Yes, I am advocating that whoever screwed up should fail. That's capitalism. Propping the worst with the money of others is also the worst kind of socialism (the kind I never liked); it creates bottomless pits.

It's called "moral hazard" and government is well aware of the risk- which is why they've taken huge chunks of equity rather than just handing out $. Those managers and shareholders have ben punished. Government did it this way to protect innocent people from sudden system-wide illiquidity. Sadly it isn't just "whoever screwed up" that would have gone down with AIG. If you get time, check out the practice of insuring junk mortgages so they'd achieve investment grade and then sellling them on that basis. Historically mortgage defaults in the US have been very low so investment-grade mortgages looked like a good buy. Everybody did well and made like bandits when times were good. But when the crunch came, AIG simply did not have the ability to pay out on all the mortgages it insured. Banks who themselves relied on that insurance were faced with revaluation of much as their investnemt grade asset as junk meaning they too would breach their banking covenants. The resulting avalanche of bank failures is predictable. The behavior of the US Government has protected all those banks and their Joe-Average customers as well.

But why would this have to affect these people? If the whole system is so sensitive to its banking, and the banking gets gangrenous, are you saying it can't be surgically removed, only shot with the patient? Then there's something seriously wrong with the whole system.

Precisely. Once the mess settles you can be sure that Government will turn its attention to "the system" and the perpetrators who never can be trusted that way ever again. The system will change. Ayn Rand proponents will try to assert the opposite but the "heroes" in this chapter aren't the free-marketeers, the heroes are the bureaucrats.

All the more reason to go back to the times of 200+ years ago when the banks weren't allowed into the US, with a good reason.

Do we have a new Amish converrt amongst us? ;-)