The Fed’s Move Is Seen As A Free Market Detour

The US has always been a global beacon of free market capitalism. But what does the latest bailout of the Fed of the ailing American insurer AIG say to the global financial community? That unfettered capitalism doesn’t work. The most aggressive companies acting on Wall Street act like broncos. When things don’t work out for them, they let the government bail them out. Wall Street won’t learn if the Fed continues with its policies, but what choice did it have? If AIG fails, it would disastrous for the US economy.

AIG is best known for selling conventional products like insurance polices and annuities, products that are overseen by state and federal regulators. The problem is that AIG is also deeply involved in the risky, opaque market for financial derivatives and other complicated financial instruments, which are unregulated.

“It’s pure crisis management,” Mr. Chernow said. “It’s the Treasury and the Federal Reserve lurching from crisis to crisis without a clear statement on how financial failures will be handled in the future. They’re afraid to articulate such a policy. The safety net they are spreading seems to widen every day with no end in sight.”

Fed To Loan A.I.G. 85 Billion

In an incredible move, the Fed reversed its decision from Sunday night and decided to loan the struggling insurer AIG $85 billion. Unless backed by the government, the insurer would have followed Lehman Brother suit into bankruptcy. AIG’s struggle stem from credilt default swaps:

Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss.