AIG: Ain't It Grand

Financial Crises lead to Financial Arms Race. But who will have the bigger guns?

AIG is the topic of today with many stories popping up from the news to the blogs for the overwhelming response from pundits and politicians regarding salary bonuses to executives of the company - bonuses that were promised last year, before the company ended up being owned by the U.S. Government. Freshman Representative Peters of Michigan has proposed legislation that would effectively tax those bonuses at 95%, with the remaining 5% to be taxed by state and local government nixing those bonuses in their entirety. Which has caused other financial institutions to consider pay loopholes that will help their executives dodge dealing with this abusive taxation of bonuses.

At the same time, a document is floating around Washington, and now on the web, that ties the potential risks of an AIG collapse to the global financial system (wonderfully recapped by the NYT). In this document, AIG lays out a doomsday scenario for its collapse that could nearly be set off by a sneeze in Asia, and end in the collapse of many Nations' Financial Markets. This is more-or-less simplified by two different scenarios began by the same lack of confidence.
1. Investor Confidence drops - In this case, a government cashes in on AIG's holdings and in the face of being accountable for the insurance written in that state, AIG is forced to cut itself into oblivion.
2. Policy-Holder Confidence drops - In this case, life-insurance policy holders cash in on their policies at a rate too high for AIG to handle at the present moment, leaving AIG in a position where it would have to liquidate subsidiaries to payout to policy holders.

I was in a bank in September where a woman was desperately trying to pull the money out of her bank account because she thought the bank was going to collapse.

Here's what we're talking about: A Financial Arms Race
To discuss Arms Races, you can use some great little tools that have been developed, namely, Game Theory's Prisoner's Dilemma. What we are seeing right now is an iterated non-zero sum game in which one player (in this case there are a very many players that act independently, though often in the same ways essentially being balanced with the U.S. Government / The People on one side and The Financial Institutions on the other) responds to the other in a reciprocated fashion in order to either punish or subvert the other player in the hopes of eventually pushing the loser into a stalemate or checkmate (the case where one player has no potential reciprocation for your opponents' last and final play).

Potential devastations of Arms Races, as demonstrated abundently during the Cold War, include Mutually Assured Destruction MAD which is the basis of the movie Wargames. The basis of MAD is that when a game is played out over and over again the players will continue to arm themselves to the teeth in anticipation of, and because of rumors that there will be, a threatening action by the opponent. So the government is threatening to restrict pay, the companies change pay structure. Eventually, however, one of two things will be reached:
1. the Equilibrium - This would be the point where delicately balanced relationship between the two sides leads to a mutual benefit
2. the Devastating Global Collapse - basically, all of the worst parts of the AIG Paper.

So let's put the two pieces together from above and think about what is coming in the next few weeks / months and consider that maybe it's time we reconsider our stances on things to reach that equilibrium instead of focusing on punishment and working towards a devastating collapse

The Opinion:
1. People: Do not try to cash out your life-insurance policy
2. Countries: Do not attempt to seize AIG's Assets in your country
3. AIG: Renegotiate and stop doing things that are going to piss off your stock holders
read here: the U.S. Government / The People
4. Realize that this game doesn't have a particular end in sight, so stop trying to make the final move and thus escalating the fight more quickly but instead realize that if we do lose, it's going to be a really big loss. So let's compromise a little bit so we can all get through this. Someone's gotta be the bigger man here and step down a little bit.

-----
Today's List
Here's a List of Games in Game Theory. When you think about the choices you make in your life, it's amazing how most of them can be simplified to one of these.

Going Galt

Atlases of our Society are pissed and are considering societal fissure

I have to start this by saying that I was really hoping to cover the EFCA. I was also urged to cover the budget today, all of which I will dedicate great care in dealing with this week...but I have to take some time to really flesh out this phenomenon - and this is my format for that.

To begin, an operational definition (note: this definition has been derived from readings that are generally from the persuasion of the oppressed and therefore intimate a personal tie to the phrase) is provided:

Going Galt: (verb)
1. to lead the oppressed creative and successful individuals of a society to begin a new society that is not socialist in nature.
2. to remove oneself from an oppressive state that has actively taxed (literally or metaphorically) you as a producer of wealth within that society

I want to start by talking about the issue that is at hand that leads those who are considering going Galt to do so. This seems to have something to do with the income tax increase of 3% on any income over $250,000 that has been proposed by the oppressive, and now apparently Socialist, Democrats. For those of you out there who do not understand the tax tables that you have your CPA handle each year, that means that you get taxed one rate for your income of $250,000 and then a 3% higher rate for your income that is over $250,000. So if you make $255,000, you will get taxed 3% more on $5,000, not on $255,000. So stop trying to figure out how to make less than $250,001 a year.

Now that we've covered that and already 20% of you have stopped going galt, let's talk about another side of this very complicated polyhedron - I want to talk about patriotism. The reason I want to talk about patriotism is because apparently those of you going galt have very loose definitions of patriotism, namely that if we're following you, you are patriotic, and if we disagree with you, then you're going to shove off and start a new country. That's not patriotism, and I'm pretty sure that Democrats stuck around for a couple of years while your boy Bush played War with our Tonka toys in the Middle Eastern sandbox.

I'll tell you something else, how much of that 3% that you are going to get taxed do you think is going to go to socialized medicine and other social programs instead of trying to pay down a very expensive war that we've carried on now for a seven years?

Here's the deal. You are not going to leave the country because;
1. You still hold out hope that your bitching and moaning is somehow going to turn back time on this issue and we'll forget that we need the money in the first place
2. Your special ass isn't going to make any money in a new country since you'll have no industry and no real capital as you're not really going to get a really good trade value with U.S. Currency then.
3. Your CPA will find some more loopholes for you and you'll end up not really paying much more anyway.

Finally, I would like to say something to Representative John Campbell (R-California) who posted a delightful little plea on The Hill Blog and Townhall.com begging that Obama reconsider the 3% increase in income tax:

I'm not going to worry about the potential collapse of the world because of a slight increase on income taxes. Your friends are not going to disappear off of the face of the planet, we're not going to see a mass exodus of people making over $250,000 and they are not nearly ready to commit to leaving this country, nor are they going to fold their businesses in revolt. They are going to continue to make money and building industry and providing jobs because they can't really do it anywhere else (and certainly not as well as here). Let's cut the end-of-the-world, fear-mongering rhetoric and let's start talking about solutions.

Tomorrow, EFCA and what it's potential pros and cons may be...

-----
Today's Suggested Reading
"Don't Think of an Elephant"
George Lakoff
Summary Blurb: "...much of the success of the Republican Party can be attributed to a persistent ability to control the language of key issues and thus position themselves in favorable terms to voters. While Democrats may have valid arguments, Lakoff points out they are destined to lose when they and the news media accept such nomenclature as "pro-life," "tax relief," and "family values," since to argue against such inherently positive terminology necessarily casts the arguer in a negative light."
http://www.amazon.com/Dont-Think-Elephant-Debate-Progressives/dp/1931498717/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1236646413&sr=8-1