An argument (flawed) in favor of propping up AIG, Citi, etc

Comes mostly from overseas (esp Asia), and goes like this:

These firms are the closest thing we have to global financial institutions - massively huge, and involved in almost all financial instruments in almost all countries - and are thus a near-proxy for the US government itself, and by extension, capitalism. After all, most folks in most countries (both in financial markets and as consumers) have much more exposure to these firms than they do to anything else American, save for fast food and entertainment - and ummm, things financial are slightly more important than fast food, yes?

So, the logic goes, if these firms were to fail, it would be tantamount to the failure of the US itself - at least in the sense that if the US doesn't protect the very center of it's public projection of economic power overseas, then we must conclude that the US has little power left to protect. If so, then what on earth can we count on? Scary indeed, as the dollar is still the de-facto global currency, and the US still, by far, the dominant economic, military and political power, etc and so forth...

Thus, the US would never let such important firms die, yes? If they were to do so, would it not mean very terrible things about the health of America itself?

This makes some sort of twisted sense, and I do believe that foreign public and media misperceptions of American banking firms' essential centrality are driving erratic attempts here in the US to demonstrate financial strength by endlessly asserting the 'not to worry, we won't let them fail mantra'. After all, Geithner made his rep in Asia during the 1998 crisis (quaint in comparison), and is very much attuned to what sentiment there may be

But let's step back a moment, please. The plain fact is that America's health is not, and never has been, tied to the health of its largest financial institutions. This is a corrosive myth of the past 20 or so years. The truth, rather, it is that American prosperity is tied to the much more permanent founding principles of this nation, which are not those of Wall St these days (nor of the Chinese). Principles such as Constitutional law, democracy, a free press, and a healthy capitalism. Such quaint notions are increasingly absent the farther across the ponds one goes...

Dangerous game, this. Denying reality, no matter where you live, catches up eventually. And reality is that firms fail, indeed must do so, and capitalism goes on. Citi, AIG, and many others are insolvent and need to go. But in our fragile global mental state, folks are hesitant and afraid to deal with reality and face facts.

But the sooner we accept reality, the sooner we can focus on what really needs to be done - reform (or perhaps more accurately, re-create) the US financial system to more closely resemble what it was in the post WWII period up until 1980.

Thus we might make a small step towards again perfecting this democracy, and towards reclaiming some moral leadership...