AIG Bailout: Outlawing Failure?

The Fed’s bailout of AIG — which is the effective purchase of a private company on behalf of the federal government using our money — is going to cost us all a lot more than $85 billion.

The question no one is asking is: Why the hell are they doing this? Yes, AIG’s failure is going to hurt some people. Yes, it will have a domino affect on a lot of other businesses. Yes, it will be painful for the economy.

So the eff what? Businesses fail — that’s what happens in a competitive market when they do the grossly stupid things that AIG did. That failure serves as an example to other businesses of what not to do. The market then corrects itself and learns to have more vigilance about dealing with other companies. This is competition driving out bad practices and bad players.

The Fed, coupled with decades of government interference in the insurance, investment, banking, and mortgage industry is what built the house of cards that’s collapsing. And it needs to collapse, no matter how painful the short-term consequences.

And yet because it’s an election year (kill me, Jesus) candidates are demanding more of what got us in this mess in the first place — government regulation, oversight, and interference.

That’s right — dig more to get out of a hole.

By the way, you want a short version of the subprime crisis history that sparked all this?

• Community activists in the 1960s come up with the term “redlining” to describe the practice of banks showing on a map areas where it was risky to make loans.
• In 1977 came the Community Reinvestment Act that forced banks to make loans to people who were bad credit risks. (The CRA also provides millions to groups like ACORN, a corrupt, radical left-wing organization.)
• As years passed, the Federal Reserve and federal regulators pressured banks to make more and more loans to people with bad credit, to artificially inflate the national percentage of home ownership. Both Republican and Democrat presidential administrations put pressure on lenders, because increased homeowner percentages (no matter how flimsy and unstable) look good on paper.
• By the early 2000s, it was getting so bad that no matter what your credit rating, you could get a mortgage or other loan. Stupid companies bought mortgage-backed securities, because all they saw was short-term profit.
• Naturally, bills came due — By 2007 foreclosures were up 75 percent. Which leads us to where we are now.

(Full disclosure: I bought some shares of AIG Monday at the ebb betting something like this would happen and I could turn a short-term profit. I’m not above taking advantage of a situation I condemn. I am mercenary, if nothing else.)