The Dukes of Moral Hazard

So the Federal Reserve, whose powers have been traditionally limited to the banking system, has now decided essentially to buy AIG and become the insurer of last resort for the credit default swap market.  This means that you and I, fellow taxpayer, are now on the hook for the irresponsible, irrational, and down right greedy behaviour of huge swaths of the market that wanted nothing to do with government regulation when the getting was good but who now are lined up at the governments door with cup in hand now that the risks have come home to roost.

This is a bad move, and one that it's not clear  the Fed can even afford to do, given the fact that the Treasury is now, wait for it, issuing more debt to insure that the Fed has sufficient liquidity in the days to come.  After re-establishing the moral hazard involved with trading exotic and convoluted credit derivatives by hanging Lehman Brothers out to dry, Paulson and company decide that it shouldn't apply to anyone who bought insurance for their derivative sludge.  But these weren't mom and pop investors who were buying this insurance in the form of credit default swaps, these were sophisticated investors who, if they'd paused for a moment and done their due diligence, should have realized that they were buying insurance from a speculator in the credit default swap market.  And that speculation was centered on the belief that there wouldn't be a systemic collapse in the credit markets.  Well, surprise surprise, yet another credit bubble has burst.  And the taxpayer is now footing the bill again.  

The sophisticated investors should be forced to take their losses.  The only people who should be bailed out are the mom and pop investors who stand to lose their retirement savings because of events they can't understand.  It'd be cheaper that way, and much more morally satisfying.