How the AIG bailout scuttles chances for a second stimulus

By Felix Salmon
November 18, 2009
Paul Krugman is right to be worried about the unintended consequences of the AIG bailout:

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Paul Krugman is right to be worried about the unintended consequences of the AIG bailout:

We’ve greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies have squandered public trust in all government action: try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts.

I do fear that the Obama administration has done a bad job of separating the financial-sector bailouts, on the one hand, from the stimulus bill, on the other. And if the general public starts conflating the two, there’s no chance of any more stimulus, no matter how needed it might be.

Part of the problem is that Tim Geithner was so vocal about the urgent necessity for both of them, dating back to his tenure at the Fed during the Bush administration. If he comes out and says that a second stimulus is needed, the obvious rejoinder will be “well you said that about the AIG bailout too”. And there’s no good answer to that.


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“Starts” conflating the two? I think the two were conflated long ago.

Posted by AndrewBW | Report as abusive

While technically different, the stimulus and the bailouts are not “that” different. Basically, the stimulus and the bailouts involve spending money the government does not have on things that may not be needed and that may in fact make things worse.

Ultimately, the public is getting tired/nervous about enormous government expenditures on the war, a new health plan, the first stimulus, and the bailouts. With Obama tied to all four, it is a tough sell to convince us to spend more money another round of stimulus.

Posted by Brad Ford | Report as abusive

Yes, a substantial fraction of the public conflates the stimulus with the financial sector bailout. Disappointing, because the stimulus was a necessary evil, and the financial sector bailout was just plain evil and a give-away to rich people.

Posted by Dirk | Report as abusive

I’m going to keep saying this: don’t call it the “AIG bailout”. It was the “Goldman Sachs bailout”, which coincided with the hostile takeover of AIG. The two delinquents got drunk and made a giant mess, and instead of making them clean up their own mess and negotiate who pays for what, the Fed stepped in and bought control of AIG by paying off Goldman. If AIG was bailed out, their shareholders would still have something.

@Brad Ford, he stimulus and takeover were very different. The stimulus was designed to offset the massive reduction in corporate spending, which had put the economy into a skid. The takeover was designed to prevent the house of debt from collapsing on itself. Both actions were necessary, but implemented poorly. Of course, politicians don’t care about whether or not their actions actually work, only that they can brag that they did something.

The bailouts should never have happened in the first place. These arrogant self righteous profiteers were known for touting their “skills” as the reason the markets were “doing well” during previous decades. “Survival of the fittest” was their mantra. But all it was, was just an excuse to keep new competitive businesses from rising up and displacing the bloated carcasses of business that have forgotten what made them big in the first place.

“Survival of the fittest” was replaced with shameless groveling, begging, and eventually paying (contributing to campaign funds), for government welfare.

That money was supposed to have gone to the citizens to keep them afloat while “survival of the fittest” worked itself out.

How does it feel to have to worry about keeping your home when your income is gone?

How does it feel to wonder if you will be able to feed your children because the bank wants you to pay your bills (even though your tax money is keeping them alive)?

How does it feel to work a job you hate, and having to do things that might go against your moral character because you need the money?

How does it feel to be forced to live in ignorance because you can’t afford an education?

This is the system we live in right now. It is brutal. It is dehumanizing. And those who value it do not value themselves or others.

And most times it’s not because they’re bad people. Most times it’s just that they can’t afford do what’s right because it might land them in the poor house as well.

Citizens really need to be discussing these things and taking them to heart. Money was never intended to be a primary consideration in any decision. But in this country we live and die by it. How obscene, and how sad.

We are not animals and we should not be content to live as such.

Or, they could (gasp) claw back the AIG bailout! This could be done quite easily – by not rolling loans at the Treasury.

And then apply the money to stimulus.

I can’t wait for someone to point out that the money from Treasury isn’t the same money as the AIG bailout.. because money is fungible.

It COULD be done.

I won’t wait up for it, though.

Posted by Unsympathetic | Report as abusive

If you’ve not already prepared yourself emotionally and financially for a “lost decade”, you’re behind the curve.

Ask yourself “which stage of the Kübler-Ross grief cycle am I on?”

(for reference: shock, denial, anger, bargaining, depression, testing, acceptance)

Posted by bryan | Report as abusive

Mr. Krugman appears to hold the belief one of these government economic activites was better than the other and should; therefore, not generate a lack of trust. In my opinion, there’s no confusion, or confoundedness. Wrong is wrong and there can be nothing wronger about this. A third wrong won’t make this right.

Posted by Bill | Report as abusive