In the fall of 2007, when the U.S. economy first seemed in peril, I began answering reader queries here on the Business Desk. I still do so, but this page has expanded to include posts from eminent economists, "far-flung correspondents," and a variety of voices that have intriguing and/or useful things to say about economics, broadly defined. Please feel encouraged to respond to any and all of them.
Question: Since the Treasury Department bailed out AIG and AIG had underwritten a large number of credit default swaps (that I understand pay up if a certain percentage of mortgages in a portfolio go into foreclosure), then isn't the Federal Government encouraging banks to foreclose so they can then collect the insurance?
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Paul Solman: I think you have it backwards. AIG was indeed in the credit default swap business. But it was typically insuring batches of loans against default. Thus if a portfolio of loans defaults because a percentage of them have gone into foreclosure, AIG is on the hook for the insurance it in effect wrote.