Why did American taxpayer money help AIG pay its debt to foreign counterparties? Representatives from both parties raised the question during Tuesday's House Financial Services committee hearing on AIG. On the surface, the question seems perfectly reasonable. Why are American taxpayers bailing out foreign companies? Shouldn't their own governments be taking responsibility for their welfare?
Beyond the reasonableness, politicians are also obviously attracted to the opportunity for stoking nativist sympathies. If the fact that taxpayer dollars are going to Goldman Sachs isn't enough to get the blood boiling, how about the even more enraging reality that foreigners are sucking from the taxpayer teat. It's yet another outrage!
Few people seem inclined to accept that as far as the global financial system is concerned, there's really not that much difference between foreign and domestic financial institutions -- the web of interconnections tying all the big players together is so tangled and intricate that if one link in the chain goes down, everyone stands a chance of collapsing. (And yes, that's a bug, not a feature.) If the goal is preventing systemic collapse, then everybody gets bailed out, regardless of jurisdiction. But Bernanke followed up an answer along those lines with an even more effective riposte: Hey, Europe has been bailing us out too!
BERNANKE: Well, as -- as we've discussed, it goes well beyond the counterparties. The critical issue was, was AIG going to default and create enormous chaos in the financial markets, or was it going to meet all of its obligations, including those to foreign counterparties?
I would point out that the Europeans have also saved a number of major financial institutions. And the issue of whether those institutions owed American companies money has not come up. So I think that there is a sense that we all have the obligation to address the problems of companies in our own jurisdictions.
In particular, the Europeans could appropriately point out that it was under U.S. regulation or lack of regulation and U.S. law that AIG failed. And in their sense, we do bear some responsibility.
Good answer. Another good answer came in response to a favorite tactic of grandstanding politicians: Demanding a yes or nor answer to a question that no sane, intelligent person can answer in one word. After one Republican legislator failed to get Bernanke to comply with his bullying, the politician moaned: "Why can't I get a yes or no answer?
Bernanke replied: "Because it is not a properly posed question."
All in all, I thought Ben Bernanke had a pretty good day on Monday -- he's clearly gotten more comfortable dealing with rampant Congressional irrationality over the last two years. While Geithner, at first, seemed tense and tightly wound, Bernanke came off as calm and dedicated to the task in front. He even seemed to enjoy arguing with Ron Paul about the first principles of government intervention in the economy. And when he claimed that after learning of the AIG bonuses he wanted to file suit to stop the payments, he sounded believable.