Tuesday, February 03, 2009

AIG is a case against nationalization

Thirty years ago, Nobel prize-winning economist Milton Friedman and wife Rose wrote that "the combination of economic and political power in the same hands is a sure recipe for tyranny." As we're learning, it's also really, really expensive.

Washington regulators tempted to nationalize banks don't need to study decades of history to understand the point. Merely consider the last five months, and the nationalization experiment the New York Federal Reserve Bank has conducted at AIG.

In September, the government took control of almost 80% of the giant insurer and to date has provided AIG with more than $150 billion in taxpayer financing. The initial terms of the government assistance were so poorly crafted that some AIG shareholders said the firm would be better off in bankruptcy. After several rewrites to the deal and a lot more taxpayer money at risk, an AIG spokesman now says that executives "hope" that they won't need more federal help.


We wish AIG well and we should note that the current management -- unlike many of the current directors -- did not create this mess. Still, we're waiting for someone to make the argument that this nationalization of a major financial firm has been a success. AIG has become the intervention that nobody in Washington wants to discuss, least of all the New York Fed or its former President and now Treasury Secretary Timothy Geithner. However, since some of the same people who gave us the AIG debacle are now contemplating plans to nationalize a good chunk of the banking system, it's vital that someone encourages them to learn from their mistakes.

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