As we rush our way through the bailout argument, it's worth being clear on the distinction between losses and collapse. The crisis is not about the possibility of Wall Street suffering sustained losses. It is about the possibility of Wall Street seeing a series of firms collapse. But Paulson is conflating the two. The easy analogy here is debt restructuring: If your business has $20 in the bank, and your creditor is demanding you pay back your full $100 loan next week, you're going to collapse. If you then restructure the debt so you pay back $10 a week, and you pay $120 in total, you may have lost more money, but you didn't collapse. The problem with the bailout plan is that we're supposed to be buttressing Wall Street against the possibility of collapse, but Paulson went a step further and constructed the government's approach to help protect against loss. But there's no reason for that. The basic problem right now is that Wall Street does not have sufficient capital, or sufficient access to credit, to pay off its creditors. Too many people are demanding too much money all at once. Wall Street can't survive the next few weeks of market panic, and they legitimately do need help. But they could pay their losses back on a longer time frame, with a more predictable payment schedule, and survive that just fine. In this case, the government would pay off the creditors in the short-term, and restructure Wall Street's debt so they pay the government back over a manageable period of time. Under this scenario, Wall Street may end up bearing the weight of its losses, but it will not collapse. That is, supposedly, the point. But under the plan Paulson has developed, taxpayers will pay Wall Street not to collapse, then pay even more to defray their losses.
