Bailout!

In principle, I'm decidedly against any bailout package for failing financial institutions. Why should taxpayers bear the cost of propping up banks that make risky, ultimately foolish decisions? Aside from that, do we really want to send the message to companies saying it's okay to take risks since failures will be buoyed by the government? Additionally, I firmly believe the individuals who took those adjustable-rate and negative amoritization mortgages without comprehending the potential repercussions should also be made to suffer their losses. Borrowing hundreds of thousands of dollars is no mean undertaking and it's a mutual failure of both lender and borrower should the risk overcome the reward.

The current situation is a little more complicated, however. The bad assets in question, in the form of mortgage backed securities (MBS), are ridiculously convoluted such that no one really knows how much money is tied up in a potential failure. While a mere 1% of homes nationwide have entered foreclosure, the rate of increase is significant and shows no signs of slowing down, which could result in a tightening of credit policy (despite the fact that the number of commercial and industrial loans has risen over the past year).

While we can debate the necessity of Paulson's bailout package, its structure leaves much to be desired (which is a politically correct way of saying "it sucks"). A $700 billion tax-payer funded lump of cash for the government to purchase bad assets, no oversight, no regard for who might succeed him as Treasury Secretary: all this so we can keep afloat firms in a market rife with blatant incompetence? No, thanks. On top of it all, there is the pressure to accomplish a bailout in one week, hardly enough time for Congress to deliberate the matter, much less consider decidedly superior alternatives.

Let's assume, for the moment, that a bailout package needs to happen ASAP (a big assumption since overt effects from these failures have yet to be really felt). Here is what I propose: instead of having the government purchase these bad assets, we should loan the money to solvent banks and private equity firms so they can purchase the MBS in question. This would be the most efficient way to pump liquidity into the market, I think. Much less oversight on the part of the government, and the financial institutions will redistribute the bad debt on their own via traditional market forces, thereby protecting the integrity of the larger financial institutions. It's not the government's place to own these securities; that's the function of our free market.

I'm interested in hearing what others have to say on the matter, in addition to any alternative bailout plans out there.