- The Washington Times - Thursday, September 18, 2008

The Federal Reserve’s unprecedented $85 billion takeover of American International Group is prompting a fierce backlash among many Republican stalwarts who openly decried the Bush administration’s recent string of financial bailouts as a betrayal of the party’s long-held, free-market philosophy.

Many conservatives and at least a few liberals are questioning whether so large a commitment of taxpayer dollars was either wise or fair, even suggesting that it smacked of a socialist form of selecting economic winners and losers.

They ask: Why pick AIG and not General Motors Corp., which has been pounding on Congress’ door for a helping hand? But most of all they complain that the AIG decision thrusts the government too far into private waters.

“You cannot nationalize every failing business in America,” said Rep. Mike Pence of Indiana, chairman of the House Republican Study Committee. “If government now becomes the safety net for every private enterprise too big to fail, we are going to end up with an economy that looks a lot more like France than like the United States.”

Conservative leaders like Mr. Pence who cheered the administration’s decision last week to allow Lehman Brothers, the giant investment bank, go bankrupt rather than bankrolling it, are now attacking the White House’s third corporate bailout of the month - sparking an intraparty debate.

“You can’t be for capitalism on the way up and socialism on the way down, and you can’t be for a welfare state for the rich,” former House Speaker Newt Gingrich, a Republican from Georgia, said in an interview with The Washington Times.

The White House on Wednesday defended the administration’s action, arguing that the failure of a company as large and far-reaching as AIG posed a much costlier risk than the $85 billion federal loan.

“You have a government that is willing to lead, act where appropriate, and govern to make sure that we limit broader financial harm to the economy,” said White House press secretary Dana Perino.

But Mrs. Perino acknowledged that Americans wanted to know why AIG was chosen and not other companies.

“I can understand why a lot of Americans would be confused as to why this company, and not another company,” she said.

Her answer: “The Fed chairman, Ben Bernanke, and the president’s economic advisers had determined that there were some - some of these companies were so big that to allow them to fail would have caused even greater harm and damage to the economy. So the goal has been to take action where necessary to promote stability and strength in the marketplace.”

Although the multibillion-dollar loan to AIG, the global company teetering on the edge of insolvency, was carried out by the independent Federal Reserve, former administration officials said the bailout would not have taken place without President Bush’s express approval. That fact triggered a wave of conservative outrage at the administration and opened a deep split on economic policy that strategists said the Republican Party could not afford in the midst of a tough campaign season.

“Conservatives are taken aback by the haste and effective generosity of the administration. This money belongs to the American people, but the cash window is open,” Mr. Pence said.

A former administration official told The Times on Wednesday that party activists were “burning up the wires” with e-mails expressing disgust at the administration’s action. “There’s a firestorm building among free-market conservatives over bailing out AIG. A lot of them say bailing out a private company is an affront to free-market economics.”

Senate conservatives expressed similar frustration with the accelerated pace of the bailouts, which they warned would continue unless policy corrections were made.

“Americans should be very concerned by the size and frequency of these government bailouts. The easy money, cheap credit policy of the Fed and the guarantees provided by Congress for Fannie Mae and Freddie Mac created a bubble that is now bursting,” said Sen. Jim DeMint, South Carolina Republican.

“Our leaders need to wake up, exercise some real discipline, and push for policies that reduce the failed role of government and reduce taxes on American investment to attract capital to our markets,” he said.

Some economic analysts raised questions about the double standard in the bailout policy, asking why a Wall Street insurance/investment giant like AIG was rescued but not GM or Ford, which have laid off tens of thousands of workers.

“It’s a qualitatively different situation with an industrial company like GM where you won’t have a cascading economic collapse [if they fail]. But there is an issue there as to whether we could give them a loan or some form of assistance that would allow them to be a strong, viable company,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank.

Still, Mr. Baker said, “You are clearly helping some people to the detriment of others and you’re creating perverse incentives. If people know the government will step in and bail them out, then they won’t have to use good judgment.”

Not all conservatives disagreed with the AIG bailout. “No question we should not have put ourselves in this situation where a Republican administration finds itself in the unpleasant and uncomfortable situation where they have to be acquiring companies,” said J.D. Foster, a former budget official in the administration who is now an economic analyst at the Heritage Foundation.

“The equity and financial markets generally are in a state of enormous stress and AIG being such an enormous player, there is a legitimate threat it could have had tremendous contagion spreading across credit markets and into the rest of the economy,” he said. “Treasury judged that risk was too great to run.”

R. Glenn Hubbard, a former chairman of the White House Council of Economic Advisers, was similarly torn. “AIG posed systemic risk [to the economy], but we are asking too much of the Fed,” he told The Times in an e-mail.

“Now the Treasury and Fed should not ignore systemic risk just to limit moral hazard. But all of this firefighting has left us with problems. Additional write-downs are coming. We cannot, and should not, try to protect every institution,” Mr. Hubbard wrote in the Forbes magazine Web site Tuesday.

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