Economic Crisis is Entirely Complicated

AIG should follow through with its badly-negotiated contracts, and should do so without using one dime of the bailout money.

The roots of our economic crisis are actually really, really complicated; we’ve learned to do things with money that are so dizzying that we really have no idea what’s going to happen next. It comes from the belief that since we invented the stuff, we must understand that laws it behaves under. I’m looking fnordward to seeing how that theory turns out, but in the meantime we’re stuck sorting through a hip-deep pool of securitized instruments that’s had a slew of interesting derivatives poured into the mess.

To quote myself:

The reason why you should never invest in something you don’t understand is because if you don’t understand it, someone is going to increase their own profit with your ignorance.

These complicated financial instruments were created because someone found an obscure loophole or a clever sales pitch and manufactured something that would make money hand over fist – but that clever person never spelled out whose hand, and which fist. For all the money you hear about the securitization industry making by slicing and bundling mortages into investment vehicles, you can be sure that lots more got made in ways that none of us really understand yet. If it’s complicated, it was designed that way to obfuscate its true purpose.

Luckily for us, not everything in the recovery is going to be as complicated as the downfall. For example, the current flap about the insanely large bonuses given to AIG employees – the same ones that brought the company down? I think the solution to that egregious violation of the public trust is to make AIG pay the bonuses, but with their own money. I wonder how quickly they would backpedal if they had to cough up every cent themselves?

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