Tuesday, March 10, 2009

A Bottomless Pit

American Insurance Group has now been showered with a total of $180 billion of public money, supposedly because it’s too big to fail. If a natural course were taken; that is, if AIG, which is basically insolvent, were allowed to go bankrupt we are told there will be terrible consequences for the economy. It’s hard to know for sure because, though it’s public money that has kept it alive, the public is not privy to where the money is going. And while the public’s investment is far greater than the value of the company, the public seemingly has no control over its actions. Or understanding of how deeply it’s sunk in the mire.

Moreover, the mere fact that it has come back, begging bowl in hand, four times in just six months seems a clear indicator that it really has no idea how badly off it is, or what it will take to right it.

There’s no doubt it will be dire, but mostly for the bankers, investors and all-around scammers who, through their unbridled greed and concurrent belief in the tooth fairy, or its equivalent, that property values never go down, have helped to bring the world economy to its knees.

AIG’s ordinary insurance business is not in trouble. The problem is the insurance, aka, credit default swaps, it sold on (now toxic) mortgage backed securities and other ‘exotic’ investment vehicles. What do I care or you care if the high-rollers who bought insurance on their wild speculative purchases don’t have their asses covered by AIG?

The biggest problem is that many of those investments were highly leveraged; that is, as little as $3 was put up to purchase $100 worth of securities. That is how the value of exotic securities out there got to be such an astronomical number. As mentioned previously, while the total US mortgage market is (or was until recently) around $10 trillion, the derivative market based on mortgages was $45 trillion. Eighty percent of that money was imaginary, created from thin air. They gambled on derivatives and then gambled that AIG would cover them in case of loss. Fine, sometimes gamblers loose: so be it.

It’s a bottomless pit. Instead of trying to fill it with public dollars it should be filled with the bodies of the ‘financial wizards’ who created the mess. AIG’s traditional insurance function should be separated out and the remaining stakeholders let loose to fight over the remains. There’s no way the US government can make good on all those bad bets, and no reason to reward those who made them by continuing to gift them with such ungodly amounts of money.

In any other context 180 billion dollars would seem immense: for instance, it would buy an extensive new light rail system for 30 to 40 mid-sized American cities.

And what is the motivation behind not letting them fail? Otherwise, we are led to believe, we won’t be able to regenerate the old system of prosperity based on borrowing and spending.

On the contrary, we should be giving the reckless and profligate past a decent burial, not trying to bring it back from the dead. Especially since every additional billion thrown into the abyss will reduce the resources we have to create a new economy, one based on sustainability, community and a healthy environment.

The consumerism of the past was never a good idea, no matter how much seeming prosperity it engendered. It was based on trying to get people to buy things they didn’t need; to shop as an end in itself. I came across an amazing statistic recently; that there is six times as much retail space per capita in America than in Europe. Vast retail areas will become redundant, and should.

Just in the past few weeks I’ve come across predictions, supposedly from those in the know, that recovery could be right around the corner… by the end of the year, 2010 at the latest. Only one more bailout and we’re over the hump. This one will work for sure. If we only show that we are acting, tackling the problem with gusto, confidence will return and we’ll be back on track.

If only. This is a wreck of a fast train in a tsunami of historic proportions in the core of a category five storm. The economy is not going to look tidy for a long time. No amount of wishful thinking is going to change that imperative.

The only way to ease the increasing hardship of the next few years is to share available work. Slow down, work less, spend less, enjoy life more. Whatever resources the government possesses should be used to keep people from destitution and prop up education and the social part of life. If a lot of people lose their fortunes, well, tough luck. Let the chips fall where they may. We’ll pick up the pieces and start over. Meanwhile we’ll be consuming less and giving the planet a welcome breather.

Ever additional attempt to protect the fat cats will only make the transition that much more difficult by burdening the people of the future with massive and unnecessary debt.

1 comment:

Juice said...


It's interesting you wrote this peice before this artical was released. At first i thought this was what you were going to spring on us.. But alas it is much worse.

The fall of many retail outlets is great... Now we will have somewhere to coupe all the inpending freaks who tasnish the good american way. Can you say "Merry Pranksters" live to fry again?