Don Roach: Is the AIG Bailout a Long-Term Solution?

With the Fed's announcement that it will bail out insurance behemoth AIG, taxpayers are left asking, "Who's on first?" It's as if most corporations were asleep at the wheel during the subprime mortgage boom earlier this decade. And now, everyone's looking at each other trying to figure out where to cast blame and unsure of what to do next.

According to the Fed, if the 18th largest company in the world, which is AIG, were to fall into bankruptcy, the ripple effects would be devastating. Many of us may have an AIG life insurance policy, or the company for which we work uses AIG products. Despite AIG's connections to many Americans, is this bailout about us or the stabilization of a market collapse due to greed?

If anything, it's certainly about staving off a catastrophic disruption within the insurance market, as an AIG bankruptcy would be the largest corporate bankruptcy filing in history. Yet, what does such a rescue say to other large companies that played the high-risk short-term-reward game of subprime mortgages? Democrats are saying that it's all a part of "crony capitalism" and are blaming Republicans. That's just political posturing.

Instead, we're seeing that the government — both the White House and Congress — did not police the market during the subprime boon, which led to numerous companies' either going belly-up or facing historic financial crises due to the pursuit of profits. There's nothing wrong with deregulation, but only if the government allows the market to correct itself. If companies bet the farm on subprime mortgages, they need to feel the pain as debtors' inability to repay their loans contracts the value of these mortgages. That type of accountability will help the survivors make better market decisions in the future.

By contrast, when the government doesn't regulate industries but does barge in to help the largest corporations, it sets up a dichotomy for disaster. In fact, if I'm any of the world's largest companies — for which there is the most risk of market disruption — I'm feeling very good about taking a chance on a risky industry right now. Why? Because in the back of my mind, I know if things go wrong, the Fed might be there to help me out.

Obviously, this too is a risky game, just ask Lehman Brothers, but the Fed is setting precedent here, and one that will not foster a more responsible marketplace.

Whether you're a proponent of regulation or deregulation, what's clear is that mixing the two at arbitrary points in time for selective corporations is only a short-term solution potentially creating even more extensive long-term damage.