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I am being just very practical here.
If AIG goes down it might seize up the capital markets.
Let me make things simple. You have no cash on you, and neither does anyone else. We carry credit/debit cards. Some of us carry cheque books.
These represent our wealth, that is certified by a number in our bank account.
At the banks there no big vault with a zillion dollar bills in it.
If the financial markets sieze up and banks stop lending to each other for fear of the unknown (AIG just went down and nobody knows the exposure of the next bank to AIG, so nobody trusts anybody) you can forget to be able to access your savings.
Why? well possible most of the big banks can end up like LEH (today Morgan Stanley was under fire with the CDS trading 850. As a reference a CDS on LEH was trading at around 600 on Friday).
As Banks fail and go under they bring down their deposit. FDIC guaranteees $100k you say? Well if WaMu goes down the FDIC becomes insolvent unless the govenrment steps in (like in the UK) to at least temporally guarantee the deposits.
I am sure you dfo understand that there is just not enough actual cash in the system for everybody to pull it out at the same time, right?
Intervening to save AIG is like intervening to prevent a run on the banking system by the depositors.
You say taxpayers are going to pay for losses made on investments made by few. This is true, in part.
I am not going into details to explain how the taxpayers benefitted in the past by looser credit conditions and easier access to capital (it seems to me we all have better cars, houses, fridges, tvs and work less etc than our fathers).
But I am saying that the COST of not interveening was far superior to the tax payers than a $138bn bailout.
What you are saying might be right in principle (I actually agree with you) but is not practical.
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