It’s a Sad Day when Nationalization is the Silver Lining
Dave asks “What do you think, Nate should “Berneke and Paulson [have] looked on in stony indifference” here too?” To be entirely honest, the answer is I don’t know. Frankly, I am not sure that anyone else really knows either. My instincts are for letting it fail. I have no idea how I am supposed to evaluate the too-networked-to-fail argument.
Although it is hard to tell from the details that we have now, I am encouraged by the fact that the government didn’t simply shell out cash to save the company. I think that it is better if feds end up owning AIG, or at least holding the threat of ownership. This at least diminishes some of the moral hazard effect, and I think that if the tax-payers are going to foot the bill for a company’s debt, then going forward the company ought to be managed in the interests of the tax payers. Better nationalization than a world of promiscuous government guarantees of private actors.
On the other hand, I have a hard time thinking that nationalizing the home-mortgage and insurance industries is a path to prosperity. Particularly, when the tax payers are left owning the bits of the industry that no one else wanted. In favor of a bit of creative destruction, I would point out that it is worth remembering that even when we are talking about sub-prime mortgages, most of them ARE NOT in default. At the margins they are in default, and the margin is a lot bigger than everyone expected. On the other hand, there are still — even in the troubled bottom end of the home lending market — a lot of valuable assets out there, and I am not convinced that letting the losses lie where the contracts put them will bring the entire system to its knees. On the other hand, I am a lawyer, which means that almost by definition I don’t know what I am talking about when it comes to finance.
Still, its a sad day when the silver lining for me is nationalization.