The culture that is French, a continuing series

“I fear the government has passed the point of no return,” said Ron Chernow,
a leading American financial historian. “We have the irony of a
free-market administration doing things that the most liberal
Democratic administration would never have been doing in its wildest

While they acknowledge the shock of the collapse of Lehman Brothers, the bailout package for A.I.G. on top of earlier government support for Bear Stearns, Fannie Mae, and Freddie Mac has stunned even European policy makers accustomed to government intervention in the economy.

“For opponents of free markets in Europe and elsewhere, this is a wonderful opportunity to invoke the American example,” said Mario Monti, the former antitrust chief at the European Commission.
“They will say that even the standard-bearer of the market economy, the
United States negates its fundamental principles in its behavior.”

In France, where the government has long supported the creation of
national champions and worked actively to protect select companies from
the threat of foreign takeover, politicians were quick to point out the
paradox of what is essentially the nationalization of the largest
American insurance company.

“Today the actions of American
policy makers illustrate the need for economic patriotism,” said
Bernard Carayon, a lawmaker of President Nicolas Sarkozy‘s center-right governing party, UMP. “I congratulate them.”

Here is the story.  Since I am not a policy maker, I cannot claim that I am being congratulated personally.  Still, I believe I am receiving a kind of indirect congratulations.

The economic fallout from these events is dominating the headlines.  The intellectual and ideological fallout we are just beginning to contemplate.


But this is quite different than the 'national champions' way of thinking. The recent rescues have been motivated by a desire to try to prevent the collapses from spreading, not to preserve iconic American companies. If not for the fear of ripple effects, the U.S. government would have been willing to let AIG disappear. As, in fact, it will, but more slowly -- as the company is 'parted out' and sold off. The rescue does not mean AIG will remain as anything like a 'national champion'.

Republicans certainly talk the talk, but when it comes down to it, they are only slightly more free market than leftist Democrats. If Kerry had won the previous election, I imagine the same bailouts would have happened.

What am I doing in this basket? Why do I smell sulfur?

It is easy to get 4.5% growth when you're way to the inside of your production possibility frontier, like France. There is very little (if anything) to copy from the French rules on the economy.

As slocum said this is very different than national champion type thinking. The real test is how the Fed unwinds its position in AIG. If it is not totally out in less than two years then I will worry.

Two me this decsion needs to be separated into two parts.

First, do you bail out AIG or not? The Fed seemed to believe that there was substantial systematic risk in letting them fail. They did not want to bail them out and if they thought there was less risk (Lehman) they would have let them fail. I don't have the info to know if the risk justified a bail out or not, but Bernanke and Paulson are privy to some of that information so I have to trust them on that. Since they let Lehman fail and waited to the last minute on AIG I feel that they do not want to bail out companies if it can at all be avoided.

Second, once you have decided to insure the risk of a company shouldn't the government be the one to benefit if there is a recovery? So if you are going to bail them out you need to take a stake in almost all the equity. If they didn't they would be giving AIG's shareholders a free option. Thus if you are going to bail out it is probably best to "nationalize"

The real test is if AIG is quickly unwound and the governments equity stake sold off and if the company is run by politicians rather than in a value maximizing way. Since it is the Fed who has the ownership stake I am inclined to think it will be unwound quickly and not be used for political purposes.

I hate the fact that this had to happen, but it is not similar to national champions or control of the comanding hieghts of the economy. The motivation was entirely different and I hope that the transition of AIG into dissolusion or private hands will be handled quickly and without political influence. But the fact of the matter is when you decide to cover a company's potential losses you deserve to get all of the potential gains in the company.

Damning by French praise

There is a difference between nationalizing good businesses and bad businesses.

If we provide competitors with left cover (or right cover, if you prefer fascism), good for us, sort of, I guess.

I wonder if gold went up yesterday due to increased parachute production.

I wondered how our misadventure would affect other markets. My concern is that we may see even more pronounced rejection of free markets in developing, weaker markets. I still wonder how much we were pressured to bailout AIG by China and other foreign investors. Thoma had an article recently noting that we have lost our financial sovereignty. I believe Poulson was sincere in not wanting to bailout AIG, but had his arm twisted.


I'm waiting for the French to start auctioning off their national champions to China.

The ideological consequences are true, though, since the details will be lost on the press and politicians. Overseeing the orderly unwinding of a bad company will be viewed as equivalent to propping up a bad company for 30 years.

at the objective level it is quite clear that the fed 'bail out' is not the same as nationalization or the french national champions model or validation of the idealogy behind the french/c-european model. But the bigger issues is the fact that in the court of public opinion, this a god-send to the leftists. they probably know the fundamental difference between what the US/Fed is doing and what they claim to be america's anti-free market policies, but that is not going to stop them from using this episode to score political points. the conservatives and other rightists might have solid arguments againt the left's claims, but they are essentially about clearing technical points and non-trivial theoretical issues, which are crucial, but are not going to win popular debates. The conservatives/libertarians should know that a big idealogical/polemical assault from the left is on the way -- time to start preparing. Also keep in mind, this is important for not just the west but also for the developing countries who take their policy cues from the west.

As the voting record, platform, advertising, and public statements of the nominee of the Democratic Party, and the likely next POTUS, demonstrate a commitment to economic nationalism, it is no surprise that the French feel congratulations are in order.

There is very little (if anything) to copy from the French rules on the economy.

Too late for that, Justin Ross. Because we're all living dirigisme now. The upside is that the face you see in the mirror is Isabelle Huppert.

There's a world of difference. Taking over Freddie & Fannie was about guaranteeing the agency paper and not causing our foreign creditors to abandon us and possibly trigger a catastrophic dollar rout. Lehman, Bear, AIG were about mitigating counterparty risk, trying to lower the risk of collapse in lending during a contraction. US gov't isn't trying to protect specific jobs and firms within its borders. Forging national champions is about preventing the failure of firms and the local components of industries, not markets.

Not defending those firms but I agree with you in principle. We need some counter-cyclical asset requirements (like they have in Spain) to keep management from extracting big rewards out of bubbles and passing the cost onto us. Fed may want to pre-empt bubbles as well with more regular tightening, even if Greenspan was theoretically correct that they can only be rarely detected with absolute certainty. Not sure how more, rather than better (discussed in previous posts) regulation will help when spending on it has increased every year under Bush.

I agree with Anthony, anybody who sees these actions as "bailouts" is not holding any common stock in AIG, Lehman, Bear Stearns, etc.

These FED actions are nothing more than de facto liquidations, and they are done with the complicity of management and the board of directors. This is not a nationalization event, it is a de facto bankruptcy.

Why not just file bankruptcy proceedings? I think it has a lot to do with the market for "credit default swaps." If AIG declares bankruptcy, then issuers of swaps on AIG debt have to pay off. Maybe they would have to pay off so much that they go broke. Maybe in order to pay off they would try to call in their "offsetting swaps" from the likes of Lehman and Bear Stearns (ruh roh!). The cascading bankruptcies would result in an attempt to "unwind" 172 TRILLION in default swap transactions. That is, like, umm, more money than exists on the planet and stuf, ya know.

Hey, whose idea was it to start a "revolutionary new market" in credit default betting? JPM, natch . . .

Check out the three major "benefits" of credit default swaps: 1) they are done without the knowledge of the entity you are betting on ; 2) it allows you to short the creditworthiness of the unknowing entity; and 3) its an off balance sheet item!! What could go wrong????

This is a politically interesting issue. Let's see how it works out for November 4th. The Dems are a party with a philosophy of highly regulated free enterprise. The macro-political fallout favors them. The polls over the last few days seem to bear this out. On the other hand, McCain saw in 2005 that the Fan-Freds, and secondary mortgage markets, were headed for rough times. He called for reform of "Fedron" and "Fanron." This effort was defeated by Dems in Congress. At the same time, the two corrupt culprits (Raines and Johnson) for these failures are currently advisers to Obama's campaign. Finally, who was the second biggest recipient of campaign contributions by Fedron and Fanron over the last 10 YEARS? Yes, the 4 year boy wonder. The question is, with the media in BHO's hip pocket, can McCain get any traction, a la the Iraq surge, that he got it right and the other guy got it way wrong. And, thus, overcome the perceived macro "failure" of the party affiliation of the current administration. Frankly, I doubt it.

The dirty little secret here is that the Fed and Treasury's meddling PREVENTED a private recapitalizaton of AIG. From the NYT blow-by-blow story, 9/18 p. C11:

"By Sunday, KKR and the Texas Pacific Group made it clear they would not come to the rescue, worried that AIG might be taken over by the government, wiping out their investments. Goldman Sachs also balked."

When patients die of doctors' mistakes, we call those deaths iatrogenic. Here, the panicky interventions and liquidations conducted by the Fed and Treasury without any checks or balances appear to have prevented a private recapitalization and the iatrogenic death of AIG. I mean, you would have to be pretty stupid to buy into one of these firms when tomorrow Henry Paulson and Ben Bernanke can decide to expropriate you and take over the management of the enterprise. I like Ben, but these repeated interventions seem ill-thought out and panicky, making matters less stable rather than more.

The federal government takes over banks all the time. Thousands of them in the last fifty years. These banks weren't nationalized, they were closed or sold very quickly and all assets were passed back into the realm of private enterprise. Some of the time the feds actually made money on the deal. Expect AIG either to pay back that $85 billion pronto or begin to be dismantled to extract value.

US administration believes the free market will not absorb this loss and in interfering with , clearly undermine their previous absolute and staunch support of it

Can we abandon our "U.S. is free market", and "Republicans are free market" mythology once and for all? The Republicans have been attacking free markets, expanding regulation, and openly advocating Euro-socialist policies for years. The U.S. has regulation, central planning, and social spending on par with any euro-socialist nation, with the full support of both parties. The Free-Market Republican stereotype is no more real than the Socialist Democrat stereotype. Both parties quite clearly support a regulated mixed economy.

Even the most free-market American presidents, such as Ronald Reagan, had nothing near absolute and staunch support of free markets.

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