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Where next for AIG? Who is John Galt?

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Paul Mason | 04:34 UK time, Wednesday, 17 September 2008

I am writing this on a train from NewYork to Washington. I have just reported on Newsnight that the US government is considering "taking AIG into conservatorship". There is a pink sky over New Jersey. The brakeman on the Amtrak is whistling Richard Halley's Fifth Concerto.

Actually this last detail cannot be true because, as all afficionados of Ayn Rand know, Richard Halley did not write a Fifth Concerto. He retreated to Colorado like the rest of America's disgruntled capitalists and creatives until the great art-deco rebellion described in Atlas Shrugged took off.

Think I am hallucinating? Well I blame Dagny Taggart for what's going on with AIG. Dagny Taggart is the heroine of Atlas Shrugged; and Atlas Shrugged (1957) is a kind of Lord of the Rings for people who dont like heavily-regulated business. In it Dagny single handedly takes on the forces that are holding back American entrepreneurship: sloth, bureaucracy, unions, intellectual property theft and over-regulation.

All unionists, sloths, regulators, IP sneaks and bureaucrats are portrayed as sympathetically in Atlas Shrugged as are the Orcs in Tolkien. Rand was one of the authors who inspired Alan Greenspan and a whole bunch of other people who helped shape the current financial architecture.

For much of today I have been slinking around in my trenchcoat and trilby (this bit I made up) outside the distinctly Dagny-esque HQ of AIG corporation (think Gotham City with Wi-Fi). AIG is in such deep trouble that it is seeking a 75 billion dollar bailout from JP Morgan or failing that, from the US government (this bit I did not make up). Inside that amazing Jugendstil tower on New York's Pine Street, clad with aluminium plate, lit like the set of a Bogart movie, they have been fighting for survival all day.

AIG has been brought down to earth by the subprime crisis, into which it threw itself with the same reckless abandon as, er, Dagny herself shows in Chapter 8 with Hank Rearden.

...Arriving at Washington's Union Station, with the yellow light streaking down the windowpanes and the click heels of a hundred weak and tired executives echoing through its marble opulence, a cab driver opened the door.

"What's happened to AIG?" I asked.

"Who is John Galt?" he answered, before slipping silently into the shadows.

Somewhere between there and the sultry decadence of New Hampshire Avenue Paul Mason, lean, haggard and exhausted, learned that Hank Paulson has indeed bailed out AIG, to the tune of 85 billion dollars. It is not in conservatorship - ie quasi-nationalisation - but Paulson has had to go to Capitol Hill to get the OK for it, as it is just as good as state controlled right now. Mason sighed. Once again he would have to pick himself up and pull his trench coat around his haggard neck, tipping the brim of his trilby hat low into the night...

Actually, once again, the US authorities have proved capable of a bit of that human greatness that Ayn Rand celebrates in the novel: they have improvised and, against all ideological prejudice, saved a major institution with timely and unique government action. What we don't know yet is if it will work long term.

So why do I blame Rand, Dagny and Atlas Shrugged? Answer: for making regulation a matter of dogma, for and against, instead of a matter of technique and creativity. It is now clear that, instead of light-touch regulation, what was needed over the decade of financial innovation was something in another dimension: the pro-active pursuit of rectitude and transparency, leaving behind the old rules of "regulate-deregulate". How AIG can be valuing its Alt-A debt at 67 cents per dollar when Lehman went bust valuing Alt-A at 39 cents is, frankly, an indictment of the regulatory regime on Wall Street. It's not a problem that I don't know who's valuation is correct: it is a problem that nobody can know.

In the book the ultimate hero/wise man figure, John Galt, proclaims: "I swear by my Life and my love of it that I will never live for the sake of another man, nor ask another man to live for the sake of mine." I find this credo a challenging counter-argument to the co-dependent culture of our times, but as a shaper of business strategy it has brought great corporations to their knees in days that had lasted more than a century.

As a creed it is being rapidly and publicly disowned by both parties: Obama and McCain are, as I speak, knocking lumps out of each other on the networks over the failure to properly regulate; and CNN is doing an explainer on FDR's New Deal.

In the next decade the debate over regulation will not be over strong versus weak regulation, but clever versus dumb: it's a global system and the light touch regulators have a point in that heavy handedness simply drives the problem offshore. But American capitalism was, today, teetering on the brink of a really serious business failure - manifestly because AIG's activities had slipped through what now looks like pretty ineffective regulation.

There are some very serious people who swear by Ayn Rand's book: I've seen it handed out for free like Chairman Mao's Little Red Book at venture capital seminars. I respect those people, and I know why the book inspires them; likewise it stuns me that loads of clever people in the internet generation have never read it, and will only know it through Angelina Jolie's upcoming film. Its worth reading.

But the masters of the financial universe have, seriously, got to move on from Dagny Taggart. She's a great human role model, but guys it's just a book! Running the real economy, as Hank Paulson has proved tonight, you have to put behind you romanticism and ideology of every kind.


  • Comment number 1.

    It has just occured to the LibDems that they have made the most serious mistake in electing Nick Clegg and not Vince Cable. Clegg is so lightweight and his interview with Paxman said so much...because he didn't. 'How much do pensioners get?' Er, it thirty quid?' That will haunt him forever. Cable makes the speech of the conference and would be welcome next week at Manchester when we will have a Brown lovefest with knives in pockets.

  • Comment number 2.

    When firms are willing to take them over why do they prefer to go bust or wait to be taken over by the fed?

    The Fed is now the worlds biggest hedge fund.

    The big car manufacturers are looking for money. Maybe the comrades at the fed can help?

    Paul- have you tried decaff? ;)

  • Comment number 3.


    I see we are into 'book analogy' and regulating the unknown. How apposite, as we are also in the combined Ages of CRUNCH and CERN. Paul Mason (any relation to Perry?) writes of one aspect: 'It's a problem that nobody can know'; in both Crunch and Cern, the common factor seems to be vast amounts of money and a lot of guesswork.
    Richard Feynman declared that anyone who 'understood' Quantum theory - didn't.
    (Wonderfully like the Tao don't you think?)
    I suspect global money has properties (chaotic?) that will never be described by a fixed formula, therefore, can never succumb to regulation. Money is not the first product of Post-Sapient Homo to slip from his opposed thumb (that so often opposes) and make a monkey of him. Of his declining CEREBRAL grasp, all I can say is: 'WATCH THIS SPACE.'

  • Comment number 4.

    Paul, I think you are wasted on Newsnight [maybe just wasted ?] - I think you could become the philosopher of our times, or a kind of 'Melvyn Bragg for the visual age..'

    Seriously - get on the blower to the publishers - I think you could have several books in you which just have to be released to stop you getting terrible indigestion...

    While you are there, can you settle an argument for me ? Justin Webb's latest tome seems to allude that the train from NY to Washington is so bad, 'you could almost be back in England'..

    Perhaps you would care to comment with a view on whether British railways might be better back under state ownership [Europe] or even more 'market based' [like the Americans..]

  • Comment number 5.

    "In the next decade the debate over regulation will not be over strong versus weak regulation, but clever versus dumb: it's a global system and the light touch regulators have a point in that heavy handedness simply drives the problem offshore."


    Yes ! Why is no one else writing about this ?
    Hank Paulson said the regulation system was 'archaic' - it is not about the Quantity of regulation [though there is now clearly too little] but its QUALITY - it's 'fitness for purpose' to use the jargon.

  • Comment number 6.

    And you need to put behind your romantism and ideology and see that we are not heading towards 'socialism' - stop dreaming-but that the chaos is being used to increase and consolidate monopoly.

    Competition policy is just now being put aside in the UK - for these convenient 'abnormal circumstances'.

    Those huge monopolies will control governments - no going back.

    That's what is going on.

    You try reading 'Shock Doctrine'

  • Comment number 7.

    The sub-prime crisis is the product of the Clinton Administration and his fight against "discrimination". All the rest are only consequences

  • Comment number 8.

    Paul - interesting thread. I have never read the book.

    I am left with the thought that, in this internet age, you should never take anything for granted. Just because someone tells you this is a grade AAA investment, do you believe him? Whether its a bond, a house or a car?

    Equally to have layers of regulation (= cost) is not the answer either.

  • Comment number 9.

    Well if we had followed the Rand bible we would have never had a fiat currency system and gone back to the reality based gold standard, so I can take it from your post you have read it but not understood it?

  • Comment number 10.

    The superiority of laissez-faire over state regulation is not something that can be explained to the layman in a few soundbites, which is why it has always been politically suicidal to promote - especially near an election in a time when the populist view of things is that the "free market" is to blame for the crisis that's worrying everyone.

    The real economic truth of the matter is that the recklessness which has led to this crisis would never have come to pass without the socialistic meddling in the economy, which was intended to give the poor equal access to loans they would never have been given otherwise. If lenders had not been forced to lower their underwriting standards by Carter's Community Reinvestment Act, the sub-prime meltdown would never have happened.

    The core messages of Atlas Shrugged, Rand's "Capitalism", Hayek's "Road to Serfdom", Hazlitt's "Economics in One Lesson" and of everything Mises every wrote still apply today, even now. Without the interference of the state the free price system will regulate itself - as soon as the state starts interfering, every interference necessitates another interference and another one until the state has two options - take complete control of the economy (socialism/fascism) or to simply let go, and let the market correct itself, however painful that may be.

  • Comment number 11.

    Paul, the problem with your view here is that the current financial misconduct came in to being to circumvent the Basle II agreement - regulation.

    If anything the root of the credit crunch was a response *to* regulation combined with the Clinton and Bush years pushing for home ownership in the US.

    The Randroids could quite easily argue, quite correctly, that regulation was part of the problem here.

    And the bald fact is that Government is too slow and attracts, in general, lesser lights than the private sector - as such regulation will always lose, and the banks will always find loopholes and ways to circumvent the regulations. It's a game the authorities can never win.

    Perhaps all that was actually needed was the enforcement of common sense?

    You can point to any amount of daft things from Rand ('smokestacks to the moon!' anyone?), but John Galt comes out of the current crisis merely bruised, certainly not broken.

  • Comment number 12.

    Ah, Atlas Shrugged and all those spotty ex-boyfriends, ex-rock bands (Rush anyone?), ex-Fed heads...I think it's a measure of progress if adolescent boys are no longer reading it! Unfortunately the ones who did from the 50s, 60s and 70s are now ruling the world. And if Angelina Jolie is in the film, yet more will have their view of the world twisted by it.

    Why respect these people? The banks etc get to the point where there are no more pips to be squeezed out of people who actually create ideas, things and services and they're 'surprised' that there was a limit! And more than that, need billions in what is essentially corporate welfare to bail them out. Incompetence rewarded yet again.

    Carter shouldn't be fingered for this mess, but Reagan, who made it possible for bankers, etc to come up with ever more elaborate ways to shelter themselves from the risks they take with other people's money. Which made them happy to encourage working people to take on more risk than they could handle with the knowledge that it would never come back on the banks.

    It's not about tinkering with regulation, it's about who controls the wealth in the economy - the people who produce it, or those who pimp off them. Rand gave a few generations of financial pimps the illusion that by controlling the wealth they were somehow better than the people creating it.

    Rand was intellectual cocaine for the 'supermen' really - and while we're told to give up our homes they keep their many houses and yachts. (Smart people are fighting repossession by asserting that their bank has sold their mortgage on and therefore cannot exercise any rights attached to it.)

    Humanity is having to choose whether it will carry on competing to be supermen and die out, or cooperate to sort out the mess the 'supermen' have created.

  • Comment number 13.

    #11 - Frank I take your point on regulation.

    It's going to be tough to impose a global regulatory regime: however there is the beginnings of a methodology - not with Basel II but Kyoto. And before a load of people attack me for advocating Kyoto I am not - I am saying it is a methodology if you wanted to re-regulate globally. But I think equally powerful is information networks: the consumer can "regulate from below" if, for example, they boycotted institutions that were not signed up to a basic global standard of business practice. It's worked for Gap and Nike; could it work for the investment banks?

    One detail I am interested in: a finance lawyer told me work is under way to create a "clearing house" system for CDSs. Anyone know about this?

  • Comment number 14.

    The faith people have in "regulations" is absolutely stunning! The entire sub-prime mess is 100% a GOVERNMENT PRODUCT. It's the consequence of:

    - Government inflating the money supply massively, thus generating equally massive misallocations of economic resources

    - Government overspending on war, pork and everything else that destroyed real wealth.

    - Government encouraging banks to hand out loans to people who should never have received them in order to get credit for having "helped poor people to own their houses".

    - Government providing help for those who made bad business decisions (such as responding to the government suggestions regarding loans to the poor), thus insulating the decision makers from the consequences of bad decisions; the entire bail-out by government is EXACTLY the kind of bullshit Ayn Rand was warning against

    - Regulators? They're IN BED WITH big business; literally! Check out the recent articles about the oil industry regulators. That's been true for all US administrations, it's not a republican or democrat thing.

    And it's WORSE everywhere else. France? Corrupt to the bone! Belgium? Incompetence incorporated. Italy? Spain? Greece? Portugal? Do I really have to mention all the ways in which regulators are worse than the worst possible abuse they're supposed to prevent?

    As for the EU, we reach new lows: when a journalist brought to light massive corruption in the Statistical office, the ONLY person to go to jail was he himself. Edith Cresson lost her job but kept her pension. That's not even remotely "punishment".

    You want to hand over control to those guys?

    International regulations - Kyoto etc? Does anyone here really have faith in the UN? Living next to Geneva, I've seen the workers at the International bureau of labor strike twice over abysmal working conditions - sexual harassment, excessive overwork, mobbing... and they're supposed to "regulate" the labor market.

    Quis custodiet custodientes? Who guards us from the guardians?

    I prefer a million times self-regulating markets. The "self" being THE CONSUMERS!!!

    Yes, businesses will fail - that's exactly how markets do regulate bad decision makers! LET THEM FAIL !!!

  • Comment number 15.

    Oh dear God...

    Ignoring the obviously absurd elements of this blog posting (private banking apparently invented by Ayn Rand - poor old 17th century Netherlands doesn't get a look in! - actually Rand is a rather obscure and controversial figure even among other liberals)...

    1. Banking is not a free market industry. It is quasi-nationalised, with the currency being printed at will by government, and backed by nothing except the government's fiat that it be accepted as legal tender. The government sets inflation both interest rates (though it can only 'target' one) by printing more or less money.

    As such, it is by no means clear on the face of it which element is to blame, although it is somewhat 'suspicious' that this happens semi-regularly to the quasi-nationalised banking system, all the time to fully nationalised industries and almost never to fully privatised industries.

    2. Greenspan was not some kind of objectivist ideologue while Chairman of the Federal Reserve (the lynchpin on which your argument that objectivism, and thus all wider liberalism, caused this and is thus 'outdated' rests), and most objectivists regard him as a traitor just for accepting a job at this statist institution. Either you already knew this and are deliberately misrperesenting facts, or you just didn't do any research. Duplicious or incompetent?

    3. There are very good reasons to believe that it was the nationalised element of the system that caused this. Notably, the expansion of the money supply, which has been proceeding at far above economic growth both in Britain and in America and has been doing so since at least the 90s.

    This provides a glut of "cheap money". Of course, as this money is "new money" and doesn't represent an actual increase in the amount of valuable 'stuff' in the world it quickly causes inflation (in effect, it is a tax on everyones' savings, paid to banks).

    But, in the meantime, it makes it appear as though it is cheaper to borrow money than can be sustained over time. The more risk-friendly banks make investments that are actually nonsense, with no hope of ever gaining a return. When the system is forced to correct itself (the government can no longer stomach pumping in as much money as would be required to keep propping it up), this truth is revealed and those banks go bankrupt.

    4. As such, many of the banks (particularly the non-investment banks) are not going bankrupt, and are absorbing the investment banks. This is capitalism working precisely as it should. Again, the government is interfering by propping up bankrupt businesses with other peoples' money. This is simply theft - there are no two ways about it - and it encourages and consolidates bad management and reckless risk taking. You seem to approve of this.

    5. The assumption that regulation will help is rested on a fundamentally wrong assertion that governments have been able to accurately predict these things. Not only have they not been able to predict any of the major crashes in world history, they have actively caused and encouraged the unsustainable booms fuelled by cheap government fiat money in the years leading up.

    Now, your final, slightly paranoid, given the evidence, assertion that Randites are in control everywhere is thankfully for you not true. If they were, there would be no licence fee (or 40%/GDP taxation, for that matter...) and I certainly would not be paying it for Trotskyite music teachers to call themselves economics editors and write absurd party-political polemics while claiming impartiality.

  • Comment number 16.

    All I can say to the mythology that any present leadership practices the tenets of Ayn Rand is: I wish! A mere look around you will tell you otherwise. Where do you see deregulation--I mean, total, laissez-faire deregulation? Where do you see the abolition of the welfare state, of public roads, fire service, post offices, and taxes? You don't. So this is BS.

    As usual, capitalism gets made the scape-goat of economic ills which are always perpetuated by government interference, and more of the poison that brought us to where we are is called for as a cure. The slightest glance at reality should make us question.

    To everyone reading (including the author of the article), I suggest you actually go and read Ayn Rand before you criticise her. Greenspan may pay lipservice to her ideas but he is hardly someone who has practiced them, as he did nothing to loosen government control over the economy while in his position as leader of the fed.


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