As James Galbraith points out in today’s Washington Post (hat tip reader Marshall), the Paulson bailout plan wasn’t necessary, and any rescue could have been handled by expanding existing programs:
Now that all five big investment banks — Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley — have disappeared or morphed into regular banks, a question arises.The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They’re called “loans.”
With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn’t, the FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund — a cosmetic gesture — and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary — as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can’t save everyone, and those investors aren’t poor.
With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis….The second great crisis is in state and local government.
Of course, such a straightforward program would have eliminated the opportunity to further enrich Wall Street by paying fees to various advisors and subcontractors for buying assets from financial firms.
dr q 
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I do not see any mention of the pricing formula or strategy? This is huge. If they buy at a reasonable discount and take equity in return, the potential losses might be mitigated although by the looks of this updated plan, it is still very likely to fail and result in hude losses as there is no concrete pricing strategy. As for helping homeowners via changing judges’ authority to modify loans and also other plans being discussed such as a freeze on foreclosures or balance paydowns (freezing foreclosures and reducing balances not part of bailout i realize) the only thing this will do is increase mortgage rates and reduce credit. How is it that the hard working, prudent people of America (and by extension the World) who pay their mortgages on time, live within their means, and are better at managing their money have to pay higher taxes, higher mortages rates in the future, and suffer from collapsing home prices due to the stupidity of Government (fuelling rise of houses through FRE/FNM and FHA, , etc), the Fed, the Banks’s execs who set credit policy, and the many borrowers who were reckless and stupid with their money ? That is the real tragedy here. In fact, most of this intervention (markets not really free to begin with) provides an incentive to default on your mortgage and / or walk away, spend like crazy, and be reckless. Things will only recover when house prices reach their market led “fair” value which is what the average buyer will afford. Add in a good job market. So it is likely we will continue to see governments and friends of certain top government people continue to implement programs to take money from the innocent (savers/depositors/private shareholders) via taxation and inflation in order to transfer it to those who have been gaming the system and engaging in stupdid behaviour (bank execs / counterparties and bondholders). Must be helpful to have a lobbyist or two working on your behalf, or better yet, make huge campaign donations and have the politician in your pcoket. The end is near for the debt based, fiat money foundation that is the American and world economy. Say hi to deflation and then at some point high inflation or a combo of both, so that in 3-4 years, most average citizens will be poor. Citizens must keep up the fight.
JO