The Next Big Bankruptcy...The Fed?

The Federal Reserve is giving a $85 billion dollar bridge loan to AIG and taking an 80% stake in the company. This news is flat out shocking considering they have been very active in so called "bailouts" but failed to do anything for Lehman Brothers. I thought America was based on capitalism. What happened to letting unprofitable businesses fail? I understand why some institutions need government backing because they play such an integral role to the economy and failure would just create more financial havoc. Fannie and Freddie are good examples of something that needs to be provided when the private sector fails to do so. But AIG? Do they have wide connections to the financial markets? To some extent they do because their businesses are so diverse from insurance to business financing. No doubt that something needed to happen with AIG but why do Americans have to pay for it. The Fed doesn't have $85B so they will have to borrow from the Treasury which means that more money will be injected in the economy. This is going to hurt the dollar and increase inflation, ultimately hurting consumers.

I will give the Fed credit though because they aren't resting on their laurels. Being counteractive is usually a good thing but when is enough, enough. They need to keep in mind all the debt they are accumulating. I hate to say it but this probably won't be the last takeover by the government. There are many other banks that are going to fail soon so we can only hope that the Fed will stay on the sidelines.

The bad part is that things are so bad that the Fed is considering crazy actions like this. There is no quick solution to the current crisis and we might not find a bottom until mid 2009. On the other hand, worldwide markets have responded well to the AIG news and we will probably see the same in the morning.