Arnold Kling  

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On AIG, you might wish to read James Kwak. You should definitely read James Hamilton.

But more shocking yet, at least if we measure these things in dollars and cents, is the amount of taxpayer funds that have gone to compensate AIG's counterparties for bets those counterparties never should have been allowed to make.

From the indispensable Mark Thoma comes a pointer to Jonathan Boymal who refers to a post by Andrew Leigh on the attribution error in economic outcomes. He uses actual research to document what I argued in this essay.

COMMENTS (3 to date)
Phil writes:

Interesting link on the attribution error.

I would add that even if voters "blame" leaders for things they can't really control, it does not necessarily mean that this is irrational. Ferejohn (1986) developed a model of retrospective voting where he demonstrates that if voters are uncertain both about the competence of leaders as well as whether their preference is to enact the policies the public desires, then the best strategy voters can employ to ensure that leaders have an incentive to enact the policies demanded by the public rather than maximizing their own personal welfare is to engage in blind retrospective voting. Competent leaders in office during bad times will suffer, and incompetent leaders during good times will be rewarded, but all leaders will be driven to focus more on popular policy agendas rather than blatantly disregarding public welfare (as we largely do see in non-democracies).

As you said in your essay, presidents are not the CEO of the economy. But neither can or should we take for granted that absent some means of oversight, presidents would have any reason to even try to improve the lives of the general public instead of using government resources strictly to enhance their personal welfare.

English Professor writes:

I have been wondering about AIG and credit default swaps for some time. I was under the impression that the point in saving AIG was that its various insurance commitments were very extensive. And I can understand paying off CDS if the counterparty was hedging his own risk--i.e., a company buying a CDS on a mortgage-backed security that it already owned. But CDS for which the counterparty did not have an immediate interest in the original risk/transaction should not be paid off. (That is, let's say that person X buys an MBS. If person Y has no monetary interest in that MBS, but buys a CDS against it either to hedge some other position or as mere speculation, person Y should NOT be paid off by taxpayer money.) Person X was hedging his own risk, which is reasonable. Person Y has been speculating on CDS without an interest in the original security. I have nothing against speculation--it is a legitimate practice--but person Y has entered into a speculative contract with a counterparty (AIG) that has gone bankrupt. It has been taken over by the government, and taxpayer money is being used to settle some of its liabilities. But taxpayers should not be asked to pay AIG's counterparties when those counterparties were merely speculating. They played a game and lost, and they, not the taxpayers, should suffer the consequences.

Dan Weber writes:

Congress has assembled a mob and picked its target. Don't spoil our fun.

We paid for blood!

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