One view that is typically touted by capitalists is that competition is good. This view was most famously presented by Adam Smith. His view, to oversimplify things a great deal, was that competition between individuals and businesses would result in better and cheaper products. This would be good for everyone. Obviously, the monopolies of the robber baron era showed that unregulated competition turns out to have rather negative effects. However, too much limitation of competition can also have very negative effects as well.
While I am not an economist (which is looking like a better thing each day), one concern I have about the bailout is that it might create some unforseen harms.
One harm worth considering is that bailing out failing companies serves to limit the rise of competing companies. For example, with AIG failing (yet still trying to pay out huge executive bonuses) there would seem to be new openings where AIG had been doing business. This would seem to open the door for new companies (or older companies that are still functional) to move in and take AIG’s business. Since AIG is failing, this would seem to be a good thing-after all, having successful companies filling these allegedly essential niches in the economy would help stabilize the economy. Further, these companies would not be using taxpayer money to get the job done.
While we need companies in key niches to be successful, we should consider whether propping up failing companies is better than allowing other companies to arise or healthier companies to move in.
In the past, capitalist types loved to (mis)use Darwin’s theory to justify their misdeeds. Well, the eco-system metaphor can be trotted out once again. AIG and the other dying companies are like failing species that occupy key niches. We can try to keep them alive; but we must be aware that doing so is very expensive and serves to keep others from moving into those niches.