Last night, the Federal Reserve announced that it'll lend $85 billion of our money to bail out American International Group, in return for an 80% stake in the company.
So much for our free-market economy.
The principle at work here is that some companies simply are "too big to fail." AIG's tentacles reach too far and too deep, we're told, and too many individual and institutional investors would be hurt by the failure. And we’re warned, of course, that the total implosion of AIG would "roil the markets" across the globe.
That some companies succeed and some fail is fundamental to a free-market economy. The insurance business is all about managing risk -- and AIG, the world's largest insurer, failed to manage its own risk.That's why AIG's stock price (and thus its market capitalization) is down 92% just this year, and why the major credit-rating agencies downgraded the company. It's also why even Wall Street's biggest players couldn't put together $75 billion to rescue AIG.
No one truly believes that $85 billion will save AIG, or that taxpayers will ever see a dime of that money. Considering the interest rate of 11.31%, a company that can't meet its business obligations isn't going to be able to pay a loan shark.
The bailout merely postpones the inevitable -- not just for AIG, but for our entire dysfunctional economy.
For the record, I don't subscribe to the naive suggestion that the federal government should devote its trillions to saving individual investors and homeowners from certain bankruptcy instead of rescuing big Wall Street firms. Rather, I submit that it's in our best long-term interest to once again make failure an integral part of our economic system.
The short-term pain would be deep, excruciating and, by any measure, devastating. It'd take years to recover and rebuild. But as long as we keep rewarding incompetence, our economy sits on a weakening foundation. Whether it crumbles slowly or collapses catastrophically, the outcome is the same.
Let it fail.
