Yesterday I became a part owner of AIG. From what I understand, it's a large insurance conglomerate, but I have to admit no one gave me many details before they included me among the new owners. For without consulting us, yesterday the Federal Reserve bought most of AIG while acting on behalf of me and everyone else in the United States. AIG was on the verge of collapsing and taking large segments of the world financial services market with it.
It seems to me that if we're going to be required to step in and buy failing businesses whose collapse would lead to financial chaos and depression, we have the right to expect far closer scrutiny of any such businesses in order to make sure they don't fail in the first place. This scrutiny comes in the form of regulations that companies resist because they cut profits. Over the past thirty years deregulation has come for some industries all at once, and for others in bits and pieces as lobbyists pushed for incremental changes that allowed for expansion and increased risk taking.
The cumulative result is the sub-prime mortgage catastrophe. Millions were suckered into homes they couldn't afford to finance. They not only bought unserviceable debt; they also bought into the American Dream of home ownership as a wealth-generating machine. Imagine if someone had were fooled into thinking that another of their basic needs, such as food, would be better met if they owned and operated a restaurant. We'd all laugh. But we don't laugh now because our culture has elevated home ownership to a place in our values beyond all reason.
It's cheaper to own a car than rent or lease one, so I buy it. And for many necessities there's no real rental market, so I have to buy (e.g., clothing outside of formal wear and costumes). As for housing, it may be cheaper to buy shelter than to rent it under a few limited circumstances (and if you have large reserves of assets), but more often it's not. A substantial rental market exists to fill this gap, but it's not as large or cheap as it might be because our culture and its marketing tell us we're incomplete if we don't own a house. The mania for home ownership led millions of renters to desire a deed to a piece of property, and the lack of regulation allowed financiers to offer these renters loans that could never be paid back. Like in a classic pyramid scheme, those who got out first walked away with the profits from the transactions, and the rest of us -- the taxpayers and investors like myself who watched passively -- now have to step in and buy up the losers who are deemed too big to fail.
The results lie before us. Stock markets have retreated and will require years to reach their previous highs. Credit will get even tighter, leading to problems throughout an economy that requires credit like an engine needs oil. Re-regulation will be on the agenda, as the new owners of giants like AIG, Fannie Mae, and Freddie Mac (i.e., us) ponder how to sell the things and avoid having ever to buy them again.
In a way, it's exciting to live through such times and experience first hand the wildly oscillating emotions. If it gets much worse, it may become like re-living the fall of 1929. What historian wouldn't value the chance to witness great things close up? But the price for such a view will be hideous, and I'd rather pass. I don't know if the world is going to let me though.
Thursday, September 18, 2008
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5 comments:
I agree, and I saw a soccer match on ESPN and one of the teams was wearing AIG proudly on their jerseys. That likely cost them a small fortune to be a sponsor. It is pathetic.
Now we the American taxpayers are the proud sponsors of Manchester United! Maybe this will entitle us to discounted admission tickets?
SCARY...sometimes I wish we did rent, but fortunate for us we did not get suckered into one of those variable rate mortgages, we are fixed. Interestingly enough my husband is in Wales and they are VERY interested in who he is voting for for President. Funny, I have NO IDEA who the new PM is over there but they know exactly who our candidates are!
This seems to mark a horrifying shift in the government's relationship to the economy. President Bush authorized 500 billion dollars to be spent today in the acquisition of "worthless" mortgages. If the government continues to bear the consequence of these high-risk ventures, how can they expect to maintain a responsible budget themselves? Even further, if the government miraculously does well with their newly acquired assets, how do you prevent financial competition with the private sector? Though I realize need of the government to prevent financial collapse, I also question the cost. I think your right that preventative reforms should have been in place to prevent this quagmire from ever taking shape!
The breakdown of the finance markets show that most of us are not capable of making educated political choices when it comes to the economy. Only a few days ago John McCain was acclaimed for demanding further deregulation, now he vilifies the brokers. In Germany, it is quite the opposite. Everyone is complaining about the ruthlessness of big business, but wouldn't understand that we cannot afford such an expensive safety net of social security.
Does anyone have a patent remedy?
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