Conservatives are highly conflicted on the bailout. In theory, it shouldn't happen. Insolvent firms should be allowed to fail and the underlying assets sorted out in bankruptcy. The problem, of course, is that the intervening period could see an evaporation of the credit market and, at best, a serious recession. It's an election year. That won't be allowed to happen.
So what kind of bailout should there be? There are three things to avoid. First, there is no need to make troubled firms whole. The government should buy enough of this bad paper to get the credit markets moving again but not a penny more. In other words, it should alleviate as little of the economic pain felt by shareholders as possible. Second, the government should not acquire any more private firms. It has no business running them. What it should do is buy these securities at a deep discount and insist on the lion's share of whatever profit they generate - which could be substantial. Third, the bailout should not be the occasion to address issues other than the distressed financial markets. We shouldn't alter the terms of mortgages or put a moratorium on foreclosures or attempt to restrict executive pay - at least not with respect to firms that are buying rather than selling. All of this gets in the way of maximizing the government's potential recovery and minimizing - or even eliminating - the cost to the taxpayers. If the government wants to aid distressed subprime borrowers, it ought to do that separately and, if it is done, it ought to be by way of straight subsidy so that the cost is clearly stated.