The staff fully recognized the power of counterparty surveillance as the first line of protection against overextended or inappropriate credit. Alan Greenspan The Age of Turbulence p. 373.
There you have it. For eighteen years, the chief overseer of the financial system was a student of Ayn Rand who trusted the market to allocate credit risk.
How did that work out? This week, the government announced that it's pouring another $30 billion into the black hole that is AIG because the counterparties to AIG's credit default swaps had NO FUCKING IDEA what AIG was up to. Counterparties were powerless to keep AIG in line just as they were powerless to keep Lehman Brothers in line.
Why do we continue to bail out AIG? One reason may be because AIG is the biggest insurance company in the world and letting it fail might cause people to start cashing in their life insurance policies. This could lead to a run on the life insurance industry that would rival the run on money market industry that followed Lehman's bankruptcy last September. This would force the government to guarantee life insurance policies like it guaranteed money funds.
So to all those Randophiles who see her prophecies coming true, please remember that they are coming true because the government allowed the financial system to operate on her principles.