by Nouriel Roubini
Last week we argued that, with the nationalization of Fannie and Freddie, comrades Bush, Paulson and Bernanke had started transforming the Usa into the Ussra (United Socialist State Republic of America). This transformation of the Usa into a country where there is socialism for the rich, the well connected and Wall Street (i.e. where profits are privatized and losses are socialized) continues today with the nationalization of Aig.
This latest action on Aig follows a variety of many other policy actions that imply a massive – and often flawed – government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe Us Treasuries swapped for junk toxic illiquid private securities); the use of the other Gses (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the Sec to manipulate the stock market (restrictions on short sales); the use of the Us Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency Mbs to manipulate and prop up this market); the creation of a whole host of new bailout facilities (Taf, Tslf, Pdcf) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the Tslf and Pdcf facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).
So, with the nationalization today of Aig, comrades Bush, Paulson and Bernanke welcome you again to the Ussra. At least in the case of Fannie and Freddie these two institutions were semi-public to begin with as they were Government Sponsored Enterprises (Gses).
Now we get instead the first pure case of a fully private company, actually the largest insurance company in the world, being nationalized. So the Us government is now the largerst insurance company in the world. So the transformation of the Usa into the Ussra goes a step further. Let me now flesh out in more detail my arguments on why this government Aig takeover is reckless, flawed and should have and could have been avoided. There were other ways to deal with the potential systemic effects of collapse of Aig …
Taken from Nouriel Roubini’s Global EconoMonitor,
Sep 17, 2008