If the government hadn't taken over AIG, the economy probably would have collapsed. A federal judge seems OK with that.

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I know plenty of smart people who believe the Bush administration and Federal Reserve should have stepped aside during the Panic of 2008 and let the whole diabolical contraption of “financial services” collapse.

We had this dispute at the time. My point was that it wouldn’t have just taken down the toffs but also the global financial system, with catastrophic consequences for working Americans. Imagine the pain of 19th century panics supercharged by complex modern societies and economies.

But they will no doubt feel justified with the federal court victory of Maurice “Hank” Greenberg, who argued the government had no right to seize the giant insurer AIG, of which he was former chairman and CEO. Greenberg wanted $40 billion in damages for himself and shareholders. He got nothing but “a moral victory.”

Had the government done nothing, AIG would have been forced into bankruptcy and the shareholders would have lost everything anyway.

But, so interconnected and “systemically important” was AIG, that allowing it to do a Lehman Brothers might well have brought on something far worse than the Great Depression.

The outcome was bad enough. Every time you hear words like “inequality,” “unemployment” and “stagnant wages” — say “Wall Street.” It’s not the only cause, but its hustles-come-crashing-down are a big part. Privatize profits, socialize losses.

If it stands, the ruling might make regulators hesitate to rescue any institution in the future. But considering regulation continues to be gamed in favor of Too Big to Fail, complexity, gambling with derivatives, and incentives to take high risk and leverage — often called “deregulation” — the next crisis won’t merely punish the Wolfs of Wall Street (if it punishes them at all).

Six-and-a-half years after the Panic of 2008, the federal government has yet to address the fundamental causes of the disaster. Dodd-Frank is not a 21st century Glass-Steagall. The Volcker rule on derivatives is in neutral. All the bad incentives remain in place. No big-time CEO larding on the risk fears going to prison or even giving up his or her lootings from the corporate treasury, quaintly called “executive compensation.”

Greenberg’s “victory” is not one for the public or the public good. But that was never his racket.

Today’s Econ Haiku:

Shell’s rig has moved on

Where the real action takes place

The pope knows the score


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