Toxic Toast – The Mighty Mighty Bosstones
Kevin Drum asks a good question:
Last year “counterparty risk” was practically crowned the phrase of the year. You couldn’t swing a dead copy of the Wall Street Journal without coming across it. It’s the reason we’re bailing out all these guys in the first place: if a big bank goes bust and stiffs all its creditors, then there’s a chance that they’ll go bust too, and before long you have a cascading series of failures that’s brought down the entire world. We tried letting Lehman Brothers — a relatively small bank in the grand scheme of things — go under, and all hell broke loose. That’s why the Fed stepped in a few days later to save AIG.
So why is everyone suddenly acting as if we just discovered yesterday that bailout money is being used to pay off AIG’s counterparties? And that this is some kind of scandal? Help me out here. I’m genuinely confused about why, after six months, this has suddenly become the populist outrage du jour.
There are two parts to this. First, people don’t actually understand what’s going on. I mean, I’ve been doing my best to follow along but it’s complicated even for folks who are making the effort. If you don’t have any background in economics and haven’t studied this stuff, it’s not difficult to understand why this stuff sounds bad. This is compounded by the second half of the answer: there are no good solutions. Sure, it’s essential that banks not go under. And sure, that means the creditors have to get paid. But that doesn’t mean this stuff fixes the banks or the wider crisis.
We’re in uncharted territory here. People have gotten into the habit of the economy just working. There hasn’t been a really serious crisis in about 25 years – one which would require the whole country to face the fact that there is simply no easy way out. So even when folks claim to understand how bad this is, there’s still a part of them that thinks why don’t they just fix the problem? And when that doesn’t happen, you search around for someone to blame.
Even very smart people seem stuck in the mindset of “the economy hasn’t recovered so what we’re doing must be wrong” – an attitude which completely fails to account for the fact that things could have been even worse if not for these measures.
Paying off creditors is something that is necessary to prevent banks from collapsing, i.e. – it forestalls something even worse in the future. But if you’re in trouble NOW, all you can see is the government “throwing money down the drain” on something that won’t possibly rectify your current situation.
By the way, This American Life had a show a week or two ago that tries to resolve this problem, sorting out exactly what’s wrong with the banks in terms that really help to clarify what’s going on. Combined with their earlier shows on the housing crisis, it’s not a stretch to say that they’ve done some of the best mainstream financial reporting of the past year.