The day seemed to be dominated by much back and forth about Neil Barofsky’s report on the payment of 100% of AIG’s obligations to its counterparties.

There was the usual outrage (Yves Smith), some surprising moderation (Felix Salmon), an intriguing suggestion that the ultimate beneficiaries weren’t Goldman, Merrill etal. but the firms that had hedged their exposure (Floyd Norris) and a spirited defense of the actions undertaken by Geithner and the NY Fed (Economics of Contempt).

Lots of others chimed in as well but I think the above represent a good sampling of the gist of the commentary. For my part, I tend to agree with EOC’s line of reasoning and I do find his point about misusing regulatory authority compelling. I suppose it’s always possible for the government to force outcomes that appear to be equitable but the cost in lost freedom is probably higher than most of us would like to pay.

Though I suspect he would have been better served by saying nothing, Tim Geithner rose to his own defense, albeit in a somewhat veiled manner:

“It’s a great strength of our country, that you’re going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight,” Geithner said during a press conference announcing a new financial fraud task force.

“Now, you’re going to see a lot of conviction in this, a lot of strong views — a lot of it untainted by experience,” he said.

The man has a point.

Shifting gears, Brad DeLong has been adamant in his contention that the government could forestall any repeat of a Great Depression. Today he shifted gears:

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it–that we know what to do and how to do it and will do it if things turn south.

I don’t think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy–a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more–are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d—– thing about it.

This really is a departure, not just for DeLong. I can’t recall hearing a mainline economist suggest throughout this entire ordeal that we could be subject to a downturn of the magnitude of the Depression. Given all the happy talk about recovery and the worst being behind us his comment is rather sobering.

Just when you thought it was OK to peek out of the cave he steps up and suggests the volcano is still active. Oh well.

Tyler Cowen has a pretty interesting list of what he would do instead of the Obama health care bill. If only we could see more of this and less of the robotic defenses from the Left and criticisms from the Right we might actually make some progress on the subject.

A House committee appears to be intent on gutting the influence of the regional Fed bank presidents. The WSJ reported that the committee has included in its bill on financial overhaul a provision that would proscribe the Fed’s Board of Governors from delegating authority to the regional presidents.

Here’s how Barney Frank describes the provision:

Under Mr. Peters’s amendment, “only the board of governors can make decisions, not the regional bank president,” Mr. Frank told reporters at a break in the committee meeting.

“The regional bank presidents are private citizens appointed by other private citizens. They should not be given government powers including voting on the FOMC, which we will address next year,” Mr. Frank said.

I think that the some of the regional presidents have been highly useful during this crisis. Rather than talking the party line they have been willing to speak out and at times challenge the party line. Something that I know the politicians hate and suspect that more than a few of the Fed bureaucrats would like to see less of.

It would be a shame to lose their voices since they have a distinct advantage over those closeted in Washington and New York. They actually live in the real world and provide a nice counterweight to group think.

Put it down to nothing more than a continuing effort to politicize the Fed and reduce its independence. When only those who are appointed by the political class can make decisions the likelihood that those decisions are going to converge with whatever the popular political stance of the day might be is enhanced.