If At First You Don't Succeed

...then try, try again, right? And hey, if it just so happens to involve a few billion dollars of (yet to be earned) taxpayer dollars, well, so be it. Alas, while this attitude probably doesn't behoove folks like you and me, who will have to pay for all of these bailouts (plus interest!!) at some point in the future, it seems to be working out fabulously for the fine folks struggling to run AIG; who, it was announced today, are set to get a second round of bailout money from our Federal Government.

So, let's recap, shall we? Last fall, under the watchful eyes of President Bush and Secretary Paulson, we decided to sink billions of dollars in AIG because it was "too big to fail" and we needed it to turn around. Now, after we gave them all this money, they have come back to us to report $61.7 billion in 4th-Quarter losses, the largest loss ever reported by an American company. And, naturally, we decided it would be a really good idea to reinvest another $30 billion in this failing business.

Well, at least now we know why all the former Wall Street people now working in D.C left Wall Street - as the kinds of business decisions they're making on behalf of the government would have gotten them fired in the business world.

Seriously though, at what point does all this bailing out finally end? Hell, after we've gone in and bailed out AIG once, why shouldn't we go in and do it a second or third or even fourth time? Better yet, when do we reach the point where a company failing is finally less important than our government's checkbook failing?

Of course, such rhetorical questions help indicate the problems this kind of government intervention inherently entails; namely that, if you do it once, there's nothing to keep you from doing it again. Indeed, given the rationale that you used the first time around (i.e. 'too big to fail'), you're pretty much compelled, rationally at least, to repeat the bailout the second time around, too. Afterall, if it was too big to fail the first time, how can it not be the second (or third, or fourth) time around as well?

So how do we escape from this trap that our political logic has led us into? Well, as I see it, there are only two ways: either the company is fundamentally restructured so that it becomes, metaphorically speaking, small enough to the point where it can fail; or it ceases to fail and, once again, becomes a successful company. Unfortunately, by bailing out companies like AIG in the first place, the government makes it unlikely that either of these things will happen. That's because, through the bailout, the government has absolved AIG of its financial losses; losses which were incurred because of poor business decisions. In other words, somewhere along the line AIG took a risk that didn't pan out - which is o.k, because risk taking (and, yes, the occasional failure) is a part of business. Now, normally, AIG would be forced to take those losses, which would, most certainly, cause serious problems for the company.

Through the bailout, however, the government has decided to prevent AIG from having to go through the painful process of dealing with its bad business decisions. The problem is that companies, like people, aren't going to learn from their mistakes if they don't have to deal with the negative consequences of them. Screwing up and taking big-time losses are what cause companies to restructure and come up with a new business plan. Consequently, by using the government to bailout an AIG, you make it more likely that this company will fail again in the future because you've eliminated the gusto, if you will, of the market forces that would normally force it into severe restructuring.

And that, of course, means more bailouts - ad infinitum, I suppose - and also indicates to us that the bailout, like so many government programs that came before it, is self-perpetuating. Proving once again the validity of Reagan's maxim that government doesn't solve problems, only subsidize them.