[sd]

Obviously, it's impossible to determine the effect of any one action on the economy -- but if this $85b prevents the markets from crashing, I'd argue its money well "spent." U.S. market cap has already fallen $4t in the past year. Do you really want to risk losing considerably more?

[byrneseyeview]

You're ignoring the question of whether or not the market should crash. If stocks are overpriced, then intervention like this just means we'll spend more time acting as if they are not overpriced, and that would be awful.

For what it's worth, my day job and my main part-time job are both entirely dependent on the market, so I sure hope the market doesn't need to crash. I agree with David Einhorn (who, by the way, has been short Lehman for a while): the stock market is okay, but the credit market is way overpriced.

[ojbyrne]

That was the argument for Fanny and Freddie. Didn't seem to work, and I bet it won't this time. WAMU is next.

[lacker]

You don't think the Fanny bailout "worked"? We don't have the luxury of seeing what would have happened if we hadn't bailed them out.

To make the pro-bailout argument more clear, here is one reputable economist predicting that if we had let the FMs default, the dollar would drop about 30% and unemployment would double, in about a week.

http://www.marginalrevolution.com/marginalrevolution/2008/09...

[ojbyrne]

You're correct, I was glib. But I think those things will happen anyway - they'll just take longer than a week.

[byrneseyeview]

So it would be like a 19th-century panic/recession, without hard money. He's omitting the part where, since we aren't subsidizing stupid decisions, stupid decisions don't get made and the economy recovers very quickly.

[lacker]

If only subsidizing nothing was sufficient to prevent stupid decisions from being made!

[sd]

Just to clarify, I meant that the other course might result in much more massive decline than has already happened. Think 22 sigma level -- like the '87 crash. Bailing out distressed financial firms is almost expected now. Thus, if it doesn't happen, then a lot of market participants may reevaluate their choice to invest in firms with heavy debt.

Obviously, these bail outs have their costs, such as the value of money lent as well as increased moral hazard, but it's worth considering whether this is worth the potential cost of a market collapse to the whole economy.

[helveticaman]

The market collapse of a whole economy? How's Google going to get torched by this? Or Boeing? Or most exporters?

[ojbyrne]

More directly related to Boeing, according to the NYT (http://www.nytimes.com/2008/09/17/business/17aig.html), AIG has an aircraft leasing division that was planning to buy 73 aircraft this year.

[gills]

In the short term the lack of credit availability could dent manufacturers, but those businesses that make real things that people want should be ok if they can survive until credit is again available to their customers.

[quasimojo]

because they are part of an integrated economy. where will google's advertizers find their ad budgets in a stagnant economy? boeing is no different. would these firms be as adversely impacted as wamu? no. but everyone suffers.

[quasimojo]

agreed. and WAMU will not be saved. they are just another retail bank.

[quasimojo]

but if this $85b prevents the markets from crashing

it won't. this loan doesn't unwind the terrible decisions aig (and others) made, nor the hedges they tied to those decisions, and the hedges they tied to those hedges, and the hedges they tied to those hedges.

the derivatives unwind cannot be stopped short of a repudiation of all global currencies. the amount of leveraged capital in hedge deals is still north of $100 trillion. no one has the money to pay that out. it would be easier just to erase the USD dollar than to circulate $100 trillion in new fiat wealth...the effect would be the same anyway...worthless dollar