Noam Scheiber brings up the AIG bailout, once again.
Which leaves only two possible explanations for the overly solicitous treatment of Goldman and the others. The first is that their own financial position was so precarious that accepting anything less than the billions they expected from A.I.G. would have destabilized them, too. Which is to say, it really was a backdoor bailout of the banks — many of which, like Goldman, claimed they didn’t need one. Alternatively, maybe Mr. Geithner simply felt that Goldman and the like had a more legitimate claim to billions of dollars in funds than the taxpayers who were footing the bill.
Five years ago, AIG had more liquid liabilities (“collateral calls”) than liquid assets. There were a number of ways this could have been resolved.
1. No government action, AIG’s creditors go to court, they win a quick judgment, and AIG has to sell off assets in order to pay the creditors.
2. No government action, AIG’s creditors go to court, things stay tangled up for a while, meanwhile AIG’s liquidity position improves, and creditors get paid out without AIG having to sell assets.
3. What I advocated, which was that the government tell creditors that they could get most of their money now or all their money later, but not all of their money now. I called this the “stern sheriff” solution.
4. A pure government bailout, which ensured that creditors could get all of their money now, courtesy of the taxpayers.
5. What we got, in which creditors received their money, but the government made sure that AIG shareholders suffered in the long run.
Note that (5) ended up close to (1), and (3) would have ended up close to (2). Had the government done nothing, then the courts would have effectively decided which path to head down. The advantage is that we would have gotten there by the rule of law, not by arbitrary exercise of power.
I think that the lesson we should draw is that in future cases of liquidity problems, officials should stand back and let nature take its course. I think that the number of prominent economists who agree with me on that approaches zero.
Question: Suppose that the top officials involved in dealing with the financial crisis had been forced to wear cameras and an audio recorders during all of the meetings during the crisis, with the stipulation that they could delay the release of the recordings for 90 days if they determined that immediate release would be harmful to financial stability. Do you think that this would have changed either their decisions or the public perception of those decisions?