I’ve been sort of watching the AIG bailout hearings on Capitol Hill. The gist I’ve gotten so far is that the House Committee on Oversight and Government Reform appears to have called the wrong witnesses. Both current Treasury Secretary Timothy Geithner and immediate past Treasury Secretary Henry Paulson said they weren’t responsible for negotiating the AIG credit default swap bailout. Geithner said he had no role while he was at the New York Fed because by that time he had been tapped by Obama to head the Treasury and recused himself from most N.Y. Fed matters and Paulson said it was the Fed’s decision.
It was smart of Geithner to hold on to his N.Y. Fed job, and just not do anything in it, in case the whole Treasury Secretary confirmation thing didn’t work out.
But I don’t mean to pick on Geithner. Overall he came across as earnest and forceful, doing his best to answer clumsy questions from pseudo-populist politicians about complicated matters. Much of his time seemed to be spent responding to grandstanding speeches from the committee members.
And when I say “clumsy questions,” I can’t even begin to count the number of times committee members asked a question, only to either continue on with a statement or re-ask the question in a belabored way before allowing the witnessâ€”Geithner or Paulsonâ€”to answer. That, more than anything, was the clearest indication that this hearing wasn’t about getting answers, it was about generating sound bites and video clips that will be used in the upcoming election.
You see, when you elect buffoons to political office, you get buffonery on the national stage. This was political theater masquerading as a policy inquisition.
The questions are:
1. Whose decision was it to settle AIG’s credit default swap claims at 100 cents on the dollar?
2. Whose decision was it to conceal information to that effect?
3. Why was that decision made?
Once those questions are answered, we can go from there. But on Wednesday, we had the wrong people asking the wrong people the wrong questions. When Rep. John Mica (R-Fla.) asked, perhaps rhetorically, “Why shouldn’t we ask for your resignation?” and then proceeded to bloviate about what he thought happened, it served as the highest example of the uselessness of the whole exercise.
The cold reality of the situation is that everything we’re dealing with today comes down to one crucial decision between saving the system as we knew it or “letting it burn.”
“In a financial crisis, you face this tragic choice. You can let it try to burn itself out and let the damage spread to all sorts of innocent victims, or you can act to prevent it, knowing that acting to prevent it will create the risk that in the future, investors will expect the government to step in â€¦ and save firms from the consequences of failure. That is the dilemma at the heart of strategy in financial crises.
“To stand back and let it burn is irresponsible. It’s what happened in the Great Depression. It almost happened to this country. The moral, just, pragmatic, fair choiceâ€”and this should be true if you’re Republican or Democratâ€”is to act to protect the innocent.”
The deeper we get into this mess, the more I wonder if we shouldn’t have just let it burn. And I say that counting myself among the so-called innocents that would likely have been harmed. Let’s say the worst happenedâ€”AIG failed, taking down with it all the various insurance companies. Then the bank counterparties to AIG’s CDS positions failed, bringing the bulk of global finance to a halt, and subsequently throwing a giant wrench into the financing that our economy has come to rely on in order to function.
I most certainly would have lost my job. There may well have been chaos, incalculable suffering with government debt defaults, corporate and personal bankruptcies, product and food shortages, demonstrations, riots. Fear of the unknown often leads to panicked reactions, especially when one is first stepping into the unknown. But I have a greater confidence in the ability of people to adapt to those circumstances than I do in the current crop of politicians and policymakers achieving any real and meaningful financial reform in the wake of all this.
Look where we are now: The jobs picture isn’t any brighter than it was then, nor the housing picture nor, in my opinion, the broader economic picture. In our desperate attempt to avoid a shock to the system, we’ve ensured that we must rely on that same flawed system to maintain even the status-quo.
Had the government let AIG, and probably by extension Goldman Sachs, go down, much of the collateral damage to the “innocents” would have played out by now, and we’d be well on our way to devising a new, more manageable financial systemâ€”one not so big complicated that only a handful of people can understand and manage it. And there would be no headlines about excessive bonuses or cover-ups, no time-wasting hearings in Washington, no Jim Cramer, no CNBC.
Perhaps we would not even concern ourselves so much with this ridiculous culture of fluff worship â€“ fluffy celebrities, fluffy finance, fluffy toys. There would be no tolerance for the kind of political grand-standing we’re seeing on both sides of the aisle these days.
We’d be too busy demanding action from our leaders, and figuring out how to build an economyâ€”and a countryâ€”that functions based on the real value of real things, not debt and the value the market assigns to pieces of paper.
What the hell? I can dream, can’t I? And nothing I’ve written here is any more far-fetched than anything I’ve heard out of Washington today, or expect to hear.