Are the Government's Bailouts Hurting the Economy?

Sept. 18, 2008— -- First came Bear Stearns, then Fannie Mae and Freddie Mac and now AIG … but is the third time the charm or the choking point?

Some financial experts worry that the government's moves to bail out ailing companies are keeping the credit crisis from reaching a bottom, ultimately delaying an economic recovery.

"Artificially trying to prop up dead entities is only prolonging the inevitable," said Peter Boockvar, an equity strategist at the trading firm Miller Tabak & Co.

"Anything that slows down the deleveraging process," he said of debt reduction, "prolongs the agony."

With its bailout of AIG -- which consists of an $85 billion loan in exchange for an 80 percent stake in the company -- the government "prevented a short-term calamity," Boockvar said, but "it's not stopping the credit markets from seizing up."

A New York Federal Reserve spokesman did not return a call for comment.

Vincent Reinhart, a resident scholar at the American Enterprise Institute, a conservative think tank, said the government, by opening its coffers, may be discouraging the private sector from lending and investing money.

"Ultimately, the industry needs more capital and, to the extent that there's uncertain government intervention, that may delay the arrival of that private capital," he said.

AIG's ability to attract private capital, in particular, remains in question.

It's unclear whether the insurance company, with more than 116,000 employees and $1 trillion in assets, will be able to sell enough assets to restore its financial health, Boockvar said.

"AIG is now a walking-dead company," he said. "Who is going to want to do business in AIG?"

Not everyone, however, believes the bailouts will delay a resolution to the credit crisis.

Dan Mitchell, a senior fellow at the Cato Institute, a libertarian think tank, is no fan of government bailouts. He believes that "cronyism" allows some companies to receive government aid while less-connected ones lose out.

Still, Mitchell argues that the government's intervention generally will not stop prices on overvalued assets like mortgage-backed securities from falling.