To take the biggest example, AIG's owners did bear the consequences. Their equity was wiped out in the bailout. Do you believe individuals who did business with AIG are the ones who should have born the consequences for bad decisions made by the owners of AIG?
Well, first of all, yes, 100% certainly -- if you try to buy insurance for uninsurable things, then you are taking a risk, and risks can have downsides.
And as for bearing the consequences, we simply do not have the capacity within the rule of law to make them bear the consequences. The people who made the decisions were extremely well compensated even outside of equity up until the moment when the house of cards came crashing down, and those people have now moved on to equally lucrative jobs -- hell, they can probably put on their resume that they managed to convince the government to give them billions of dollars to cover their asses, which is more than anyone else gets when their bad decisions come home to roost.
Without the bailouts there would at least be grounds to sue the individuals who created the situation when things unwound, because there would have been consequences.
I'm getting a little up in arms here because nothing triggers me more than the idea that macroeconomics is a science -- all the actions around the bailouts, and this narrative of "economic collapse" and "too big to fail" -- the same people who disastrously failed to predict the future before we're now trusting to predict the future. Einstein said in response to the fact that hundreds of scientists thought his theory was wrong by saying "if I were wrong, one would be enough". In economics, nobody would even consider their models to be incorrect, no matter how much they have been falsified.
The vast majority of people who did business with AIG had nothing to do with subprime. Your whole answer seems to assume that the consequences of AIG going bankrupt could have been neatly contained the subset of their business that caused the problem.
No, it would not have been neat. It would have been incredibly messy. Their life insurance in particular, was mostly shielded by statute, but the remainder of their business would have been fair game -- that would have had wide-reaching implications, both in and out of the financial sector. The collapse of major investment banks that would have inevitably followed would result in many companies not being able to make payroll. That would have exacerbated the already existing problems with the real estate market collapsing, as meeting payment obligations would be more difficult for people, further depressing the values of mortgage-backed securities, as financial companies would have sought to mitigate their losses and cover their reserve and capitalization requirements by selling things at firesale prices.
It would have been a disaster of epic proportions. Would it have been worse than what happened? I don't know -- and neither do the economists who insisted on action. As it was, innumerable businesses not at the scale of AIG were left in the cold to collapse without billions of dollars of free money, and, more significantly in my view, institutions and well-capitalized individuals who correctly predicted the collapse of the market would have been well-positioned to use their assets to buy up undervalued assets (including home mortgages, which, if purchased at fire sale prices, would have made decisions about de-valuing the loans easy, because the effective yields would have been so much higher).
