There are problems with this system. Researchers often have to spend a lot of time writing grant applications, and grants can be rejected for any number of bad reasons. And there are cases where research was funded that probably shouldn't have been funded. But research funding isn't given willy-nilly to whoever asks, and taxpayers wasting money on kooky ideas isn't a particularly big problem.
I would add that weird ideas can be surprisingly useful; nobody expected research on gila monsters to lead to our most successful weight loss treatment to date.
string theory.
Anyways, it's very naive to think that "panels of experts" is a sustainable way to judge scientific quality. Eventually, those panels start awarding grants more on the basis of "pattern matching" vs "good science" and then the grant awardees who have been cargo-culted in, start serving on panels.
We don't know what could've happened, but we do know what did happen. It's like those people that say that the New Deal was bad, actually, and if we did nothing that would be the same or better!
Right... but no. Because the New Deal did pull us out of the depression. It's one of the most potent and effective pieces of policy in American History. We can play armchair economist all day. But we have to face what we know worked and think about why it worked.