it is nothing new to the Federal Gov’t.  Back in the Clinton years, the Fed was in charge of selling off several assets for similar situations. (savings and loan crisis) 

His job will be to "conduct asset sales on an orderly basis" in order to raise funds to repay the Fed’s loan, according to AIG’s description of the situation.

When the assets are sold - no longer will it be a gov’t institution.  If done right it will assist in propping up the shaky foundation - but not let it all snowball down.

Other gov’t bailouts have included Chrysler in the Reagan years and you could even consider the Mexican propping up in the Clinton years as well.

As much as I’d favor letting the free market sort itself out - it’s been prolonged too long - now it’s needed to keep from turning into avalanche.

Michael, not only that, these unfavourable conditions in the market in US and all these bankrupcies and financial volatilities highly affect world markets. In Turkey stock exchange went through a 12% decrease in 3 days just because of the announcement from Lehman Brothers and then the AIG position.
So it is not just US tax payers that are affected, it is the world.

Natioanalization may not be the viable option here but if as Interested put it will be done properly and do more good than harm for the long run, then it seems the only option.

I am not an expert on economics and maybe I am wrong and maybe letting the free market economy blow once and for all and then turn to normal levels may be the best thing to do and all these efforts may indeed be delaying the inevitable but from where I stand, regulation is not an all or nothing situation and necessary interventions should be done for the bigger picture.

Very specific Question..

How do facts like the above make the case for further expansion and spreading out of the global economy? How is this unlike putting all your eggs in one basket?  If one egg spoils, in this case, it has negative effects all the others.  Wouldn’t having debt consolidated in one basket comprised of in this case…

 (The greed of the US markets)

 as well as and probably partially related to:

(The Government home purchase lending requirements imposed on private banks to give the less fortunate that wanted a home but shouldn’t have bought one because they couldn’t pay it back)
 
…Protect the other baskets of eggs better?  I’m not talking about what to do after the negative event like the one we are going through now has happened, (as other healthy baskets not in the chain of dominoes could always volunteer to help the one in need) I’m specifically talking about how could we avoid the domino effect of the spoiled egg spoiling all the other eggs as was we see above.
I hate to have to pre-defend my question, but unfortunately I can here it already.  "You libertarians are all alike; the interconnectedness of the world economies could never be reversed as the world economies are too intertwined. (Which to me sounds like the defense referring to the argument as justification) but I digress…  I’m not saying that the interconnectedness can or cannot be undone; I’m saying that something went wrong, to me, interconnectedness at face value appears to be part of the problem of the domino effect, and history shouldn’t repeat itself. How can we avoid this domino effect going forward so we have protected pockets that don’t get slammed by the pockets that make bad decisions? 

sorrry, My cut and paste didn’t work correctly ..I was referring top Elif’s first paragraph:
Michael, not only that, these unfavourable conditions in the market in US and all these bankrupcies and financial volatilities highly affect world markets. In Turkey stock exchange went through a 12% decrease in 3 days just because of the announcement from Lehman Brothers and then the AIG position.
So it is not just US tax payers that are affected, it is the world.

How do facts like the above make the case for further expansion and spreading out of the global economy? How is this unlike putting all your eggs in one basket?

I just spent the last two days lecturing on this topic, specifically in reference to students’ questions arising out of the AIG bailout.  But since I know you don’t place any value on such claims of expertise, I won’t waste your time by pretending that you actually want an answer here, Jay.

For those that don’t have a bias against expertise, I will point out that there is a substantial body of research on how interdependence is better than attempted self-isolation. Even taking into account periodic crises and downturns, economies that are connected to the global economy do MASSIVELY better than economies that are isolated from it. The positive effects of connectedness are so huge, in fact, that one analyst (Thomas P.M. Barnett) has suggested it to be the primary determinant of peace and stability in the world.

Yes, it also makes it possible for problems to spread (Mexico, 1994, Asian crisis 1998, US crisis 2008), but that only comes after years and years of growth that never would have happened at all without interdependence and engagement in the global economy. The growth is the norm, the crisis is the exception. Even given the problems, the net benefit over time is HUGE. Isolationists and anti-globalists exaggerate the short-term harms from crises and ignore the long-term benefits of the global economy. For example, Thailand had a huge financial meltdown in 1998, proportionally far worse than anything we face now. But do you think Thailand would have been better off if it had never been engaged in the global economy in the first place? Of course not. Instead of being a developing country that had a crisis for a few years, it would still be an undeveloped third world country.

Also, it should be noted that along with the potential for problems like AIG to spread comes the incentive for actors in other countries to help with containing and reversing the damage. There is a silver lining to the economic clouds we see right now. I know that economic nationalists like to think that our being dependent upon China’s investments is bad, but they overlook the substantial side effects of China being also dependent upon us, resulting in a decreasing likelihood of war and an increased long-term likelihood of political reform in China ON TOP of the regular benefits of lower-cost goods in the U.S. and huge long-term market potential for U.S. goods in China.

To the contrary if anything I have spent the past few posts with you trying to get you to provide expert opinion and examples.  With me anyway, you finally you have.. Good Job! 
So to boil this down…basically some experts suggest we should not worry [so much] about this, that this is just the exception, not the norm, and that the people in the effected country will benefit down the road by borrowing from other countries.  I sincerely hope you are right.

Another question:
In general, do you think this process of connectedness that the experts you cited condone act as kind of an enabler of these patterns of bad behavior?  Or act to suppress them?  Knowing that other countries will just bail you out anyway?  If so, is there downside for the citizens of the country that performed the bad behavior?  Is there should there be a "credit score: that countries should have?  Is there incentive or pressure worldwide for countries to not act in this manner?

As with most things, the answer defies simplistic memes.  The global financial system both enables and suppresses "bad behavior".  It suppresses it by punishing 99% of companies that take bad credit risks (you never hear about these examples because they happen all the time and are too small to be "news").  It enables it by bailing out the 1% of the companies (and countries) that really are "too big to fail" without triggering unacceptable consequences for everyone else.

Does that raise a "moral hazard" that encourages some companies and countries to take unwise risks in the belief that they will be bailed out anyway?  YES.  But that cost is often worth paying for the overall benefits from the global economy.  And those costs can be mitigated by imposing burdensome and unpleasant regulations as part of the bailout process, thus making it a less attractive alternative to bank on.  In regards to countries, this takes the form of IMF "structural adjustment programs" that require countries receiving bailouts to implement harsh programs of restructuring and regulating their economies in ways that are both unpleasant and likely to reduce the risk of recurrence.  In domestic settings, it means taking ownership of companies being bailed out away from those who mismanaged them in the first place, like was done with the Resolution Trust Corporation during the S&L bailout, was done by the Hong Kong government in 1998, and is being done now with the U.S. government bailout of A.I.G.  It also means criminal accountability when appropriate (something that Democrats were eager to embrace for Enron executives, but are notably silent about with the partisan Democrat executives of Fannie Mae and Freddie Mac — HMMMMMMMMM).

Moral hazards are a real problem, but they should not be a barrier to necessary policies.  And their effects can be mitigated to a large degree by appropriately punitive methods of implementation.

This is internesting…. something that Democrats were eager to embrace for Enron executives, but are notably silent about with the partisan Democrat executives of Fannie Mae and Freddie Mac — HMMMMMMMMM).

I take it you are referring to (at least in part) the liberal government home purchase lending requirements imposed on private banks to give the less fortunate that wanted a home but shouldn’t have bought one because they couldn’t pay it back?

That was an element of what caused the housing crisis, but I was actually referring to something less subtle.  The CEOs of Fannie and Freddie were major league contributors to the Democratic Party just like Ken Lay was a major contributor to the Republican Party.  The the partisan and media treatment could not be more different — a wall-to-wall jihad to nail Ken Lay to the wall, but a quiet (and rich) retirement for the Fannie and Freddie CEOs. 

P.S. The current “lead story” is my more specific commentary on this whole financial mess.

The positive effects of connectedness are so huge, in fact, that one analyst (Thomas P.M. Barnett) has suggested it to be the primary determinant of peace and stability in the world.

And to expand slightly - but only slightly.  The growth of other nations, rising income levels in every continent but South America has all led to the United States shifting away even more from Industry and more into higher technology fields.  The rising income levels around the world would not have happened if not for the globe being so interconnected - it has also served to help contain world-wide inflation rates (generally speaking).

Hi Jason,
I hear what you are saying about moral hazards, I realize you can’t just say any bad behavior is unacceptable (even though these exceptions to the rule don’t apply to you and me, I can’t write off my debt on a different set of books to pass to someone else) but from a taxpayer standpoint at what point does our current system say enough is enough and take the "marketplace route".  The rest of us have to play by the rules (bad buseness judgment = failure, thanks for playing goodbye)  I know the world is not "fair" but the rules should at least be somewhat consistent. Meaning, why can’t I keep my house and decide not to pay my mortgage… (Not that I really would want to do this as I take pride in myself) Do you see what I am saying?  Inherently, it does not seem just unfair, it just seems wrong.  And to me, this is what I want to hear the powers that be explain to the rest of us.  Explain to me why it is ok.  I don’t think we would ever get a detailed answer other than that is just the way it is. The system is not perfect, but it is what it is.

The answer is that it is NOT ok.  It is all there is.

The alternative to a bailout is not just letting the markets punish the guilty.  It is letting the system collapse completely into a depression that would make the Great Depression look like cold and flu season.  The situation we are in is not a market distortion or glitch. It is a market CESSATION. Banks have stopped lending to each other. That means that the engine isn’t sputtering, it has STOPPED. If allowed to persist for too long, we would be in a gruesome deflation cycle — literally NO equity or credit available for ANYTHING. No cars being sold. No houses being sold. No credit cards being issued. No new hiring. No new building. Student loans cut off in midstream, without warning. No new companies being started ANYWHERE. NOTHING. LITERALLY, NO SUBSTANTIAL ECONOMY ACTIVITY AT ALL. I am honestly not exaggerating here when I say that would be an economic DEATH SENTENCE. We’re not there yet, but we’re on the road and we are approaching the last known exit ramp.

Market principles are good, but they should not be a suicide pact.  Measures should be taken during and after the bailout to identify who caused the system to crash and to hold them accountable, financially and even criminally, to the maximum extent possible.  Properly done, the government will eventually even make a profit on the bailout (like Hong Kong did in 1998). But regardless of that, we should still do the bailout because we fundamentally have no other choice.

Moral hazards are bad things, but they are not even close to the worst things. I read today that what I am endorsing is as much as $1 TRILLION being added to the U.S. debt overnight. Its almost inconceivable. Mind-boggling. But everything I can find indicates that it is absolutely necessary, a bargain even at 10 times the price.

I still say that the sky is not falling yet, but it CAN fall if we let panic or bad priorities get in the way of the massive undertaking that it appears MUST be done. The only available way to address the panic is the ban on short-selling that was put in place today (very good move). And the only available way to prevent the eventual collapse of the debt structure is bailout, which it looks like a bipartisan consensus will endorse this week. (The fact that a bipartisan consensus is even possible in a presidential election year is powerful evidence that this really is a fundamental necessity, not just a choice.)

Interesting read (raises some basic questions)
 
http://www.forbes.com/business/2008/09/19/banking-bailout-paulson-biz-wall-cx_lm_0919questions.html

Think we will ever get a real answer on any of these?  I think since we are footing the bill we should be given answers to these questions.

I would add: How do we make sure the heads of these companies do not walk away with their golden parachute?  (Including reeling back in the heads of Fannie and Freddie)
I would like to see open hearings on what / who caused this (in the private and public arena) how they will pay (jail, loss of retirement funds, etc) Any further gains from these companies should have a portion funneled off to pay of their part of the debt they created) and sunlight into how we decide to fix this going forward so that it doesn’t happen again.

I think the legislation for the bailout should include authority for a special investigative commission with power to prosecute those who failed in their fiduciary duties AND with the power to take away the "golden parachute" packages from those found to have been incompetent.  The money could then be redirected back into the bailout fund.

Going forward, the fix will have to be in the form of new regulations that require transparency and independent auditing for the derivatives market (which is currently totally unregulated).

And we WILL get answers to those questions in the Forbes article, since it would be absolutely necessary to answer them in constructing the legislation authorizing the bailout.

I suspect many of the answers have already been decided upon and that the decision will be to bailout MORE rather than LESS.  This sounds counter intuitive to the secondary goal of minimizing moral hazards, but it is probably the only way to avoid having to tinker with the system again and again and again going forward, which would inevitably make the system less effective and would lengthen the financial crisis by undermining investors’ trust in the bailout.

And the answer to #8 is "no".  The hard truth is that the consequence of the collapse of the banking industry is the end of the U.S. economy.  The consequence of the collapse of the U.S. auto industry (even if that was imminent, which it is not) would be a shift of ownership of Mexican auto factories from U.S. to Japanese companies.

Not hard to see the difference in justification for federal government intervention.

Very good description of the Domino effect of the hows and why we ended up propped up Fannie, Freddie, AIG, etc.  Not complicated at all.

http://www.ricedelman.com/cs/education/article?articleId=762&titleParam=Update+Regarding+the+Financial+Markets