Conservatives looking decidely socialist as AIG and market flounder

You know there’s been a profound sea change in the American economy when CNBC’s Larry Kudlow sounds like a bloody socialist, allowing room for taxpayers to bail out American International Group (NYSE:AIG) with short-term bridge loans.

This, on the heels of Lehman Brother’s (NYSE:LEH) slow-motion bankruptcy declaration, threatened since investment bank Bear Stearns bit it in March, and Merrill Lynch’s (NYSE:MER) hasty shotgun wedding to Bank of America (NYSE:BAC), keeping one of the oldest financial institutions in the country from becoming a has-been tart of little means.

This morning the New York City Fed met to discuss the options to prop up AIG, which got itself in to this disastrous mess with exposure to $62 BILLION in credit default swaps. First, this number is MASSIVE — yes, boldface uppercase emphasis here, as the amount is three times as large as the entire U.S. stock market valuation. Secondly, it’s complex as all get out; credit default swaps (CDS) are risk management devices in the form of derivatives that are designed to act as hedges.

Yes, that sounds like gobbledy-gook if you aren’t familiar with the financial industry. Even a tremendously wealthy and financially savvy guy like Warren Buffet thinks they are dangerous, calling them “financial weapons of mass destruction.” (Spot on, Mr. Buffet.)

Larry Kudlow, whom most conservatives I know believe to be to the far right of them, sounds panicky this morning on CNBC when trying to wrap his head around his new-found belief in taxpayer-funded bailouts for corporations. This bit from a statement by Treasury Secretary Hank Paulson, is forcing Kudlow and his conservative brethren to take pause:

Q Thank you, sir. Can you talk about what the federal role should be going forward? And are we likely to see any more federal involvement in rescues, like you did with Fannie, Freddie and Bear Stearns?

SECRETARY PAULSON: Well, the federal role is obviously very important, because as you’ve heard me say, nothing is more important right now than the stability of our capital markets. And so I think it’s important that regulators remain very vigilant. We’re very vigilant, but we do not take, and I don’t take, lightly ever putting the taxpayer on the line to support an institution.

Q Should we read that as no more?

SECRETARY PAULSON: Don’t read it as no more; read it as that it’s important, I think, for us to maintain the stability and orderliness of our financial system. Moral hazard is something I don’t take lightly. The other thing I think I’d like to focus you on is the way our financial system came together, those institutional leaders coming together to do things to support the markets. And that’s what I’d like to see continue to happen here.

Emphasis mine — that’s the key nugget checking the financial industry talking heads short this morning. Paulson’s telegraphing concerns of worse problems ahead, and that we need to think stability and order, not free-wheeling free market and its now incumbent free-fall.

With all the blithering and panic going on in the financial media, I can only wonder why all of the talking heads aren’t now coming to the realization that regulation isn’t always the bad thing that conservatives make it out to be. AIG’s business model, built on regulation-free financial instruments, surely brings the point home.

I also wonder why they aren’t making the connection between between a certain senior presidential campaign adviser — the one who said the problem with the economy is all in our whiny heads — and the debacle on Wall Street.