Q: They keep telling us that taxpayers own AIG now, but isn’t the Fed a private bank? Who really owns AIG and what’s it worth?

A: Yes, the Federal Reserve Bank of New York is a private bank. Here’s how the deal worked: the Fed agreed to loan $85 billion to AIG at a very high interest rate. That’s what the Fed gets out of the deal: enormous interest payments. But the Fed told AIG that it couldn’t have the loan unless it made the US Treasury (the taxpayers) the majority shareholder in the company. So now, the Fed (as AIG’s biggest creditor) and the US Treasury (as the majority shareholder) control the direction of the company.

The first thing Bernanke and Paulson did was fire the old CEO and hire a new one. The next thing they’re going to do is sell off AIG’s valuable assets and use the money to pay off creditors (including that huge $85 billion loan to the Fed). If there’s not enough money to pay all the creditors, the US Treasury (taxpayers) will be on the hook to cover the bill. And all the junk assets that couldn’t be sold will belong to the US Treasury (taxpayers), including AIG’s credit default swaps. Don’t be fooled by statements that claim the US Treasury (taxpayers) could make some money off this deal. There’s no market in credit default swaps, so there’s no place to sell this junk, and there never will be. It’s worthless.

So, if they’d been allowed to fail and declare bankruptcy, AIG would have had to sell off all its assets and pay as many of its creditors as it could. Everyone else, including its bondholders, shareholders, and customers who owned credit default swaps, would get nothing. Under the bailout plan, the US Treasury will ensure that at least the bondholders and customers of AIG get something–all at taxpayers’ expense.

Q: What about the bigger bailout that Congress is considering? Isn’t that just going to help the rich jerks who got us into this mess? Why doesn’t Congress do something to help people like you and me who are losing their homes to foreclosure?

A: You’re right, there are two ways to handle the problem. You can inject money into the top of the pyramid and bail out the big banks and investors, which is what’s happening now. Or you can spread money around at the base of the pyramid by helping out folks going through foreclosures. But the time to do that is past. Back in late 2007, housing advocates called loudly for a government plan to help people refinance their mortgages; this would have forced banks to take write-downs for part of the value of the bad loans they made. Sure, there would have been turmoil at the top, but it wouldn’t have been as bad as it is now. For one thing, everyone would have had a better idea of how big the problem is, instead of continually trying to guess, and then finding out you’re still underestimating the problem.

Even back in March, when Bear Stearns collapsed, there was an opportunity for the Bush administration to wake up and formulate an overall plan for addressing the problem. There was still time for President Bush and Treasury Secretary Henry Paulson to put together legislation that might have helped homeowners and given Wall Street some guidance on how to get through this crisis. But at every step of the way, the Bush administration was hamstrung by its own extreme free-market ideology, which prohibits government from interfering with the “self-correcting” market. The current panic is the result of that inaction.

Q: I’m not surprised that George Bush didn’t have a plan; that’s his modus operandi, whether we’re talking about stuff here at home or the war in Iraq. But what about the presidential candidates? Do they have any plans to deal with this crisis?

A: John McCain has done a number of flip-flops when it comes to the economy. He has a record of supporting deregulation, and his senior advisor on the economy is Phil Gramm, the man who drafted key legislation to deregulate the finance industry. But just last week McCain started talking about imposing more regulation on banks and finance companies. He’s also done a complete U-turn on bailouts. He was against bailing out any private companies, but last week he changed his mind and supported the bailout of AIG. Then he changed his mind yet again and scolded the Fed for setting up a bailout plan for the industry and said it should stick to managing inflation and ensuring a strong dollar. That made people question whether McCain is on the same planet as the rest of us. It doesn’t help that the only concrete proposal he’s made so far is to set up a commission to study the financial crisis.

Obama, on the other hand, has been clear and specific about what he would do. Back in March, when Bear Stearns collapsed, Obama listed three things that should be done immediately: 1) the Fed should be allowed to regulate any company that borrows money from it, 2) regulators should set standards for how much cash on hand each bank must have, ensuring that banks have adequate cash-flow (liquidity) and not just adequate capitalization (which measures assets that aren’t necessarily easy to sell), and 3) the federal government should create an oversight body that can identify risky types of investments before they become a threat to the stability of the system (in other words, regulate derivatives and ban the riskiest ones before they are widely marketed and sold). These three very specific proposals show that Obama at least understands the nature of the problem. Obama wouldn’t necessarily do a better job managing the economy than McCain would, or even do things differently from McCain. But at least Obama isn’t stumbling in the dark trying to figure out the problem. He knows what it is, and that’s the first crucial step in finding a solution.