Update: Why Bailouts Don’t Work

Are you ready for this? Despite getting an $85 billion government bailout last month, global financial giant AIG is “still seeing tightness in the marketplace” and desperately needs the federal government’s $700 billion bailout plan to pass in order for the company to stay afloat.

AIG has already blown through $61 billion of the government’s money to right its financial ship, but even that massive amount apparently hasn’t done the trick – a bad sign for all the bailout backers in Congress who warn of the “calamity of inaction” as their rationalization for approving the biggest government boondoggle of all time.

From CNN Money:

Despite receiving an $85 billion line of credit from the Federal Reserve, American International Group Inc. (AIG) is still seeing tightness in the marketplace, said Edward Liddy, the company’s chairman and chief executive Friday.

The insurance giant has already drawn down $61 billion of the amount, and about $53 billion or $54 billion of that has gone toward collateral calls on its derivatives business, Liddy said.

Other cash has been used for other needs, particularly as the credit market has frozen, Liddy said. “Our CP (commercial paper) lines have dried up,” which has happened throughout the market, he said during an investor update that was Webcast Friday.

He said he could “never say never” to a potential need for more money. Borrowing on the Fed credit line will go up.

“It will be very much driven by market considerations,” he said.

“The Treasury bailout would be helpful to us,” Liddy said, though details on the potential bill are still vague. “Until we can see exactly how the Treasury will be purchasing assets, there is not enough information to know how that would work. What is important is that we would be able to access that.”

Alright, a couple points here … as people a lot smarter than us have noted previously, the credit markets are dried up because nobody’s going to make a move with the government poised to drop $700 billion into the markets.

As Harvard economist Jeffrey Miron points out, “bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.” Miron also raises grave concerns about the true value of the assets the government is about to purchase, noting that “if these assets are worth something … private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.”

But it’s not just the fiscal recklessness of the bailout that worries us – or the fact that the AIG scenario is already demonstrable proof that this government interventionist approach is doomed to failure.

We’re also concerned about the last part of Liddy’s quote, which references the complete lack of specificity and accountability in the Treasury’s asset identification, valuation and purchase plan.

Quite simply, we’re giving one man unlimited power to do something the federal government has never done before – an unprecedented power transfer that raises legitimate Constitutional questions in addition to the fact that it doesn’t have a shred of independent (i.e. non-Washington) oversight.

Again, government got us here in the first place. And government failed to take action five years ago when the writing was on the wall.

More government isn’t going to fix this, as the ongoing AIG debacle clearly demonstrates.

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