“A.I.G., Where Taxpayers’ Dollars Go to Die” by Gretchen Morgenson is a good three-page explanation of how taxpayer dollars are disappearing in the A.I.G. bailout. Due to secrecy, she could not follow the money all the way through to the ultimate destination (it might be mostly foreign banks, which would probably truly upset American taxpayers), but the article shows us where at least $50 billion has already gone and where another $100 billion or so is likely to go (hint: none will go into factories that hire American workers; none will go into infrastructure that will make it easier to do business in America; my ideas for economic recovery seem to be receding ever further into the distance).
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There’s one country that seems to be following your prescription: New Zealand under John Key.
http://online.wsj.com/article/SB123638162497057661.html
And to complement that article, read this one also by Gretchen Morgenson, http://www.nytimes.com/2009/01/25/business/25gret.html. Apparently we are subsidizing pure gamblers who bought credit default swaps from AIG.
Further to this, AIG took the premiums received for the CDS’s and invested it in…..mortgage backed bonds.
The money given to AIG will be used to cover its obligations to other institutions. This is a good thing, because if AIG defaulted on its obligations, the other banks would suffer even greater losses than they already have, and it’s possible these losses would then impact on ordinary savers, which would not be fair on them. In essence, the bailout is taking a bit of money from everyone to protect the system, because if the system fails, some people would lose a lot of their savings on a random basis.
Also, don’t forget that the loss-making part of AIG is a relatively small unit within the entire corporation. If it were to cause AIG as a whole to fail, many ordinary policyholders would lose out. Thus it’s to their benefit to protect AIG from being liquidated to satisfy the (admittedly outrageous) obligations entered into by the derivatives trading unit.
Regarding “subsidising pure gamblers”: speculators play a role in all markets to increase liquidity and price discovery. Some are handsomely rewarded for this: some lose their shirts. But limiting the market in derivatives to those who hold the underlying security (“hedgers” in the article) would risk leaving those hedgers trading in an illiquid and price-bound market. Speculators often take the opposite position, but this no more causes a company to collapse than people betting against a particular team in the Super Bowl cause it to lose.