Say good-bye to the old America. Welcome to our new socialist paradise!
America is changing while we debate the minutia of the presidential candidates’ syntax and style. No conspiracies, nothing hidden. A Tonkin Gulf resolution for our generation. The Executive branch reshapes our economy in plain sight. With just a nod from Congress (no tiresome bother with debate and voting). Not only is our economy being restructured, but powerful precedents are set which will be used again. And again.
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Anger is easy. Anger at the right person, at the right time, for the right reason, is difficult.
— Aristotle, in the Nicomachean Ethics, book IV, chapter 5 (lightly paraphrased)
Press Release from the Governors of the Federal Reserve System, 16 September 2008:
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
See the Wikipedia entry for AIG for background information.
This is a takeover of AIG. The new system for America is private risk-taking by politically powerful groups, with the taxpayers stepping in when necessary to take the losses. This is not the capitalism taught in grade-school. Or in Economics 101. Or Economics 901.
What was the emergency?
- The AIG holding company is insolvent, or nearly so (otherwise it could have found buyers, investors, or lenders).
- The insurance subsidiaries are probably fine, insulated by design from the holding company. (If not, then some State insurance commissioners should be fired then whipped)
- The credit default swaps in which AIG was a player are a zero-sum game. Some losers, some winners, net zero. Bankruptcy courts exist to sort out these claims.
- The creditors of the AIG holding company would get whatever; the losses would not have crippled or even damaged a $13 trillion/year GDP nation.
- The stockholders would have been wiped out, a salutary lesson in risk management for everyone.
The relevant analogy here is the Tonkin Gulf resolution. Pushed through in desperate hurry in 1964 as a response to a fake crisis, its consequences echo down history to this day.
Text of Section 13: Powers of Federal Reserve Banks
3. Discounts for Individuals, Partnerships, and Corporations
In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.
In less advanced countries these changes occur at gunpoint, after the Palace is stormed by crowds yelling “For the Revolution!” In America our elites consult their attorneys, who comb through the millions of words of legislation, administrative law, regulations, and outright fantasy to find the necessary enabling text.
Historical note: In 1980 President Carter signed legislation guaranteeing $1.5 billion in loan guarantees for Chrysler (aprox $3B today). We have come a long way since then.
How fortunate that there is an election in November
The consequences of the recent government interventions — of which this is the latest, not the last — are wide and deep. Far greater than most Americans imagine, far beyond anything even hinted at in the government’s terse announcement. America is changing — right now, right before our eyes, in a way totally unconstitutional.
No need to wait. Email your congresscritters now! Then get involved in donating time and money to the candidate of your choice — and push him or her to take a stand on these issues.
Or you can wait until 2009, and see what happens. You might not like the result, but if so your passivity strips you of any right to complain about it.
Some advice from one of the great heroes of history
Telemachus, now is the time to get angry.
— Odysseus, when the time came to deal with the Suitors. From the movie The Odyssey (1997)
Here I will post links to material at other sites about this sad day for America.
- “The transformation of the USA into the USSRA (United Socialist State Republic of America) continues at full speed with the nationalization of AIG“, Nouriel Roubini (Prof economics, NYU), 16 September 2008 (free registration required)
- “Can the Government Buy an Insurance Company for Cheap?“, David Zaring, posted at the Conglomerate, 17 September 2008 — Interesting analysis of the legal basis for the nationalization of AIG.
- Chet Richards at Defense and the National Interest gives the best one-line summary of the situation: “That rosy red light isn’t the dawn.”
- Matthew Yglesias starts listing the ways a progressive President can use the power of these nationalized corporations to reshape America (that didn’t take long to surface).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- Good news about America, a collection of articles!
- about America – how can we reform it?
- the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. Here are some of those posts.
- A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
- The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
- We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
- Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
- Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
- The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
- Prof Nouriel Roubini describes “The Decline of the American Empire” ,18 August 2008
- The World’s biggest mess, 22 August 2008 — A brilliant ex pat looks at America from across the ocean.
- “The changing balance of global financial power”, by Brad Setser, 22 August 2008
- “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008