AIG made stupid decisions in the credit-default swap business that ultimately put them in a cash crunch. AIG is a private corporation that's not directly regulated by the federal government. So the Treasury has no responsibility to protect them from the consequences of their stupid decisions.
Although it's a loan, in exchange the Fed is getting warrants (options to buy stock) so we are in effect buying AIG -- something nobody in the private sector wants to do.
I addition to the principle of the thing and the moral-hazard consequences of this precedent the biggest risk is this: if the Treasury continues to expand it's debt commitment like this, at some point the world will lose faith in Treasury debt. At that point, the Treasury would face the same situation as AIG -- and who's gonna bail out the US Treasury?
That would be real catastrophe.
I'm no expert. Hell, as far as wall street is concerned, I'm sub-human. (I have no debt load) As a guy well versed in kitchen table economics and as a small business owner that is watching his customers begin running around in circles banging into each other and wailing like lost puppies.. instead of buying my widgets.. I'm scared.
This makes no sense... if my business was doing the tidy bowl twirl, nobody would step up with anybody's money to save my arse. So Unca Sam steps in, bails them with a loan. "well good, that'll restore confidence, save the economy' the experts say.
So why are the markets still tanking? Why are the customers still wailing?
Why am I sitting here typing this instead of heading for the retreat in the hills?
