The Corner

A Beneficial Loss

The Times has a piece today that features some observers’ hand-wringing over the possibility that the government-owned insurance company AIG will suffer as competitors poach its best people and businesses.

But what’s going on now is exactly what is supposed to happen when a company fails and liquidates. Other private-sector companies can buy the failed firm’s best people and assets, so that good businesses previously stuck in a bad company can continue to benefit the economy.

With AIG, the missing step was bankruptcy. Last year, the U.S. government had no system in place for an orderly failure of a big financial firm, and thus propped up AIG with $180 billion of taxpayer money.

Any focus on whether taxpayers will get a good “return” for that money is misguided. Government entities aren’t supposed to make a profit. The government’s attempt to earn a financial return for the taxpayer at AIG doesn’t help the economy; it just crowds out private-sector competitors.

It would be better for taxpayers to take a huge bath on their AIG investment — so that they pressure Washington to make sure that too-big-to-fail rescues never happen again.

— Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of the forthcoming After the Fall: Saving Capitalism from Wall Street — and Washington.