The more important concern in this crisis should be for people who have houses foreclosed. Foreclosure is a truamtic event - whole families being kicked out of houses/communities where you have stayed for multiple years and have memories, which are sort of tough to recover. If govt is spending so much money why not force banks to stop any foreclosures - govt can pay them also for doing that. Forecloursers from pure economic sense also are great losses. A typical foreclosed home is very tough to sell as most of the house is vandalized when people leave as they are angry and these houses sell for pittance even compared to prevalanet market prices of the area. Foreclosed house also reduces the value in the area.
The second concern should be that people have access to credit to do day-to-day stuff like buy houses, run small businesses etc. This means a way so that economy does not suffer a severe recession. Other concerns include avoid job losses, save taxpayer's money etc.
Saving banks/other institutions should be a side product of these concerns. If a failing bank/institution does not materially impact the above two goals I would let it go down.
Once we have the priorities of concerns finalized lets think about how a plan might look like.
Govt can hold on to foreclosed houses and let family stay for a few years, renegotiate the mortgages from ARM to fixed over a longer duration, make banks share in the loss of value of houses by reducing mortgage amount, give govt guarantees for part of the amount. Bank lobbies are strongly opposed to that and so this has not come up as serious option at all. In the bailout package currently being considered banks are hoping that government will buy the mortgage securities at higher prices than they can be sold in the market and hence their balance sheets will improve. In short , banks hope that through current bailout they will transfer the losses to government which they might not be able to in the foreclosure case. Secondly republicans are strongly opposed to any foreclosure sort of plan as that would be socialism. I think US is going from so called "capitalism" to wrong type of "socialism" where its socialism for corporations/banks and capitalism for home owners/individuals (BTW this always existed but not as pronounced and in the face).
There should be a completely different bill, bailing out individuals/families directly rather than banks/corporations. If banks/corporations need to be bailed out then it should be highly punitive. First even now banks are giving out dividends to equity holders. I dont know how govt can talk about bailout when banks are giving money to shareholders. The bailout will give banks money but it seems they have money to give out!!!.
In a punitive bailout plan, equity and bond holders should be wiped out. Govt should take over as was done in case of Washington Mutual and auction off things to private parties. If there are none then nationalize the entities. Otherwise do as Warren Buffett did, give loans at high interest rates with option to buy shares later at pre-fixed low prices (he did this for Goldman Sachs & now GE). Stop all dividends, fire any CEO/management who made the risky bets, create separate authority not the treasury which will doing the bailing out as was done in 1987/1930, bailout only in cases where absoutly necessary and after two years put a tax on profits of financial firms which benefited from bailout to recover costs).
To protect from effects of job losses increase unemployment insurance duration, introduce infrastructure projects to raise employment. Finally someone has to pay for all this so increase taxes on the super rich and wall street also has to pay higher taxes in a year or so when it recovers to pay for all this and more.
A note on costs of current bill: what media doesnt mention is that costs are not just losses which might be incurred by govt but also opportunity cost of putting the $700 billion. Clearly, even though candidates dont say it, many of the programs will have to be scaled back or not introduced at all which has huge social costs. Because this $700 billion will be stuck for years to come govt will have to scale back funding health insurance programs, alternative energy, ...whole bunch of stuff. The costs of not acting on other issues like global warming, health insurance is as serious or higher than not acting on this bailout. Global warming is almost exactly like this issue there is unpredictability on how soon things can go bad and how bad and hence one can argue action is needed NOW (even if u agree with republican argument that global warming is not caused by humans they admit there is unpredictability in that which I can argue is with not acting on bailout of whether its necessary). Infact global warming would actually wipe human race from Earth unlike the financial crisis.
