World finance chiefs heading for Washington for crunch talksFor years the federal carrot and stick program -mortgage lending guarantees coupled with the class-baiting dogma that minority home ownership was "disproportionately low"- pressured lenders to make loans that they otherwise would not have risked making.
Once this engine of capital redistribution was in place, it was ripe for exploitation.
Lenders milked it for quick profits. High-risk borrowers milked it for more expensive homes than they really could afford. Congressmen milked it for votes, campaign contributions, liberal credentials, and sometimes favors of an even less savory sort.
Numerous lenders permitted the irresponsible federal policy and opportunity for quick profits to override good judgment. They made millions of high risk loans to borrowers, and neither lenders nor borrowers seemed really to care whether the loans could or would be repaid.
Lenders weren't overly concerned about this, since federal loan guarantees meant that ultimately the lenders weren't gambling with their own money. The government saw to it that these these loans were purchased from the lenders, their true risk camouflaged, and the resulting toxic investments funneled back into the economic food chain. A time bomb was formed and its fuse lit by a combination of bad government policy, market forces, greed, recklessness, and even fraud on the part of government officials, lenders, and borrowers. The default rates on these loans was enormous, yet the engine roared ahead unchecked.
The socialist dogma used to justify such widespread, high-risk lending was that if some individuals can't afford to buy homes, then it is government's job to force others to subsidize the cost of providing them. Such heavy-handed meddling in the lending market meant that many bad borrowers would receive loans, and this diversion of capital meant that many good potential borrowers were denied loans, while others simply paid more for the loans they obtained.
Now the time bomb has exploded. Banks are collapsing, people are losing homes, and the radius of destruction expands. Predictably, congressmen blame their opposing parties. But let's not waste time blaming each other, they say: It's time to fix the problem! Yes, the federal government, rarely content to leave bad enough alone, has stepped in with another scheme: Let's reward the guilty and punish the innocent with yet another gigantic redistribution of capital, controlled by our new demigod, the Trillion Dollar Czar.
The show's far from over. John McCain, supposedly the more conservative of our two presidential candidates, now has suggested that the federal government should go further to "stabilize the housing market", buying up homeowners' failing mortgages and replacing them with new "manageable" loans, as decreed by some magical process to be administered by bloated bureaucrats inhabiting some new bloated bureaucracy. Undoubtedly these will include many of the same meddlers (and their disciples) who brought about this current crisis in the first place.
Yet history shows that government schemes to control or "stabilize" market prices of any commodity -including homes- almost always cause far more harm than good, and prove to be giant failures and destroyers of wealth due to their unintended negative consequences. (For an eye-opening explanation, see the classic "Economics in One Lesson", by Henry Hazlitt.)
This plan, if adopted, will be an unmitigated disaster on top of the current disaster which is already unfolding.
AIG isn't alone, but it's a good symbol for the financial house of cards which is collapsing in ruins around us. Surely the government, banks, investors, and insurers were not powerless to see that a collapse was likely if not inevitable. 
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