Wednesday, March 18, 2009

Government Failure: Markets Did Not Bailout AIG

Should serve as a lesson to everyone that wanted the government to micromanage the economy.

The market solution to AIG was to let it go. The government intervened and kept it afloat with our money, taxpayers' money. Markets worked, government failed.

If you're outraged by the AIG bonus scandal, then ask yourself: why is it that AIG had to be saved as a company anyway? Even if you believe that there would be financial contagion, and that the contagion would create problems that could be avoided by government action (all big "ifs" anyway), AIG didn't have to be saved. On the contrary, under the perspective of economic incentives, the only logical thing to do was to let it fail. Moreover, it's not just economics: under a moral perspective, the only reasonable thing to do was to let it fail.

When judging AIG, markets were more efficient and more virtuous than the government was. AIG should go bankrupt, period. Next time, let the markets do their job.

PS: here's Marginal Revolution on AIG presidential campaign contributions.
PS: here's Cafe Hayek on Fannie and Freddie bonuses.

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