NYT's primer on the AIG fiasco--perhaps the poster-child for the economic crisis--noted that "the government feels it has no choice: because of A.I.G.'s dubious business practices during the housing bubble it pretty much has the world's financial system by the throat:"
I don't doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world's biggest insurer to fail? Who would want to take that risk?
...because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn't have to put anything aside for losses. And it didn't.
We've already given AIG a total of $170 billion--an amount that dwarfs the $75 billion allocated to helping those millions of homeowners facing foreclosures. And more will be thrown down the AIG rat hole because President Barack Obama is blindly following the misguided advice of his top economic advisers, who insist that AIG is too big to fail.
Scheer also asks this all-too-relevant question:
If AIG were so important to the American economy, shouldn't government regulators have been looking more closely at its activities?
But oversight conflicts with free-market fundamentalism, under which nothing is more important than profits--however they are obtained. Punishment, as Matt Yglesias observes, is also unlikely:
Thus far, there's been an extraordinary aversion to actually punishing any of the people responsible. It's true that most of them are less rich than they once were, but they're still far richer than most people. And it shouldn't be that wrecking your company and wrecking the world economy is a good way to become richer than most people.
AIG is, as we all know by now, representative of a much larger systemic failure. Media outlets are full of anger misdirected at homeowners and consumers, but Robert Weissman's Wall Street Watch report "Sold Out: How Wall Street and Washington Betrayed America" (summarized here at AlterNet) examines how this travesty was enabled by the free-marketeers in Washington:
[O]ver the last decade, Wall Street showered Washington with over $1.7 billion in what are prettily described as "campaign contributions." This money went into the political coffers of everyone from the lowliest member of Congress to the President of the United States. The Money Industry spent another $3.4 billion on lobbyists whose job it was to press for deregulation -- Wall Street's license to steal from every American.
This report has one overriding message: financial deregulation led directly to the financial meltdown.
It also has two other, top-tier messages. First, the details matter. The report documents a dozen specific deregulatory steps (including failures to regulate and failures to enforce existing regulations) that enabled Wall Street to crash the financial system. Second, Wall Street didn't obtain these regulatory abeyances based on the force of its arguments. At every step, critics warned of the dangers of further deregulation. Their evidence-based claims could not offset the political and economic muscle of Wall Street. The financial sector showered campaign contributions on politicians from both parties, invested heavily in a legion of lobbyists, paid academics and think tanks to justify their preferred policy positions, and cultivated a pliant media -- especially a cheerleading business media complex.