AIG bailout the worst of both worlds

Clowns to the left of me, jokers to the right, here I am …

Stealers Wheel sang that three decades ago, but they could just have well described the AIG bailout.  Two successive administrations, Republican and Democrat, have thrown over $150 billion at the failing insurer, soaking up an impressive 80% stake, but as discovered this week, holding almost no ownership power.  Now that retention bonuses amounting to less than 0.1% of the government investment have embarrassed Congress and the White House, the two political parties have finally diverged on the lesson learned — a bit late:

Though the outrage is bipartisan on Capitol Hill over the $165 million bonus payout by American International Group, the solutions are not.

Republicans are touting the incident as proof that the government should get out of the bailout business, while Democrats are using the public outcry to push more government regulation and intervention, including a plan to take over AIG.

When House Financial Services Committee Chairman Barney Frank, D-Mass., walked out of his hearing room Tuesday afternoon, he told reporters “it’s time for us to take over the company.” …

Republicans on Tuesday morning lambasted the administration for poor handling of the bailout money, pointing to a March 2 transcript in which White House press secretary Robert Gibbs asserted that Obama knew where the bailout money given to AIG and other financial institutions had been spent.

House Minority Whip Eric Cantor, R-Va., said the bonus flap puts a spotlight on excessive government spending and involvement in rescuing private companies.

In truth, either solution would have been better than the one pursued since last September.  We chose, in essence, the worst of both worlds.  We spent all of the money it took to nationalize a company without gaining any authority to direct its actions.  If the government allowed AIG to declare bankruptcy while making itself the receiver, all of those contractual obligations would have been ended, and the government would have not had to pay any more than it already has while gaining actual control of the company.

Or we could have simply allowed AIG to sink on its own.  Both Henry Paulson and Tim Geithner insist that AIG’s failure would have crashed the world’s economy.  It certainly would have been painful, but it would have been a one-time shock from which other opportunities flow, just as any private failure is.  Instead, we have a slow-motion crash, one that continues to occur.  No one seems to know where the actual money goes, which is the point belatedly made by Republicans who see a political opening in the failure of a policy most of them supported last fall.

Either nationalize or leave private industry to fail privately.  I prefer the latter, as it keeps government from becoming fascistically powerful in dictating economic choices and limiting individual freedom in the marketplace — but choose one or the other.