Treasury’s Tight Wire Act

Americans hate huge financial institutions (“they caused all this”), and there is strong resonance in the Republican cry to let the big boys with battered bogus balance sheets fail. The American government is heavily invested in many of these institutions, because they believe that if one of these bigger monstrosities goes under, they will drag the entire economy down into a real “down-and-dirty” depression. Remember September 15, 2008, when Treasury let Lehman Bros. fail? Think of everything that happened since based on that fallen domino.

Insurance giant AIG, which got money even before the Lehman fall, is behind massive numbers of policies in the entire insurance industry – many insured policy holders think that because they signed with one insurance company, that company is the only structure they need to worry about. Finding out that their risk is now and has been covered by AIG would create a gut-wrenching, soul-sapping realization that a vast number of Americans would lose their life and casualty insurance, even if they have paid the premiums already. Huge corporations and small business alike – including a host of very unpopular financial institutions (foreign and domestic) – are insured by AIG which is very, very BIG.

So it is with the biggest financial institutions – like Citigroup, Bank of America, Wells Fargo, JP Morgan Chase, and the list goes on and on and on. The impact on everything from employment, real estate and the stock market – bad enough as we know it is – would be nothing short of catastrophic with these failures. It would be akin to pushing an evil fat man off the cliff with a chain securely fastened to your own legs.

Letting the chips fall where they may be great in the longest term for those who are under 45, unless you realize that higher education would no longer be affordable middle class goals, but for people north of the age dividing line, the future would be a bleak “reset” in which even solid jobs based on experience and education would vaporize permanently by the millions, what little is left of home values would plummet to new depths and personal pensions would drop through the floor. But we wouldn’t be “wasting” taxpayer money, the pundits say – most voters seem to agree – and the deficits would not increase further. I say we’d have deflation of unprecedented size since the Great Depression.

So the conundrum is how to effect the necessary restructuring of a financial sector we all hate without going off the same cliff we want to push the big banks off of? Can you imagine asking Congress for another trillion+ plus dollars any time soon? The March 9^th NY Times: “To avoid asking Congress for more money, [Treasury Secretary, Tim] Geithner has been trying to stretch government money by working with private investors, the Federal Reserve and government-controlled companies like Fannie Mae and Freddie Mac, the mortgage giants. But that has introduced other tough policy issues, many of which remain unresolved.

“ ‘Their huge problem is that the American public is not willing to accept large losses for large financial institutions,’ said Vincent Reinhart, a former Fed official and senior fellow at the American Enterprise Institute, a conservative research and lobbying organization. ‘Everything they are doing is about having the smallest possible footprint on the federal budget. They don’t want to engage the Congress and they don’t want to engage the American people in that discussion.’ ”

On the other hand, if we don’t bite the bullet, act decisively and deal with almost $2 trillion of toxic assets on the books of those big financial bad boys, we’ll be joining them in a short, magnificent moment as we drop off the cliff with them. We don’t like going to the dentist either and those with cancer most certainly do not enjoy chemotherapy!

I’m Peter Dekom, and I approve this message.