AIG bailed out by the Fed

September 17, 12:16 a.m. 2008

The New York Times is reporting that the US government through the Fed is providing an $85 billion loan to AIG insurance in return for an 80% stake in the company in the form of warrents convertible to common stock order to prevent it from failing and in   the light of a refusal by private banks to bail out the firm. Its reasons for doing so are because AIG is so enormously and complexly involved with so many other companies world wide that its failure would have caused a disasterous toxic wave of debt default whose limits could not be predicted. This extraordinary event falling hot on the heels of the failure to provide a comparable bailout to Lehman brothers reveals the true extent of the financial crisis , the worst since the great crash of 1929. Hopefully the AIG bailout will be the final chapter in government bailouts of Wall street companies(although neither Fed chairman Bernanke   nor Secretary   Paulson could guarantee this) and both the Fed and the US government can get on with the task of reforming the regulatory framework to prevent events like those of the past few weeks from happening again for a very long time. No one can any longer argue that global capitalism works best when markets are left to their own devices free of government interference for the simple reason that this approach led to the disaster we have just witnessed.

Instead we now have proof and billions of dollars of it that markets require an extensive regulatory framework and state intervention to ensure their orderly operation and the operation of the system in the interests of everyone. Keynes and his colleagues made this argument for years during the 1930s and 40s and they were right then and it is correct to argue so now. This truly marks the end of the 35 year experiment with laissez-faire capitalism and ``rational markets``.