(Update: Sean Paul, who worked in the field for years, opines that the Feds should have let AIG go down.  The pile is too big to pile out of anyway, and the Feds are only delaying the inevitable.  So let it burn!

Socialists could never have done to the market what the free marketers have. The socialization they never wanted done, they’re now down on their knees begging for. "Buy us. Please buy us. Save us from ourselves".

As the news that AIG has sold 79.9% itself to the Federal government for 85 billion dollars, Scarecrow wrote to me:

Seriously, this is staggering. The US government is about topurchase and operate as a government entity the world’s largest insurance company for $85 billion.

So the US now owns/operates the entities that purchases home mortgages from banks/S&Ls (and owns $5 trillion of that) and the largest entity that insures the transactions that repackages and resells those mortgages.

I will add that this shouldn’t be a surprise to FDL’s readers:

Written in March:

14) The federal government will become the largest holder of mortgages, and in effect, owner of houses, in the country. By far. The Fed, which has been accepting sub-prime paper already, is going to wind up stuck with a lot of it, because some of the banks using it as "collateral" are not going to survive absent huge government bailouts.

11) The government will have to bail out Fannie Mae and Freddie Mac because they are insolvent

Written in November:

7)Multiple banks will probably go insolvent. They are simply holding too much crap paper. There will be an extreme tightening of consumer debt of all kinds, including consumer loans, credit cards and mortgages. Even people with good credit will start having difficulty getting loans.

*10) *When the full extent of how bad things are hits Joe Public, expect a move for reregulation of Wall Street and to reinstitute something similiar to Glass-Steagall.

So, the fun will continue. It’s very interesting that Paulson let Lehman go under, but blinked on AIG. It’s because they insure mortgages. Without that insurance a lot of pension funds, municipalities, and so on can’t own mortgage backed securities, because most of them would be below the necessary rating. I hope it’s obvious that if the insurer is bankrupt, it’s insurance isn’t worth much. Fortunately the US isn’t bankrupt. Yet.

A lot of this smacks of foreign debt holders telling the US what to do. Because my great fear, and I’m sure Paulson and Bernanke’s fear as well, is what happens if the Chinese decide to stop financing America. If they get twitchy, the Fed would be forced to either watch as the dollar crashed (and I do mean crashed, 20% would be reasonable) or intervene by raising interest rates precipitously (probably to over 10%), crushing the economy like a cockroach underneath a jackhammer.

Oh, and Obama (assuming he wins)? Most powerful president since FDR, in economic terms. When you own the market, you get to tell it what to do. No need for laws, you appoint the boards and CEOs. All he needs now is for Bernanke and Paulson to have to take over Citigroup.

Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in Pogge.ca and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at http://www.ianwelsh.net/