Wednesday, September 17, 2008

Resolution Trust Corporation Redux?

Perhaps with the government loan guarantees for the orderly liquidation of AIG, it might be time to establish an entity similar to the Resolution Trust Corporation, which was charged with the orderly liquidation and auction of assets of failed savings & loans back in 1989. While the government could actually make money on the deal it crafted with AIG, the establishment of an entity, such as the RTC, might make any further bankruptcies of banks, investment banks or insurance companies more routine, and eliminate the sensational reporting of these various crises when entities deemed "too large to fail" begin to falter. The current financial difficulties we are now experiencing are not without precedent, and the irresponsible references to current events being similar to the Great Depression are simply unacceptable.

While I realize Mr. Obama is running for President, he should be using his position to reassure the public that the economy is indeed sound and able to deal with situations, such as the ones we've been watching play out for over a year now. The Federal Reserve made policy errors, failed to increase the money supply, and failed to coordinate the orderly liquidation of assets during the Great Depression. The unemployment rate was a staggering 25%, not 6% as it is currently, and the stock market had lost MOST of its value during the market meltdown prior to the Great Depression, not 4% as happened with the "historic" 504 point decline on Monday. In fact, the 508 point decline in 1987 represented a 22.6% market crash, so we must use perspective when discussing the current situation.

Finally, in reference to the AIG situation, it is important to relay to the public that while the insurer is one of the largest insurance companies in the world and deemed too large to fail, the policy holders are NOT in jeopardy. With the loan guarantees, AIG's insurance businesses will be auctioned off to other insurance companies, who know it is in their best interest to be sure those policies are made whole. Insurance companies are also regulated by state insurance commissions which also back the explicit guarantees in insurance policies. An economy, in conjunction with the government, that can react to these situations and have the ability to craft deals that protect account holders and policy holders, but doesn't reward CEO's and common shareholders, is one that is fundamentally sound. Grandstanding and pointing fingers doesn't solve the problem.

The Congress, if gets off its duff and adopts a credible energy policy utilizing all of our resources to break our dependence on foreign oil, could go a long way toward STIMULATING a sound but faltering economy. Leadership will be key as we go forward. This is no time for our leaders to be crying wolf to get elected. A clear and level headed response to the economic challenges we face is paramount to reforming the weaknesses in our system.

John Kaighn

Jersey Benefits Advisors

The Kaighn Report