Rotten AIG

The government is shoveling more money into the maw of AIG. The Times' Joe Nocera explains that this is really a bailout of the banks that purchased insurance in the form of credit default swaps from AIG. Its all about the "systemic risk." On his blog, he writes:

[T]he reason A.I.G. is being propped up is that the government fears that if the company defaulted the counterparties would suddenly be faced with tens of billions of dollars worth of unacknowledged losses — and they would go bust. It would make the Lehman fiasco look like a garden party.

He explains further in this column. The Baseline Scenario has a chronology of AIG's bailouts, so far. See also Felix Salmon, Justin Fox.

Reagan Fact of the Day

Bruce Bartlett, one of the architects of Reaganomics, reminds us:

According to a recent Treasury Department study, Ronald Reagan proposed the largest peacetime tax increase in American history as part of a budget deal to get the federal deficit under control. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 was signed into law on Sept. 3, and most of its provisions took effect on Jan. 1, 1983.

During debate on TEFRA, many conservatives predicted economic disaster. They argued that raising taxes in the midst of a severe recession was exactly the wrong thing to do. "Every school child knows you don't raise taxes in a recession unless you want to make it worse," The Wall Street Journal's editorial page warned. Said Rep. Newt Gingrich, "I think it will make the economy sicker." The Chamber of Commerce of the U.S. said it had "no doubt that it will curb the economic recovery everyone wants."

Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth. As one can see, the economy's growth rates after TEFRA took effect were among the fastest in history....

Reagan signed into law major tax increases every year of his presidency after the first. By the end of his presidency, he took back half of the 1981 tax cut in the form of higher taxes. And it should also be noted that when confronted with a crisis in Social Security in 1983, Reagan endorsed a rescue plan drafted by Alan Greenspan that consisted almost entirely of higher taxes.

Morning in America

Under the headline the Times' David Leonhardt writes:

The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years. They do so first by rewriting the tax code and, over the longer term, by trying to solve some big causes of the middle-class income slowdown, like high medical costs and slowing educational gains.

That's My Congressman

The Cincinnati Enquirer reports:

Boehner praised President Barack Obama's address before the joint session of Congress, which dealt mainly with the non-controversial topics of better health care and education while cutting earmarks and wasteful spending. "With few exceptions, it was a speech I could have given," Boehner said, joking that he probably couldn't have delivered it quite as well. "It was a very conservative speech. Very few parts that I disagreed with."

Ahh, yes.. if you can't beat 'em, pretend like they've joined you.

Turning Japanese?

Paul Krugman, among others, really thinks so. But the Curious Capitalist points us to Foreign Affairs, where Richard Katz argues that we are not repeating Japan's mistakes:

The consequences of the 2008 U.S. financial crisis will be different from Japan's slump in the 1990s for three reasons: the cause of the current crisis is fundamentally different, its scope is far smaller, and the response of policymakers has been quicker and more effective...

The Japanese and U.S. crises differ in many ways, but the starkest contrast is in the response of policymakers. Denial, dithering, and delay were the hallmarks in Tokyo. It took the Bank of Japan nearly nine years to bring the overnight interest rate from its 1991 peak of eight percent down to zero. The U.S. Federal Reserve did that within 16 months of declaring a financial emergency, which it did in August 2007. It has also applied all sorts of unconventional measures to keep credit from drying up.

It took Tokyo eight years to use public money to recapitalize the banks; Washington began to do so in less than a year. Worse yet, Tokyo used government money to help the banks keep lending to insolvent borrowers; U.S. banks have been rapidly writing off their bad debt. Although Tokyo did eventually apply many fiscal stimulus measures, it did so too late and too erratically to have a sufficient impact. The U.S. government, by contrast, has already applied fiscal stimulus, and the Obama administration is proposing a multiyear program totaling as much as five to six percent of U.S. GDP. When it comes to crisis management, it is far better to do too much than too little.

Bretton Woods

The Times' travel section visits the Mount Washington hotel, in Bretton Woods, New Hampshire. The cross-country skiing is good, apparently, but the 1944 United Nations Monetary and Financial Conference remains its claim to fame:

The choice of Bretton Woods as the location then was partly a concession to the failing health of John Maynard Keynes — the most renowned economist of the 20th century and Britain’s chief representative — in an era before air-conditioning. Keynes had a bad heart and pleaded with Harry Dexter White, the United States Treasury economist with whom he was making the plans, not to “take us to Washington in July, which should surely be a most unfriendly act,” according to Keynes’s biographer, Robert Skidelsky.

State Department officials lobbied for a resort in Indiana, but Henry Morgenthau, the Treasury secretary, directed White: “Have it in Maine or New Hampshire, some place up in the mountains there.” The fact that State Route 302, which runs through the basin, could easily be sealed for security is thought to have played a role in the decision, too, along with President Franklin D. Roosevelt’s friendship with Senator Charles Tobey of New Hampshire.

I have yet to make the pilgrimage...

Bernanke Rorschach Test

As of 7 pm, the glass is half-full in Washington, where the Post says: and half-empty in New York; the Times reports:

A Metaphor

for the Treasury's efforts, at Calculated Risk. Check it out!

Silver Lining Dept.

The AP reports: Animal spirits, indeed. HT: Michael Crowley.

Memo to Oxford, Ohio City Council

We could use some of these: From Piled Higher and Deeper, where there's more.