AIG, the Fed, and accelerating socialism.(Inside Track)(American International Group, Inc., Federal Reserve Board )

America's headlong rush into full-blown socialism accelerated on September 16 with the Federal Reserve's takeover of American International Group, Inc. (AIG), one of the world's largest insurance companies. Following on the heels of the nationalization of Freddie Mac and Fannie Mae, the seizure of AIG sent markets reeling the following day, and with good cause: despite the $85 billion loan the Fed extended to AIG, the recovery of the insurance behemoth is far from certain. To service its debts, AIG will have to find buyers for large asset chunks. If it fails to do so, American taxpayers will foot the bill.

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In exchange for its largesse, the Fed received an 80 percent stake in AIG and the authority to replace senior management. The unprecedented deal has put the Federal Reserve and the federal government in the insurance business without so much as a by-your-leave from Congress. "The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America's once-vaunted free market economy," Peter Schiff, president of Euro Pacific Capital, told the news agency Agence France-Presse. "Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire."

In point of fact, the hard laws of economics will impose limits on the Fed's powers--eventually. This bailout, like a whole series of Federal Reserve actions since last December, was carried out in concert with the Department of the Treasury. The Fed usually creates money by purchasing government debt, meaning that the Treasury must issue new debt against which the Fed can then create new money in the form of loans like the $85 billion extended to AIG. In this instance, the U.S. Treasury has agreed to play its part, and will be selling $40 billion in 35-day bonds to help fund ...