On Tuesday afternoon, Federal Reserve chairman Ben Bernanke, Treasury Secretary Henry Paulson and the rest of the members of the President's Working Group on Financial Markets briefed President Bush on their plans to extend an $85 billion loan to the American International Group (AIG), in return for 80 percent ownership of the largest insurance company in the world.
Perhaps someday, when books about the current crisis start filling up entire libraries, we will be given an account of how the president reacted. Was he angry at this unprecedented expansion of government intervention in the private sector? Dismayed at the transformation of the United States, under his watch, into a command-and-control socialist economy? Rueful at the malevolent irony of fate? (George W. Bush, the great tax cutter, has saddled American taxpayers with potential liabilities that are difficult to comprehend, much less calculate.) Or was he pragmatic? When history deals you a bad hand, you have to play it -- you don't have the option of folding and cashing in your remaining chips.
Or did he simply, like so many of us, just goggle at the sheer scale of this mess, and say to Paulson and Bernanke: "I hope to hell you know what you are doing."
We live in "unusual and exigent" times. I quote from Section 13(3) of the Federal Reserve Act, which states that any Federal Reserve bank has the authority "in unusual and exigent circumstances" to extend credit to "any individual, partnership, or corporation ..." A terse note from the Fed released at 9 p.m. Tuesday night cited Section 13(3) as the legal justification for the AIG rescue.
It is difficult to put this latest bailout into perspective. The government-mediated shotgun wedding of Bear Stearns to JPMorgan and the nationalization of Fannie Mae and Freddie Mac pale in comparison to what is, in effect, the outright government seizure of a multinational private insurance company. The fact that a Republican administration is taking these steps only underlines the seriousness of it all. Paulson and Bernanke are coming under criticism from all sides for every move they have made in this crisis, but no matter how you feel about their strategy and tactics, it's hard to imagine that either man wants to be taking these steps out of some megalomaniacal desire to expand Big Government.
As I write these words, investors appear to be very unhappy. Shortly after noon ET, the Dow Jones industrial average had fallen almost 400 points. It is troubling to imagine the kind of havoc a real, honest-to-goodness stock market crash would wreak right now or what steps the U.S. government might be forced to take if (or when) additional mighty financial institutions tip over the edge of insolvency. I am hoping that when we look back on these momentous events, we will hail Bernanke and Paulson as heroes who, through drastic and radical exercise of government power, staved off the next Great Depression. Because the alternative is too dire to wrap one's head around.
The American taxpayer is gradually assuming primary responsibility for keeping global financial markets above water. But before this crisis ever started, this country and individual Americans were already spending far in excess of their income -- we were already living on credit. It's hard to see how we can afford the liabilities we are taking on.