The Problem with Bailouts

Recessions can pierce through financial fog and reveal weakness in seemingly invulnerable businesses, like Citibank and Toyota. But diagnosing the nature of corporate ill health may be difficult. Some firms suffer from a fatal disease; others have a temporary virus. Typically, professional investors must decide which troubled firms deserve a new round of financing. With the government increasingly playing angel investor to fallen firms, this task now falls to politicians and their bosses, the voters. When investment is private, professional investors determine which companies are doomed and which are salvageable. In the current situation, however, the government has decided that a large number of firms are too big to fail and so our elected leaders are deciding which firms to save and which to let go.