The $85 billion federal bailout of AIG Wednesday, on the heels of other government takeovers of financial institutions, is an unprecedented change in economic policy, immensely risky and the result of the government allowing unregulated privatization of a large part of the financial industry.
That’s the view of Glenn Barnette, chairman of Gustavus Adolphus College’s economics department.
“It’s a major shift because you have the government involved in bailing out institutions that they have not been in the business of guaranteeing their assets or liabilities,” he said.
“And there’s never been an instance of the federal government bailing out an insurance company.”
AIG, Freddie Mac, Fannie Mae and Bear Stearns were bailed out in spite of the fact there is no established protocol for doing so, Barnette said.
Commercial banks are covered by the FDIC insurance program, in which the banks pay fees the FDIC pools and uses to help struggling banks and insure customers’ deposits. Those commercial banks also are closely regulated.
“I’m concerned about these bailouts. They go beyond the original charter of the Federal Reserve system. None of these institutions had any kind of guaranteed protection for any of their depositors or creditors like the FDIC does for banks.”
He said the lack of law to cover such bailouts makes them risky.
“With the government going in and doing bailouts without any legislation to go with it worries me. They are putting taxpayer money at risk without any legal basis for it.”
Joe Kunkel, chairman of the political science department at Minnesota State University, agrees the government seems to be in a rush.
“No one seems to have a real plan here. They appear to be trying to stop the hemorrhaging and not sure what to do next.”
Kunkel said the sheer cost of the bailouts, on top of other deficit spending, is another worry.
“Where is this money coming from? It’s not like they have a piggy bank. It’s the same as with the war and national security. They just pay whatever they have to, whether they have it or not. They seem to just be printing money.”
Barnette said the collapse of the institutions was born in deregulation.
“The reason a lot of these events came about is because government had privatized certain segments of the financial sector and reduced government regulations.
“So basically the investors and creditors are assuming the risk. Having the government come in and bail them out runs counter to the free market and to the principle of deregulation,” Barnette said.
While he opposes the bailouts in principle, Barnette said it may be the only option if Federal Reserve and Treasury officials believe the companies’ collapse would cause wide financial repercussions.
“If that is the case, then we need to see from Congress and policymakers a long-term restructuring plan for the industry that would bring more regulations,” Barnette said.
“And if AIG is too big to fail, then they are too big to be one company. Break them into 10.”
Kunkel said the worsening financial crisis is changing an already fluid presidential campaign with both McCain and Obama now concentrating on economic reform.
“What is this campaign about? First it was about Bush, then the Iraq war, then personalities and star power, then the Russian invasion of Georgia, then gas prices, and now we have this financial crisis of historic proportion.
“It’s strange, we see this financial crisis getting worse, but gas prices are coming down. It seems like gas prices were like three campaigns ago.”
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