A Better Idea: Let GM, AIG, Citigroup Fail

Odysseas Papadimitriou is founder and chief executive officer of Evolution Finance, the parent company of Wallet Blog and Card Hub, an online marketplace for credit cards.

The recession, the longest in more than half a century, has starred companies that are so vast and influential that their failure endangers the U.S. economy. General Motors(GMGMQ Quote), Chrysler, AIG(AIG Quote), Citibank(C Quote), Bank of America(BAC Quote) and others are now all too familiar to most Americans. (GM has emerged from bankruptcy protection, according to reports today.)

To prevent systemic economic collapse, the government has resorted to bailouts, essentially changing the rules of the game. What's clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing compared with the damage caused by their downfall. Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free-market principles in which companies compete with one another. If one fails, other -- and presumably better -- companies take its place. The market evolves to better meet consumer demands. Companies fail in a free-market economy because they are unable to compete with stronger business models. As such, they should be allowed to fail in these circumstances so that better business models can take their market share.

When, instead, a company is kept alive with taxpayer money, it maintains the share meant for another, better company and, therefore, prevents innovation. What's more, the taxpayer becomes an investor in what is, by definition, a failing company. It goes without saying that it's a bad idea to invest in companies that have flawed business models or incompetent management. This means that in keeping these companies alive, we are forcing the taxpayer to make bad investments.