Wednesday, September 17, 2008

Too Big To Fail or Just Too Big to Fail Quickly?

Last night around 10:20 p.m. news broke that the Fed agreed to loan $85 billion to American Insurance Group (AIG). This is the latest in a recent run of corporations that needed fast cash or went bankrupt.

As I understand the situation, the loan is to give AIG time to liquidate some of its assets and get a handle on things before paying the Fed back in two years time. I like this. I like it better than straight bailouts. I get that AIG failing overnight could shake consumer confidence and perhaps induce people to start dumping stock shares left and right. I also get that AIG is in a precarious position and needs to take steps to turn the Titanic around.

Hopefully, the loan will be paid back and this won't be another example of naked corporate welfare.


Josh Fershee said...

I agree, Alison, I hope that this money gets paid back, too. But no matter how well this is explained, it is a bailout that I find troubling. It is perhaps a better structure, but it still involved the government stepping into an area typically reserved for the private sector.

I don't buy the argument that the government needed to step in to avoid "shak[ing] consumer confidence." Is shaken confidence a bad thing or should confidence be shaken more than is has been so far? Free markets operate on the idea that consumer behavior will lead to the best (or better) outcome. Consumers will thus allow the best market players to rise to the top and the rest will fail.

Artificially propping up companies like AIG is substituting government judgment for the market's judgment. In doing so, we may be delaying the inevitable, while putting taxpayers on the hook for a failure the market already said was proper.

On an individual basis, I see the appeal for each of these government interventions. The problem is that it sets a bad precedent. These loans are being made to some very shaky companies, and I am more than a little worried that the Fed is doing it's own subprime lending. And you know where that got us.

Alison M. Kilmartin said...

I completely agree with you, Prof. Fershee, and my general disposition toward this kind of thing is: Let Them All Fail.

Entities acting in the market (individuals and corporations) will not change their ways until completely burned by them, and the government bailouts prevent the burn while putting our nation's solvency at risk.

The Great Depression must have been terrible, but it toughened a generation to be able to stand during WWII. It didn't mean the end for America, we came out on the other end better, I hope!

That would happen again, if only the government would quit acting socialist and return to our capitalist roots.

Avoiding bad things is not always the best thing and as you said only "delays the inevitable."