I'm becoming increasingly skeptical of the notion that any single Wall Street bank or insurance company can really bring down the whole system by failing.

If we were to simply stop supporting AIG, what's the worst that would happen?  Some hedge funds would go out of business because the counter-party risk they took by purchasing credit default swap contracts issued by AIG would cause some catastrophic losses.  But who cares?  The hedge fund managers took the risk and it didn't pay off.  That happens all the time.  Goldman Sachs and some other banks would lose money.  Some banks might lose a lot and some might fail.  But again, so what?

Only two things need to be preserved: customer access to insured deposits and the continued payment of consumder insurance obligations.  The CDS market was never regulated and there was never any promise that the public would step in to make good on the promises of a failed CDS issuer. 

The concept of "systemic risk" is really just the finance world's way of tricking the taxpayer into meeting obligations that were never ours. Yes, the credit markets did seize up after Lehman failed.  But it wasn't actually the end of the world. Barclays bought whatever of Lehman was worthwhile and the only collateral damage was felt by money market fund managers who never should have owned Lehman debt in the first place.

I was as angry as anyone about the AIG bonuses but I'm more angry that we taxpayers are have been called on to save supposedly sophisticated banks like Goldman Sachs for risks that its bankers knew they were taking and understood fully.

We've been told that we have to keep on capitalizing AIG until all of its obligations to its swap customers are met or unwound.  I don't believe it anymore.  AIG is insolvent and needs to go to bankruptcy court.  Its swap customers can get in line behind more senior creditors and they can try to recover whatever they can.  Yes, some banks and hedge funds will blow up but finance will survive.   It's not the financial system that's at stake here -- it's the futures of some politically well connected institutions. Enough.

I was really excited about Obama's choice of Geithner for Secretary of Treasury.  Geithner has worked in the Clinton Treasury and had specialized in crisis roles, dealing with both Russia and Asia in the late 90s.  His academic work is in line with Ben Bernanke's -- he's a student of both the Great Depression and Japan and that's what we've been dealing with of late.

I'm also loathe to want to deny a new president access to the cabinet of his choice.  Obama chose Geithner not only because of his professional and academic past but because, as chair of the New York Fed, he was pretty much the ranking Democrat involved in the Bush response to the banking and credit problems.

The problem is, Geithner now seems wedded to the Bush era response which was to throw money at Wall Street executives who went to the government with guns held to their own heads, promising to take the entire economy with them if they were allowed to fail.

AIG is not, and has never been, a "systemic" risk to the global economy.  There is no such thing.  AIG sold Credit Default Swaps to other banks and hedge funds.  Those are, in essence, insurance policies against corporate defaults.  If you're afraid GM will stop paying its debt (or if you think they'll stop and want to profit from it) you buy an insurance policy that pays you if they go under.  If GM doesn't default, you're out the premiums.  If they do, you get paid.  But what if GM defaults and your insurance provider defaults too?  Guess what? you're out of luck.  It's called counter-party risk and there's no reason that Goldman Sachs should be protected from it any more than I'm protected if I sign a cell phone contract and my cell phone provider goes out of business.

Even worse -- a lot of these banks are domiciled in Europe.  If it's absolutely necessary that they survive losses from the counter-party risks they took willingly, then let the European Union bail them out!

Geithner knew about the AIG "retention" bonuses from the start.  He's the one that helped engineer the AIG bailout and who made no effort to curb such excesses.  He also fought as hard as possible to keep compensation limits out of economic legislation. Geithner has, in short, supported bank executives and highly paid traders and financial engineers at every turn.

What I find even more galling is that critics of Geithner and the administration are being marginalized as "populists" and make no mistake the populists are on both the left and the right at the moment.  I'm really worried that this is going to turn into a range against the Obama machine -- a head needs to roll to prevent that and Geithner's will do just fine.  We can also replace him (and maybe Summers) with some more practical, liberal economic thinkers.  Robert Reich and Dean Baker will do just fine.

I can still be convinced that the initial bank bailouts, like Bear Stearn's arranged marriage with JP Morgan Chase were legitimate attempts at stabilizing the system but they should have stopped long ago.  I'm not surprised that the Bush administration decided to trsnafer enormous sums of wealth from taxpayers to Wall Street.  But the Obama Bail-Outs have to stop and I don't think they will unless we get rid of Geithner.