Some commenters are pushing back on my previous post by suggesting that the GM bailout was desirable and the AIG bailout wasn’t. I don’t have hard evidence for this, but I’m pretty sure economists in general are more supportive of the bailout of AIG than the bailout of GM. For one thing AIG is a financial company whose failure would have brought down many banks, and we have known for over 100 years that preventing banking panics is an important function of central banks. Justifying bailouts of manufacturers on the basis of economies of agglomeration does not fit within the well understood and commonly agreed upon tenants of central banking. Regardless of the end desirability of the GM bailout, it is certainly a more controversial thing for a central bank to do.
More importantly though, the issue here is that Treasury issued a notice that exempted companies which the government became an owner of in a bankruptcy preceding from the established section 382 of the tax code. Are those who criticize the AIG tax benefit but not GM really arguing that this ruling should be amended so that whether section 382 applies is subject to the discretion of the Treasury? For one thing I’m not sure that would be legal (somebody who knows more can tell me if this is the case). But even if it were it strikes me as pretty undesirable to give administrations that level of discretionary taxing power, essentially allowing the President to provide a potentially massive tax benefits to companies it bails out if it feels like it. No, I would rather not give Presidents more arbitrary bailout power, especially of the kind that tends to be hidden and unreported.
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Friday ~ March 16th, 2012 at 1:12 pm
BR
This explains it:
“The panel members said no company should be getting that tax break, but focused on AIG because they said the tax break is such a major factor in its recent quarterly profit. AIG said that after tax operating income for the fourth quarter was only $1.6 billion.”
http://www.latimes.com/business/money/la-fi-mo-aig-bailout-tax-20120312,0,3760882.story
Friday ~ March 16th, 2012 at 2:58 pm
BSEconomist
If you are referring to the comment I left, I think it is only fair to mention that this is not at all the point I was making. In fact, I was more supportive of the AIG bailout than the GM one.
The point was rather that there was a case to make in favor of the GM bailout i.e. for the purpose of saving and preserving the corporate ecology around the auto industry. This is a real benefit… just because this is a form of industrial policy doesn’t make it wrong. And then there was also a case against continuing support for AIG. To be completely frank, I don’t know anyone making the case for continuing support for AIG conditional on overall financial stability. Continuing support is not the same thing as the original bailout and this is the issue that Warren was bringing up. Once other banks are ready for AIG’s (orderly) failure, in theory that failure would not trigger the kind of destabilizing network effects that we observed following Lehman’s collapse.
Which is all to say that a person can reasonably and simultaneously hold the beliefs that 1) GM should have been bailed out and should continue to receive support and, 2) AIG should not continue to receive support. Moreover, this person need not be a hypocrite or a poll-following hollow-suit. And keeping in mind that Warren really is an expert on bankruptcy and knows this issue much better than you or I do AND that the GM bailout is almost certainly not popular… maybe you should give her the benefit of the doubt on this. No one is asking you to vote for her, for crying out loud.
And in the future, (assuming I was the person that you’re responding to) I would appreciate it if you could respond to my actual argument, instead of knocking down a straw man.
Friday ~ March 16th, 2012 at 4:04 pm
Lord
A confused argument. If central banking policy then what has treasury to do with it? If preventing a run, then bailing out their counterparties was all that was necessary. If treasury takes ownership, is there any reason not to provide discretion over how it will take ownership or to say which is less expensive or indeed whether there is any real difference in cost, hidden or visible. Government ownership is a political act and will always be weighed as such.
Saturday ~ March 17th, 2012 at 10:55 am
Economists Are Inveterate Economists « squarelyrooted
[...] Adam Ozimek, defending his equating the bailout of AIG with GM: I don’t have hard evidence for this, but I’m pretty sure economists in general are more supportive of the bailout of AIG than the bailout of GM. [...]
Saturday ~ March 17th, 2012 at 10:51 pm
Frank in midtown
I think you misunderstand the impact of an AIG failure. AIG, through its subsidiaries, has a very large marketshare in liability insurance for US industrial services. AIG’s failure would have caused all those industrial service companies to be in breach of their contracts for failure to maintain liability insurance. Oh, and a lot of retiree’s annuities would have failed too.
Sunday ~ March 18th, 2012 at 2:38 pm
Review – General Electric: The Worst Bailout in the World aka; Indebting America To High Taxation. Contrary To The Founding Fathers. | Political Vel Craft
[...] More on the GM and AIG bailouts (modeledbehavior.com) [...]