[quote=davelj]
This is true. But… would you also have been in favor of canceling – or, more accurately, discounting – all of AIG’s insurance contracts where claims were due? My point is that if you don’t make Goldman, etc. whole – which is fine – then you can’t make Jane Q. Public whole on her husband’s (who just died) life insurance either. Everyone is made whole or everyone gets the same haircut. You gotta pick one.[/quote]
Dave,
I don’t think the choice is as black and white as you make it. When the FDIC takes over a bank, they do not make the investors whole, nor do they cover accounts bigger than the insurance limits. Likewise in the this case, the government could pick and chose who they make whole, and who they give haircuts to.
Now, politically that might be difficult for a group of people put in office through campaign contributions. Or you could argue that it was not the government’s place to pick and choose. (Although by choosing to make everyone whole they are choosing winners (banks that got bailed out) and losers (taxpayers who will foot the bill) Or you could argue that you don’t think giving some haircuts but not others is fair. (Sorry, but fairness in our economy went away a long time ago) But there is no reason the government couldn’t have given haircuts to some and not to others.
For instance, they could have set limits on how much they were going to make people whole for. (Just like the FDIC does) They could have said, we will honor insurance policies up to 5 million dollars, for instance. That would have protected Jane Q. Public whose husband just died, but not traders at GS.
Likewise, they could have decided to backstop certain products but not others. The government could have backstopped life insurance products, business coverage, homeowners, etc, but not backstopped derivatives and/or credit default swaps.
Or another option would have been to only backstop credit default swaps where the holder of the swap actually owned the underlying asset. ie, those that bought the swaps as insurance vs those that bought the swaps as gambles.
But the reality is that what the fed/government did is not apply any of these kinds of tests but instead made everyone whole at the taxpayer’s expense. Most of us see that as rather unfair, because we believe that companies like GS knew darn well what they were doing, knew darn well that AIG couldn’t cover all these bets, and knew darn well that their former associates were in place to cover their bets.
