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Required Reading: Obama and AIG

1:14 PM, Sep 17, 2008 • By DEAN BARNETT
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From Political Punch, "Does Obama Support the AIG Bailout" by Jake Tapper

Barack Obama - still voting present after all these years.

In dilating endlessly on the AIG bailout, Barack Obama declined to say whether or not he supported it. He did, however, condemn the bailout as sadly reflective on John McCain. But again, he didn't deign to say whether or not he thought the bailout was a good thing. How depressing! If ever we needed someone with magnificent judgment, it's now.

"The fact that we have reached a point where the Federal Reserve felt it had to take this unprecedented step with the American Insurance Group is the final verdict on the failed economic philosophy of the last eight years," Obama said. "While we do not know all the details of this arrangement, the Fed must ensure that the plan protects the families that count on insurance. It should bolster our economy's ability to create good-paying jobs and help working Americans pay their bills and save their money. It must not bail out the shareholders or management of AIG.

"This crisis serves as a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary," Obama continued. "It's a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people; a philosophy that says we should give more and more to those with the most and hope that prosperity trickles down to the rest. Instead, the pain has trickled up - from the struggles of Main Street all the way up to the crises on Wall Street.

"Despite his eleventh hour conversion to the language of reform, Senator McCain has subscribed to this philosophy for twenty-six years in Washington and the events of this week have rendered it a colossal failure," Obama continued. "It is time for a new economic strategy, guided by the principle that America prospers when all Americans prosper, where common-sense rules of the road ensure that competition is fair, open, and honest. That is the strategy I will pursue as President, and I will bring the change we need to restore confidence in our financial markets and strength to our economy," said Barack Obama."

You'll notice that Obama doesn't really assert anywhere in here that he supports -- or opposes -- this bailout.

There's a staggering amount of Obamian economic ignorance on display here. Let's start with the "crony capitalism" charge. Who, pray tell, were AIG's cronies the past two years? I don't recall the Democratic congress rushing through a rash of oversight or regulatory measures. Of course, Obama is using the cliché of "crony capitalism" in the same manner he often uses his rhetoric - as an impressive way of saying nothing while seeming to be uttering some remarkable profundity.

Here's some more bad news for Obama - in spite of his pathetic class warrior Schadenfreude over Main Street's difficulties trickling up to Wall Street, that's not what happened here at all. Wall Street made its own mess, creating the subprime crisis by issuing million of mortgages that defied economic sense. What will happen is that as Wall Street struggles with this mess, the pain will in fact trickle down to Main Street. Getting a mortgage will be much more difficult than it was. Homeownership will drift out of reach for many Americans. Unless Wall Street can pull itself together fast. To put it simply, Senator Obama seems to have no understanding of the symbiotic relationship between Wall Street and Main Street. He seems to believe that Wall Street is a nattily dressed predator that preys on ordinary folks like his humble next door neighbors the Rezkos. That's what Saul Alinsky probably thought.

Obama also seems to have no grasp of why the AIG bailout was necessary. It wasn't because a lot of consumers would have lost their homeowners' policies or life insurance. If AIG had gone under, those profitable parts of AG's business portfolio would have been scarfed up by eager third parties before sundown. To give you (not to mention Senator Obama) the Reader's Digest version of things, the parts of AIG that write consumer policies are essentially a separate company from the part that's in trouble. The reasons for this are too boring to get into, but it has a lot to do with state regulatory guidelines that cover consumer insurance policies.

So what's the part that's in trouble? If you've sensed a pattern this week and already guessed it has something to with the subprime mortgage mess, give yourself a gold star. And maybe you should consider seeking the Democratic nomination for president in 2012. AIG also wrote de facto insurance policies for subprime mortgages and mortgage-backed securities for the banking community. What were they insuring? They were offering insurance against the possibility that the holders of those mortgages would default. Which as you know by now, they have. Selling such policies turned out be a very poor business decision.

Here's where things got potentially sticky - the American financial community has been planning on AIG making good on its insurance policies, sort of the way you expect Allstate to make good on your homeowner's policy when your house burns down. If AIG failed to meet these obligations, it would have been a devastating blow to the American financial community. "Devastating" in this context could have meant something like that bank run in "It's a Wonderful Life" on mega-steroids but without that annoying Uncle whose carelessness almost got George thrown in jail. The terms "illiquid," "insolvent," and "panic" would have received frequent use.

Contra Senator Obama, the government didn't bail out AIG because the guys at the Fed and Treasury wanted to do a solid for their pals at AIG. AIG got bailed out because its failure would have been catastrophic. Furthermore, the Fed's terms for the bailout were Draconian. AIG stockholders and executives aren't laughing all the way to the bank this morning. The company's CEO is gone, his departure a condition of the bailout.

I've written many times here that I believe Senator Obama is a fundamentally good man. This is an opportunity for him to show his qualities as a leader. It would be helpful if he would try to calm the markets rather than further agitate them. I wouldn't dare hope for him to express his confidence in the markets or the economy - since he obviously understands neither, such a declaration would ring hollow anyway. But since he doesn't understand the issues to such an extent that he's unwilling to take a position on whether or not the AIG bailout is a good thing, is it too much to ask for him to refrain from playing the arsonist?