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.