AIG: not too big to fail

I had a nice chat with Bill Niskanen, chairman of the Cato Institute, while writing this editorial for the Register on the decision to offer another $30 billion in bailout money from the taxpayers to AIG, the insurance behemoth. As he put it, when the gurus say a company is "too big to fail," the proper response is that it's too big to subsidize, because it has all the leverage over taxpayers. The ironic thing is that there are pieces of AIG that are nicely profitable, but it got caught up in exotic secondary mortgage market instruments like Fannie and Freddie (which should be cut up into little pieces and sold to the private sector instead of being given another $200 billion to squander).

Bailed-out companies still failing

Here is a Register editorial on the phenomenon that two of the companies presumably "bailed out" by the taxpayers -- AIG Insurance and Fannie Mae -- are doing worse (bigger losses) since the government supposedly "saved" them. The reason is obvious. In a free market companies that waste money and do stupid things face the prospect of losses and going out of business. But if they get an injection of money from the government, the temptation is to postpone necessary restructuring or rethinking. This outcome was almost entirely predictable, as is the certainty that another dose of "stimulus" won't save the economy. There has been malinvestment (mostly but not entirely driven by government mandates and loose money from the Fed). The bad investments need to be worked out of the system, which is what a recession forces -- unless government decides that some firms are "too big to fail."