This blog devotes many of its column inches to discussing the collapse of our nation's moral authority and the ongoing collapse of its adherence to its own laws... we do occasionally take a break to discuss... its economic collapse. And so today...
Joe Nocera gives us this column in the Grey Lady walking us through the AIG fiasco, noting the various ways in which the denizens of world's largest insurance company American International Group, or AIG, gamed the system and gamed its own sterling AAA credit rating via regulatory loopholes and everything else it could think of in order to extort hefty fees of transmitting the world's (yes, the world's) risk associated with decline in American housing values to its own books... or, as Nocera more accurately tells us, to the books of the American taxpayer who would, inevitably, have to protect this "far too big to fail" behemoth.
And here we are: the simple principle of "credit default swaps" and the like is analogous to insurance, in the sense that the purchasing/contracting party expects its counter-party (AIG) to bear the loss under certain contingencies; a normal insurer would set aside appropriate reserves to cover the contingency. AIG... didn't. In fact, it actually increased systemic risk by taking its "premiums" and buying more mortgage-backed-securities, which, if and when real estate prices fell, would create an even bigger problem (which of course, it did).
Regulators were not unaware of all of this, but who's going to shut this down during fat times? And so... and so... Expect the American taxpayer to fork over at least another hundred billion dollars bringing the expected tab to clean up this one company to over a quarter trillion dollars.
Anyway, this is how "bubbles" become so widely destructive; everyone on Earth in some way or another is betting on the same asset price being strong and growing... in this case, American single family homes, especially new constructions in the sunbelt. Yank out that card... and the rest of the house of cards comes down... as explained by Nocera.
There's something about the homo sapien-- wired into our genes, perhaps-- that just encourages us to follow the most aggressie alpha males off of any cliff they want to take us, just so long as they are a little taller than the rest of us, and willing to fling their feces harder and grunt and screech louder. As it was for a disastrous "war on terror," so it has been for a financial system built on under-paying workers in wages but with the promise of compensation through increasing home prices (that they can borrow against!)... through, ultimately, the possible (some would say probable) cause of the ultimate demise of our "civilization": the response to two major imported-oil related shocks in the 1970's by lowering the price of gasoline and inventing the SUV, rather than recognizing the need to avoid creating permanent lifestyle infrastructure based on a commodity that must inevitably be depleted, everything else be damned.
Will any of the present events serve as any kind of a wake-up call to dramatic actions (which will include apparent "standard of living decreases," even if, by restoring meaning to many lives they may increase "happiness")? Ummm... I just can't see it. And there you have it: the thing is, while American International Group may be too big to fail, American civilization... isn't. We have had societal wake-up call after wake-up call (including the one we are in the middle of right now)... and yet, we just don't seem to wake up. We've been inconceivably lucky before... will that lucky streak continue? Quite literally... not how you bet.