Bailouts and Plans

So the sky doesn't fall another day! Another rally, the Dow is up 450 odd points after being down 777 just yesterday. The S&P 500 made similar gains. The more we delay the inevitable bailout, the more it seems like it doesn't have to be inevitable.
I have more than a few friends who oppose the bailout under any circumstances and the general public seems to agree. I have mixed feelings about it honestly. On the one hand, I don't mind letting Wall Street squirm a little under their own failed largesse and excessive risk taking Right now, the only real effect it's had on me is that it's made work a lot more interesting and I get to have wonkish discussions with my coworkers. On the other hand, some people I know have been more effected, primarily because mutual fund indexes are down 52% on the year and their 401K's are looking pretty horrific right now. Luckily for me, I didn't have anything to begin with; nobody is freer than a man with nothing no? But I think that's something being lossed in all of this- the effect this will have on ordinary people. If nothing is done, credit will be even harder to come by, people's savings and investments will drop considerably. Take a look at Japan's lost decade. If we can do something to avoid that then we should. And there are credible economists who think that something like that could happen. Not Great Depression level, but a gradual contraction of our economy and the credit markets. It's always fun to "stick it" to the fat cats on Wall Street, but like it or not, we voted for these policies of little oversight by voting for the leaders who enacted them. The game is always rigged against the little guy, but we helped to rig it ourselves as well. What is important is saving the ship now, and making sure something like this doesn't happen again.
Let me also say that I think the bailout package as proposed, both the three page sham which Secretary Paulson started off negotiations with and the 100 plus page document that Congress ended up putting together, were terrible. They both called for the US to buy 700 billion dollars of bad assets with the money being spent solely at the discretion of the treasury secertary with no or little oversight. Congress added caps for executive compensation and cursory support for other "populist" measures to make sure that taxpayers eventually get their money back. There are no provisions for helping homeowners keep their homes, which, so I've heard, is a complete non-starter for Republican House members (as one Republican who voted against the package put it, if we start socializing the losses then we'll have to socialize the profits, one shudders at the thought). What no one has really explained, however, is how this solves the credit crisis we've been in for some time now. Nor has any one in Congress actually sat down to really think if this is even close to being the best plan. Perusing some economists websites, I saw an intriguing case study of 42 instances where the government had to intervene during a banking crisis. The first conclusion is that doing nothing was the worst option; that much is clear. The study also concluded that attempts by the government to buy bad assets without getting any stock, as in cases by Japan and Mexico cost significantly more than other plans. What this economist thought was the model for dealing with this kind of crisis was the Scandanavian model (man the Scandanavians sure know how to do things right). It was basically using public funds to recapitalize troubled firms through buying preferred shares of stock, putting government securities on the balance sheet of troubled banks, and getting the private sector to match government contributions.
There are a few major things wrong with buying bad assets. First, the taxpayers have much less of a chance of recouping their money. The government would be paying above market price for all of these assets and there is a good chance that even held-to-maturity their net present value is less than what we pay for them. Second, it does not address the real problem of recapitalizing the undercapitalized banks. While passively explained in the economist post I linked to I'll try and explain it more right here really quickly. If the government were to buy the assets it would help cash flow but writedowns would still be necessary and permanent. If the government were to buy equity in the firm, writedowns would still be necessary, but the recapitalization would improve the equity side of the balance sheet and the written down assets could be written back up if/when the market returns.
A United States plan could look something like this, the government could use a significant portion of the 700 billion to buy preferred voting shares and convertible debt with the insistence that the private sector match dollar for dollar. I'd prefer for the taxpayers debt to be senior, but subordinate is okay also. Part of the money could be used to buy some assets, but an equitable plan must taxpayers having stake in the company and a chance to share in the profits should they be realized. If these assets we're buying will eventually payoff as people say they will, then why not let the companies keep them on their books for now. Mark them market right now and hold on while the injection of public money tides you over.
It's a shame- I'm 22 years old, just started my first real job, only took undergraduate economics classes. But I understand that there are plenty of smart and judicious people in the world who have expertise in this area and at the very least, their research could help make a more palatable plan. Why can't our congressional and adminstrative leaders understand this?