Ben Bernanke, via Andrew Leonard, explains why U.S. tax dollars were used to bail out foreign banks:
Why are we bailing out foreigners?, by Andrew Leonard: Why did American taxpayer money help AIG pay its debt to foreign counterparties? Representatives from both parties raised the question during Tuesday's House Financial Services committee hearing on AIG. On the surface, the question seems perfectly reasonable. Why are American taxpayers bailing out foreign companies? Shouldn't their own governments be taking responsibility for their welfare? ...
Few people seem inclined to accept that as far as the global financial system is concerned, there's really not that much difference between foreign and domestic financial institutions -- the web of interconnections tying all the big players together is so tangled and intricate that if one link in the chain goes down, everyone stands a chance of collapsing. (And yes, that's a bug, not a feature.) If the goal is preventing systemic collapse, then everybody gets bailed out, regardless of jurisdiction. But Bernanke followed up an answer along those lines with an even more effective riposte: Hey, Europe has been bailing us out too!
BERNANKE: ...The critical issue was, was AIG going to default and create enormous chaos in the financial markets, or was it going to meet all of its obligations, including those to foreign counterparties?
I would point out that the Europeans have also saved a number of major financial institutions. And the issue of whether those institutions owed American companies money has not come up. So I think that there is a sense that we all have the obligation to address the problems of companies in our own jurisdictions.
In particular, the Europeans could appropriately point out that it was under U.S. regulation or lack of regulation and U.S. law that AIG failed. And in their sense, we do bear some responsibility.
Good answer. ... All in all, I thought Ben Bernanke had a pretty good day on Monday -- he's clearly gotten more comfortable dealing with rampant Congressional irrationality over the last two years. ... And when he claimed that after learning of the AIG bonuses he wanted to file suit to stop the payments, he sounded believable.
This is another case (DeLong response) where having procedures worked out in advance can help with both the politics and the economics. It's best if we don't have to waste time bickering over who should pay for what while the economies of both countries are going down in flames, and policies made in the heat of the moment aren't always the best policies, particularly when they are made in combative political environments. But all of that can be avoided if the polices are thought through carefully and dispassionately in advance, and have the approval of the appropriate authorities.