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Brad DeLong and the fairy tale of Wall Street
This is a great read from Brad DeLong: A_Wall_Street_Fairy_Tale
I think it is also wrong in a solvency sense but spot on in a liquidity sense.
The Federal Government will lose big money on AIG - but the money lost - after all asset sales - is unlikely to exceed $300 billion. Huge money - but only about 6 months of pre-tax, pre-provision profits for the global financial market. And AIG insured the GLOBAL financial market.
An AIG failure would have made the crisis more difficult - but it fundamentally did not change what happened. The losses were HUGE - but the deepest part of the crisis was about liquidity. Nobody trusted any wholesale financed financial institution and they would have all failed without government support. With liquidity support (which has been forthcoming) the pre-tax, pre-provision profits are bailing out the banks.
If AIG had been let fail the losses would have been larger - but not critically so - and the government support would have been required for longer. But it would not have fundamentally changed the world.
John
PS. Huge losses are still to come - but so are vastly increasing pre-tax, pre-provision profits.
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You seem pretty ready to forgive, forget, and, I would guess, stop reforms that would ensure this sort of thing doesn't happen again.
Some people have no sense of humor about $300 billion going down the drain to a single company, right buddy?
June 17, 2009 9:15 PM | Reply | Permalink