I have argued here and here that Obama needs to do a better job of explaining how we got into this financial mess, how his policies will get us out of it and, most important, how we prevent a repeat in the future.
A little while ago, the president gave an impromptu press avail and made a small, but good start. I don’t have the video just yet. But when he was asked if he could explain to the American people why it’s important that taxpayers bail out AIG. Here is a summary of what he said:
AIG issued a lot of insurance policies to banks against losses for the bad investments they made. Once those investments went south, AIG was forced to pay, but it hadn’t enough capital. If AIG was then allowed to go bankrupt and not pay the banks, those banks would have failed and the investments of many Americans in those banks –- through their 401k’s and pensions — would have been decimated. Small businesses would also not be able to tap into credit lines to keep their businesses going.
He then explained that it was critical that moving forward that financial institutions and those who issue insurance policies have more capital, so that if they are forced to pay out, they can do so without going under. In other words, they need a better asset backing for the insurance policies.
All in all, it was a good start. Here’s how he could have improved upon the explanation:
- He could have added that banks were also buying securities (mortgage-backed securities and other exotic derivatives) without enough capital to protect themselves against losses.
- The reason AIG could issue those policies is because the U.S. has insufficient regulations to require assets to back those insurance policies.
- He needed more info. on why bank failures hurt the country. That may seem elemental, but a lot of people don’t understand why it matters. It’s not just a matter of depositors losing their money. The FDIC can protect some of that. But if many big banks fail, the U.S. doesn’t have the money to pay depositors. We can print money, but then the value of the dollar would drop so precipitously that our entire economy would be threatened by hyper-inflation.
- Explain better how 401k’s are invested: The organizations that — labor unions, investment concerns paid to invest 401k contributions – typically invest employees funds in banks and insurance companies. If they go bankrupt, the 401k tanks.
- A bit more detail on the kinds of regulations he would propose would have been helpful, including saying specifically that he wants to make sure that, going forward, no institution is “too big to fail.”
Still, this is the kind of explanation Obama needs to make in a series of fireside chats.