Nothing To Gain And A Lot To Lose In AIG Counterparty Argument

Yesterday I put up a post about AIG and the dust-up over divulging the names of its counterparties. The WSJ came out with the list and it seems to have everyone quite riled up. I said that I didn’t quite get why this was developing into a big deal.

Felix Salmon this morning had a post at Portfolio.com on the subject and his thought on the issues involved is interesting.

A lot of banks used AIG to insure themselves against a global financial meltdown. When that meltdown happened, even the mighty AIG was incapable of paying out on its obligations, so the US government stepped in to backstop them. Is it a scandal that many of AIG’s insureds were European? I don’t think so. But it does imply that maybe some European governments should be sharing with the Obama administration the burden of backstopping AIG’s obligations.

Ok, I can see his point. In a sense the Europeans are free riding on this one. But the argument about who is and isn’t pulling their weight in a more general sense has been floating around for awhile now.

Brad Setser earlier this week offered some details on stimulus efforts by region. He had this to say about Europe.

But China isn’t the only part of the world that needs to do more. Europe’s economy contracted as fast as the US economy in q4. But Europe’s combined stimulus looks to be significantly smaller than either the US or Chinese stimulus. Bruce Stokes of the National Journal/ Congress Daily did the leg work:

The International Monetary Fund has called for a global fiscal stimulus of 2 percent of GDP. In 2009, U.S. and Chinese stimulus spending is likely to match or exceed that target. European stimulus will total less than half that amount. And spending in Brazil, South Korea and South Africa will also fall below the IMF goal, according to estimates by the IMF and J.P. Morgan. …

“In proportion of GDP,” Jean Pisani-Ferry, director of the Brussels think tank Bruegel, wrote on the National Journal economics blog last week, “the size of the stimulus packages put in place in Europe [is] at best half the size of the U.S. and, unlike [the American effort] several of them are rear, rather than front-loaded.” While Germany’s spending will amount to 1.4 percent of GDP in 2009, French outlays will total only 0.8 percent, and Italy has not put forward any meaningful fiscal boost at all …

“Any way you slice the numbers,” wrote Ted Truman, a senior fellow at the Peterson Institute for International Economics, on the National Journal blog, “policymakers are falling short of real ambition in the face of the worst global downturn since the Great Depression.”

 

That won’t cut it. Especially if Europe isn’t willing to do much to help Eastern Europe avoid a sharp adjustment, one that will cut into Eastern Europe demand for western European goods. Germans don’t want to bailout profligate governments (and profligate banks that financed profligate households) in the East. But their profligacy provided the demand that spurred Germany’s exports. Bailing out the East is an indirect subsidy for a host of German jobs ….

If you look at it from this context, the charge that the Europeans should be stepping up to help out with AIG is just a subtext of the argument that they should do more overall. Given that the AIG contretemps has its roots partly in political grandstanding perhaps it would be wise to just let it die. It could easily blossom into ugly nationalism.

It’s valid to make the charge that a given region, country or groups of countries should step to the plate and shoulder their fair share of the burden of righting the current world economic situation. Trying to pick apart all of the unique problems that make up the whole and determine who is or is not holding up their end is a hopeless and self-defeating exercise. It’s a mamoth ball of string that cannot be untangled and in trying to do so all that we will achieve is the creation of suspicion and ill will.

Demonizing the people that we need to cooperate with in order to work out these problems leads down a road with an ugly end point.

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