Earlier quoted context omitted.
Just so we're on the same page, do you understand the logic behind not paying extortionists? The "later" doesn't come, and the payment only makes them better at extorting you, and draws in more people to try the same. You typically won't get a better opportunity. If you come up with a rationalization for how you absolutely must defer the reckoning today , why won't you come up with one tomorrow as well?
The US government could have done something about the banks after having bailed them out without wreaking havoc, but they didn't. Not because the government didn't have the power to, but because it apparently didn't have the will. Simply letting the US banking industry collapse and take the country with it as a power play of refusal to give in to "extortion" would have been insane.
First, Lehman Brothers was allowed to collapse. That was huge and directly contradicts the revisionist history we hear about today. But it immediately became apparent that the system couldn't sustain another collapse like that.
Second, nonetheless Washington Mutual was allowed to collapse a week later.
Third, the Feds forced Bank of America to eat Merrill Lynch with patently illegal threats. But banks like operating in regulatory gray areas, and at the time were willing to take their own medicine.
Fourth, earlier that year Bank of America bought Countrywide, and since then regulators have been particularly brutal to BofA regarding Countrywide's practices prior to the acquisition.
Wells Fargo ate Wachovia. That was a good deal for Wells, but point being the Feds didn't prop up Wachovia, they just made sure it didn't crash and burn.
Citibank had to sell Bear Stearns at a loss (I think; feel free to correct me) with JP Morgan picking up substantial risk. Again, while not quite the same kind of shot-gun weeding as with Merrill Lynch, doubtless the Feds were pushy.
Fifth, while AIG wasn't allowed to collapse, the government took receivership and were relatively brutal to investors. There are still ongoing 5th Amendment Takings claims, and while morally it's repugnant the legal arguments are pretty good. Point being, it's another example where the govt didn't shirk their responsibilities in the way people claim.
Lots of other banks went under with investors losing money. You can't paint the entire banking industry as getting off scot-free just because some of the biggest (and most nimble) banks came out comparatively unscathed. As big as those banks are, the U.S. is unique in that it has a huge number of retail banks compared to any other country, and plenty of them and their investors got their comeuppance. (That history stems from the national bank debates in the late 18th and early 19th centuries, and ultimately President Andrew Jackson's resolution disfavoring a national bank. That system is still largely in place, even after the establishment of the Federal Reserve, though in the past decade it's been quickly consolidating, evolving, and becoming more tightly bound by Federal frameworks.)
There's alot more history to the financial crisis. I'm not saying things were fair, or that the banks were punished enough. My point is just that people very well understood the moral hazard at the time. Regulators did an arguably _reasonable_ job at mitigating that hazard as much as possible, even in hindsight.
Retail and transactional banking is a very integral part of modern Western civilization. The system is well over 1,000 years old (in a nearly identical form from a commercial and legal perspective) and predates all modern governments. It's organic rules are complex, opaque, and don't employ the same organizational models as modern systems like democracy, corporations, etc. You can't analyze the banking system so simplistically.
