So, the bail out.

The thing about unregulated markets is, on the one hand, they really are the most efficient economic system. But, on the other hand, that efficiency comes at two kinds of costs: screwing some bottom segment of the population on an ongoing basis (c.f., the percentage uninsured in the US insurance system), and screwing some now outdated segment of the population during any transition (c.f. US auto workers as we increasingly outsourced manufacturing).

Basically, then, US economic policy is a balancing game between two competing desires: we want our system to be efficient, but we also want it to be ‘fair’, by which we mean that we want to somehow protect any of those bottom segments and transitional segments we see getting screwed.

And, last week, it became clear that the segment getting screwed during the current transition was, more or less, all of us. A whole lot of different factors had made the financial system into a total mess, and letting the market work that mess back out (which, indeed, it would, eventually) would have probably led to a massive recession, huge unemployment, and a lot of other similar stuff we’d much prefer to avoid in the process.

So, in essence, who we were bailing out was not just some guys on Wall Street, but ourselves. If we wanted to avoid all that ugly recession / unemployment / etc. stuff, we didn’t have much choice.

Of course, there are better and worse ways to handle things, and I suspect highly that Paulson’s investment banking background and ties led him to a bail-out approach that’s messier than it needs to be, and one that relatively few economists favor.

The bill that just passed gives the government the ability to buy bad assets from banks. As NPR’s Adam Davidson analogized, that would be sort of like giving the government the right to come in and buy the junk from your basement.

The other, and in my opinion smarter, approach, would be a stock injection plan. Instead of letting the government buy the bad assets from banks, it would instead let the government buy a part of the banks themselves. This one, by Davidson’s analogy, like giving the government the right to actually buy part of the house. And then possibly to move in.

In the first case, we face a sticky short-term question – how much is a basement full of junk worth? In the current crisis, if we pay too much for banks’ bad assets, we flush money down the drain; if we pay too little, we don’t save the banks.

In the second case, however, we don’t have to figure out a price for the junk, and we already know the price for pieces of the bank – it’s called the stock price. Further, because of a number of complicated issues (like capital requirements), a single dollar spent in a stock injection probably equals many more – as many as twelve dollars – spent in buying bad assets. And finally, as when we did something similar a few weeks ago with AIG, owning a big chunk of a bank would let us shit-can the CEO and other management, limit executive pay, and generally effect the sort of ‘you get what’s coming’ justice that most Americans think would make a lot of sense.

Though, and here’s the part that bothers me, it probably makes less sense to you if all of those CEOs and execs are your long-time friends and golf-buddies, which is to say if you’re Hank Paulson.

Therefore, our bill mainly provides for that first kind of ‘buy the junk’ bailout.

Though, at the same time, tucked deep inside the actual bill – a much revised 451-page expansion of Paulson’s original three-page draft – are a couple of sections (106, 107 and 113) that would also give the treasury secretary the right to take the second, smarter, better for taxpayers but less good for bank executives, stock-injection plan.

I’m not sure if there’s anything we the people can do to convince Paulson to take that path. And I’m not even sure if electing Obama would mean a new Treasury Secretary, one who might be more likely to err towards that more populist approach.

But, either way, even if we just take the ‘buy the junk’ approach, it’s something we should all be happy about. Because, otherwise, we’re left solely to a market solution, and all of us are totally screwed during the transition.

We’d be to this current financial meltdown as Flint, Michigan is to globalization. Which, if you’ve seen Roger & Me, you know would totally suck.