The principal argument of the free market is that government can not effectively pick winners and losers in the marketplace. There simply is not enough centralized knowledge to make these decisions. Price signals and the laws of supply and demand are infinitely better at directing resources to the best possible use.
Over the past few months, the government has been engaged in a high stakes game of winner and loser picking as it seeks to "fix" the market. It chose to let Lehman fail and to save AIG. As it turns out AIG's leadership has proven very ineffective post-bailout and has needed near double the funds initially pledged to help it out and has spent large amounts of cash on corporate retreats. Bad pick government.
Now Citigroup is on the brink--again. What this failure shows is the inability of government to fully understand the stability or sustainability of any one firm. Back in September, when the FDIC first brokered a deal in which Citi would purchase Wachovia, there was widespread belief that this was a federal vote of confidence in the capital strength and stability of Citigroup.
This all points to one simple thing: the inability of the government to be the end all, be all of knowledge. The problem with central planning isn't that it can never work. Even a broken clock is right twice a day (and socialism can work when you know everyone's name). The problem is that it isn't the best, and as society has grown larger and more globalized, the ability to condense all knowledge has gotten harder and harder.
The government should let the market pick winners and losers. The Treasury Secretary, SEC Chairman, Fed Chairman, and their various staff are not dumb people. President-elect Obama's economic team is not comprised of idiots. They are all well educated and doing their best. But the simple fact is that it is impossible to have all the data, know all the variables, and be able to predict the market. Citigroup's capital may have been fine, but the market lost confidence in them. That's unknowable, and its best not to play with taxpayer dollars like you might a game of poker.