NOMI PRINS: The bailout of AIG is an example of the government having to step in and clean up a mess. It is not so much that subprime mortgages fell and that caused some losses to AIG. AIG was acting not simply as an insurance company; it was acting as a speculative investment bank/hedge fund, as was Bear Stearns, as was Lehman Brothers, as is what will become Bank of America/Merrill Lynch. So you have a situation where it’s bailing out not just the money, but taking on the risk of items it cannot even begin to understand, because if it had understood them, this would never have gotten to the point to which it has gotten.
AMY GOODMAN: How did it get to this point? How did it go beyond insurance?
NOMI PRINS: In AIG and in Lehman and with Merrill and every other company on Wall Street that has faltered or is faltering, it’s about taking on too much leverage and borrowing to take on the risk and borrowing again and borrowing again, twenty-five to thirty times the amount of capital, the amount of money that they had to basically back the borrowing that they were doing. Human regular borrowers cannot do this. This is something that is an item only of the banking industry.
And not only was all that borrowing happening, but there was no transparency to the Fed, to the SEC, to the Treasury, to anyone who would have even bothered to look as to how much of a catastrophe was being created, so that when anything fell, whether it was the subprime mortgage or whether it was a credit complex security, it was all below a pile of immense interlocked, incestuous borrowing, and that’s what is bringing down the entire banking system.
AMY GOODMAN: Michael Hudson, we’re talking government bailout, which means taxpayers stuck with the bill. Do you think this is the right move?
MICHAEL HUDSON: No, it’s the worst possible move, and it puts the class war back in business with a vengeance. Wall Street has been preparing for this for years, because every financial analyst knows that the debts can’t be paid. And the question that Wall Street has, if you’re going to take a gamble on bad debts that can’t be paid, how are you going to come out a winner? And there’s only one way of coming out a winner, and that’s to make the government bail you out. This has been known for years, because it’s inherent almost in the mathematics of compound interest. Every banker I know knew that the loans they were making were going to go bad. They were trying to sell them to somebody else, ultimately expecting them to end up with some sovereign wealth fund.
And now, you had at the beginning of the show, McCain saying that this is the result of fraud and incompetence. The government has now bailed them out. But by bailing them out—Wall Street was coming to terms with the bad debts. When Bear Stearns went under and when Lehman Brothers went under, this began to wipe away the bad debts. And when the debts exceed the ability to pay, there’s only one thing any economy can do, and that’s wipe them out. Instead, the government is trying to keep the fiction alive. And what Paulson did yesterday, in bailing out AIG, was to try to lock in whoever is the next president not only to further bailouts of Wall Street, ostensibly to protect the public money, but to make it impossible to write down the debts of the four million homeowners that are expected to default this year, impossible to write down the debts of companies that have issued junk bonds, impossible for the country to get rid of this excess of debts that can’t be repaid. And you’re having really a war now of creditors against debtors. And this is what Wall Street has been preparing for. It needed an emergency to do it. It’s really not an emergency at all. This has been building up for many years. Everybody expected it. And breathlessly now, the Secretary of Treasury has done it.
AMY GOODMAN: But, of course, the argument was, if you don’t bail out AIG, it could lead to a global financial meltdown.
MICHAEL HUDSON: What you—it’s a meltdown of the gamblers, as Nomi said. These are people who’ve gambled. You had McCain saying they’re gamblers. If these people have gambled, we’re talking about derivative trades, billions of dollars of bets on which way interest rates will go, billions of dollars of bad loans beyond the ability of debtors to pay. Why on earth would you want to bail out these creditors?
AMY GOODMAN: So, what would happen if you didn’t?
MICHAEL HUDSON: Then you would prepare the ground for writing down the debts of the homeowners that have no way of repaying the exploding mortgages. Those interest rates are going to be jumping up this year. You would be able to bring the debts down to the ability of the economy to pay, and you would save these four million homeowners from defaulting and being kicked out of their houses. Now they’re going to be kicked out of the houses. The houses will be vacant. The cities are going to now say, “Gee, we’re going to have to cut the property taxes to enable the debts to be paid to save the financial system.” So, if they cut the property taxes, they’re going to have to cut back local expenditures, local infrastructure. The economy is being sacrificed to pay the gamblers....
