For the first time in this unfolding financial crisis, I felt personally scared by the news. Not about my money, but about the potential for catastrophe. The Federal Reserve’s lightning rescue of AIG has the smell of systemic fear. The house of global finance is on fire and everyone is running for the exits, no sure way to turn them around. What’s next? The question itself is ominous because there are no good answers.

The U.S. central bank and other nations acted with speed, and good that they did — an emergency loan of $85 billion to prop up the failing insurance giant plus another $75 billion in liquidity pumped into the banking system to calm nervous bankers worldwide who abruptly stopped lending.

The international rate for overnight lending among banks has doubled — an expression of fear that describes the potential danger of a sudden freeze in lending, more or less everywhere. That would deliver a deep shock to real economic activity, not just in the United States but worldwide. This feels ominously parallel to the financial chaos that followed the crash of 1929 and led to global economic collapse.

Government is much better equipped this time with various safeguards to defend the system against an implosion — including Fed Chairman Ben Bernanke’s personal willingness to act swiftly with unorthodox measures. But the case of AIG suggests the present unwinding has a malignant dynamic to it that might even overwhelm the authorities’ capacity to put out fires. That’s scary. I hope I’m wrong.

The reason the Fed was compelled to save an American insurance company in order to save the global financial system goes to the source of the rot — the “new financial architecture” developed during the last generation…

Full Story: http://seattlepi.nwsource.com/opinion/379509_greider18.html