Just a Glance at 1929: Readers Respond

Our readers react to the bailout of AIG and Jeff Koopersmith's latest commentary:

From: Forrest

My question is what product was produced by AIG that made it important to the world financial system.  Did it produce steel?  cars?  shoes? toys?  We are told AIG employed about 50,000 people worldwide.  Exactly what did all those people do?  Did they go about selling life insurance from door to door?

Each year it seems the United States produces fewer and fewer actual goods, and turns more and more to services, investing, banking, insurance, producing nothing that is actually useful in every day living except a game called profit and loss.

I don't think this is a healthy economic system.

From: Steve in Dallas

You have put your finger right on the button.  Indeed, the US has moved from an economy that manufactured and exported widgets globally to one that sells financial instruments globally.  That is why at the center of our trade agreements we have a clause allowing us to put branch banks in the country, offer credit cards, etc.  And, yes, sell life insurance, but the biggest play that AIG did, why it is in 130 countries worldwide and what got it in trouble, was that it not only sold life insurance but it sold insurance coverage linked back to the American mortgage industry.

How did that work?:  Mortgage companies generated mortgages by making loans to home-buyers.  Fannie Mae and other investment bankers bundled those mortgages together and sold securities based on those mortgages.  AIG, knowing that these mortgages might NOT be paid off, sold insurance to cover possible losses.  [Something no different than farmers buying crop insurance.] Investors, wanting to hedge their bets, bought those insurance policies.   These mortgage-based securities and  the insurance policies to protect security buyers if the home buyers defaulted on their loan were sold in 130 countries!

When home buyers defaulted on their mortgages (those ARM that people have bailed out of)  these mortgages went bad, the securities went bad and AIG was on the hook to cover the losses….all over the world.  So, you say, "Tough luck, sometimes you win and sometimes you loses."   But that doesn't work in this case: why AIG was rescued and Lehmann Brothers was allowed to fail.

What was a stake here was not just one company going broke, but the financial reputation of the whole US economy, something that is essential to the world economy, because we are the 400 lb gorilla in the room.  We are in debt to the tune of about $10 trillion to places where AIG sold its securities and insurance…places like China, Germany, Saudi Arabia, et.al.   Do we really want to send the message to our BANKERS that we are going to not make good on our end of the borrowing/lending game?  I don't think so!  Do we really want 25% of our workers in bread lines?  That's what our past holds in such times!!!

I know that on, first blush, all we think of is investors being able to gamble and win whether they won or lost, and our blood starts to boil,  but that in not what is happening.  Nothing in the bailout includes stockholder, those gambling investors, being reimbursed for the stocks they bought at $100 that are now worth $5.  The management is given the boot, what we have left is the company, essentially owned by the taxpayers and managed by the government, enabled to fulfill its obligations to its customers…people around the world, like Thai pension plans or German mutual funds…the life savings of real people, lots of LITTLE PEOPLE, who will lose their life's savings because the American government has allowed criminals to run our financial institutions.  We cannot morally allow that to happen!!!

This is chickens coming home to roost.  We have allowed the free-marketers to take over the US economic engine and their bogus theory is, once again, shown to be unworkable.  The financial industry cannot be trusted to self-regulate to the benefits of all the players in the economy.  Liberals have been saying this for decades but nobody wanted to listen.  The "beautiful people" told us that what happened in 1929 could never happen again because there were new and better humans in charge of the economy.   If Moses had been a free-marketer…on of those "beautiful people"… we would not have the Ten Commandments!

We should have learned that lesson in the 30s or latter, when the S&L industry crashed, but WE DIDN'T.  We have allowed the drunks to once again slip into the driver's seat..  It is painful as hell, but we cannot just walk away and impose on the rest of the world the consequences of our stupidity unless we are willing to bring down the world economy as happened as a consequence of 1929.   This is why commentators are saying this is the worse crisis since 1929!!!

And this is why we need to elect Obama.   He has not forgotten the lessons of 1929!

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