"Before we approve any bailout bill, it would be great if we just had a clear understanding of what our $700 billion or $350 billion is supposed to accomplish."

This is my theory. Bernanke and Paulson have concluded that the financial system is severely undercapitalized - many firms are either bankrupt or perilously close to meeting that fate. After eighteen months of hopeful "liquidity crisis" talk, the realization has dawned that this is a solvency crisis the likes of which none of us has ever seen.

The overriding objective of the Big Plan therefore is to get the system recapitalized, and the reason for going ahead with an almighty ontake of imparied assets as a first step, is that they reckon this is the most likely move to provide the confidence necessary to bring about the recapitalization.

The reason they have not come out and said this explicitly is because they reckon the truth would scare the bejesus out of the markets and ensure that the recapitalization does not end up occurring, at least not any time soon.

But anyhow, I believe their thinking is that if Uncle Sam pays top dollar for banks' junk, that's the best start-point for the industry to recover. The alternative - wiping out existing shareholders either by doing nothing or forcing fire-sales - is not something they wish to contemplate.

Given this theory, I would not be asking what happens to the 700b - not at first anyway - I would be asking whether 700b is enough. 500-odd billion has already been written down by the industry; yet the reason for the present crisis is not so much this, but fear about losses not yet recognized.

On this theory, 700bn isn't going to be enough. It might be enough to repair the ship, but it won't be enough to convince people to get on board again.

I don't know about that. Afterall, foreign banks had to lobby pretty aggressively to be included, and, unless I'm mistaken, sovereign wealth funds haven't even been considered.

I'm sure that Treasury is worried about keeping foreign investors confident in the market, but the admin has been pretty clear that their concern is under capitalization (panic-avoiding code word for insolvency). There are those, of course, who say that the admin's constant refrain on this is just a smoke screen, but the fact that their plan is basically to dump capital into the financial system shows that what they're concerned about is a lack of capital. Their fear is, as they and their surrogates have stated, one that Buffet (a man who doesn't necessarily like the Bush admin that much) shares, namely, that if banks decide that they can't trust other banks and credit companies to be solvent, they they will keep their capital to themselves instead of lending it out. The effect of this would be that our bank and credit card companies, as over-leveraged as everyone else in our economy, would then halt deposit payouts, credit card payments, payday loans, and the like which, given that the average U.S. citizen is just as over-leveraged as our companies, means that lots of people would suddenly have no money.

Think of all those people who live off their credit cards. Think of how much they would freak out if their cards stopped working.

Is this fear justified? I'm no economist, and even if I was, I don't have access to Treasury's info on the subject so I can't say. It seems to me though that they have yet to make the case that injection a few hundreds of billions of dollars into a market worth tens of trillions a month ago will really change anything.

The reason banks are afraid to put their money out there, either in the form of buyouts or interbank loans, is because they are afraid it will just get swallowed up by the blackhole that is these valueless debt securities and derivatives. Why will the government's money be any different? And what if, contrary to what Treasury thinks, these products and the housing market aren't undervalued, but are still on the way to their true market value?

What we're (prospectively) propping up isn't prices so much as consumption. Where do you think the ostensible growth in the economy came from while the median wage was flat? Consumption by the people who did refis and HELOCs, by the people who sold at high and rising prices, by the people who shuffled all the paper. They've all been extracting cash out of something that turned out not to exist.

So of course it makes sense that the solution should be to find more cash by issuing promises to pay at some indefinite date.