Our elected representatives decided that the best way to solve the current financial crisis is by throwing money at it.  $700,000,000,000, to be exact.  The fact that the economy just happened to need that exact round number to be rescued isn't the coincidence it seems - the Secretary of the Treasury's office just wanted a really big number that would convince investors and companies that it meant business.  How reassuring.  (Imagine Secretary Hank Paulson proclaiming the amount he wanted to the Senate with a Dr. Evil accent and pinky to his lips for added laughs.)

What isn't so readily noticed is that, rather than using the money to guarantee the deposits and assets of struggling banks and institutions as it has in the past, the government has decided to buy up the assets of those troubled institutions and manage them itself.

Did you guys get that?  Rather than just regulating the financial markets, the government is now an active participant therein.  Now Paulson will be managing $700b worth of profit-seeking assets.  How will he decide who to bail out?  Remember he used to work for Goldman Sachs.  Perhaps a bit more of that cash will go their way?  Who are his friends?  Who does he trust?  Fortunes will continue to be made or lost in the market, but now they depend on the whims of unelected government administrators.  We've seen crony capitalism before, and it's not pretty.  People freaked out about privatizing social security but I guess a gut-wrenching market dislocation was enough to get us over the hump.  Paulson initially required that the cash be strings-free and that he not be subject to review, investigation or prosecution if he screws it all up.  He later abandoned that ridiculous demand, but the mere fact that he made it frightens me.  That man doesn't deserve a job just for that.

But it gets worse.  One of the key reassurances that our elected office-seeking representatives have given about this bailout is that we (the taxpayers) will be getting that money back, and with a profit no less!

Our electorate is so insensible that it believes this is a good thing - oh boy, we'll get our money back!  And then some!  The government is saving the system!  We're all capitalists now, because our government now controls the means of production!

Grave-spinning is hardly sufficient for this state of affairs.  That groaning sound you hear is zombie Ayn Rand coming to eat your brain. 

But it gets worse.  The fact that "we're getting our money back and then some" is a flat-out lie does not make it any more palatable.  The government's position is that there's a crisis in the market - not a crisis of money, or capacity, or ability, but of confidence.  People don't believe in the markets as much as the markets deserve to be believed in.  Thus they're less willing to invest in it.  Thus values go down.  Thus we're all poor.  On the flip side, companies have money but they're scared of the future.  They hold onto their cash rather than lend and invest it, in case they need it to save themselves.  Then liquidity in the market goes down.  Then inventors with good ideas don't get financing.  Then productivity drops.  Thus we're all poor.  So the government will step in and take control of assets, buying them so the banks have more cash to give to inventors and homeowners, thus spurring the economy.  The gov't will hold the mortgage notes until such time as people are more confident, and more willing to invest.  Then they'll sell the assets back into the market, and for a profit!

You may ask - why not just seize those assets and manage them?  They're the government, they can do what they want! 

Well, the problem with that is that it would make the crisis even worse.  The value of the stock of thes investment banks, brokers, holding companies and so on are based on the perceived value of its assets (a mortgage, for example, being an "asset" that produces income according to the borrower paying on it).  Borrowers are fleeing their overvalued properties in droves, and banks are having to repossess those homes and buildings to resell and recoup the mortgage amount.  Except, because real estate prices have gone down those properties aren't worth anywhere near the mortgage amount anymore.  So the bank loses money.  And investors can see that those mortgages aren't very secure, and many of them will result in losses because the owner will walk.  Investors lose faith in the company's ability to get money from the mortgages, and the stock value goes down.

If the gov't merely seizes those mortgages, the banks and firms would take an enormous hit in their stock price, because then they aren't getting anything at all in return.  Then the banks go out of business and the economy continues to crumble.  So instead the government is going to buy those "toxic" assets.  They trade bad mortgages for good money.  But in order to actually help the bank, the government has to be willing to give way more to the bank than any other investor would be willing to right now (remember?  confidence).

How do "we" make a profit here?  The government is buying distressed assets for way more than market value.  Nobody in the world thinks these assets are worth having, probably at any price.  If there were any person or company in the economy who thought these bad mortgages were worth having, they'd buy them and the government wouldn't have to.  No, the market is telling us that our government is giving good money for products that won't be worth anything for a long time, probably ever.

But it gets worse.  Where is that big pile of money coming from?  Answer: not from taxpayers.  From China, from Saudia Arabia, from Russia.  We don't have a single penny to spare, the deficit will be rising by exactly $700 billion because of this, and it will be added to the rest of the deficit spending we'll be doing this year and next.

This also means a $700b loan's worth of interest, to be paid off by our children and grandchildren.  As we keep trying to spend our way out of this crisis, eventually the solvency of the US government will be called into question.  That will not be a pleasant day.

Very smart people agree that quick and overwhelming action is what gets the economy past these bumps without too much trouble.  But this blizzard of cash raises the stakes enormously.  The US's borrowing power and debt-servicing ability are finite.

But it gets worse.  We are socialists now, but the worst kind.  Our current system was capitalist until everyone started losing.  Then the hue and cry was for taxpayer money to solve everything.  Capitalism loses all meaning if only the profit is privatized.  This greatly reduces the risks that banks and firms are exposed to - why not take crazy and stupid risks if Washington extends its helping hand every time there's a problem?  The message we're sending to the market is that if they can get us over a barrel we'll give them whatever they ask for.  And we haven't yet demanded to be let off of that barrel. 

I don't know if this calls for tighter regulation or a complete refurbishment of our market system, or what.  But I do know that we're looking more like the Soviet Union every day.