It may sound strange to some, but our domestic economic policies have everything to do with how we are perceived globally at this point, because to a great degree, they literally do "own" us.
So we can argue Krugman vs. Geithner adnauseum, but the bottomline is that our issues are quite serious!
The banking crisis as a foreign policy issue If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
No one wants to say it, but essentially the Fed has been bailing out European banks.
The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars. If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan? (I do not, by the way, think that central banks ought to treat foreign creditors differently.)
One attempt to formulate a bailout plan for eastern Europe just failed. This is round one in a series of longer negotiations. As the European financial crisis worsens, and Germany asks itself whether it will bail out Ireland and Hungary and maybe others, it will become increasingly clear that major foreign policy crises are afoot.
The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up. http://www.marginalrevolution.com/marginalrevolution/2009/03/the-banking-crisis-as-a-foreign-policy-issue.html The fact that the counterparties are overseas means that out of
the three options: bailout, bankruptcy, or nationalization — none are satisfactory. A bailout means that the government makes good on the value of the securities, including the derivatives which are tied to the collapse of the U.S. economy. That means the worse things get, the more money flows out of the country. Not politically acceptable.
Letting insolvent banks go bankrupt is the option being pushed by some politicians, including John McCain. In some ways it would be the cleanest solution, allowing the bankruptcy courts and the FDIC to do the tough job of allocating the losses from the toxic securities.
The problem, though, is that they tried the bankruptcy option with Lehman, and they nearly broke the global financial system in the process. The Lehman bankruptcy backfired, creating new panic around the world. This reflects how much money many foreign investors had put into the U.S., and how many worried about losing it when Lehman went under.
Nationalization creates a political problem. Once the government buys a company, it is financially and morally resonsible for its debts. It puts the U.S. government in the position of either using taxpayer money to bailout foreign investors, or telling foreign investors, no, the richest country in the world is not going to pay its debts.
What’s the solution? Conclusion: Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.
If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.
http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html?chan=top+news_top+news+index+-+temp_news+++analysis To learn more about AIG, what it is and how it works in simpler terms, Please go here:
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8281017&mesg_id=8281017
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