Key Points:

We can all breathe easier now the Federal Reserve has come up with a life-saving transfusion of American taxpayers' money for the insurance giant AIG.

It was the right call, for the same reason our Government was right to bail out the Bank of New Zealand 18 years ago. The collateral damage caused by letting it collapse would have been too great.

The US authorities let the big Lehman Brothers investment bank fail on Monday. That, too, was the right call.

Capitalism requires enterprises to be allowed to fail and their owners - whether reckless, inept or just unlucky - to lose their money.

But some businesses are too big to be allowed to collapse in a heap. An orderly dismantling is needed if they are not to knock a lot of others over too.

The difference between a collapse of Lehman Brothers and of AIG is the difference between breaking your arm and breaking your back.

AIG is everywhere. Its business is inextricably bound up not only with the financial system but with the real economy.

If someone's house has just been demolished by Hurricane Ike, the last thing he or she would want to hear is that the insurer has gone bust.

Likewise, a large company which has been able to borrow more cheaply than it might have otherwise because AIG stood guarantor would not want to have to scramble to refinance because its insurer's collapse put it in breach of its banking covenants.

AIG is not getting a free ride. The Fed is charging an arm and a leg for its loan, and is taking 80 per cent of the company's equity on behalf of the American taxpayer as well.

If the group survives the next few years it will be a lot smaller, and it is a fair bet it will have to operate in a much more regulated environment.

Wall St institutions have become adept at taking on risk with one hand and laying it off to someone else with the other, collecting a fee in the process.

But their stock in trade is risk, and it all depended on the health of the American housing market, which is still in a bad way.

All this has implications for borrowers in New Zealand, too.

Our banks have to import about a third of the money they lend.

The longer fear stalks overseas credit markets, the more costly this money will be and the higher Kiwi mortgage rates will stay.