The bailout is fantasy land, it is an exercise in paper shuffling and political distraction. None of the intrinsics change. Just for completeness I’ll paste in Section 8:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Which translates to, “gimme cash, I’ll take it and do what I like, when it fails you will have no comeback.” Every basic rule of economics, good governance, and common sense says it can’t work.

Until the people of the US can stand up to this sort of piracy, their country is going to sink like a stone. Think Titanic here, noise of grinding ice and people saying, “nothing to worry about, unsinkable don’t you know”.

The effect is that a bank that looks sound on the surface may not be. As a consequence the interbank lending market has seized up. The Ben/Hank plan is intended to offer banks a chance to confess and a buyer who will take their toxic junk (at a pricing basis that is yet to be agreed), thus restoring a degree of trust to the industry.

Leaving aside the fact that Congress has currently rejected the plan, it could fail in a number of possible ways. The amount of junk might turn out to be more than is currently thought and Congress could balk at seeing the initiative through to completion. Alternatively, banks may see the conditions of the scheme (surrendering part of their ownership to the government, cap on executive remuneration etc) as too onerous and decide to simply tough it out.

As to who ultimately benefits, a great deal depends on the pricing basis that is agreed. Michael Hiltzik, writing in the Los Angeles Times the other day reports:

some economists say that the mortgage-backed securities the Treasury proposes to buy from crippled banks have been so beaten down in price that taxpayers could actually profit once the market for these securities — now virtually nonexistent — unfreezes.

“It’s entirely within the realm of possibility that we’ll make money on this deal,” says J. Bradford DeLong, professor of economics at UC Berkeley.

DeLong observes that several government bailouts of the past have ended up in the black, including the 1994 rescue of the Mexican peso. The U.S. government eventually recorded a $500-million profit on its share of Mexico’s $50-billion international loan package.

Of more immediate relevance, the government’s takeover of stricken insurance company American International Group may have already produced a paper profit, and could produce more gains as AIG’s asset portfolio is sold off or recovers its value.

“Very senior people in charge of asset portfolios on Wall Street have said they are envious of the terms the government imposed on AIG,” DeLong says. “They think the Fed’s going to make a fortune.” He conjectures that the $700-billion bank bailout could yield somewhere between a $100-billion loss and a $100-billion gain.

Paulson has also endorsed requiring banks that sell troubled assets to the government to give some sort of equity warrant, so that taxpayers can share in profits once those institutions recover financially.

But questions about the ultimate bill to taxpayers continue to drive alternative proposals to contain the credit crisis roiling international markets.

Rafe, I think the article by Frank Shostak you quoted rather misses the point. Wholesale credit markets are currently dysfunctional and the “invisible hand” that Mises adherents champion has become paralysed. Markets are currently affected by what Nassim Nicholas Taleb would describe as a black swan occurrent and abnormal action may be needed to unclog them.

My blog has devoted a few posts to this topic. See The Bailout Explained by the CBO for a summary of and links to comments by the Director of the Congressional Budget Office, a non-partisan research bureau of the US Congress. See also The Case Against the Paulson Plan for a link to extended commentary by University of Chicago economist Robert Shimer. My own humble comments on the whole sorry mess can be found in “Can the Banking System Hold Water?”

Note that I am not the very excellent James Farrell from Australia, but a poor cousin laboring in the States.