NEW YORK (MarketWatch) — This isn’t about “bailing out Greece.” Yes, the Greeks owe about $500 billion, but they already have spent the money.

This is about bailing out the banks that lent to them.

The biggest creditors are French banks. The second biggest are the Germans. The third biggest are the British. I’ll bet a lot of Greek bonds are now held by hedge funds.

These are the people asking for public funds.

What’s happening in Europe right now isn’t a financial crisis. It’s a hostage crisis.

Once again, we are all being held hostage by a bunch of bankers. “Give us a bailout,” they’re saying, “or else the economy gets it!”

Maybe it’s time to call their bluff.

Perhaps Europe should let Greece default. Let it go bust. Force the bond holders to take their losses.

If you invest in a stock that falls, you don’t get made whole.

If you buy bonds in a company or institution that collapses, you don’t get your money back. So why here?

They call it “risk capital” for a reason.

This is Bear Stearns all over again. It’s AIG all over again.

People are going to scare you. They’ll say it will be just like Lehman Brothers Holdings Inc. LEHMQ “If Greece goes bust, the whole financial system will go down.”

Maybe they’re right. But the burden of proof is on them.

After the high-finance fiascoes and thievery of the past few years, I will take some convincing. We were told we had to step in to rescue AIG to protect Grandma’s annuity, and then it turned out we were really protecting Goldman Sachs Group Inc. GS, +2.12%

Greece, as I say, owes about $500 billion. But even if it defaults, all that money won’t be lost anyway. Greece won’t vanish from the world. What will happen instead is that the bond holders will be forced to take a haircut.

Or a buzz cut.

Greek bonds are already trading at about 50 cents on the euro. (They’ve been trading like that for months, so why everyone is suddenly surprised about this crisis is beyond me.) Based on that math, the big banks will need to take losses of around $250 billion.

Yes, that will wipe out a lot of equity. It will wipe out a lot of bonds too. Banks will need to recapitalize. But what is the alternative, “extend and pretend?”

To put this in context, world equity markets are valued at about $50 trillion and those of the European Union at about $10 trillion.

So writing down Greek government bonds by half would be equivalent to a 2.5% decline in European bourses, or a half a percent decline in global markets.

Greek leader facing resignations

Various commentators warn darkly that if Greece defaults, that will also detonate a derivatives time bomb. All those institutions that wrote credit-default swaps will blow up.

Well, maybe. But whose fault is that?

Greece has been in crisis for more than a year. The institutions have had a long time to sort out their Greek exposure. They have had a long time in which to sell their derivatives and reduce their risks. If they haven’t done so, there’s a point at which we can’t just keep writing them checks.

Those credit-default swaps, most of which are speculative, shouldn’t exist anyway. Once upon a time, you couldn’t take out fire insurance on your neighbor’s house. We should go back to a system where these kinds of contracts aren’t legally enforceable.

Among the banks supposedly at risk is France’s Societe Generale (GLE). If the management hasn’t prepared for financial disaster, it only has itself to blame.

One of the global strategists who has warned most persistently and brilliantly about the risks in the financial system for many years is Albert Edwards in London. Who does he work for? Er ... SG.

Was the bank’s top brass not paying attention to its own strategist? Who is running this circus?

Some people claim that a Greek default will “break up the euro.” Why? And if, say, Louisiana had to reschedule some of its municipal bonds, would that “break up the dollar?” The suggestion is absurd.

Arkansas rescheduled in the 1930s and yet the dollar survived. Amazing.

Greece shouldn’t be in the euro anyway. But even if it dropped out, the euro could still survive.

Comparisons to Lehman Brothers are overwrought. People forget that in September 2008, America saw two gigantic bankruptcies: Lehman and Washington Mutual.

The second one is forgotten because it caused little or no panic. The Federal Deposit Insurance Corp. went in, took control and managed the process. Depositors were protected, and the federal government insured there was continuity.

If the European Union and the IMF want to intervene in Greece, maybe they should follow that model.

Yes, there’s a case for providing emergency lines of credit to keep the lights on in Athens.

There is also a case for providing liquidity to frozen markets. As the saying goes, in a financial crisis the government should lend freely to sound institutions — at a high rate of interest. If the European governments want to lend money to some of their banks at 10%, so be it.

Should they really be cutting checks to protect bond holders? How much good is that going to do anyway?

According to CMA DataVision in London, the credit markets now give Greece an 80% chance of default. But the markets also give Portugal and Ireland 50% chances of default, and Spain 23%.

This all is good news, I guess, for those who own gold. If you had to bet from here, you’d say governments on both sides of the pond are just going to keep printing and printing money.

Disclaimer: Brett Arends holds some gold, platinum, and mining shares in his portfolio.