Bailout?

My take, in short:

1) Is this bailout plan ideal? No. Cf. Wooden Arrows.

2) Should we reject it? No. The risk of a multi-year Depression is real, because there is a serious problem in the markets right now.

3) Credit. That's the story. The state of California can't get short-term loans. Businesses who use commercial notes to even out cash flows between large projects can't get loans. Without credit, the economy grinds to a halt like a gasoline engine with sand instead of motor oil.

4) The Credit crunch is the result of a lack of trust and transperency in the business community right now. Banks are under-capitalized, because no one knows if any of their mortgage-backed securities are worth anything. Banks then are more unable to make loans, which limits the ability of other under-capitalized banks to get short term loans when they need to come up with more capital.

5) The point of the bailout is twofold - Restoring some confidence to the market, and providing more capital so that there isn't a self-reinforcing chain of failures by a number of banks.

6) The Bailout was not perfect - probably far from it. But freezing credit kills companies on the edge - and not just huge financial giants that deserve what they get, but small local companies just trying to make it from one project to another. One reason I desperately loathe the now-commonplace Wall/Main street description of the issues is that it creates an illusion of isolation, where the two really are intimately aquainted. Anyone wanting to punish those smarmy scoundrels will, in the end, be stabbing the blue collar guys whose jobs rely on those scoundrels indirectly in the back.

7) Big thing to fear: the floodgates are open. How can any politician reject $7 billion in deficit spending in the wake of something like this? If in times of tight credit people are busy investing like crazy in US Treasuries to the exclusion of other forms of reliable debt, we're going to see the treble effects of crowding out (with the wave of new deficit spending), an increasing debt burden (national debt: now over $3,000 for every man woman and child in the US), and a depreciating dollar all at once. Blarg.