01 March 2009

More on the Economy

Still don't understand all the details of the economic collapse we are experiencing, though Jack has explained some of it (I'll get back to that soon). I asked my World Civ class, mostly freshmen, if the recession were effecting them. Interestingly, it was those who work as waiters and waitresses who had the most direct experience with the down side: tips were drying up.

In The New York Times Joe Nocera has an article about the bad, even stupid, business decisions that have crippled AIG and have led to billions of tax money being shoveled its way in order to avoid a melt down of the entire Western banking system. Nocera has done some of the best reporting on the financial collapse and is usually relatively calm and collected. Not this time. He is angry.

Here's a bit of it:

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.

I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.

And remember, the fellows who made these decisions were the captains of the universe who deserved to be hugely compensated for all the business they were bringing in. As anyone who as ever trained a puppy ought to know, if you reward bad behavior ....

oh well. I am sure they were worth it. Meanwhile my university has to return millions to the state and soon enough jobs may be at stake.

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At 01 March, 2009 11:24, Blogger jack perry said...

That's an amazingly lucid article that explains something I had never understood myself: why foreign countries have been affected by our mortgage implosion even worse than we have.

Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.


At 01 March, 2009 13:21, Anonymous Maire said...

"As anyone who as ever trained a puppy ought to know, if you reward bad behavior..." That's sh*t of it, isn't it? They don't deserve to be bailed out, but the suffering that would inflict on millions globally is unconsionable. To quote a Depression-era song (Woody Guthrie I think):
We worked to build this country, Mister/
While you enjoyed a life of ease/
You've stolen all that we built, Mister/
Now our children starve and freeze.

At 02 March, 2009 21:52, Blogger Clemens said...

Yep. I thought it was clear because I could understand it. I had an intuitive feel for why it went global so fast but really couldn't explain it. Nocera has been writing a lot on the issue and I've noticed he always seems to understand it, and can explain it, two things that don't always go together.

Otherwise, anybody could be a college professor.


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