Slate explains:
http://www.slate.com/id/2200299/?GT1=38001
Anybody want to take a stab at deconstructing this transaction? Is it “bad” or “good” and why?
I thought that the Fed gets these securities by writing checks on itself, creating money out of thin air… There was an article somewhere that explained this but I can’t find it atm, clarification would indeed be good as to where this money really came from.
As for whether this is good or bad: regardless of where the money came from, this is bad. The whole point of a recession is that misallocated resources are liquidated and put to better use. By saving companies like AIG from bankruptcy, the Fed is interfering with the healing of the economy, what we call a recession. Yet liquidations are inevitable because resources are misallocated on the market. By not allowing them to occur today, the Fed is only stacking up more and more problems for the future, and when that pile crashes down, pray you don’t have money in the bank…
Also, AIG was practicing a fairly extreme version of fractional reserve banking, only with insurance. Apparently, they only had assets to back 50 billion out of the trillion dollars they claimed to insure.
Hope that partially helps…
Selling securities is a method to reduce inflation by reducing the amount of money in circulation (by keeping the money that bought the security stored in the CB). By selling securities and using that money to bailout AIG, the Fed is essentially not doing anything in regards to inflation/deflation (since the money is simply being moved from one source to another).
Spending $85 Billion dollars to “save” anything will always be bad. This is money that can otherwise be allocated, or bought by the public. The FED had about $800 billion in government securities that could have hypothetically be bought by any member of the general public. While $85 is not a large portion of $800, I still dont understand why we should be helping AIG in the first place?
Down to its basest elements, what is AIG? A business that is in business to make money.
Why did AIG need a bailout? Because they were not as effective as they could and should have been, through making bad business decisions or through poor economic form, they began to fail. The tenet of an economy is that businesses that do the right things make money, and those that do bad things dont make money and fail. This is just another example of failure being perpetuated through supposed help.
What happens if we let AIG fail? In all reality, nothing of importance will happen if we let them fail. Letting them fail leaves whatever pieces they drop to be picked up by some similar company that can and will do a better job. Whatever people are part of the fallout will realize that they allowed themselves to be a part of a scam that made poor business decisions, and will be more careful, knowledgable and informed next time they make large business decisions.
Instead of doing the job, the FED has once again overstepped their bounds, and I foresee this being detrimental to the American public.
If I understand correctly, the $800 billion you’re referring to was at the start of the year. Right now, their total amounts to less than $200 billion. Can you believe they’ve spent over half a trillion just this year?
The state has expensive tastes. No need to scrounge around for pennies.
-Jon