Thursday, January 28, 2010

Treasury Secretary On The Hot-Seat

Tim Geithner got roughed up a bit before a House oversight panel yesterday for his handling of the AIG bailout while President of the NY Federal Reserve Bank. But at a very basic level of understanding, Geithner is correct--the lawmakers who criticized him and others for not making AIG executives feel more pain fail to comprehend--or if they comprehend it, they simply ignore--the basic fact that AIG execs KNEW the government would fold and so they had no incentive to back down. This is the "too big to fail" argument, and it appears to have played itself out here. I wonder whether size matters, or complexity; my sense is that it is the interconnectedness of AIG's dealings that gave its rescue the impetus, rather than simply its size.

1 comment:

  1. The impatience so many Americans (and especially public office holders up for reelection) express saddens me. Do any of these people realize what would have resulted had the administration not pumped billions into the economy? Paulson said perhaps 25% unemployment! The financial crisis of the 1930s took a decade to overcome, and some historians claim it was the economic effects of WWII that actually ended it. We are only 14-18 months from the devastation of fall 2008. For those looking for immediate results, you best journey back in time 2000 years when miracles did happen. A core question: should companies be allowed to grow to become too big to fail? Should we have more AIGs? Or should we impose regulations that reduce risk (and costs to the taxpayers) and ensure more competition?

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