and on and on and on went under. And more mortgages would be defaulted on. As well as car loans, credit card debts, personal loans, etc. But the world would survive. The sun would come up the next morning. And a dollar might just be worth a dollar (or a yen a yen or a pound a pound or whatever). But that is the capatalistic dream and as tax girl said, don’t you believe for one single minute that we are a captalistic society….no more then we are a democracy (without a disclaimer such as “representative”. And I doubt that anyone ever will be….but it would be kinda nice to see what would happen. Social problems would be voluntarily solved and I think they would be. Infrastructure would be built voluntarily and I think it would be. But, maybe fortunately, I will never find out.

Skip McQuaid

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