The banking crisis as a foreign policy issue

by on March 2, 2009 at 7:51 am in Current Affairs | Permalink

Here is some simple background:

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz
& Company, other institutions, including pension funds and American
and European banks “will face their own capital and liquidity crisis,
and we could have a domino effect.” A bailout of A.I.G. is really a
bailout of its trading partners – which essentially constitutes the
entire Western banking system.

No one wants to say it, but essentially the Fed has been bailing out European banks. 

The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars.  If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan?  (I do not, by the way, think that central banks ought to treat foreign creditors differently.)

One attempt to formulate a bailout plan for eastern Europe just failed.  This is round one in a series of longer negotiations.  As the European financial crisis worsens, and Germany asks itself whether it will bail out Ireland and Hungary and maybe others, it will become increasingly clear that major foreign policy crises are afoot. 

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.

I wish to thank Michael Mandel for a conversation related to these topics.

E. Barandiaran March 2, 2009 at 8:36 am

Tyler, the NYT article you refer to does not provide any background on what the Fed and the Treasury are trying now to do. The article is largely about the many mistakes AIG’d have made to become “too big to fail”. I have not been able to find any reference about the Fed&Treasury’s plan. Whatever that plan is, and let’s hope there is one, it is important to know what they are trying to achieve and how. Indeed AIG is a prime example of “too big to fail” and has to be broken down as soon as possible. According to the Wikipedia’s entry
(see http://en.wikipedia.org/wiki/American_International_Group )
that’s what the government is trying to do, but there are not details of any plan. I hope you’re able to get more information.

d4winds March 2, 2009 at 11:49 am

“No one wants to say it, but essentially the Fed has been bailing out European banks.”

The other major bailees are Goldman & Merrill. Oh, and everyone has been saying it since Sept.

bear1909 March 2, 2009 at 3:40 pm

who relies on wikipedia.org for information on this stuff…but that is beside the point.

there are two things coming down the pike that Treasury is hiding: 33 Bernie Madoff ponzi schemes coming from Wall Street. and number 2: Fed bailouts of commercial and investment banks overseas that have been buying US paper….you know, the guys that represent the Big Panda and the Rising Sun?

Big time troubles. They can sell the paper and take a hit converting currency out of the dollar to something “more stable”….(like salt or fish hooks perhaps?)….. but the printing presses for Geithner are coming to a halt. See that flake later.

And with any luck his ineligible Boss, the first “african american” Bag Man to get elected POTUS.

Bear1909 out.

derrida derider March 3, 2009 at 1:01 am

Err, its a bit rich for any American to complain that US funds are propping up some of the European finance sector just a week after the Chinese pointed out that they have propped up American consumption for years and will have to continue to do so for the foreseeable future …

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