Thoughts on the AIG Takeover

by Dual Income No Kids on September 17, 2008 · 0 comments

All,

You’ve probably heard about the Federal takeover of the American International Group. Its been all over the headlines since Monday. Since the news is so huge, here are a couple of thoughts on the issue.

1) The Federal Reserve and the Treasury had no choice. AIG had become so large, and was invested in so many exotic insurance polices that the ramifications of their failure would have had unknown and potentially catastrophic consequences. Few people really understand AIG’s business due to the complexity of many of their insurance polices and investment instruments.

2) It’s inflationary. The AIG bailout reportedly cost $85 billion dollars. Now, in case you haven’t been watching the news closely, the federal government is running a massive budget deficit. – $400 billion and change to be exact. That means this $85 billion will have to be added to the money supply – either by “printing it” electronically or by issuing new debt. Here is a hint for you: put in laymans terms inflation is determined by supply and demand for money – when you add more to the supply and demand is reduced – like it is now – then your prices will increase. By dumping another $85 billion into the economy when economic activity is depressed, Bernake and Paulson are adding more inflationary pressure.

Thanks,

James

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