The Fed buying securities isn't a debt. It got other people's debt, which is to it an asset. It issued its own, which is money. People unwilling to hold high quality bonds get outright money instead, the Fed owns the securities they used to own, and earns the interest they used to earn.
If you make a bet and can't pay it can be your fault, but why do you think it is the fault of the person who took the other side of it? You do understand, right, that if that principle is applied ruthlessly, no one on earth including you has any credit whatsoever. If every bank on earth is supposed to never enter any transaction with merely AAA counterparties, then there are no credit transactions, full stop. Therefore there is no capital.
And no, it has nothing to do with how massive this or that company is, and neither you nor anyone else "allowed" them to become so. They are free men. Free men can screw up in big companies or in lots of little ones, and they always will. The risk of losses to some that the losers can't pay is an automatic side effect of the freedom to engage in credit transactions of any kind. You cannot remove that possibility by any policy imaginable, that leaves any meaningful economic freedom to private actors.
And the threat of failure doesn't come from a few big banks. In case nobody noticed, *millions* of ordinary people played "heads I win, tails the bank loses" in the real estate bubble, then *welshed*, that is what started it all. In case nobody noticed, the Federal government gave a guarantee to Fannie and Freddie debts and then let those fail, despite strident calls to reform their finances and rein them in. In case nobody noticed, the FDIC when obligated to pay out $40 billion to depositers in Washington Mutual, conveyed the assets instead, sticking senior secured creditors in the parent company with the loss. And as a side effect shut down the corporate bond market for months.
It is all utter foolishness. You cannot make capital less expensive by refusing to pay for it. Grok already! The only way to stop the bleeding and recover is to pay back every dime lost to capitalize the system. You can wait for higher rates and more strigent loan standards to do that very gradually over a lost decade. Or you can simply pay the heck up. But until banks as a group have recovered every dime of losses they were stiffed for, nobody else gets rich. Including the treasury.
A capitalist system in which bankers are made to pay for everyone's deadbeat behavior is a round square and a misunderstanding. They don't pay. Debtors pay. They can pick which hat they are wearing when they do so - borrower, depositor, taxpayer. There is no free capital to rob. The capital of the banking system cannot be raided. The attempt costs those trying it ten times as much as just paying in the first place.
Pay the damn bill already and move the heck on.
Did we, or did we not, through our own legislative processes make it legal to operate an investment bank and a commercial bank under the same roof? After all, that was more efficient, wasn’t it?
Where did those high powered dollars the Fed used to purchase those securities come from?
Did the executives at AIG receive bonuses for pulling the comapny down around their ears, or not?
I notice you did not answer one of my original questions. If my company should go bust prior to February 25, 2010, would you support the government stepping in to pay my contracted bonus? If not, why not?
Free men make mistakes, and good men can disagree. I am not against some level of recapitilization. I am against the fools who broke their company getting rich while the government has them on life support. Though if they survive to get off life support, they can have at it.
AIG didn’t take on a failing company at the government’s request. Citigroup did, and I view them in a differently.