Unfortunately the debate with regard to the Paulson plan seems to have boiled down to "do it or let the market take care of itself" . The latter option seems to have gained great favor with those on the left. This diary aims to show that neither of the two options will protect the innocent- which IMO should be the first concern of government policy. I also suspect that it represents the point at which those on the left and right who are opposed to the bailout part company.
First, lets identify who are the guilty. While we can debate the relative share of each persons guilt there is no question that the lenders, borrowers and their enablers are guilty. It seems to me that first test of the bailout is are any of these guilty parties being helped by the bailout.
Secondly, who are the innocents in this mess. Clearly it is those who deposited their money in banks prepared to earn the lower yields in exchange for the perceived safety of the bank. They are individual depositors, businesses who deposited their payroll,regional banks who deposited surplus deposits in the interbank market etc. None of these folks was trying to get rich quick. They were counting on their government to keep the banking system safe for people like them and the government failed them.
If one believes that the problem is as bad as Paulson makes it out to be (I don't) then the Government taking no action i.e."allowing the markets to work" will cause these innocents to suffer. (note: if the debt problem is not large enough to wipe out the capital of banks i.e cause depositors to lose money then the problem is not as great as Paulson makes it out to be).
Therefore if the Government does nothing and the banks all fail sure the equity (preferred and common)and subordinated debt will be wiped out;however loses thereafter will be borne by the depositors in the bank. Many investors would relish this outcome since it will give them the opportunity to purchase assets at deeply discounted prices from failed institutions. Who will bear the cost of that- the innocent depositors. The more cynical amongst us might believe that is the reason so many on the right are opposing the bailout.
What Paulson and his Wall Street cronies are blackmailing us with is the threat that if we don't protect them then the innocents are going to get hurt. This is nothing more than the conduct of a hostage taker- give me a plane and a million dollars or I kill the innocent people. The conduct assumes that there is no other choice other than capitulating or death of hostages. That is simply false. There are many solutions that don't require either but as in a hostage situation they often require the elimination of the hostage taker. That is solution that Paulson /Republicans and some Democrats are not prepared to accept because it would hurt their patrons.