AIG, Obama & the Domino Theory

Last year, Treasury Secretary Henry Paulson of the Bush Administration gave us a single untested reason why the federal government should pump billions into AIG. Under President Obama, current Treasury Secretary Timothy Geithner continues to endorse that policy: It is that AIG is too big to fail. The theory holds that because of its size, an AIG failure poses “a systemic risk” which would spread throughout the financial system.

This is like telling us that the financial system resembles a set of dominoes all lined up half an inch from each other. AIG, it’s implied, is the first domino in the string and, if that one is knocked down, all the others will collapse in succession. We are presented with no other options. In the 1960’s the nation fell for that line of reasoning and paid dearly for it.

Those of you who are old enough to remember the months preceding the Vietnam War (and you young ones who should have been taught the causes of that war in school) may remember that Americans were told the same thing.

The rationale for war was officially called “the domino theory.” The United States could not afford to let Vietnam fall to the communists. To do so would result in other Southeast Asian countries to be overrun by communism.

To assure that this would not happen, the U.S. dispatched thousands of young American soldiers to Vietnam; failed to support them in a bungled military operation; spent billions; and lost the war. All that and, after a disorderly American retreat, Communist North Vietnam took over the entire country.

The infamous domino theory used to justify the Vietnam War was a feckless assumption. The other dominoes did not fall.

See the connection? We are now being sold a similar financial domino theory that if AIG is allowed to go down, the other firms in the financial world will go under. Perhaps. But Americans have not been presented with alternative, less costly and more market-oriented alternatives.

Like the Vietnam era domino theory, we are expected to blindly follow the “experts,” just like those Johnson era presidential advisors, Robert McNamara and McGeorge Bundy who kept President Lyndon Johnson in that war to its bitter end, and ruined his chances for re-election.