Perhaps the tide is turning.  Congress is now receiving more calls in favor of the bailout? Ugh.  People are so attuned to short term market moves defining what is right or wrong.  They would surrender their liberties just to make the markets rise.  Well, the Senate votes on Wednesday evening, and the House probably on Thursday, so I urge my readers, and the rest of the blogosphere to call Congress to oppose the Bailout.

Now, the current plan is better than the original one, having more oversight, and requiring equity stakes.  I still don’t like the proposal, because it won’t work on the areas of our economy that need help now, mainly the short term lending markets between banks.

As it is, the pressure in those markets is high, and the Fed is stretching its balance sheet to cope.  Other nations and central banks are acting to stem the panic, and are moving to support the short-term lending markets.

This is a global crisis, with rates rising in Asia, with failing banks in Europe, and the rescue of AIG protecting the interests of European banks, as well as domestic institutions.  The other nations of the world should step up to their responsibilities; we are all in this together.  If not, we will probably experience a global recession lasting two or more years.

Not that anything is certain in economics; the global economy has been straining over the last few years to goose growth in ways that seem foolish to me.  We know the lessons of mercantilism.  Why force exports when the returns may prove to be far less than advertised?  China may laugh over a growing economy where they sell an increasing amount to the US, but what are they receiving in return but devaluing US T-notes?

Look, there is a better bailout available.  Aim at the short term lending markets; use the $700 billion to recapitalize the Fed, and let them provide liquidity until the short-term lending markets calm down.

Or, use the money to take super-senior convertible stakes in financial institutions that are in trouble.  If the government is bailing institutions out, let them do it in a way that minimizes loss, that they would have a senior creditor position if there is loss, and significant ownership if there is a recovery.

With that, I close by saying don’t listen to foolish people who say that we can make money off of the bailout.  The objective of a bailout is to lose less money than you expected.  There are rare cases where money is made, but as we would expect with government intervention in tough times, the incentives are perverse.