Jeannine Aversa, Ieva M. Augstums, and Stephen Bernard are also idiots. (And probably also state school grads.)
The Federal Reserve’s actions for AIG is not a government bailout.
The thing that worries me most about the current economic turbulence is the public’s knee-jerk reactions and complete ignorance of the public. Take this AP article on Sacbee.com. The “journalists” blatantly call this a government bailout and carelessly throws around the term “taxpayer money.” It’s not. Worse, look at the comments from those slackjawed tinfoil hatters. They’re totally buying it! Just because the Federal Reserve has the word “Federal” in it doesn’t mean it’s a government entity.
The Federal Reserve is a quasi-private überbank to the nation’s banks. It’s primary goal is to insure the long-term economic health of the country in general and the banking system in particular. It is designed to be independent from the political process. True, it is chartered by Congress, and the President (through Senate confirmation) picks the Board of Governors. However, Congress and the President have no direct, and little indirect, influence over Federal Reserve actions. The Federal Reserve is not funded with taxpayer money. Each Governor serves a fourteen year term to shield them from the agenda of any one particular Presidential Administration. The Governors are mostly academics, and they themselves have only minority influence on the twelve district banks. In summary, the Federal Reserve is run by people who are smarter than politicians and corporate execs; and it does pretty much what it damn well pleases.
Where is the $85 billion that’s being loaned to AIG coming from? The Federal Reserve makes about $20 billion a year from trading securities and lending to member banks. Its operating expenditures are about $2 billion annually. That’s a pretty nice profit. It usually makes a large donation of its profits to the U.S. Treasury, but it is in no way obligated to do so. This donation is not taken into account when Congress and the President work on the budget. So, while this $85 billion could have been donated to the taxpayers, it at least isn’t coming from the taxpayers.
Don’t get me wrong. The moral hazard on Wall Street is reprehensible. I keep looking out my office window every so often hoping to see investors jumping off buildings in Manhattan because I’m a misanthrope and a believer in karma. However, neither you, me, nor our elected officials have control when one private company, in the AIG case, the Federal Reserve, decides to help another. Further, I think spending $85 billion in private money to stabilize an important financial institution is better than turning it into public money and building bridges to nowhere in Alaska and leaky tunnels under Boston.
You are smart. And linked via my blog.
Comment by Nora — September 17, 2008 @ 8:28 am
Thanks for the explanation. I remember some of that stuff from the cursory look at the Fed we took in high school economics, but its good to remind myself how it works and that any actions taken by the Fed are likely the best alternative decided upon by people who know what they are doing.
Comment by stmontgomery — September 17, 2008 @ 9:37 am